Bitcoin vs. the MSCI Index

 

The chart shows Bitcoin (blue) and the MSCI World Index (red) on two different scales. Major cycles in Bitcoin appear quite closely related to those in the stock market. Formal analysis shows that in recent years, Bitcoin has a beta of about 2 to the market but also a very high alpha and also of course a lot of extra volatility. The relationship of the price of Bitcoin to a 4 year cycle around halvings could just be coincidence. However, the high alpha shows that there is a strong upward trend that is uncorrelated to the stock market. Economic theory would show that the price of Bitcoin is mainly demand driven. The rewards that Bitcoin miners get drive the number of miners rather than mining costs driving the price of Bitcoin. For the price to continue to rise we need to have increasing demand. The recent introduction of ETFs is an example of that.

Futures Trading Disaster

I really messed up with bitcoin futures positions and lost a bunch of money. The triangle didn't work out. I really shouldn't trade futures directionally, I think. They give me anxiety that holding stocks does not. It makes no sense but that is the way it is. So then I trade badly. I closed the positions I had, probably at the bottom of the market for a big loss because I couldn't take it any longer. I still have ETF positions. But I feel so much calmer about those. Crazy. I know that I can't handle this sort of trading holding positions overnight but still I do it. You would think I would have learned this, but somehow I am still optimistic that it will work out.

I am following this dude closely on Youtube:

Elliott Wave Triangle in CME Bitcoin Futures

I'm not big on this sort of technical analysis and especially Elliott Wave but it is amazing how the CME Bitcoin Futures just touched the line drawn connecting the previous two recent lows forming a perfect Elliott Wave triangle:

Hopefully, it will hold with the halving this week...

P.S. 16 April

The low at E was overshot during the US trading session, but this often happens in these formations. As the low of C was not exceeded the triangle is till valid if you believe the theory. Downward pressure is coming from both the general "risk-off" mood in the financial markets and prior to previous halvings there was also weakness before the event and then a bull market following. Also, Anthony Pompliano points out that Americans have to pay their taxes by today. So, they may be selling Bitcoin to get the cash for their taxes. But the price of bitcoin apparently does need to be higher than this post-halving for miners to breakeven.

Sold Berkshire Hathaway

I sold my 100 shares of BRK/B. The last earnings report raised questions about the performance of several major Berkshire businesses. My target asset allocation said I could reduce my exposure to US shares and I wanted to do something else with the money. Yeah, I bought more bitcoin. Munger would have been horrified.

Total profit on Berkshire to date was USD 18k and the internal rate of return was 11.09%.

March 2024 Report

This was a very good month investment-wise. Not all numbers are in, we still might get updates from more illiquid investments. But based on what we have, we had our best investment result ever in terms of absolute Australian Dollars (rather than percentage return) at AUD 228k. It's beginning to feel like 2021 again:

We are approaching having made AUD 3 million in gross returns by investing. In 2020-2021, we had a record-breaking run of 17 positive months ending in December 2021. So far we have only had 5 positive months in a row, but the longest positive run we had in the intervening two years was only two months. So, this feels very different than the last two years.

In March, the Australian Dollar rose slightly from USD 0.6504 to USD 0.6514. Stock indices and other benchmarks performed as follows (total returns including dividends):

US Dollar Indices

MSCI World Index (gross): 3.20%

S&P 500: 3.22%

HFRI Hedge Fund Index: 1.53% (forecast)

Australian Dollar Indices

ASX 200: 3.57%

Target Portfolio: 2.76% (forecast)

Australian 60/40 benchmark: 2.41%. 

We gained 4.44% in Australian Dollar terms or 4.60% in US Dollar terms. So, we beat all benchmarks. Shocking 😀.

Here is a report on the performance of investments by asset class:

The asset class returns are in currency neutral returns as the rate of return on gross assets and so are lower than the Australian Dollar returns on net assets mentioned above. Returns were positive for all asset classes. Gold had the highest rate of return and made the largest contribution to returns followed by futures in terms of contribution and Australian small caps in terms of rate of return.

Things that worked well this month:

• Seven investments made more than AUD 10k each: Gold (48k), Bitcoin (28k), 3i (III.L, 26k), Regal Funds (RF1.AX, 23k), Pershing Square Holdings (PSH.L, 14k), Unisuper (11k), and CFS Developing Companies (11k).
  

