Bitcoin Cash Trading Strategy: Backtest Analysis (Video)

Since the emergence of Bitcoin in 2009, thousands of cryptocurrencies have been created. While many were created to solve a specific problem in the emerging blockchain technology, some cryptocurrencies are just spin-offs of the older ones, and Bitcoin Cash is one such. What exactly is Bitcoin Cash?

Bitcoin Cash is a cryptocurrency created from a fork of Bitcoin in August 2017. The cryptocurrency was created to accommodate a bigger size of blocks, which allows more transactions to be processed and improves scalability. However, in November 2018, Bitcoin Cash split further into two cryptocurrencies: Bitcoin Cash ABC and Bitcoin Cash SV (Satoshi Vision).

Let’s take a look at this cryptocurrency to see how it works. We end the article with a backtest of a Bitcoin cash trading strategy.

What is Bitcoin Cash?

Bitcoin Cash is a cryptocurrency that was created from a fork of Bitcoin in August 2017. It shares many of the same characteristics as the original Bitcoin but also integrates a number of changes and features that set it apart. One of those features is that it accommodates a bigger size of blocks, which allows more transactions to be processed and improves scalability.

As with Bitcoin, Bitcoin Cash uses a decentralized network, offering transparent yet secure transactions. Users can send it on a peer-to-peer basis, without any third-party involvement. Transactions are immutable and secure. Among crypto users, it is a tradable asset, trading on many crypto exchanges with the ticker symbol, BCH.

In November 2018, Bitcoin Cash split further into two cryptocurrencies: Bitcoin Cash ABC and Bitcoin Cash SV (Satoshi Vision).

How does Bitcoin Cash work?

Bitcoin Cash works as a digital currency that can be sent directly from one person to another via its blockchain network — a distributed public ledger that shows transaction blocks stored voluntarily by a network of participants known as ‘nodes.’ Miners maintain the nodes and verify transaction blocks.

Just like Bitcoin, Bitcoin Cash uses a proof-of-work algorithm to timestamp every new block, and a new block is generated every ten minutes on average. The time needed to calculate a new block is influenced by a parameter called the mining difficulty. It is programmed in a way that the block time is kept roughly constant. So, if the total amount of mining power increases, the mining difficulty also increases, and if the mining power decreases, the mining difficulty decreases.

What is the difference between Bitcoin Cash and Bitcoin?

The main difference between Bitcoin and Bitcoin Cash is the block size. While the maximum block size of Bitcoin is 1MB, that of Bitcoin Cash is 32MB. The larger block size makes it more scalable, which enables it to carry out more transactions per second, reduces its environmental impact, and in theory, increases its viability as a currency.

Bitcoin Cash, on its website, claims that it has the capacity to process as many as 200 transactions per second, which makes transactions faster and reduces the cost of transactions.

A Bitcoin Cash costs less than a penny compared to a Bitcoin transaction that costs up to $50. The downside to faster transaction verification is that it’s potentially less secure than Bitcoin. With larger block sizes, fewer miners are needed to process and confirm transactions, which could make it easier for a hack.

Another difference between BCH and BTC is market size. As of the time of writing (August 11, 2022), Bitcoin Cash has a total market cap of around $2.8 billion compared to Bitcoin’s $467 billion market cap. However, as you might imagine, that may have changed a lot by the time you read this.

Other Bitcoin and crypto strategies (all backtested)

We have backtested many other Bitcoin and crypto strategies – however, mainly Bitcoin. Overall, we would say this is an asset that is in transition (for now). Trendfollowing trading in Bitcoin used to work really well, but not so much anymore. Is that a sign it’s starting to mature?

Also, we have lots of free resources if you are looking for a robust and profitable trading strategy.

Bitcoin cash trading strategy (backtest and example)

Because Bitcoin cash (BCH) has a shorter history (and a pretty wild one as well) than Bitcoin, we don’t want to make a backtest on BCH. We believe history is too short to draw any conclusions from it.

Instead, we make a backtest by using Bitcoin (BTC).

