Deep Dive on Trend and Momentum Strategies

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Deep Dive on Trend and Momentum Strategies

Hey Sommeliers! It is with high spirits that we share the next two Cellars poised to arrive on Sommelier! The first Cellar to launch on the platform, an Aave stablecoin lending strategy, demonstrated the power of Sommelier’s architecture. Now, these next two strategies, provided by Cleargate, offer a higher risk profile, actively trading ETH and BTC positions. For what seems to be the first time in DeFi, Sommelier will be providing retail access to actively managed strategies aimed at outperforming the hodl approach with ETH and BTC, a common benchmark for crypto investment.

A common phrase that crypto Twitter parades is “The macro bottom will be marked by rapid upwards price movement, leaving most investors sidelined.” This begs the question, do you want to be left on the sidelines, anon? Fear not, the latest strategies deployed on Sommelier will reduce the likelihood of this possibility. Your only requirement is to add liquidity to either of these Cellars, which will handle the rest.

With that, let’s dive into the specifics of the upcoming second and third Cellars to deploy on Sommelier:

Cellar #1 (Trend Following Portfolio)
Cellar name: Trend following portfolio in BTC and ETH
Accounting asset: USDC
Benchmarks: BTC, ETH, equally-weighted BTC and ETH
Rebalancing frequency: 1-2 times per week
Platform fee: 2% (1.5% for strategy provider + 0.5% for protocol)
Performance fee: 10% (7.5% for strategy provider + 2.5% for protocol)
Venue for trading assets: Uniswap V3

The trend following Cellar accumulates BTC and ETH relative to USDC with a medium to long-term perspective based on quantitative analysis that identifies price trends. The rebalancing decision applies the concept of trend following while also considering the correlation between the portfolio assets and emerging trends. The Cellar aims to outperform simply holding BTC and ETH, while also giving investors lower volatility and risk than holding BTC or ETH individually or an equally weighted portfolio of BTC and ETH.

The strategy is long only but cuts risk exposure when the price trends are negative. The Cellar has been heavily backtested (more on this in a future post) and is expected to outperform at times when price increases are moderate, while outperforming significantly and reducing risks in a bear market. The strategy is likely to underperform in sideways markets or when prices are rising extremely quickly (because of being long only and not using leverage).

The Cellar is expected to capture the majority of any positive price trends, but it will always enter the market only after the trend has started to be positive. The strategy will limit losses if price movements are negative with the expectation of improving the risk-reward ratio. The benefits of the strategy are expected to emerge within a 3-6 month (i.e., medium term) holding period in case of diverse market conditions and are very likely to emerge for holding periods over 1 year (i.e., long term).

Cellar #2 (Momentum Following Portfolio)
Cellar name: Momentum portfolio in BTC and ETH
Accounting asset: USDC
Benchmarks: BTC, ETH, equally-weighted BTC and ETH
Rebalancing frequency: 1-2 times per week
Platform fee: 2% (1.5% for strategy provider + 0.5% for protocol)
Performance fee: 10% (7.5% for strategy provider + 2.5% for protocol)
Venue for trading assets: Uniswap V3

The momentum Cellar accumulates BTC and ETH relative to USDC with a medium to long-term perspective. The rebalancing decision is based on quantitative analysis that tracks price momentum and the asset with higher momentum is assigned to be overweight. The strategy aims to outperform and have lower volatility and risk than holding BTC or ETH individually or in an equally weighted portfolio of BTC and ETH.

The strategy is long only, but it reduces risk exposure if price momentum is negative. Backtests indicate the cellar will outperform at times when prices are rising moderately or one of the portfolio assets is appreciating faster than the other. The strategy is likely to underperform when there are extreme price appreciations but is expected to capture the majority of any positive price movements. The strategy is expected to outperform in a bear market since it can cut risk exposure, but it is exposed to negative price movements because it is long only and always holds at least a small proportion of risky assets. The benefits of the strategy should emerge within 3-6 month (i.e., medium term) holding period in case of diverse market conditions and are highly likely to emerge for holding periods over 1 year (i.e., long term).

Key differences between the Cellars

The following information outlines the differences between Cleargate’s two distinct BTC and ETH portfolio cellars and may help in choosing between Trend following portfolio in BTC and ETH (Trend-BE) and Momentum portfolio in BTC and ETH (Mom-BE).

Trend-BE follows price trends, Mom-BE accumulates assets by their price momentum
Mom-BE reacts faster to price rises than Trend-BE because identifying price trends with greater accuracy takes more time than observing price movements
Its faster reaction to price appreciation means the Mom-BE strategy may make more trades that do not end profitably
Mom-BE always holds some risky assets whereas Trend-BE does not hold any risky assets when no positive or neutral price trend is detected
Trend-BE provides less volatility and more stability at times when prices are falling
Mom-BE may outperform Trend-BE in the short run and when prices are rising fast, but Trend-BE should outperform Mom-BE in a longer time frame and offer better risk-return characteristics

We are excited to provide folks that have a higher risk tolerance in the Sommelier and greater DeFi communities access to these state of the art, on-chain trading strategies. In our eyes, these more powerful alternatives to hodling could not be coming at a better time as DeFi investors look to ride out this crypto winter. Keep your eyes out for governance proposals for both Cellars in the coming days.

Deep Dive on Trend and Momentum Strategies

Key differences between the Cellars

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