What really didn't work: 

• Unpopular Ventures had the worst result (-5k) as one of our investments with them went bust.
  

Here are the investment performance statistics for the last five years:

The top three lines give our performance in USD and AUD terms, while the last three lines give results for three indices. Compared to the ASX200 we have a lower average return but also lower volatility, resulting in a higher Sharpe ratio of 0.97 vs. 0.72. But as we optimise for Australian Dollar performance, our USD statistics are much worse and worse than either the MSCI world index or the HFRI hedge fund index. Well, we do beat the HFRI in terms of return, but at the expense of much higher volatility. We have a positive alpha relative to the ASX200 of 3.3% with a beta of only 0.45. 

The SMSF continued to outperform both its benchmark funds after under-performing for a few months:

We are fairly close to our target allocation. We are underweight private equity and hedge funds and overweight real assets and futures. Our actual allocation currently looks like this:

About 70% of our portfolio is in what are often considered to be alternative assets: real estate, art, hedge funds, private equity, gold, and futures. A lot of these are listed investments or investments with daily, monthly, or quarterly liquidity, so our portfolio is not as illiquid as you might think.

We receive employer contributions to superannuation every two weeks. We are now contributing USD 10k each quarter to Unpopular Ventures Rolling Fund and less frequently there will be capital calls from Aura Venture Fund II. It was quite a busy month:

• I sold 1,000 shares of the Perth Mint gold ETF (PMGOLD.AX). This helped fund capital calls from Unpopular Ventures and Aura totalling AUD 40k.
  
• I sold 3,000 shares of the WCM Global Quality ETF (WCMQ.AX).
• I sold 20,000 shares of Cadence Capital (CDM.AX). We no longer hold this in our SMSF, but do hold plenty of shares in other accounts.
• I sold 5,000 shares of Platinum Capital (PMC.AX).
• I bought 750 shares of Fidelity's bitcoin ETF (FBTC). This was funded by the sales of stock funds listed above.
• I also did some successful day-trading of Bitcoin and gold futures. I feel like I am finally getting this trading thing :)
  
• I sold 7,794 shares of Regal Funds (RF1.AX).

February 2024 Report

In February, the Australian Dollar fell from USD 0.6595 to USD 0.6504. Stock indices and benchmarks performed as follows (total returns including dividends):

US Dollar Indices

MSCI World Index (gross): 4.33% 

S&P 500: 5.34%

HFRI hedge fund index: 1.92% (forecast)

Australian Dollar Indices

ASX 200: 1.03%

Target Portfolio: 3.08% (forecast)

Australian 60/40 benchmark: 1.65%. 

We gained 1.78% in Australian Dollar terms or 0.37% in US Dollar terms. So, we beat the ASX200 and the 60/40 benchmark but underperformed the other four. The main reason we underperformed the target portfolio is because it gained 1.15% from venture capital and buyout whereas we had a negative return from private equity.

Here is a report on the performance of investments by asset class:

The asset class returns are in currency neutral returns as the rate of return on gross assets and so are lower than the Australian Dollar returns on net assets mentioned above. Futures experienced the highest rate of return and made the largest contribution to returns followed by US stocks and ROW stocks. On the other hand,  private equity and real assets had negative returns in February.

Things that worked well this month:

• Bitcoin (AUD 22k - see below), Pershing Square Holdings (PSH.L 16k), and Winton Global Alpha (11k), and WCM Global Quality (WCMQ.AX, 10k) all had gains of more than AUD 10k.
  

What really didn't work: 

• Tribeca Global Resources (TGF.AX) lost AUD 15k.
  

Here are the investment performance statistics for the last five years:

The top three lines give our performance in USD and AUD terms, while the last three lines give results for three indices. Compared to the ASX200 we have a lower average return but also lower volatility, resulting in a higher Sharpe ratio of 0.90 vs. 0.69. But as we optimise for Australian Dollar performance our USD statistics are much worse and worse than either the MSCI world index or the HFRI hedge fund index. Well, we do beat the HFRI in terms of return, but at the expense of much higher volatility. We have a positive alpha relative to the ASX200 with a beta of only 0.45. 

