Why is my bot making less profit than the underlying coin?

Dear botbuilder, Crypto.bot trading in ETH only and took 10% while Ethereum went up by 20%!  Explain yourself!

This type of question comes on a daily base in a variety of flavors, one being more polite than the other. In both bear and bull markets our precious bot heroes are spending a lot of time justifying themselves, while in almost all cases the answer is straight forward. The bot acted rationally, the crypto market did not.
Very often these questions do not come from a lack of trust but more an attempt to better understand how these algorithms works. Therefore, I decided to use an example from the recent past to illustrate how bots behave and why it perfectly makes sense these things happen.

Let’s head into a real-life example.

For demonstration purposes I cut a few corners and use round numbers to ease the math. In reality it is far more complex but irrelevant for this illustration.

We go back to the beginning of May 2021. I have Crypto.bot running with 2850 USDT. Exactly 1 ETH at that time. What a coincidence.

Crypto.bot is in ETH for 100%.  On May the 2nd ETH hit the symbolic 3K. The so called “all time high” (ATH). While every vein in my body was shouting “To the moon!”, Crypto.bot started to see some orange flags. Its logic told him the risk of a correction became higher than the chance of continuing this steep upwards line. In an attempt to secure the profit it pro-actively traded 25% of in USDT.  The upwards trend continued and at 3.1K it secured another 25%.

While my emotions kept on shouting to buy more, my bot rationally decided to secure another 25% at 3.3K.

At that point I have 2350 USDT and 0.25 ETH in my portfolio. Against all odds, ETH kept on booming and went almost straight to 4K. On May the 6th Crypto.bot realized it was missing out too much and decided to buy again 50% of ETH at 3.5K.

The log file showed the below trades. I skipped a few and the actual numbers are slightly different but as mentioned before, for easy illustration purposes I simplified. In movie terms we would speak of “based on true events”.

Why is my bot making less profit
BOT performance: +11%
Ethereum performance: +19%

Conclusion

At certain thresholds, the algorithm decided to prioritize securing profit.  Would you really bet all your money that Ethereum would hit the 4K at that time?
Probably not. Crypto.bot did not either and unfortunately it missed some of the gain in his effort to secure some profit.

But then, would you have done better?

PS: If you want to know how it acted on the recent drop, keep an eye for my next post: “Lessons learned”.

 

Boosting Alpha trading-Bots performance per February 2021

Boosting Alpha trading-Bots performance per February 2021

February was the best month for our trading bots since the start. Our bots managed to generate an average monthly return of 52% while Bitcoin (BTC) only went up with 38% and Ether (ETH) with 7%. Almost all of our bots managed to reduce / avoid the 20% drawdown in crypto that happened in the last week of February.

Another testimony that our bots work well both in bull and bear markets. This results table is based on the results as seen in the BOTS App on our own account.
Your results are dependent on when you started investing in those bots and the moment you entered with those bots into new trades.
Once you start investing in any bot, you will have to wait until the bot opens a new trade (i.e. you do not enter open trades that are open at the moment you are joining the bot).

Roy Lenders, Boosting Alpha

Final results: “Should I invest in crypto trading bots or should I buy crypto coins myself?”

A month ago I tried to answer the question:”Should I invest in crypto trading bots or should I buy crypto coins myself?”

Should I invest in crypto trading bots or should I buy crypto coins myself?

To answer the question I have been comparing three portfolios. Two portfolios on the Binance cryptocurrency platform in which I bought and held on to a selection of crypto coins (Top 10 cryptocurrency coins and cryptocurrency coins 11-20) and one portfolio with my selection of 30+ crypto trading bots on the Revenyou Bots platform.

After six months of comparing the performances of three portfolios, here are the final results.

Euro results three portfolios

The results of the three portfolio’s after six months as per mid February 2021 (5 months results as per mid January 2021):

  • Top10 coins portfolio Binance (orange line): +291,12% (+88,6%)
  • Top11-20 coins portfolio Binance (grey line): +172,67% (+40,1%)
  • Crypto trading bots portfolio Revenyou Bots (blue line): +141,49% (+55,8%)

Incredible gains in the last month, where both Binance holding portfolios have outperformed the crypto trading bot portfolio. The difference in ROI (return on investment) of the Binance Top 10 portfolio as compared to the crypto trading bot portfolio is shown in the following chart.

