Dr. Anna Becker and Dr. Chiara Longo

Last year Crypto showed an extreme potential for profits (10–1000% annual returns). Of course, in such a young and weakly regulated market extreme risks are inevitable. In a recent article, we began our analysis of risk and reward in this new environment. Our goal in this article is to find a good investment recipe to compete with the traditional Buy-and-Hold investment approach.

Just as we do for every “project” in life, from baking a cake to purchasing a car, when it comes to investing in cryptos we prepare a plan and follow it. Just think about this; when you need to buy a car, you don’t show up at the dealer’s front door with a certain amount of money and simply ask for a vehicle. If you were to do that you’d certainly end up disappointed; the performance is lower than you expected (you got a compact when you wanted a SUV) or the gas mileage is lower than what you can afford (you’re stuck with the mpg of a Monster Truck when your budget was more in line with a hybrid). You need to do your homework, define your preferences, then prepare a plan and go with it.

Let’s review the steps one can to take to build a solid approach for investing in crypto markets:

The steps described above are shown in the following figure, which represents the EndoTech (“ET”) methodology.

Let’s analyse each step in the EndoTech methodology:

1. Risk / Reward profile.

The potential investor joins the table with the expectation (or, better, the hope) of big profits and a very low probability of losses. But when uncertainty in introduced into the equation, she has to be aware that her hopes are far from reality, especially in a market like Crypto. That’s why, before jumping in, one must set one’s priorities straight and decide what level of pain can be tolerated: having a big exposure to market risk or getting a lower return as the price to pay for a lower risk. Once the diagnosis is clear, we can start to prescribe the therapy.

But, as we know, a good diagnosis starts with an accurate anamnesis. We have to ask the right questions to find the best answers. So, we don’t ask what the investors want the most (obviously biggest profits and zero losses); we want instead to know what they tolerate less and build the best strategies given these constraints.



The following diagram summarizes an investor’s preferences in term of exposure to the market (in this case, to Bitcoin, as the data so far supports the hypothesis that Bitcoin is a good proxy for the overall dynamics of the market).

Alpha Portfolio: Alpha is perceived as a measurement of a portfolio’s profitability. Choose among Alpha portfolios if you are not averse to higher risks, which might generate a higher profit. We offer a methodology of daily rebalancing signals to produce profit from both bullish and bearish patterns. The only market where this won’t perform (lose money) in is a sidewise market, or when sharp reversals occur during one day. Overall, we see that upon back testing such an approach showed this result:

The benefits of ET Majors Alpha compared to Buy-and-hold Bitcoin were:

· Profiting on Volatility — both up and down trends

· Almost double the profit — annual profit of 1000% when Bitcoin showed 360% annual profit

· Reduced Risk (26% instead of 66%)

Beta Portfolio: Beta is a measure of the security of a portfolio in comparison to the benchmark asset or the market as a whole. Choose among Beta portfolios if you prefer lower risks with a moderate profit. We offer you methodology of daily rebalancing signals to profit from bullish patterns while staying away from bearish patterns.

Benefit of ET Majors Beta compared to Buy-and-hold Bitcoin;

· Reduced Risk (21% instead of 66%).

· Loosing less on down moves. Peak near the Bitcoin peak

· Closing Profit is therefore higher than buy-and-hold

Overall, an annual profit of 700% as compared with a 360% Bitcoin annual profit during the testing period.

Also, one can split his capital between Alpha and Beta portfolio to diversify the risks.

1. Choosing Assets

The assessment of the investor’s preferences is functional to the choice of the assets that will be included in the portfolio. The decision is made after evaluating how much each asset contributes to the opportunity, how liquid it is, how risky it is. In such a young market, from my point of view, there is not a strict dominance of one asset over another, with the exception of a few top majors. Instead, it seems more logical to differentiate with respect to sector, technology and type of asset. My portfolios mix Majors and Minors, sectors, and add Gold, commodities and fiat currencies with relevant leverage.

2. Choosing appropriate ET Signals

Given the high volatility of the crypto market, the buy and hold strategy is rarely the winning one; for now at least. With the employment of AI/ML algorithms for the identification of patterns, it is possible to spot what assets are breaking out and when, their time frames, and their correlation; everything in the purpose of determining what the optimal return targets are, minimizing the losses at the same time. More on this in upcoming blog post on Coin Rating.