The SMSF outperformed both its benchmark funds after underperforming for a few months:

 

We are quite close to our target allocation. We are underweight private equity and hedge funds and overweight real assets. Our actual allocation currently looks like this:

About 70% of our portfolio is in what are often considered to be alternative assets: real estate, art, hedge funds, private equity, gold, and futures. A lot of these are listed investments or investments with daily, monthly, or quarterly liquidity, so our portfolio is not as illiquid as you might think.

We receive employer contributions to superannuation every two weeks. We are now contributing USD 10k each quarter to Unpopular Ventures Rolling Fund and less frequently there will be capital calls from Aura Venture Fund II. In contrast to January, it was a busy month:

• I made a follow-on investment of USD 5,000 in Kyte, who are trying to "disrupt" the car rental business.
• I sold all our holding of Ruffer Investment Company (RICA.L).
  
• Likewise for WAM Leaders (WLE.AX).
• I sold around 3k shares of Hearts and Minds (HM1.AX).
• I sold around 5k shares of WCM Global Quality (WCMQ.AX). 
• I sold around 3k shares of Cadence Capital (CDM.AX).
  
• I did a short-term trade in Platinum Capital (PMC.AX) netting only AUD 64...
• I bought 100k shares of DCL.AX at 1 Australian cent each. Then the stock was suspended again... 
• I bought 1,000 shares of PMGOLD.AX the gold ETF, which I have already sold by now for a quick trade.
• I bought 2,250 shares of Fidelity's bitcoin ETF (FBTC). That is about 1.75 bitcoins worth. I have traded bitcoin in the past using futures and CFDs but it is costly with high margin requirements. I don't want the hassle of owning actual cryptocurrency with hacking risks etc. So, the new ETFs are good for me. Oscar Carboni thinks it's going up. The next "halving" is coming. And the ETFs should be a new source of demand. I will include this asset in the "futures" asset class for now, though it is spot bitcoin actually. Bitcoin can serve as both a diversifier and a return booster. A small allocation to Bitcoin raises the Sharpe ratio of the portfolio.
   

Bitcoin

 I'm finally back into Bitcoin. The position I could get was tiny. Margin requirements are crazy. On IB they are something like twice the actual BTC position. I took a small position on Plus500.

Long Only Bitcoin Trading

I continue to struggle psychologically with shorting Bitcoin futures and as a result make mistakes and lose money. So, I investigated how taking only the long trades would perform. If the "model" says to short Bitcoin, we close the long and stay out of the market. This is equivalent to being always long 1 unit of Bitcoin and going long or short one unit in addition.

Statistics since March 2018 for long trades only are very similar to the statistics for all trades. But because you are in the market only half the time, total returns will be lower. Since the beginning of 2019 total returns have been the same - short trades have added nothing to returns. Winning long trades outnumber losing long trades 10 to 6. Losing short trades outnumbered winning short trades 10 to 5.

So, I think that in the interim I will only take long trades in Bitcoin.

Note that in the last 10 months of 2018, long only trades gained a total of 18% while Bitcoin lost 65%. So, taking long only trades doesn't mean losing if Bitcoin returns to a bear market.

Worst Loss on Bitcoin

Just got stopped out for a 7.06% loss on Bitcoin trading. That is the worst loss that the Bitcoin model has suffered so far. So, most losses won't be as bad as that. Back to short...

This position was never in the money. The position was entered on a spike in price, which just triggered the stop. But I exactly followed my approach. 

This is our equity curve (USD) so far in trading Bitcoin futures:

We also had some profits trading Bitcoin CFDs.

Only 40 Active Accounts Trading Bitcoin Futures?

According to this article, there are only 40 active accounts trading CME bitcoin futures. I can't read the whole article without paying for an expensive subscription, so I don't know their methodology. I am surprised by this as I have two accounts regularly trading bitcoin futures. I wonder if all accounts at a broker like Interactive Brokers are bundled into a single virtual account?

May 2019 Report

In May the Australian Dollar fell from USD 0.7047 to USD 0.6930. The MSCI World Index fell 5.85% and the S&P 500 6.35%. The ASX 200 rose 1.96%. All these are total returns including dividends. We gained 0.37% in Australian Dollar terms and lost 1.30% in US Dollar terms. Our currency neutral rate of return was -0.53%. I estimate that the target portfolio gained 0.01% in Australian Dollar terms and the HFRI hedge fund index lost 1.75% in US Dollar terms. So, we under-performed the Australian stock market but outperformed our other benchmarks.


