In previous posts about BTCSHORT, we have discussed that BTCSHORT tracks -1x of the daily performance of Bitcoin. 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 the price action of Bitcoin during noticeable events. In this article, we decided to investigate how BTCSHORT would have performed during previous Bitcoin Halvings.
Please note that the following analysis uses historical data to simulate BTCSHORT's theoretical historical performance. This analysis does not include fees or expenses All data for Bitcoin performance is taken from Bitstamp.
Once every 210,000 blocks or approximately four years Bitcoin’s block reward halves. At Bitcoin’s genesis block its block reward began at 50 BTC and then reduced to 25 BTC on November 28, 2012. Historically, Bitcoin’s price has been largely affected by previous Halving events and some argue that they have been the drivers behind bull markets of 2013 and 2017.
As a thought experiment, it is interesting to see how BTCSHORT would have performed compared to Bitcoin on the day of the 2012 Halving.
At the start of the 29th of November 2012, Bitcoin’s price was up by 1.97% from $11.98 to $12.22 whilst BTCSHORT’s daily performance would theoretically be -1.97%.
As mentioned in previous articles, BTCSHORT’s recommended holding period is equal to one day or less and this fact becomes evident when we look at what would happen if a token holder decided to hold BTCSHORT for a week from the day of the Halving — from 28 November to 3 December.
If BTCSHORT were held over the whole week then by the 3rd of December 2012, Bitcoin’s price would have risen by 3.14% from $11.98 to $12.36. Conversely, BTCSHORT’s performance over the period would hypothetically be -3.93%
BTCSHORT is useful for token holders looking to benefit from daily negative downturns in the price of Bitcoin — however, in this case, a token holder would not have benefited. It’s noticeable that if a token holder had only held the token on the day of the 2012 Halving then the losses would have been massively limited.
On July 9, 2016, Bitcoin’s block reward halved again from 25 BTC to 12.5 BTC. Let’s look at how Bitcoin performed and also how BTCSHORT would have performed if held from the day.
On the day of the 2016 Halving, Bitcoin’s price fell from $660.24 to $646.86 which was a fall of 2.03% whilst BTCSHORT would have risen by 2.04%. This means that a token holder would have benefitted from holding BTCSHORT on the day of the Halving and hedged the downside of Bitcoin’s performance on the day. The situation is more complicated if BTCSHORT was held for longer than one day.
Due to BTCSHORT’s rebalance at the end of each day (5 PM CET), BTCSHORT does not maintain notional exposure to -1x of Bitcoin’s performance over multiple days. Given this fact, the token is not ideal for multi-day holding periods if the price of Bitcoin does not constantly decline each day during the holding period. As we can see, the gains made on the first day of holding BTCSHORT dissipate in the coming days due to the mean reversion of Bitcoin’s returns. By the end of the week, Bitcoin’s returns over the period (9 July to 16 July) was 0.74% whilst BTCSHORT’s performance was 1.05% — higher than Bitcoin’s but still much lower than the 2.04% at the end of 9 July.
BTCSHORT is a useful tool to allow token holders to get notional exposure to the inverse (-1x) daily performance of Bitcoin. While it is debatable whether the upcoming Halving will have a positive or negative impact on the immediate price of Bitcoin, historical data shows that BTCSHORT provides an excellent way to hedge against its downside risk on a daily basis. As such, there is strong evidence of BTCSHORT’s usefulness as a tool within a token holder’s arsenal. However, in total, due to the compounding of 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.