Crypto bull runs and leverage

In my previous blog post I’ve looked at the outcome of investing in ETFs using leverage and what the returns and drawdowns would have been over the last 15 years.

In this blog post I will do the same but with a focus on cryptocurrencies. Specifically, I’m interested to see what effect leverage has when investing into the top 10 cryptocurrencies during a bull run.

I picked the start date of this study to be 2017-12-01 - the middle of the last crypto bull run. To avoid survivorship bias, I’m only picking crypto currencies that were in the top 10 at the specified date.

• Bitcoin (BTC)
• Ethereum (ETH)
• Bitcoin Cash (BCH)
• Ripple (XRP)
• Dash (DASH)
• Litecoin (LTC)
• Bitcoin Gold (BTG)
• IOTA (MIOTA)
• Cardano (ADA)
• Ethereum Classic (ETC)

The full snapshot of cryptocurrencies ordered by market cap on 2017-12-01 is availabe on CoinMarketCap

I will examine buying and holding crypto with 1:1, 1:2, and 1:5 leverage.

Parameters and code

val initialInvestment: Double = 10_000.0
val startDate = LocalDateTime.of(2017, 12, 1, 0, 0,0)
val leverage: Double = 1.0

val data = loader.download(ticker).dropWhile { it.datetime.isBefore(startDate) }
val closePrices = data.map { it.close.toDouble() }
val equity = closePrices.asReturns().equityCurve(initialInvestment, leverage = leverage)
val drawdown = equity.drawdown()

chart("Buy and hold - ${ticker.tickerName} - Leverage: 1:${leverage}") {
    panel(height = 300) {
        xylinechart { closePrices.toXYSeries("${ticker.ticker} Price") }
    }
    panel(height = 300) {
        xylinechart { equity.toXYSeries("Equity") }
    }
    panel(height = 200) {
        xylinechart { drawdown.toXYSeries("Drawdown") }
    }
    panel(height = 200) {
        xylinechart { drawdown.longestDrawdown().toXYSeries("Longest drawdown") }
    }
}

Bitcoin (BTC)

Ethereum (ETH)

Bitcoin Cash (BCH)

Ripple (XRP)

Dash (DASH)

Litecoin (LTC)

Bitcoin Gold (BTG)

IOTA (MIOTA)

Cardano (ADA)

Ethereum Classic (ETC)

Results

Conclusion

The picture is bleak. Making a buy-and-hold investment during a crypto bull run using leverage is a guaranteed way to lose most if not all money invested.

Using no leverage performs a lot better, but still comes with huge drawdowns of over 90%.

Even using no leverage, out of 10 investments, 5 have returned less than we originally invested. Sometimes by a large amount. ETC left us with 39% of the original stake, BTG with 5%, DASH with 28% and BCH left us with 36% of the original $10,000 investment.

On the bright side, investing in an equal weighted crypto portfolio of the top 10 coins would have doubled the stake despite all losers.