Here again is a detailed report on the performance of all investments:

The table also shows the shares of these investments in net worth. At the bottom of the table I also include the Australian Dollars return from foreign currency movements, other net investment gains and losses - net interest and fees, and futures trading. At the asset class level, private equity was the best performing asset class gaining 1.56%. The worst asset class was rest of the world stocks.

Things that worked very well this month:

• Trading Bitcoin. The beginning of the month we made big profits and then towards the end of the month started losing.
• Medibank Private. We sold out of it in the post-election rally.
• Oceania Capital. They announced a buyback at a premium to the last share price prior to planned delisting. See below...
• Hearts and Minds. Continued to outperform the markets.
• Our corporate bond portfolio began to have net positive returns.

What really didn't work:

• Bluesky Alternatives. The parent company of the fund manager went bankrupt... See below...
• China Fund. Got hit by the trade war.

Trading income was USD 4,436 for the month. The rate of return on cash in trading accounts was 3.15%. We made a lot of money in Bitcoin and a little in ASX200 futures and lost in crude oil, gold, NASDAQ 100, and palladium. We were up much more in the middle of the month before a drawdown in Bitcoin. Though this month we didn't make as much as in May 2018, we are overall tracking slightly higher so far this year than in 2018, which is informally my goal for this year.

We moved further away from our new long-run asset allocation * as we continued to accumulate bonds. But this is probably "peak bonds" in terms of their share in our portfolio, as we have finished moving money from my US bank account to Interactive Brokers:

Buying Australian Dollars is also on hold for a while as we bought a lot last month.

On a regular basis, we also invest AUD 2k monthly in a set of managed funds, and there are also retirement contributions. Then there are distributions from funds and dividends. Other moves this month:

• USD 50k of corporate bonds matured (General Motors)  and I bought USD 147k of USD bonds (Tenet Health, Anglogold, Deutsche Bank, and Yum Brands).
• We traded successfully, as discussed above.
• We sold 3521 Medibank Private shares when the price spiked after the election. We now have no individual company stocks.
• I bought 25,000 BAF.AX shares following the manager BLA.AX being put into administration. The board of the LIC is trying to engage Wilson Asset Management as the new manager and I think the chances of that are now better. The discount to NAV is about 36%, so even if assets managed by BLA are liquidated, I think there is a margin of safety.
• I bought 8000 OCP.AX shares after the manager announced that they would delist and buy out minority shareholders. The announced buy out price of AUD 2.30 is much less than NAV of AUD 2.83 though higher than NTA of 1.50. So, I am still hoping that they will raise the buyout price. On the other hand, the largest shareholder owns 60% of the shares and so it seems that they can do anything they like. Only around 25% are held by non-insiders/managers. Even if they don't raise the price, it is about a 12% p.a. rate of return from my entry price to redemption.
• I bought 2000 shares of the IAU gold ETF. 
• We applied for the Regal Funds IPO.

* Total leverage includes borrowing inside leveraged (geared) mutual (managed) funds. The allocation is according to total assets including the true exposure in leveraged funds. We currently don't have any leveraged funds.

Weekend Trading

Bitcoin is again rising over this weekend, so far. I set a stop buy order in my CFD trading account, which allows me to trade Bitcoin 24/7 for 7700 and it has triggered. Bitcoin is around 8000 at the moment. This long position hedges my short futures position. It allows me to have a stop on my position over the weekend when the futures market is closed. I would have been better off and less anxious if instead I had closed the futures position at the close of trading on Saturday morning Australian time. I think that is what I will do in future.

Monday's Move in Bitcoin was a Huge Outlier

The weekend move in Bitcoin extended into Monday's trading and Bitcoin ended up rising 25%. You can see how much of an outlier that was on my daily trading return vs. volatility graph:

Since then, Bitcoin has gone into another consolidation range. This morning it looked like we might get stopped out of the long trade at the open, but the market bounced and we are still long from 5285.

