Whether you’re invested in traditional stocks or cryptocurrencies (or both), having an edge is essential.
One of the best ways to gain an edge is having insight into the past — and, therefore, a glimpse of the future. Known as backtesting, traders harness past results to predict future outcomes.
Although you’ve probably heard past performance is no guarantee of future results — it does illuminate beneficial trends in the crypto or traditional stock market.
Cryptocurrencies have accumulated years of market data that yields a fruitful backtesting environment for your portfolio. From backtesting your current crypto strategy you’re about to learn what backtests can teach you about long-term crypto investing trends.
What Is Backtesting?
Backtesting uses data (past results) to assess the potential success of a trading model or pricing strategy.
Every data point in the historical timeline of a market point towards a semblance of predictability. Accumulating past data is a well-known method to determine past results of your current market strategy.
At its core, backtesting is a method to search the market for opportunities by marking out previous trends and pitfalls. In other words, backtesting can help to point out mistakes and highlight lucrative opportunities of a given asset.
Specifically, backtesting provides ex-post (after the fact) results by harnessing ex-ante (before the fact) data. For example, you may want to check the viability of holding Bitcoin from January 1st to December 31st.
You’ll find the realized price at the end of the year and the starting price at the beginning of the year. All you need to do is input the amount of your projected investment. Backtesting will show how much your Bitcoin investment would have performed over a specific time period.
The Benefits of Backtesting Long-Term Crypto Strategies
Backtesting your long-term crypto strategy may be a valuable method to understand the risk of your crypto strategy.
If you’re familiar with backtesting trading strategies for stocks, bonds, and ETFs — the benefits won’t surprise you below.
Optimize and Improve Your Strategy
One of the most important benefits of backtesting is to improve and optimize your long-term crypto strategy.
For example, backtesting may point towards monthly rebalancing as the optimal method for your crypto portfolio. Depending on the tools used while backtesting, you may discover new indicators that historically provide insight on when to buy, sell, and hold crypto assets.
Simulate Your Strategy Beforehand
Backtesting allows you to check your long-term investment strategy before buying crypto.
Unlike paper trading, backtesting allows you to run hundreds or thousands of scenarios to check the probability of past success. Powerful algorithms crunch data to simulate a given strategy and yield results quickly so you can get started on the real deal.
Although backtesting is a simulation — it gives you an idea of the odds you wouldn’t find by relying on your gut.
Whether you invest in relatively safe government bonds or higher-risk assets like tech stocks and cryptocurrency — risk is risk.
The number one rule in any long-term crypto strategy is to reduce risk. Backtesting may reduce risk by providing results based on past events (ex-post forecasting). Although there is no such thing as a risk-free trade, visualizing past pitfalls may prevent you from making similar mistakes.
The path to success in any form of long-term investing is understanding the general trend.
Although Bitcoin has been trending upwards since 2009, backtesting would also show that Bitcoin has been in a downtrend since the end of 2021. Overall, backtesting provides insight into micro and macro trends that can optimize your long-term crypto strategy.
Enhance Your Long-Term Crypto Portfolio
Ultimately, the trend is your friend — and so is backtesting.
Backtesting may help reduce risk while promoting long-term growth. If you’re ready to benefit from the power of history, sign up for free with Shrimpy and see how backtesting can improve your long-term crypto strategy for years to come.
From rebalancing your long-term crypto portfolio to automated investing, Shrimpy is built to follow trends with the help of extensive backtest data.
The above material and content should not be considered to be a recommendation to invest in a basket or an individual digital asset. Investing in digital assets or cryptocurrency (collectively “digital assets”) is highly speculative and volatile, and digital assets are only suitable for investors who are willing to bear the risk of loss and experience sharp drawdowns. Past performance does not guarantee future results and the likelihood of investment outcomes are hypothetical in nature.