A positive score on the chart means the “Revenyou portfolio” has a higher ROI than the “Binance portfolio”. For example if the “Revenyou portfolio” has a return of 20% and the “Binance Top 10 portfolio” has a return of 50% the result on the chart will be 20 – 50 = -30%

(Return On Investment Crypto Trading Bot portfolio) -/- (Return On Investment Binance Top 10 crytpo coin portfolio)

The same chart showing the difference in ROI of the “Binance Top 20 portfolio” (Binance Top 10 + Binance Top 11-20) as compared to the “crypto trading bot portfolio”.

(Return On Investment Crypto Trading Bot portfolio) -/- (Return On Investment Binance Top 20 crytpo coin portfolio)

The performance of the Binance Top coins holding portfolios in the last 30 days has been stellar, resulting in an outperformance of the Top 10 coins of 149,63% and an outperformance of the Top 20 coins of 81,67% compared to the Revenyou crypto trading bots portfolio.

The above data suggests that holding a selection of larger volume coins is wiser than buying crypto trading bots. But as noted last month, the risk due to the volatility of holding on to the individual coins is much higher than owning crypto trading bots.

Crypto trading bots work like asset managers, buying and selling crypto coins for you depending on market conditions and signals. Managing your assets reduces risk meaning both gains and losses will be smoothed out. Volatility (risk) is not what most investors are looking for. A controlled profit with the least possible risk is preferable. If the cryptocurrency market undergoes a correction, the fall of prices will be better controlled by the trading bots.

How do we take risk or volatility out of the equation and get a fairer comparison?

The answer is Sharpe ratio. Next italic explanation is copied from last months post and can be skipped / fast forwarded if you know all about Sharpe ratio by now.

The Sharpe ratio was developed by Nobel laureate William F. Sharpe and is used to help investors understand the return of an investment compared to its risk. Risk in this case is equal to volatility. A portfolio with a high degree of volatility is riskier than a portfolio with lower volatility. High volatility brings with it chances of higher profit but also chances of higher loss.To briefly summarize the usefulness of the ratio:

    • The Sharpe ratio adjusts a portfolio’s past performance for the excess risk that was taken by the investor.
    • A high Sharpe ratio is good when compared to similar portfolios or funds with lower ratios.

A higher Sharpe metric is always better than a lower one because a higher ratio indicates that the portfolio is making better investment decisions and not being swayed by the risk associated with it. Sharpe ratio grading thresholds are commonly interpreted in the following way:

    • <1: Not Good
    • 1 – 1.99: Ok
    • 2 – 2.99: Really Good
    • >3: Exceptional

To calculate the Sharpe ratio we need a risk-free rate of return. This is the return on an investment with zero risk, meaning it’s the return investors could expect for taking no risk. The yield for a U.S. Treasury bond, for example, could be used as the risk-free rate. In my calculations I used T-bonds or Treasury bonds. Treasury bonds are fixed-rate U.S. government debt securities with a maturity range between 10 and 30 years. I used the 10 year bonds.

The following chart shows the development of the “10 Year US Treasury Yield” over the past 6 months. The yield has almost doubled in half a year, increasing from 0,675% mid August 2020 to 1,301% mid February 2021

Development of the “10 Year US Treasury Yield” over the past 6 months

The following chart represents  the Sharpe ratios of the three portfolios, Crypto trading bots (blue line), Top10 coins (orange line) and Top20 coins (yellow line).

Sharpe ratios of Crypto trading bots (blue line), Top10 coins (orange line) and Top20 coins (yellow line)

The Sharpe ratio results (last months results):

  1. Top10 coins portfolio: 4,54 (3,20)
  2. Crypto trading bots portfolio: 4,27 (3,52)
  3. Top20 coins portfolio: 4,21 (3,16)

The ROI (return on investment) of all three portfolios can be classified as more than exceptional, scoring well above 3. After a month with ‘out of the ordinary’ crypto results the portfolio with the highest Sharpe ratio is the Top 10 coins holding portfolio.

Final conclusion after six months of comparing:
Based on the proposition “A higher Sharpe metric is always better than a lower one because a higher ratio indicates that the portfolio is making better investment decisions” the Top 10 coins holding portfolio wins.

If you like taking risk, you don’t mind the volatility, and you believe in the future of crypto currency, holding the larger volume coins (Top10) would have brought you the highest return in the past six months. Even corrected for risk/volatility this would have been the best choice. The more cautious investor probably sleeps better with a broad selection of crypto trading bots that will manage your assets with less risk. In a declining market or market moving sideways (like the first three months of my comparison) the bots will absorb eventual blows better.

