ETH Strategy Backtest Outperforms HODL

Long Only - Basis and Option Skew Signal Combo

ETH Skew + Futures Basis Trading System

New to this week’s newsletter, we’re featuring a new series of content that displays backtested crypto trading strategies using historical GVol data.

Regarding this week’s strategy, the system longs spot ETH at the daily close when select ETH futures basis spreads are above a preset daily simple moving average, and ETH skew (C-P) is most negative in the short-term.

Although the option market is bearish in sentiment, I hypothesize that if ETH futures basis spreads are above the short-term moving average, then long momentum is expected to pick up on spot ETH, essentially finding pivotal longs.

When either the basis signal or skew signal ceases the strategy gets flat!

Below is a backtest displaying the results of the system starting with an account balance of $10,000 in April 2019. Through the duration of the system, the strategy yielded positive returns with minimized drawdowns throughout 2020.

I hypothesize that the drawdowns prior to 2020 were due to a sideways market and a lack of “follow-through” as signals chopped around. - Greg

I hypothesize that the drawdowns prior to 2020 were due to the lack of liquidity in the ETH futures/options markets with false indications of significant buy/sell signals. - Tyler

Comparative to buy/hold spot ETH, plotted below, the hypothesized system drastically yields a better risk-adjusted return due to the differences in max drawdown and consistency over time. Regardless of buy/hold spot ETH yielding a larger account balance through the duration of the holding period, buy/hold spot ETH is clearly less consistent with far larger drawdowns that the hypothesized system.

Twitter @TPrahm Tyler Prahm