Topic: Extracting stable positive return from high-volatile asset.HF recipe made simple (Read 371 times)

Despite recent “Digital Gold” rhetoric, bitcoin still shows no correlation with any other asset class.
Hence Shannon’s demon still very effective to extract value.




Source:
https://twitter.com/VentureCoinist/status/1232671637130088449

Recently, "anti-fragile" rhetoric on bitcoin has been reiterated many times, noting how every time there was some kind of "stress" bitcoin moved North:

It happened with Iranian Missiles, it is happening again with coronavirus spreading:






Source: Bitcoin Bolsters Claim as a Haven With Rally Topping Gold’s


A positive correlation of 20% over a 60 days horizon is still too insignificant for changing any investment strategy, but it is something to keep an eye on.
Increasing correlation could damage the investment strategy analyzed on this thread, but could on the other hand reinforce the "digital gold" rhetoric" that could be useful to smuggle Bitcoin into traditional investment industry.
We will see.

Intresting quote from @PlanB


https://twitter.com/100trillionUSD/status/1201477183815999489?s=20


Bonus:
Full PDF presentation here.


First graph has to do with volatility,
Second graph has to  do with low correlation with other assets.

Bitcoin Investment case is definetly getting traction.

Ps. I am gettting worse with formatting: why is this post showing good on preview, but shitty when I post it?

Little update.
This might not have been a great month for Shannon Demon strategies.

Bitcoin moved south with volatility droppping to depressed levels:


[Source]

Hence postiive ield extraction must have somehow slowed.

Van Eck just published a blog post stating the obvious: adding Bitcoin to investment portfolios do improve results.

 The Investment Case for Bitcoin




Of course adding Bitcoin, uncorrelated assets with high volatility benefit any portfolio.
They also provide some evidence:



Basically this past performance has to do with the incredible drift Bitcoin had on the past 9 years. It's difficult to expect similar appreciation rates for the future.

PlanB, a few months ago even demonstrated an extreme asset allocation with bitcoin was fairly superior to an equity portfolio:



https://twitter.com/100trillionUSD/status/1136969637588021250?s=20

Adding bitcoin to a portfolio of cash givers more performance AND less volatility of an equity portfolio. This is called stochastic dominance and it is very difficult to observe in financial markets, where usually higher yields are associated with more risks.

Should I add a standard disclaimer: past performance is not guarantee for future performance?

I saw from WO the reference to his Topic, really very grateful, it is true, it may be that such a correlation is a magic recipe, based on some recommendations given by Malkiel Burton in his book of a Step on Wall Street, recommends diversification, although not Mention is made for that moment of Bitcoin, it is interesting how it can increase the portfolio in an impressive way.

Fair enough.

I did kind of make a mistake with that article because I started to read it, and I was giving it a bit too much benefit of the doubt because the article had a lot of nice graphs and was well-written.  But then upon further review, I realized some of the seeming bullshit distractions contained therein.

Ultimately, no harm, no foul.  

It does not hurt to present information that might have a variety of perspectives, and surely it is better if some of the misleading aspects of such "variety of perspectives" are highlighted in order that some folks don't fail to recognize some of the spin that seems to be going on.

There are a lot of folks who might start to buy BSV or Zcash or gold based on such cursory look at such articles that have lovely charts that are likely drafted and reviewed by relatively smart people because the readers just start to mentally categorize those other assets as somewhat "related to" bitcoin, when in fact there are meaningful differences in bitcoin that they are NOT quite comprehending and need to be reminded over and over NOT to take some writings at face value and to prod some folks into looking into matters with a bit of a more critical eye and maybe thereafter be able to get some better perspectives regarding various ways in which bitcoin is distinguishable from other assets, while mainstreamers either ignore or downplay such materially and significant distinguishing aspects of bitcoin.

I do second all of your views, JJG. Luckily here this thread will be unknown to-you-know-that-WO-metal-nazi-troll, so there will not be much discussion about BTC vs Gold here.
I was only referring to that article because it mentioned correlation with other asset classes and volatility, two features that are of interest of the original topic of the thread.

I will concede that there are a lot of decent attempts at putting together various data points within the article; however, the points about Bitcoin versus Gold seem to be an attempt to pump Gold and to fail/refuse to take into account bitcoin, as an immature asset class that is likely to surpass the fuck out of Gold in the coming years, because bitcoin remains both an  asset class that has never been witnessed in the existence of man, and superior to Gold in a variety of ways (and really who the fuck cares about short term store of value mumbo jumbo spin?).  

Anyhow, many of the studiers of bitcoin recognize obvious relevant and modern day realities, and this is not to diss gold for it's historical contributions.  Spend a few minutes to think about 1) verifiability, 2) transportability, 3) costs, speed and ease of transactions/storage, 4) ability to directly hold and transact, and 5) divisibility.  These are not unimportant concepts, and I should not have to go into detail regarding the differentiation obviousness.  

Bitcoin is superior, and sure, physical Gold is going to be superior to BTC when Armageddon comes and the whole fucking internet gets destroyed by an asteroid, world war III, zombie infiltration, an electro-magnetic pulse, or whatever other extreme scenario(s), but also seems to me that we are going to have a whole-hell-of-a-lot more important things to worry about in those not-too-likely Armageddon scenarios, and I am not going to make my modern day investments based on pie-in-the-sky fantasylandia scenarios.

