A Quick Look at Bitcoin Returns

Bitcoin seems to be all the rage these days, and I’m jumping on the bandwagon. Quandl tweeted about their bitcoin data today so I decided I’d have a look at it. I have tested a bunch of popular/”standard” ideas, and the results aren’t really surprising, though they do illuminate the trend-y (bubbl-y) character of the bitcoin market. BTC prices do not revert like equities but show strong momentum, both in the short and medium term. IBS is useless, while trend following works like it does everywhere else.  The (daily) data covers the period from 17/7/2010 to today.

Descriptive Stats

histogram

The mean simple daily return has been 1.012%, while the annualized standard deviation has been 121.70%. The distribution of returns is obviously fat-tailed (with a kurtosis of 8.62), though somewhat surprisingly (to me at least), slightly positively skewed (0.76).

Up/Down Streaks

Strong up streaks tend to be followed by high returns over the medium term, and there has been a surprisingly large number of these streaks given the small amount of data available.

day streaks returns day streaks updown

 

IBS

IBS does not appear to have any predictive value when it comes to bitcoin returns.

ibs quintiles ibs

 

 

RSI(3)

No mean reversion to be found here. Using a 3-period Cutler’s RSI, next-day bitcoin returns are 0.392% when RSI(3) is below 20, and 1.763% when it is above 80. The story is pretty much the same if you go for a medium term length for the RSI: high values beget high returns, with no mean reversion in sight.

rsi 3

Simple Trend Following

The strong trends that bitcoin has shown would have been very profitable to any trend followers. Going long at a new 50-day high close (with an exit at a new 25-day low close), and vice-versa for short positions, would have yielded these equity curves:

trend following

Day of the Week

DOTW

 

Before you jump in, keep in mind that this sort of market can change character very quickly, especially after a big bubble pop. Also consider the fees: Mt. Gox, the most popular exchange, charges an obscene 120 basis points per roundtrip. There are some brokers that will allow you to short bitcoins, and there even appear to be some thinly-traded options and currency futures available…I imagine there are gigantic inefficiencies in the pricing of these instruments (though their legality is probably questionable).