It turns out that there’s a “cheat code” for trading cryptocurrencies (or stocks / ETFs associated with cryptos): on-chain analytics.

I’ll be rolling out more lessons for subscribers but in this newsletter I wanted to show you how to develop a long / short BTC strategy that’s good enough to launch your own fund. Ok, maybe it’s not that good, but here are the results.

Notably, this period starts in 2020 and runs to the present – so, from just before COVID until now. The strategy, which uses stablecoin data, is represented in red. Bitcoin is in its traditional orange.

Here are the numbers side-by-side with BTC.

Sharpe and Sortino ratios are 2 ways to measure risk-adjusted returns, because a smart strategy is one that provides higher returns without taking on more risk. 

The strategy is tactical, both in its long and short positions, meaning that it takes profits early. This means that it tends to outperform, as most un-leveraged algos do, over a 3 year period. It takes patience, but it’s also simple to execute manually.

The core idea is simple: if aggregate stablecoin values begin to drop, cash is leaving the crypto ecosystem. When they rise, the crypto ecosystem is rising. BTC will follow those trends.

This is a late indicator, but one that comes with high levels of confidence. And that means you can use this signal to make money on BTC’s crash (potentially – this is simulated data and not financial advice).

In the image below you’ll see $BTC prices since 2022 in black, the total stablecoin value in red, and the 50 day simple moving average of the stablecoin value in green.

Now let’s use this data as a source for a trading signal

Strategy 1 - Long

Our strategy is simple:

• If the aggregate (red line) closes above the SMA 50 (green line), then buy and hold BTC.

• Else sell.

Of course, with such a long-trending strategy, you are going to need to take some early profit. Let’s set that at a simple point: Every 2x sell 33% of your BTC holdings.

You are going to keep less than you hypothetically could if you had perfect timing, but that’s an illusion. This tactical approach bags cash for you on the way up and reduces your volatility.

Strategy 2 - Short

This is nearly the mirror image of the long strategy:

• If the aggregate (red line) closes below the SMA 50 (green line), the sell BTC short.

• Else close your position.

Because shorting is tricky, we need two tactical rules:

• When you reach 50% profit, close 33% of your short position.

• If BTC drops more than 10% on a given day, close out another 33% of your short position.

That second rule ensures that you take profits from a “capitulation” event.

Finally

That’s the entire lesson. It returned better than 457% over BTC since 2020.

You’ve learned:

• That on-chain data + very simple momentum approaches can potentially yield excellent results. The alpha comes NOT from the sophistication of the strategy but from the quality of your data.

• Aggregate stablecoin volume is a unique data source that can be used (at least potentially) in just this way to achieve easy alpha.

Access to this data does cost $1100+ a month. And what you get is a firehose’s worth of data -- there is just so much of it, and none of it is parsed for what is relevant or what isn’t.

What to do?

Well, for non-accredited investors, we have offerings at 1.2 Labs that will follow this signal. Accredited investors should just reach out to me because we can even offer you something custom if you want.

Happy Trading!

― Sebastian Purcell, PhD