Final note: This comparison doesn’t involve trading by yourself. All three portfolios are buy and hold portfolios for “lazy” investors. The adage has been: Let the coins and the bots work for you, and do not intervene.

Should I invest in crypto trading bots or should I buy crypto coins myself?

Why should I invest in crypto trading bots? Why not open an account on a crypto exchange and trade in crypto currency myself? Okay, maybe trading by myself is not the smartest option. It takes a fair amount of time, knowledge, skill and steel nerves to trade successfully. Even more so when trading cryptocurrency.

But what about buying a selection of larger cryptocurrency coins, and just hold them for a longer period of time? The cryptocurrency market is in an upward trend, so my portfolio will grow automatically. And I guess it will gain more than crypto trading bots are able to realize.

This was my line of reasoning in July/August 2020 when I saw cryptocurrencies gain 50-60-70% in a matter of weeks, while my trading bots only gained 15-20-25%. Time for some research.

I opened two accounts on crypto exchange Binance. One for the Top 10 cryptocurrency coins, and one for cryptocurrency coins 11-20, and started tracking and comparing the value of my Binance portfolios with my selection of 20+ crypto trading bots. An exiting venture, every evening after dinner entering the current position in Excel and seeing the charts develop. In this blog I want to share the results over the past 5 months.

Looking at the cryptocurrency market over the past 5 months, the first 3 months (mid-August to mid-November) show a sideways to slightly negative trend. Results vary between 0 and -20%. The last 2 months (mid-November to mid-January) show enormous growth, with the larger cryptocurrencies (Bitcoin, Ethereum) gaining up to 200%.

A good way to follow the development of the broader cryptocurrency market is through the CMC Crypto 200 Index.

CMC-CRYPTO-200-INDEX-BY-SOLACTIVE

Because Bitcoin has a market dominance of 67% the crypto 200 index is also published without BTC (EX-BTC):

CMC-CRYPTO-200-EX-BTC-INDEX-BY-SOLACTIVE

Both charts show that the cryptocurrency market didn’t gain much in the first 3 months, but doubled in value over the last 2 months. My charts show the same picture. The charts underneath show the results of my collection of crypto trading bots (blue line), my Top10 crypto coins portfolio on Binance (orange line) an my Top 11-20 crypto coins portfolio on Binance. The first chart shows the results in Bitcoin, the second one in euros.

Due to the enormous value increase of Bitcoin, the value of all three portfolios in BTC has decreased. Expressed in euros all three portfolios show an increase in value. In percentages:

  • Top10 coins portfolio on Binance: +88,6%
  • Crypto trading bots portfolio: +55,8%
  • Top11-20 coins portfolio on Binance: +40,1%

Let’s zoom in on the performance comparisons of the Crypto trading bots against the Top10 coins and against the Top20 coins (adding Top10 and Top11-20). First Bots (blue line) vs Top10 (orange line).

The 15 day moving averages show a better result for the Crypto trading bots (yellow moving average line) in the first three months compared to the Top10 coins (light blue moving average line). The Top10 coins lose up to 20% in value in this period, while the trading bots drop a maximum of 5%. Around day 96 the moving average lines cross. In the last two months the Top 10 coins have a clear advantage. What is striking is the difference in volatility. The trading bots show a more controlled price trend than the Top10 coins. Top10 coins is showing deeper valleys and higher peaks.

Let’s have a look at Bots (blue line) vs Top20 (orange line).

As seen before, Top11-20 coins didn’t perform as well as Top10 coins. Adding the results shows an almost identical performance for the trading bots (yellow moving average) and the Top20 coins (light blue moving average line). Again, the greater volatility of the value of the Top20 coins portfolio compared to the trading bots portfolio is striking.

So the question remains: Should I invest in crypto trading bots or should I buy a selection of cryptocurrency coins, and just hold them for a longer period of time? The above data suggests that a selection of larger volume coins is performing better. Or does it? Volatility is not what most investors are looking for. A controlled profit with the least possible risk is preferable. If the cryptocurrency market undergoes a correction, the fall of prices will be better controlled by the trading bots. But how do we take risk or volatility out of the equation and get a fairer comparison?

