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Thursday, May 26, 2022

Protecting Against the Crypto Risk

تم إعداد هذا المنشور من قبل سنشري للاستشارات

Protecting Against the Crypto Risk
Protecting Against the Crypto Risk

* Trading in financial market carries risk and can result in loss of capital.
* This performance is only observed with historical backtests and not traded by the company.

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The product and investment ideas do not consider the risk profile and financial position of the recipient and may not be suitable for everyone. Trading in financial markets and use of margin involves a significant risk of loss, which can exceed deposits. Please read the complete disclaimer carefully.

Risks & Assumptions

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The product and investment ideas do not consider the risk profile and financial position of the recipient and may not be suitable for everyone. Trading in financial markets and use of margin involves a significant risk of loss, which can exceed deposits. Please read the complete disclaimer carefully.
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Holding cost is subject to change impacting the trade either negatively or positively.

Bitcoin & Ethereum still much above the Pandemic Levels

Crypto fans have bagged ample gains in the past, powered by exuberant risk taking in an era of low interest rates. But now the car is coming down the other side of the roller coaster.

While Altcoins are almost back to March 2020 levels, Bitcoin and Ethereum are still much higher in comparison to their prices in the first quarter of 2020.

The chart below depicts the line chart for, Bitcoin, Ethereum, Dash, and Bitcoin Cash.

line chart for crypto

Data Source : Bloomberg

Prices of Altcoins such as Dash and Bitcoin Cash have reverted to March 2020 levels, while BTC and ETH are still up 445% and 1,574% respectively.

Cryptocurrency Price as of 3/18/2020 Price as of 5/19/2022 Percentage Change
Bitcoin $5338.27 $29173.44 446.5%
Ethereum $116.51 $1950.74 1574.3%
Dash $57.31 $55.22 -3.7%
Bitcoin Cash $182.05 $190.31 4.5%

Data Source : Bloomberg

When assets rise very quickly in price and surge to a record high, typically this makes a correction much more likely, which is when the price falls back down to a more normal level. This appears to be the situation Bitcoin and Ethereum are in right now. Additionally, as per Bloomberg, the correlation of Bitcoin & Ethereum with the NDX, SPX and RTY Indices is at a high.

The metric below indicates the correlation of Bitcoin (XBTUSD) & Ethereum (XETUSD) with the three major US indices, namely: Nasdaq (NDX), S&P500 (SPX), and Russell 2000 (RTY).

SPX SPX XBTUSD XETUSD NDX RTY
SPX 1.00 0.68 0.79 0.97 0.80
XBTUSD 0.68 1.00 0.94 0.68 0.64
XETUSD 0.79 0.94 1.00 0.80 0.72
NDX 0.97 0.68 0.80 1.00 0.82
RTY 0.80 0.64 0.72 0.82 1.00

Data Source : Bloomberg
Data & Prices as of: 24/05/2022

While previously Bitcoin and Ethereum were claimed to be a hedge against inflation, the tight correlation with stocks now could indicate otherwise.

If the client wishes to hedge an existing holding with a short position, the client is likely to obtain holding cost. The table below depicts how clients can protect existing holdings by going short on BTC and ETH.

Protection to Downside Exposure

Platform Date Ethereum Price Quantity Exposure Change
Other Open 3/24/2022 Long $3,116 500 $1,558,000 -$584,500
Close 5/24/2022 $1,947 500 $973,500
CMC Open 3/24/2022 Short $3,109 500 $1,554,500 $570,500
Close 5/24/2022 $1,968 500 $984,000
Loss -$14,000
CMC Annual Holding Cost on Short 16%
Daily Holding Cost $683
Days of Trade Open 61
Holding Cost Received $41,660
Total P/L $27,660

Data Source : Computed using data from CMC and IBKR
Data & Prices as of: 24/05/2022

Risks and Assumptions for Back-tested trading strategies
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The risks and assumptions listed here are not intended to be an exhaustive summary of all the risks and assumptions involved.
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The strategy might suffer from look-ahead bias which occurs due to the use of information or data in a study or simulation that would not have been known or available during the period being analyzed. This can lead to inaccurate results in the study or simulation.
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Future price movements may not be exactly the same as the historical price movements and this could lead to variation in performance.
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Testing can sometimes lead to over-optimization. This is a condition where performance results are tuned so high to the past they are no longer as accurate in the future.
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The model assumes no slippages in trading. Slippage refers to the difference between the expected price of a trade and the price at which the trade is actually executed.
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Drawdowns in actual trading can be higher than the tested system and losses could be significant in the event of leverage.
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Unforeseen events can lead to variation in performance from the tested trading strategy.
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The tested result has been computed with price feeds available from Bloomberg.
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The testing environment has not considered transaction or any other costs.
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Trading indicators used for the purpose of testing has been provided by Bloomberg.
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The strategy might suffer from data mining fallacy, selection bias and backfill bias.

Data Source: Bloomberg

Arun Leslie John
Chief Market Analyst

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