So, do all the fuck you like, mainstreamers, in your less-emphasized dilution of gold value because of paper manipulation, personally, I am
NOT going to put much, if any, of my investment into gold under current modern-day, internet is going to stay, circumstances, because bitcoin is obviously superior in spite of various institutional investment mainstreamers, including the article's attempts to subliminally prop up gold based on short-term gold pumpenings.... which may or may not continue....  that likely also include a whole-hell-of-a-lot more current access to gold to be able to quickly move investors into gold through currently financial vehicles (as compared with what is currently available to bitcoin, but still building in bitcoin).

Let's see what happens to gold in the coming years, as compared to bitcoin, especially with a couple more halvenings in the next 5 years, too.  Yeah, we are quite likely to have considerable UPs and DOWNs in bitcoin in the next 5-6 years, but there also seems to be considerable likelihoods that the UPs in bitcoin are going to be higher, relative to gold.. so where you going to put your money to prepare yourself for the next 5-6 years?  Good luck, gold bugs, you are going to need it.  

Edit:
After looking through the above-linked article some more, I believe that it engages in a decent amount of distraction and misleading to try to equate various other "crypto" projects to king-daddy bitcoin which could quite mislead folks into thinking that there is some validity with various shit projects, including bcash or zcash...   So, hopefully no one is too mislead by my attempt to give some benefits of the doubt to this article because of some of its lovely and seemingly misleading graphs (even though they are factual, to me, they still seem to be misleading spin attempts).

Interesting point in last week’s Coinmetric newsletter:

Coin Metrics' State of the Network: Issue 16





Also they stated correlation with Gold (the other asset class Bitcoin has been historically most correlated to) has gone South:




They are basically saying Bitcoin is becoming less correlated with gold, and maintaining still elevated volatility.
Well, this is not good from a SoV perspective, but it is surely good to have a High-Volatility, uncorrelated asset to trade with the Shannon Daemon!

Fantastic thread, out of merits otherwise you'd get 'em. Thanks for sharing this very useful information.

I sort of get the point of rebalancing the allocation of cash to crypto and vice versa but its just really a more comiplicated version of the budget rule we have which is the 50-30-20 rule the only difference is we try to balance out the investment part of the rule. A 50-50 ratio for trading and/or investing will work if you are trying to profit out everytime and you will just rebalance it later but I wouldn't always stick to a rebalancing method but try to take another opportunity if there is any. This will assure you that you still have capital as well as position just in case you have other plans for a trade.

One news hit the wires on a few days ago of an Hedge Fund (HF) closing a financing round of 50 millions USD:

UK Fund That Aims to Capitalize on Crypto Volatility Raises $50 Million

it was a very interesting article, on many levels, with many point to be taken into consideration.
One passage caught my attention in particular:


of course you have to discount a huge amount of marketing bullshitting while reading those comments, but something might be interesting about this statement.

So I did a little of research and I found an interesting article.

Rebalancing With Shannon’s Demon


This is nothing new in traditional finance, it is usually called also volatility pumping or rebalancing premium: you start with an allocation of two assets (one can be cash for simplicity), and when this allocation deviates from the optimal, say 50%-50%, you sell the appreciating assets and buy back the losing assets. If the two assets are driftless and decorrelated, you end up buying each assets at "low" levels and selling it at "high" level.

In traditional finance this is not widely used, HF usually rely on other types of trades to provide a positive, stable result (sometimes referred as alpha). Two markets where this strategies are used are the emerging markets (think about the equity/bond markets of Argentina and Turkey, they are probably high volatility and uncorrelated markets), or even volatility as an asset class trades (for the most technical: straddle buying or selling).

Is this a magical recipe?
I doubt so: you have to think about the following things.

• Transaction costs: liquidity and slippage (market moving because of your own orders)  add costs to your strategy that must be taken into account while considering the final P&L
• Rebalancing Window Optimization: which frequency do you use to rebalance? rebalancing to often has a negative effect on transaction costs and tamper positive effect on letting the trend go on, hedging late draw back the expected P&L of the trading strategy back to the long term drift, we assumed to be zero.
• Traditional assets are highly correlated. This used not to be true in the past, but now, with QE all over the world the "bubble of everything" biased all correlation results toward high levels, all asset class move the same direction all together. Someone says because you are measuring with a shorter and shorter meter (the USD itself). For sure Bitcoin being a uncorrelated assets might be really interesting on this point.
  
• More importantly, final performance of the strategy depends on the realised decorrelation and drift of each asset. if you select two assets that are perfectly decorrelated and had zero drift in backtesting, but when you actually use them as trading instrument are drifting lower in a correlated way, your expected result will inevitably differ from theoretical performance.  
  
  

Conclusion: this is a very sensible approach. Leveraging the decorrelated nature of Bitcoin (I bet that, contrary at what it has been written, they will concentrate on BTCUSD only), automated trading and a somewhat positive drift of BTCUSD, the approach of this kind of HF could be interesting from an investor perspective.

Another way of looking at it is a way to scale down the investment in BTC, using this approach to have a FIAT augmenting/BTC decreasing allocation mix over the time to grant a positive fiat inflow.


More about Shannon Demon, volatility pumping and similar topics:
(I tried to put them on a "difficulty of approach" order, from simplest to more technical)

• Volatility Harvesting: Why Does Diversifying and Rebalancing Create Portfolio Growth?
• VOLATILITY HARVESTING: EXTRACTING RETURN FROM RANDOMNESS
• Demystifying Rebalancing Premium and Extending Portfolio Theory in the Process

Nb: one chart in the first linked article is totally misleading:



In this graph the two assets are and the resulting portfolio are totally superimposed.
The point is the two assets in the graph are not only perfectly correlated, but have also the same exact volatility. Two assets can have perfect correlation even if they have different volatility: i.e. the two lines could be different on the graph, but, for an approximate example, one moving the double the amount of the other.