The answer is Sharpe ratio. The Sharpe ratio was developed by Nobel laureate William F. Sharpe and is used to help investors understand the return of an investment compared to its risk. Risk in this case is equal to volatility. A portfolio with a high degree of volatility is riskier than a portfolio with lower volatility. High volatility brings with it chances of higher profit but also chances of higher loss.To briefly summarize the usefulness of the ratio:

    • The Sharpe ratio adjusts a portfolio’s past performance for the excess risk that was taken by the investor.
    • A high Sharpe ratio is good when compared to similar portfolios or funds with lower ratios.

A higher Sharpe metric is always better than a lower one because a higher ratio indicates that the portfolio is making better investment decisions and not being swayed by the risk associated with it. Sharpe ratio grading thresholds are commonly interpreted in the following way:

    • <1: Not Good
    • 1 – 1.99: Ok
    • 2 – 2.99: Really Good
    • >3: Exceptional

To calculate the Sharpe ratio we need a risk-free rate of return. This is the return on an investment with zero risk, meaning it’s the return investors could expect for taking no risk. The yield for a U.S. Treasury bond, for example, could be used as the risk-free rate. In my calculations I used T-bonds or Treasury bonds. Treasury bonds are fixed-rate U.S. government debt securities with a maturity range between 10 and 30 years. I used the 10 year bonds.

The following chart represents the Sharpe ratios of the three portfolios, Crypto trading bots (blue line), Top10 coins (orange line) and Top20 coins (yellow line).

Let’s zoom in on the last two months.

The results in percentages:

  • Crypto trading bots portfolio: 3,52
  • Top10 coins portfolio: 3,20
  • Top20 coins portfolio: 3,16

The ROI (return on investment) of all three portfolios can be classified as exceptional. But when taking volatility out of the equation the portfolio with the highest Sharpe ratio after 5 months of comparing is the crypto trading bots portfolio.

The conclusion for now: if you like taking risk and you don’t mind the volatility, holding the larger volume coins (Top10) can bring you a higher return. The more responsible investor is better off with a broad selection of crytpo trading bots that will manage your assets with less risk. Based on the (preliminary) results they achieve a higher result over a longer period in a volatile market such as cryptocurrencies.

Performance of single coin Ethereum and Bitcoin trading-bots – final update

My last update on the single coin crypto trading bots, trading Bitcoin and Ethereum. Bitcoin has passed the 40.000 USD mark to a new all time high. Ethereum tried to tap the 1300 USD boundary. How are the bots that trade in these coins performing?

In percentage (27 Dec.):

    1. Bitcoin (green line): +274,51% (+154,84%)
    2. Himalaya by botcreator Boosting Alpha (blue line): +88,26% (+50,60%)
    3. Sweet Orange Mia by botcreator Agga Technologies (orange line): +73,69% (+31,63%)
    4. Dr Block 2 by botcreator Rave before the machine (yellow line): +38,77% (+31,62%)
    5. Dr Block by botcreator Rave before the machine (grey line): +26,47% (+25,71%)

In percentages (27 Dec.):

    1. Ethereum (blue line): +258,69% (+96,88%)
    2. Refreshing Grey Mia by botcreator Agga Technologies (grey line): +122,40% (+22,70%)
    3. Dr. Spock by botcreator Rave before the machine (orange line): -8,93% (-12,81%)

I have decided to sell Dr. Spock and reinvest the money in another bot. Therefore this will be the last performance comparison for the Ethereum trading bots.

For the Bitcoin bots I have started tracking the performance of Bitcoin and a number of Bitcoin related instruments , being:

  1. Bitcoin Tracker EUR XBT Provider ETF
  2. VanEck Vectors Bitcoin ETN
  3. The Big Friendly bot (USDT based “bot” investing all its funds directly in Bitcoin)
  4. Thunderbird bot (BTC based bot focusing on trading 8 BTC pairs)
  5. DeFi Strategy bot (BTC based bot trading in the top 10 coins in the world of Decentralized Finance)
  6. CBS bot (BTC based bot trading all available markets)
  7. Himalaya bot (USDT based bot trading only in BTC)
  8. Sweet Orange Mia bot (USDT based bot trading only in BTC)

The new comparison will try to answer the question which instrument is the most profitable, taking risk into account. Bitcoin trackers (1-3), BTC based bots (4-6) or USDT based bots trading BTC (7-8). The comparison will replace the current performance comparison. Keep posted for the first blog.