Backtest Signals To Hedge Your HODL Strategy
Introducing signal backtests where we provide more detail on the “short-term holder realized price” metric and how it has helped signal momentum trends in the market over the last few years.
Relevant Past Articles:
Earlier Than You Think: An Objective Look At Bitcoin Adoption
One Year Until The Bitcoin Halving: Analyzing Holder Dynamics
Using Bitcoin Derivatives To Discern Speculation From True Momentum
Introducing: Signal Backtests
Today, we are excited to present a new form of analysis to PRO subscribers. In the past, we have frequently mentioned and referred to various Bitcoin on-chain metrics that highlight the relative attractiveness of allocating to bitcoin at any one point in time. Now, we are introducing historical backtesting to accompany a certain metric, which will allow readers to evaluate the potential usefulness of such an indicator and determine if it’s something they wish to use when making their own financial decisions.
We understand that our audience consists of bitcoin HODLers, traders, speculators, investors and those who are simply curious about bitcoin as an investable asset. As such, we wanted to bring a new perspective to some of the data and insights we share with our readers in the form of allocation strategy backtests. Our backtest models incorporate 0.10% trading fees for buy/sells and are 100% risk on/off, meaning bitcoin allocation is either 100% or 0%.
IMPORTANT NOTE: This is not to encourage readers to sell all of their bitcoin or allocate 100% of their liquid portfolio to the asset, but merely to highlight the historical significance of this particular metric. Past performance does not indicate future results.
With that being said, let’s take a look at the short-term holder realized price and trends for bitcoin allocation using this metric…
Short-Term Holder Cost Basis
Bitcoin price versus the short-term holder (STH) realized price is a simple bitcoin on-chain indicator that’s been useful for determining short-term momentum. As we’ve highlighted before, short-term holders are a Glassnode classification consisting of those who have bitcoin held for less than 155 days. Realized price is essentially their cost basis. This cohort represents active, short-term market participants across traders, market makers, new bitcoin buyers and every group in-between.
What makes this cohort useful is that it represents the current marginal bitcoin buyer. We know long-term holders are accumulating at a consistent rate over-time which creates a fairly inelastic supply of bitcoin in the market. Yet, inelastic supply cuts both ways. The behavior of that short-term holder group of marginal buyers or sellers can determine bitcoin price and trend in the short-to-medium term (3-6 months). As price tests and retests this group of holders’ cost basis, are they staying in the market or trying to get out?
After 5 months of upside, we’re currently at another pivotal point in the market that will determine the next period of either a continued upside or a downside trend. Short-term holders realized price acts just like any other key moving average in the market. The key area to watch is the price reaction to the $26,000 level.
Zooming out to other key realized price levels, the network realized price sits right around $20,000 and the long-term holder price sits just under $21,000.
Backtest And Drawdown
Digging in deeper to how this signal compares over time, below we’ve highlighted some backtest and drawdown comparisons to a simple HODL strategy since 2017 starting with $1,000. The short-term holder realized price momentum strategy is fully allocated to either bitcoin or cash, depending on if price is above or below short-term holder price.
What you will see is that since 2018, this has been a fairly useful strategy at providing all of the bitcoin upside with about half the drawdowns in the worst case scenarios across 2020 and the recent bear market. Overall, deploying this strategy since 2017, even underperforming in that year, has grown the starting investment of $1,000 to a value of $72,262, versus the HODL strategy of $28,222, using the end date of May 28, 2023. That shapes up to be 156% upside relative to a HODL strategy (not including taxes).
As bitcoin drawdowns reached 83%, 75% and 77% the STH momentum strategy reached 65%, 35% and 32%. The results have been more effective in the latest cycle with the strategy allocating to cash at the turn of the bear market while getting back in at the new momentum trend in January. This strategy is not as frequent and acts as more of a medium-trend indicator when price faces major momentum shifts.
Highlighted in green below are all the times in the market where the STH strategy was implemented with price exceeding STH realized price.
Final Note
In short, the STH realized price momentum signal is one of many we can test and incorporate to find actionable signals in the market. In many ways, it acts as a critical moving-average-like level for an important cohort of market participants that shape new momentum and trends. The STH realized price is hovering around a pivotal area that may define the next 3-6 months. Keep your eyes on this metric at the $26,000 price level. How the market responds over the coming days and weeks could signal either a loss of momentum and ensuing price correction or a continuation of the bullish price action we’ve seen year-to-date.
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That adds value! Thanks a lot, guys! I will be looking closely at the metric and price action.
This is interesting. Were other parameters used? It looks like this executed a trade on each single cross of the STH price on a daily level or is it accounting for crosses on a hourly or shorter/longer timeframes? What % of the trades was done in close succesion of each other due to price swings across those key levels, negligible ?