Following The Trend In Bitcoin (Cryptocurrency:BTC-USD)

Investment thesis

Bitcoin USD (BTC-USD) hardly requires an introduction. The crypto asset has made regular headlines in the news in the past years, as the price of the asset fluctuated strongly.

In this article, we will present a classic trend-following strategy in which the buy & sell signals will be generated automatically by a set of predetermined rules. We will execute a number of backtests to see whether such a strategy can be beneficial for investors/traders/speculators who would consider investing in Bitcoin.

After these backtests have been executed, we will execute an out-of-sample test to see whether the results would have sustained throughout 2020.

Historical performance of a Buy & Hold strategy

Investing in Bitcoin is not for the faint of heart. If one would have started purchasing Bitcoins back in 2014, you would have gone through a spectacular uprise, only to see the value of your cryptocurrency come back strongly in value just as quickly.

The investment would have slowly appreciated from 2014 to 2016 before it started to increase exponentially in 2017-2018. After this, the value of the cryptocurrency crashed down only to rise again thereafter.

Source: stockcharts.com

A simple buy-and-hold strategy in which one would have purchased Bitcoin for $10,000 on the start date (17 September 2014) and would have held the investment until today (9 April 2020) would have had the following equity chart

Source: Created by the author

The returns on a month-to-month basis would have fluctuated substantially as well, sometimes going up with 63% only to decline later with 33%.

In the chart below the underwater equity is demonstrated, showing to losses one would have endured by holding BTC in the portfolio throughout the past years

That’s right, the maximum drawdown (the biggest decline from top to bottom) would have been 83%. If you would have been unlucky enough to have purchased BTC at the top and face this 83% loss, you would need a price appreciation of…

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