How does BTCSHORT perform? | Black Thursday

In this case study we analyze how BTCSHORT would've performed on March 12 2020 (dubbed "Black Thursday") where the crypto market faced a noticeable downturn.

Introduction

In previous posts about BTCSHORT, we have discussed that BTCSHORT provides notional exposure to the inverse (-1x) of Bitcoin’s daily performance. This means that if Bitcoin’s price falls by 5% in a day then BTCSHORT’s price will rise by 5%. It is useful to see how BTCSHORT would have performed at previous historical market conditions as such this piece of research will simulate BTCSHORT’s historical performance based on Bitcoin’s historical price. In this piece we ask the question:how would BTCSHORT have performed during Bitcoin’s flash crash on March 12? Please note that the following analysis uses historical data to simulate BTCSHORT's theoretical historical performance. All data for Bitcoin performance is taken from Bitstamp. This analysis does not include fees or expenses.

Black Thursday

On March 12th, Bitcoin’s price fell from $7935.44 to $4761.29 in what was one of the biggest single-day drops in Bitcoin’s history — as Bitcoin returned -40%. This day also represented a perfect opportunity for those seeking to get -1x exposure to Bitcoin’s daily performance. The chart below shows the performance of BTCSHORT if it was bought on March 11 and then sold at the end of March 12.

BTCSHORT’s cumulative performance over the same time frame was 51.53% as, due to its large price increase, it rebalanced one additional time during the day. This means that if a token holder held $100 worth of BTCSHORT on March 12 and then sold at the end of the day on March 12, they would have around $151.

Holding BTCSHORT for longer than a single day can lead to worsening returns due to BTCSHORT’s daily rebalancing. This rebalancing causes returns to compound which means that in periods where Bitcoin’s price goes up and then down by the same amount, BTCSHORT would actually underperform Bitcoin. The chart below shows what would have happened if a token holder held BTCSHORT for more than a day following the purchase on March 12 to March 18.

Explanation

As we can see, the returns of BTCSHORT taper off following its large rise on Black Thursday. This is due to the fact that in subsequent days the price of Bitcoin on a daily basis continued to rise and fall. As we have mentioned in previous research pieces, BTCSHORT provides notional inverse exposure to Bitcoin’s daily performance. This is not the case over longer periods of time due to compounding — as we explained in previous blog posts. On March 12 as the price of Bitcoin fell by more than 33% during the day, BTCSHORT in addition would have undergone an intraday rebalances given its rebalance threshold of ±33%. There is also rebalancing every single day which causes additional compounding.

The table below shows the performance of Bitcoin and BTCSHORT over the March 12–18 time frame shown above.

Conclusion

BTCSHORT is a useful tool to allow token holders to get notional exposure to the inverse (-1x) of Bitcoin’s daily performance. We showed how if one could have bought BTCSHORT on Black Thursday during Bitcoin’s large price fall and then sold the next day, you would have benefitted noticeably. However, we also showed how, due to the compounding BTCSHORT, it is not advisable to hold BTCSHORT for more than one day as BTCSHORT does not give a token holder notional exposure to the inverse of Bitcoin’s performance over multiple days.

Disclaimer

This document has been prepared and issued by Amun Limited (“Amun”). This document may contain market commentary. All information used in the publication of this document has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this document or the information contained/referenced herein.

This document may contain independent market commentary prepared by Amun based on publicly available information. Although Amun endeavors to ensure the accuracy of the content in this document, Amun does not warrant or guarantee its accuracy or correctness. Any third party data providers used to source the information in this document make no warranties or representation of any kind relating to such data. Where Amun has expressed its own opinions related to product or market activity, these views may change. Neither Amun, nor any affiliate, nor any of their respective officers, directors, partners, or employees accepts any liability whatsoever for any direct or consequential loss arising from any use of this document or its contents.

Crypto asset trading involves a high degree of risk. The crypto asset market is new to many and unproven and may have the potential to not grow as expected. Currently, there is relatively small use of crypto assets in the retail and commercial marketplace in comparison to relatively large use by speculators, thus contributing to price volatility that could adversely affect an investment in crypto assets. In order to participate in the trading of crypto assets, you should be capable of evaluating the merits and risks of the investment and be able to bear the economic risk of losing your entire investment.

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Any historical performance included in this document may be based on back testing which is a means of evaluating a particular strategy by applying it to historical data to simulate what the performance of such strategy would have been. Back tested performance is purely hypothetical and is provided in this document solely for informational purposes and neither represents actual performance nor should it be interpreted as an indication of actual or future performance.

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