Launch App

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.

More articles


This website does not constitute an offer to sell or a solicitation of interest to purchase any securities in any country or jurisdiction in which such offer or solicitation is not permitted by law. Nothing on this website is meant to be construed as investment advice and we do not provide investment advisory services, nor are we regulated or permitted to do so. This website is provided for convenience only. Sommelier does not manage any portfolios. You must make an independent judgment as to whether to add liquidity to portfolios.

Users of the Sommelier website should familiarize themselves with smart contracts to further consider the risks associated with smart contracts before adding liquidity to any portfolios.

Note that the website may change, and we are under no obligation to update or advise as to these changes. There is no guarantee that the Sommelier Mainnet, including any software, products or token use cases mentioned on the website, will be built, or offered by Sommelier. In particular, actual results and developments may be materially different from any forecast, opinion or expectation expressed in this website, or documents contained in it, and the past performance of any portfolio must not be relied on as a guide to its future performance.

To the extent permitted by law, the company and its directors, officers, employees, agents exclude all liability for any loss or damage arising from the use of, or reliance on, the material contained on this website whether or not caused by a negligent act or omission. The release, publication or distribution of this website and any materials herein may be restricted in some jurisdiction and therefore you must inform yourself of and observe any such restrictions.

© 2022 Sommelier by Bajanss OÜ –Maakri 36-50, Tallinn, Estonia 10145

Telegram
Discord
Twitter