Bitcoin Momentum and Mean-Reversion Analysis

Our MR1 mean-reversion strategy shows an annualized return in excess of 20% at -34% drawdown since 2015, which is reasonable for a speculative asset of this kind. Momentum has increased recently but we expect a return to mean-reversion soon.

Below is a daily chart of bitcoin since 2011 with the Momersion indicator for a rolling 365-day window plotted in the first pane along with the 365-day rolling return shown in the second pane.

After a sharp rise of Momersion in 2013 due to momentum increase, bitcoin returns turned mean-reverting in 2015. At the same time, the rolling 365-day return turned negative from November 2014 to December 2015.

The real party took place in 2013 with a spike of the rolling 365-day return near 8,900% but then prices plunged due to mean-reversion. Returns based on the 365-day period turned positive in 2016 and are currently at 312%.

Below is the performance of our MR1 mean-reversion algo since January 2015:

CAGR is 20.5% at -34% maximum drawdown. The risk is reasonable for this type of highly speculative asset. Year-to-date return is about 25%.

We are using the MR1 strategy to confirm mean-reversion, not for trading. Since mid April the strategy is flat and this agrees with the Momersion rise above 50 due to increasing momentum. We expect a return to mean-reversion territory as the number of speculators increases.

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Charting and backtesting program: Amibroker


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