The evolution of our cryptocurrency trading strategy: how drawdowns have affected our setups and future plans
1. Introduction: The journey towards a global trading strategy
Everything starts with a dream. For me and Jarnou, that dream has always been to develop a comprehensive trading strategy that fits all assets and financial instruments. While we haven’t fully achieved that yet, we have made significant progress. Just as Rome wasn't built in a day, our trading system is the result of years of development and overcoming challenges. We have developed a strategy for perpetual Bitcoin futures contracts, which is profitable annually, and in most months as well. But it hasn’t been easy, as we faced our biggest obstacle: drawdown. In this blog, we will explain how our trading strategy evolved, largely thanks to those periods of drawdown.
Here’s what you will learn:
What is our trading strategy?
Why many institutional clients include our strategy in their multi-asset portfolios
The largest drawdown periods we faced with our trading strategy
How we improved our setups after facing those losses
Why price declines can sometimes be a hidden opportunity
Why drawdowns cannot be completely avoided with this type of strategy affecting our future plans
All data in this blog reflects the average of our strategies on Binance, Bybit, and OKX, using USDT as collateral.
2. Understanding our trading strategy: detailing the fundamental approach
The best description of the current version of the trading strategy is that it is a fully automated multi-strategy for fast speculation (Scalping) on perpetual Bitcoin futures contracts, which is a derivative product of Bitcoin, allowing speculation on the price of Bitcoin without owning the asset itself and without an expiration date. It is multi-strategy because the system combines two different approaches to trading perpetual Bitcoin futures contracts, where each hedges against the other to reduce risk. The fast speculation element involves trading on shorter time frames, targeting quick, small profits.
3. Why institutional clients trust our multi-asset portfolio strategy
In 2021, Oxido Solutions focused its efforts primarily on high-net-worth individuals. By 2023, we shifted our focus to institutional clients, partly out of necessity, as regulatory changes made cryptocurrency derivatives less accessible to individual investors. Since then, we have adjusted our trading system and business model to meet the needs of active institutions, such as cryptocurrency market makers and family offices.
Institutional clients typically seek trading strategies that achieve a total annual return ranging from 25% to 50%, with a maximum drawdown ranging from 10% to 15%. The low-risk version of our perpetual Bitcoin futures trading strategy meets these requirements, providing institutional investors a means to achieve passive income through their preferred collateral, whether Bitcoin, stablecoins, or fiat currencies.
An increasing number of institutional clients prefer to invest through a managed separate account (SMA) structure, and Oxido Solutions provides this option. Here’s how it works: Clients create two sub-accounts on Binance, Bybit, or OKX, each funded with at least $125,000 or its equivalent in cryptocurrencies. They then generate API keys and secret keys for each sub-account and provide them to Oxido. Our system sends trading signals to both sub-accounts via an API connection with the exchanges: one for strategy 1 and the other for strategy 2, which operate independently. When profits are achieved, Oxido takes a share in the form of performance fees.
Another reason that attracts institutional clients to our strategy is its low correlation with the spot Bitcoin market and other strategies typically included in a multi-strategy portfolio. This makes Oxido Solutions' fully automated fast speculation strategy an important tool for enhancing portfolio diversification.
4. Facing setbacks: dealing with the largest drawdown periods
You now have a deep understanding at least of what our trading strategy entails and its importance to institutional investors. Based on that, let’s address one of the main challenges we faced: managing significant drawdowns, which refer to the decline in the value of the portfolio or strategy from its peak before recovering.
Compared to market-neutral trading strategies, delta-neutral strategies, and arbitrage strategies, fast speculation strategies, such as Oxido Solutions, typically experience larger drawdowns (but also offer the potential for higher profits). This often occurs during price volatility or when prices rise or fall very quickly. Over the past few years, our trading setups have faced challenging and varied market conditions.
Below is an overview of the largest annual declines for each risk profile in our trading history. Additionally, the declines are categorized by risk level. Oxido Solutions offers its trading strategy with three types of risk: low, medium, and high risk. In the current version, low-risk trades involve 1% of the trading capital per trade, medium risk 2%, and high risk 3%, excluding slippage.
Maximum annual drawdownlowaveragehigh20206.65%12.65%18.15%20219.80%18.10%25.90%20228.45%15.65%21.65%20239.66%17.20%23.25%YTD 20245.72%8.91%11.78%
5. Turning losses into gains: how we improved after difficult drawdown periods
Drawdown periods are never enjoyable and can be stressful, but they can also be a hidden blessing, as we have seen at Oxido Solutions. These tough times have pushed us to reevaluate our approach and look for areas where we can improve and innovate. I have personally witnessed how Jarnou and our quantitative analysis experts have been able to innovate spectacularly during these tough times. Here’s an overview of the five main features that emerged from those drawdown periods.
5.1. Determining dynamic position sizing (late 2021)
: In 2021, we faced a notable profit decline ranging between 9.8% (low risk) and 25.6% (high risk), partly attributed to slippage. At that time, our system relied on a fixed position size for each trade. In highly volatile markets, it is preferable to adjust the position size according to market conditions, as setting a fixed stop-loss and position size can lead to repeated stop-loss executions in volatile environments.
To address this issue, we launched the Dynamic Position Sizing (DPS) feature at the end of 2021. This feature calculates the trade size based on instantaneous market volatility. During periods of high volatility, the system automatically reduces the position size, while increasing it in low volatility conditions accordingly. By adjusting positions to match market conditions, dynamic position sizing helps reduce slippage and mitigate drawdowns.
This dynamic approach offers better risk management compared to the previous fixed position size model, making our strategy more responsive and less susceptible to sharp market fluctuations.
5.2. Sideways trend filter (late 2022): The decline percentage
The maximum in 2022 ranged from 8.5% (low risk) to 21.7% (high risk), largely due to the continuous price fluctuations that year. To improve handling of sideways market movements, a sideways trend filter was developed at the end of 2022. This tool measures trend strength and quickly detects when prices are stuck in a sideways range. As a result, the trading system takes no action until a clear trend emerges, which helps reduce losses and improve profitability.