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Comment by pdog | Hacker News Reader

A better approach with an extremely volatile asset like Bitcoin is a simple tactical asset allocation strategy.

For example, the following system significantly outperforms both buy-and-hold and dollar-cost averaging strategies.

    1. Buy when the monthly price of Bitcoin is greater than its 10-month simple moving average (SMA).
    2. Sell (and move to cash) when the monthly price is less than its 10-month SMA.

That's it. Market timing improves the risk-adjusted returns with minimally increased transaction costs versus a buy-and-hold strategy.

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Am I reading this right? It seems to be advocating “Buy high, sell low”.

This is exactly how I read it. I think the OP flipped the two.. This, and the fact there is zero evidence to back up the claim is enough for us to confidently ignore it and move on.

No, the OP said it correctly, it's a momentum strategy, you presume the market will keep going in the direction it's already going. This is a simple trend trading strategy. It doesn't actually work anymore, but anything that ever worked once will continue to live and be promoted by people who don't grasp that markets aren't static.

What the strategy ignores is that it gets eaten alive in ranges, when the market isn't trending, this strategy buys high and sells low over and over until you're broke. Works great when the market is trending though.

Bitcoin for example last crossed its 10 month moving average around $246, it's now trading over 4k; $246 would have been a hell of a price to get in at. So yes, buying the "high" works well in a trending market. It's have to drop to $1827 to trigger that same sell signal so you'd lose well over half the floating profit, and then it'd probably cross back and forth a few times when it's near the average trigger many failed entries and exits eating up all the profit you just made.

Moving average strategies don't work except in hindsight when you can see the trend and decide which MA would have worked (something you can't know beforehand), but they're great teaching aids in understanding and learning about trading strategies because they're nearly as simple as a strategy can get.

Well, think about it in the context of a rising volatile asset. I think what OP is recommending is to identify "entry points" and "exit points".

  - Buy as the asset is rising above 10 month MA (and likely will continue to rise, maybe for weeks, months, years)

  - Sell as the asset is cooling off (falling below 10 month MA). Don't get "back in" until the asset is heating back up.

With something like bitcoin, this idea would be to ride up a large market bull, but then get out until it looks like it is happening again. If you play with the Moving Average[0], you can see that this strategy would basically have you enter in late 2013, sell in mid 2014, and not enter again until late 2015, then hold all the way. Not exactly a riveting strategy, but OP didn't claim as much.

[0] https://bitcoincharts.com/charts/bitstampUSD#rg1460zigDailyz...

Since most markets trend for long periods of time, this winds up being a better strategy than you might imagine. "Buy high, sell low" also isn't quite an accurate description, because moving average crosses in strongly trending markets happen at the beginning of the move, rather than the end.

No one regrets buying AAPL high in 2010, or selling LEH low in early 2008.

>No one regrets buying AAPL high in 2010, or selling LEH low in early 2008.

This is clearly survivorship bias.

I just tried that momentum theory on the bitcoin closing data someone posted in a sibling comment.

I get 715 days of a trend continuing (down->down or up->up), and 739 days of the "trend" reversing: down->up OR up->down.

That pretty much points at a random walk. "Momentum", and any other patterns people see, are imagined.

Standard momentum strategy, sure, but there's no way you can claim this outperforms buy-and-hold for certain.

That makes no sense... It sounds like it directly contradicts the notion of "buy low, sell high"?

And now imagine it with the ability to write covered puts. The juicy premiums are going to be HUGE when you don't get exercised because everyone thinks bitcoin is going to be volatile, and then the one times when your options get exercised you get a lower cost basis!

I want this so bad.

Bitcoin spot market is going to get SPAN margining instead of Reg-T, so the options leverage is going to be amazing, way better than the ridiculous margin requirements for equity options, it is almost unfathomable.

With the CFTC loving it, CBOE and CME Group gearing up for futures and options, and the Winklevoss Twins pushing them hard because they want that ETF, thats how I know bitcoin is just getting started.

This is one of my bullish cases. The entire "but muh volatility" argument goes completely out of the window, after they reinvent hedging.

By "monthly average" you mean "trailing 30 day simple moving average price" and by 10 month you mean "trailing 300 day simple moving average" right?

In this case ,this is assuming that when the market shifts from bull to bear you can see it with a 30 day average-- or put another way, it's assuming it moves at a certain speed.

When you claim that this "significantly outperforms" is that based on measurements of bitcoin or of some other assets?

> By "monthly average" you mean "trailing 30 day simple moving average price" and by 10 month you mean "trailing 300 day simple moving average" right?

No. The system is only updated once a month, e.g., on the first day of the month. Daily price fluctuations are totally ignored.

Author of "possibly the most misguided comment ever read on HN." ?

>Market timing improves the risk-adjusted returns

Unless you've got a crystal ball, market timing isn't something you can count on for investment returns.

10 months could be about 9 months and 30 days too long of a timeframe. Volatile assets are volatile, and 10 months is a long time.

Are you sure? Would you bet your money on that?

If yes, then I must say that black swans are just around the corner waiting for you.

I think this strategy would be safe to black swans because it would be invested when it's going up tremendously, and out of the market when it drops tremendously.

But it would lose all it's value if it just swings up and down slightly over time, as it buys high and sells low.

The whole point of black swans is that you can't predict them. They are equally likely to happen when the market (or a particular security) is going up or when it's going down. I don't see any reason to think you'd be more likely to be out of the market when something unpredictable happens.

thanks! It sounds a good use-case for the next experiment

The downside of this is called "whipsaw".

what about taxes from selling?

Aren't taxes only applicable to the profits? I assume the only issue with taxes is it'd be a little more paperwork to document all the trades done with the bot than just a single buy-then-sell.

> Aren't taxes only applicable to the profits?

If you hold for less than a year it's income, if you hold for more than a year it's capital gains. So buy and hold would possibly be advantageous in the US at least (35% vs 15% tax rates.)

>If you hold for less than a year it's income

But it's the profits specifically that are taxed as income, not the whole sale value, right? If I buy and sell one Bitcoin a hundred times in a day and make $1 of profit in total, is the tax is a percentage of $1 or a percentage of 100 times the bitcoin price?

Yes, just the amount gained. You also can write off losses against any other incomes you have.

Nonsense snake oil.

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