I have so many followers that are into cryptos and want me to get involved in some way. I started trading Bitcoin and Ether micro futures as an experiment about 6 months ago. I use 9-day indicators, so it’s a relatively short-term trading strategy. So far, I am into my 6th trade, this one to the downside. As of now 5 of the trades have been profitable and one a very small loss. One of the trades had a terrible fill due to large moves in cryptos on a Saturday night when the futures were closed. All together, the experiment has been a good one and I will continue to trade micro crypto futures.
A thought came to me while analyzing things as I do from time to time. Lately, I keep hearing about stocks being down and cryptos being down in the same day. Business shows call it risk on or risk off. If this were the case, cryptos would not be a very useful diversification against a stock portfolio.
However, the data doesn’t agree with the business shows as usual. Below is a scatter diagram of the daily percent changes in the Russell 2000 stock index versus the daily percent changes in Bitcoin prices.
It looks like a shotgun blast pattern. With a very low R-squared of 0.0965, you could say that there has been little relationship between a 2000 stock composite index and Bitcoin, the largest of the cryptos.
What does this mean to you as a trader? I’m always trying to add items and strategies to the portfolio that are non-correlated to my existing portfolio. I usually have between 40-60 positions across 8 strategies over 3 time periods. It appears that over the last year, Bitcoin would have provided an excellent diversification to long stocks.
Prices of the crypto sometimes went the same way as stocks and other days it went the opposite of stocks. With futures, it’s easy to go both long and short the cryptos and I’ve only had to do 6 trades in over a half a year. It’s not too much of a strain on my retirement life.
Based on this, it might be a fruitful thought to consider adding trend following crypto futures to the portfolio as a diversification, smoothing your results and helping you enjoy the ride!
Hi Gavin, When I say Bitcoin futures, I mean Bitcoin futures. Here's a link to the CME (The old Chicago Mercantile Exchange) https://www.cmegroup.com/trading/micro-bitcoin-futures.html. No options involved. You can go long or short. Having the micro futures allows you to trade a smaller size and experiment with it without committing a substantial part of the portfolio to it and aside from the closed on weekends nature of the futures, it's certainly as interesting to trade as any other futures market. The micro size is 0.10 Bitcoin with correspondingly lower margin required. I trade the current contract up to about a week before expiration, then roll to the next month. It's been a positive to the portfolio over the last six months. Yesterday, I went long.
Nice analysis. Thanks for the kind words. Having fun writing these little snippets.