P.S. 12:55pm

We just closed the long position and went short at 7715. Profit on the trade was USD 12.1k Of course, all this was done automatically via stop orders. 20 minutes later the short is up USD 5k. This is crazy price action.

Bitcoin Going Completely Nuts Over the Weekend

I've noticed that in recent days Bitcoin has gone up starting at around 6pm US Eastern time when all stock markets in the World apart from New Zealand are closed. Of course, this is the afternoon and evening on the US West Coast. So, I figured that it was driven by retail investors in the U.S. Now this weekend, that trend has continued in dramatic fashion:

Bitcoin is up almost $700 on Friday's close. Luckily, I am long Bitcoin futures. It certainly makes me wary of ever being short Bitcoin over the weekend. Bitcoin has now popped up to be my 22nd best investment in dollar terms ever - I've been investing since 1996... Just about to overtake Pendal Property Investments. Anyway, anything could happen by 10am Monday Eastern Australia time when the futures market re-opens...

P.S.
Obvious solution to going short over the weekend is to have an account with a cash Bitcoin exchange that is open over the weekend and buy Bitcoin if the stop loss level is reached. What such exchanges allow stop orders?

P.P.S.
Bitcoin now up $1000 since Friday. If this persists till Monday it will be the biggest daily move in percentage terms in my dataset, possibly since the futures market open at the end of 2017. Plus 500 allows CFD trading 24/7. There are huge buy-sell spreads, so this would only be used as insurance. You can place conditional orders, such as buy only when the price reaches a certain level.

P.P.P.S.
I tried the demo platforms at Plus500 and eToro. eToro appears to be very limited and geared to novice traders. There were strong restrictions on the levels of orders that could be placed. So, Plus 500 seems to be the only real option that offers Bitcoin CFD trading 24/7.

More Asymmetry

A couple of days ago I posted about the asymmetry of market returns capture by the target portfolio. The portfolio captured less than 100% of the upside in the markets but almost none of the downside. The chart below, inspired by a recent paper from AQR, shows the Bitcoin trading model's daily returns compared to the absolute percentage change in the price of Bitcoin futures for that day:

The rising diagonal line are all the days when the model was properly aligned with market direction. The descending diagonal line are all the days where it was incorrectly aligned with market direction. The remaining cloud of points is where the model changed direction. Some of those days were winners and some very bad losers when the model ended up incorrectly with the market in both directions that day. For example, it was stopped out of a long position and entered a short and then the market rose for the rest of the day...

The fitted quadratic curve shows that for low absolute price changes up or down in the price of Bitcoin, the model tends to lose money. This is because of "whipsaw". There is a strong asymmetry in the response for large moves and so the fitted curve shows that the model captures increasingly more of the return the larger the move.

The results do conform to AQR's argument that returns to trend-following have been poor recently because markets haven't been moving enough.

Varying Position Size Still Doesn't Make Sense

Last year, I posted that increasing trading position size when volatility is lower didn't make sense for my trading system. When the volatility was low trades tended to lose more and win less. So, trading bigger because risk was supposedly lower didn't pay off.

Now I am using a more traditional trading system that wins by letting winners run and cutting losses short, without pretending to predict the direction of the market. Here, I have found that there is no correlation between the profit from trades and the maximum loss possible given the initial stop loss:

The chart shows all the trades in Bitcoin futures my system would have made in the last year The x-axis shows the maximum loss on the trade of one contract (assuming we can exit at the stop loss, i.e. no Black Swans). The y-axis shows the profit for the trade. There is a slightly positive correlation, though it is not statistically significant. On the other hand, you can see that realized losses do increase with increased initial risk. The system won 46% of the time with the average win 4.1 times bigger than the average loss. The average trade lasted 5 days.

If you adjust position size so that the initial risk of each trade is the same, returns do increase, but so does the maximum drawdown. If you scale back the average size of trades so that the maximum drawdown in percentage terms is the same as for trading with the same number of contracts each time, then returns turn out to be very similar for both strategies.

Bottom line is that varying position size increases returns but also drawdowns by a similar amount. If you care about drawdowns it doesn't help. So, I think I will focus on controlling drawdowns when choosing position size rather than equalizing initial risk.