3. Choosing ET Allocation

In choosing how much capital to allocate to each portfolio asset, in order to get the risk/reward combination in line with the investor preferences, the main instrument available in finance is the Capital Asset Pricing Model (CAPM). This model, employed on traditional markets for more than fifty years, simply expresses the expected return on a security or portfolio as function of the market risk premium, reduced by a factor (b) that represent the risk/reward ratio. Despite its age, the CAPM proves itself a valuable tool in the optimization of portfolios on the crypto space as well.

In this context, we plan to leverage our know-how and to create dynamic portfolio weights in order to optimize investment strategies and maximize the expected outcomes.

4. Execution

In a market as young as the Crypto, a lot of uncertainty comes at the execution stage. Where do you execute the orders and how you do it? Fortunately, the situation for the investor is less complicated than for the trader. Nevertheless, it’s still a quite delicate topic since, if the investor cannot execute the order, or the exchange is hacked or it files for bankruptcy, no matter how beautifully the portfolio is managed the investor will carry 100% of the execution risk. We also caution that the investor be careful about spreads and slippage, as on some exchanges there are bots that benefit from market transaction, and while a few percent on the spread doesn’t see too high, during choppy markets when transactions will be done weekly it can become a killer for the portfolio’s profits.

5. Choosing Money Management

Money management is the mathematical process of increasing and decreasing the number of contracts/shares/options. The purpose of utilizing money management should be to increase the profitability during positive runs and protect those profits during losses. Money management is represented by the ensemble of decisions and strategies regarding how to reinvest the profits or to handle losses. A common opinion is that money management really has the capability of moving the needle for investment returns.

There are many aspects and methods — compound vs. fixed, active capital %: fixed dollar amount, percent at risk, trading with optimal F, etc. For example, we believe that in a market like Crypto, where results can be almost as high as those available in leveraged markets, most models can be considered as almost too extreme. Yet, since the appetite of investors is high, we are using 90% of the capital as active capital, and a compound reinvestment strategy to keep up with Bitcoin returns.

And finally to the output of this process. Check these detailed reports of the portfolios. Note that they are backtested results. We are not financial advisors, and we are not recommending you to follow this system. We are sharing with our clients what we found to work in such markets, but we cannot guarantee that it will work in the future. When you subscribe to EndoTech Portfolios (available since Apr 1, 2018) you will receive daily real-time reallocation signals for each portfolio.

When it comes to cryptocurrency investing, the concepts of portfolio risk management can be applied. And like any considered investment approach, it is critical to evaluate your preferences and make a deliberate plan before you begin.

DISCLAIMER: Trading cryptocurrencies carries a high level of risk, and may not be suitable for all investors. Level of experience, and risk appetite. The high degree of leverage can work against you as well as for you. Before deciding to trade cryptocurrencies you should carefully consider your investment objectives. There is a possibility that you may lose some part or all of your initial investment and therefore we recommend you not to invest money that you can’t afford to lose. You should be aware of all the risks associated with cryptocurrencies trading. EndoTech Ltd. will not accept liability for any loss or damage, including without limitation to, any loss of profit, which may arise directly or indirectly from the use of or reliance on the information EndoTech Ltd. provides.

About the authors

Dr. Anna Becker leads the Artificial Intelligence and Machine Learning teams at Endotech Analytics. Her deep-learning algorithms are used to manage over 1 Billion dollars of investment (AuM) and have been deployed in managing institutional monies by her clients for more than a decade. Her teams of AI scientists have more than 20 proprietary AI systems in operation and serve as the AI investing backbone of trading at more than 150 investment firms across the United States, Europe and Asia. Following her PhD in Artificial Intelligence at the Technion University, Dr. Becker has founded and sold several AI companies in the FinTech space including Strategy Runner.

Dr. Chiara Longo is Chief Economist at Pareto where she leads the Predictive Analytics and Economic Research department. Dr. Longo brings deep experience in econometric modeling of commodities and currencies, having worked at Bank of the West/BNP Paribas, KBB, and ENI Spa (Italian national energy group). She holds a PhD in Economics from University degli Studi di Milano and a Masters in Econometrics and Economic Theory from University de Toulouse.