How are the strategies holding up?

TLDR;

• ClearGate strategies are working as anticipated
• The magnitude of price drops were similar to the worst days in our model
• Our models include the ability to handle extraordinary events, but the models regarded current situation as a realization of high market risk, not a strategy override

The launch of the Trend and Momentum ETH-BTC strategies happened less than 2 weeks ago. The market is in shock today and the prices of the strategy tokens are down as well. But let’s walk through what’s been expected and what’s unexpected.

Strategy token prices can be seen here.

First, the timing of the launch coincided with missing a significant upward price move in ETH and BTC. This was something we couldn’t control. But in the long run, the launch timing shouldn’t matter and didn’t affect what’s happening now.

ETH-BTC Momentum strategy

The ETH-BTC Momentum strategy is more responsive to market movements but is designed to keep holding a position in ETH and BTC no matter what is happening. Around a total of 50% of assets are supposed to be in ETH and BTC all the time with the current strategy configuration. So, the momentum strategy did exactly what it was supposed to do. It detected the disappearance of upward momentum and decreased the exposure in ETH and BTC to near its lowest allowed (ca 40-50%). The strategy clearly outperformed the market during the current major exchange failure. 

The ETH-BTC Trend strategy

The ETH-BTC Trend strategy is designed to take advantage of price trends and will be somewhat slow to react to newson news depending on volatility. In otherwise volatile markets, it will not react that easily because in order to ride trends, you have to tolerate some volatility. So, when we get a news event which will bring the whole market down more than 10% in a single day (or hours as it happened yesterday), the trend strategy is not supposed to react by design. So, it didn’t react and it’s down in a similar magnitude with the combination of ETH and BTC. This means that the trend strategy is working as it is supposed to.

Ideally the strategy could be able to detect the breaking of the trend earlier, but in reality we got almost the worst possible scenario we had simulated. This is when major news drives prices significantly down in a very short period which is happening after a volatile but long and strong enough price upward move. All of that had to happen at the same time. Such events were expected but for it to happen in such a magnitude and during the first two weeks of the launch, didn’t favor the early adaptors. The strategy was designed aggressive enough to capture some returns and this comes with a trade-off that it can never detect all market downturns. The current one just happened to be one of those undetected events and the strategy is otherwise working as it is supposed to. 

Extraordinary event handling

Although nothing extraordinary happened with either of the strategies, the users would naturally expect as much volatility reduction as possible. We did create extraordinary event protection protocols to be in place against coin specific news such as what happened with Terra. We had similar normal strategy operation override protocols in place for natural disaster or whole financial system collapse events (e.g. Nasdaq or S&P500 being in free-fall at the same time). The collapse of a major cryptocurrency exchange and the effects on confidence in the broader cryptocurrency ecosystem were not something the protection system anticipated because when being in the crypto market, one needs to tolerate some market risk to make higher returns. For example, the strategies take into account correlation with Nasdaq index and some macro events. Because e.g. Nasdaq stayed solid enough during the start of the current crypto sell-off, the strategies were not eager to go into cash as fast as they would when Nasdaq is falling at the same time. We will be constantly testing and retesting our models to make them more robust and correspond to user risk and return preferences.

The strategies run based on algorithms and human intervention is only appropriate for extraordinary conditions. The algorithms will keep doing their job and one aim of using them is to minimize the effect of human emotions that can often lead to worse outcomes.

You can find our strategies on Sommelier. Please use the provided contact details or the form below to ask any questions you might have.