Margin Requirements for Bitcoin Futures Trading

I just discovered that while going long a Bitcoin futures contract requires margin of about USD 16843.75 per contract, going short requires initial margin of USD 200k at Interactive Brokers. Do they really think that Bitcoin could rise by a factor of 7-8x when the market is closed?* This makes it much harder for people to go short and contributes to the inefficiency of this market. Importantly there are no options on these futures, so you can't hedge against large adverse movements. I can't see anything about this asymmetry in margin on the CME site, so I assume that it is set by the broker.

* Stops will only work when the market is open. The Globex futures market is open 23/5 - closed one hour each day and over the weekend.

April 2019 Report

In April the Australian Dollar fell from USD 0.7096 to USD 0.7047. The MSCI World Index rose 3.18% and the S&P 500 3.72%. The ASX 200 rose 3.36%. All these are total returns including dividends. We gained 0.95% in Australian Dollar terms and 0.26% in US Dollar terms. Our currency neutral rate of return was 0.91%. The target portfolio gained 2.37% in Australian Dollar terms and the HFRI hedge fund index 1.57% in US Dollar terms. So, we under-performed our benchmarks.


Here again is a detailed report on the performance of all investments:

The table also shows the shares of these investments in net worth. At the bottom of the table I also include the Australian Dollars return from foreign currency movements, other net investment gains and losses - net interest and fees, and trading Bitcoin futures. Trading income was USD 733 for the month, which at an annualized rate was roughly a 7.3% rate of return on capital.  At the asset class level, only real estate lost money this month. Australian small cap stocks were the best performing asset class.

Things that worked very well this month:

• 3i, the UK private equity firm, and Generation Global shined. A few other funds beat the index. Tribeca bounced back from underperformance.

What really didn't work:

• Cadence and Bluesky sucked. Cadence went ex dividend and I couldn't be bothered to account for this properly in my accounts, so it will do better next month when I receive the dividend. However, it fell by more than the dividend and falling in an up-market is not good. I'm still willing to give them the benefit of the doubt that they will come back again. Bluesky was probably affected by troubles at the manager, also known as Bluesky, and lack of certainty about Wilson Asset Management taking over as the new manager. 
• I continue to be impressed by PSS(AP), where we are now in the balanced fund.

We moved away from our new long-run asset allocation * as we continued to accumulate bonds:

The main driver is continued movement of cash from my US bank account to Interactive Brokers where I am buying bonds before eventually transferring some of the money to our Australian bank accounts when the broker allows..... At the end of the month we bought 1/4 million Australian Dollars by transferring money from Falafeland. This means that we will buy new US bonds for a few months as the current ones mature rather than changing the proceeds into AUD immediately as the plan is to buy about AUD 50k per month. After the month end, I immediately made an AUD 90k non-concessional (after tax) contribution to superannuation. As I plan to roll over my retail super fund into a self-managed super fund after the start of the new financial year in July, I invested the money in the CFS Wholesale Conservative Fund.

On a regular basis, we also invest AUD 2k monthly in a set of managed funds, and there are also retirement contributions. Then there are distributions from funds and dividends. Other moves this month:

• USD 69k of corporate bonds matured (Royal Bank of Canada)  or were called (Goldman Sachs) and I bought USD 275k of USD bonds (Tokio Marine, Anglogold, General Motors, CNO, Scorpio Tankers, Woolworths, Safeway, and Hertz). There is still more than USD 100k to convert into bonds. I also bought 245 more shares (net) of CBAPH - Commonwealth Bank hybrid securities.
• I did some unsuccessful trading of gold futures and then bought 1000 more (net) shares of IAU - a gold ETF.
• I did some successful trading of Bitcoin futures.
• I sold my remaining shares in PIXX.AX and bought a small amount of OCP.AX at $1.98 a share.

* Total leverage includes borrowing inside leveraged (geared) mutual (managed) funds. The allocation is according to total assets including the true exposure in leveraged funds. We currently don't have any leveraged funds.

Bitcoin Trading Update

This morning Bitcoin plummeted several hundred dollars at the open of the US overnight session on Globex. It triggered both my sell stop to close my long April futures position at a profit of USD 194 and my sell stop to go short the May futures from 5375. This also triggered the set-up of a buy stop for the short position. Everything worked as it should. On the other hand, I was pretty lucky to come out with a profit from the long position, which at one point was much more in the money.