Let’s go on to make a backtest of a Bitcoin trading strategy with specific trading rules and settings to make it 100% quantified.

Most traders involved in trading know about the end of month effect in stocks. Do we see the same effect in Bitcoin? Let’s go on to make a strategy.

We base our backtest on data from Yahoo!finance and thus it could be inaccurate, as most free data is – depending on the instrument. The data starts in 2014 and thus the history is very short.

We like to make optimizations to “get a feel” for our results. Contrary to what many believe, optimization of a trading strategy is smart – as long as you know what you are doing. By doing it, you can see “clusters” of where the parameters and settings are good and bad and thus see how likely your results are due to chance or randomness.

Below is an excerpt where we tested a lot of different combinations. We enter N-trading days before the end of the month, and we exit after N-days of the new month.

This is the result of our optimization (100 different simulations):

Bitcoin cash trading strategy

For example, row one shows the result when we enter at the close of the tenth trading day before the end of the month and we exit at the close of the ninth trading day of the new month. Columns 3 to 11 show the results for each strategy (in total 100 different simulations).

Let’s pick one simulation from the optimization above and formulate it into a specific trading strategy with specific trading rules:

  • We go long at the close of the third last trading day of the month.
  • We sell at the close of the third trading day of the new month.

We start with 100 000 invested and compound this amount into a new trade every month. The equity chart looks like this (logarithmic chart – read here for why use logarithmic charts):

Bitcoin cash trading strategy backtest
Our end of month (turn of the month) strategy in Bitcoin performs pretty well.

You are invested only 16% of the time and manage a CAGR of 32.3%. The max drawdown is around 20% (why is max drawdown important?) If we divide CAGR by the time spent in the market we get a risk-adjusted return of 197% – significantly better than buy and hold. In other words, you have (thus far) managed good returns while avoiding most of the gut-wrenching crashes.

Can the strategy be improved? Yes, we can improve it (reducing most of the drawdowns) by changing the day of entry and at the same time adding another variable. If we do that, we get the following equity curve:

Bitcoin cash trading strategy trading rules
We improve the risk-adjusted return of the end-of-month strategy.

The CAGR drops to 38% because we take fewer trades, but the equity curve gets smoother. As always, there is a trade-off in trading.

The performance has been flat lately, but that is a big win considering BTC has fallen hard. When Bitcoin picks up again, you are ready to start compounding from a much higher level.

We don’t want to reveal the strategy because we might use it as a monthly trading edge at a later stage.

Bitcoin cash trading strategy – concluding remarks

We didn’t use Bitcoin cash in the backtest, but we still hope that it has helped you to get some trading ideas of how to get a foot inside the crypto market. Bitcoin and all other cryptos have a history of crashes, something that is hard to avoid, but a significant crash has the potential to make you abandon it at the exact wrong time. Thus, our Bitcoin (cash) trading strategy backtest might lead you in the right direction


How does Bitcoin Cash work as a digital currency?

Bitcoin Cash is a cryptocurrency created from a fork of Bitcoin, designed to handle larger blocks for more efficient transactions. Bitcoin Cash operates on a decentralized network, facilitating peer-to-peer transactions through its blockchain. Miners verify transaction blocks using a proof-of-work algorithm, and new blocks are generated approximately every ten minutes.

What led to the split of Bitcoin Cash into Bitcoin Cash ABC and Bitcoin Cash SV?

Bitcoin Cash accommodates larger block sizes (32MB compared to Bitcoin’s 1MB), allowing for more transactions per second. In November 2018, Bitcoin Cash underwent a split into two separate cryptocurrencies, Bitcoin Cash ABC and Bitcoin Cash SV. The split was due to differences in the vision and development direction within the Bitcoin Cash community.

What is the significance of the block size in Bitcoin and Bitcoin Cash?

The main difference lies in the block size, with Bitcoin having a maximum block size of 1MB and Bitcoin Cash accommodating larger blocks (32MB). A larger block size enhances scalability, potentially allowing for more transactions and reducing environmental impact.

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