Cardano Trading Strategy (Backtest)

Last Updated on April 18, 2023

The prices of crypto can be very volatile and may not be suitable for all investors. But daring investors flock into the crypto market where Cardano and its native token, ADA, are gaining popularity.

Cardano is a decentralized blockchain that runs on the proof-of-stake (PoS) Ouroboros consensus protocol, which is designed to be a more efficient alternative to proof-of-work (PoW) protocols. Its native token, ADA, is used in the blockchain’s PoS consensus mechanism.

In this post, we take a look at Cardano and its native token. At the end of the article, we make a strategy backtest.

What is Cardano?

Cardano is a decentralized blockchain that runs on the proof-of-stake (PoS) Ouroboros consensus protocol, which is designed to be a more efficient alternative to proof-of-work (PoW) protocols.

The blockchain platform aims to be a decentralized application (DApp) development platform with a multi-asset ledger and verifiable smart contracts. It was developed to offer solutions to the issues of scalability, interoperability, sustainability, growing costs, energy use, and slow transaction times plaguing other networks.

Cardano’s native token, ADA, is used in the blockchain’s PoS consensus mechanism. The token is given as a reward for work done for the blockchain by users participating in a stake pool. Cardano came into the crypto market in 2017, and the token has enjoyed an impressive return ever since, pushing its way to the top 10 cryptos by market cap.

Cardano vs. Solana

Cardano and Solana are similar in many aspects and also vary in other aspects. Here are some of their key features:

  • Support for smart contracts: Both platforms support smart contracts for decentralized applications (DApps), offering improved features for decentralized finance (DeFi) ecosystems.

  • Scalability: Both blockchains were built to solve the scalability issues plaguing the protocols before them. Their scalability has made them a direct competitor of the Ethereum blockchain, and even gives them a competitive advantage in terms of transaction speed and fees, at least, until the Ethereum blockchain completes its migration to a PoS protocol. The uniqueness of Cardano has made it a possible comparison with the Solana blockchain.

  • Native token: The native token of the Cardano network, ADA, has a supply limit of 45 billion ADA, and there are over 33 billion in circulation. However, SOL, which is the Solana native token, has no specified maximum supply, although only 489 million are available, with about 349 million already in the market.

Which one do you buy?

That is hard to tell. It depends on your personal preference and what you want. If you are interested in a fresh-out-idea project with an outstanding performance in the past years that has shown good potential, although with a history of multiple technical issues, then Solana is your best buy.

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However, if you are cut out for a consistent but slowly growing performer with scientific foundations and a proven track record, although known to have swayed from multiple deadlines, then Cardano is your guy.

In conclusion, you must do your due diligence and have a well-written investment strategy before investing in crypto. Remember, cryptos are volatile and may not be suitable for all investors.

Cardano trading strategy (backtest and example)

We have earlier made some strategy backtests on Bitcoin with strict trading rules and settings to evaluate the historical performance. For simplicity, we use one of these backtests today on Cardano.

Please keep in mind that the history of Cardano is short and thus we get few trades. Additionally, Cardano has proven to be very volatile with wild swings up and down. We suspect this might not be the case a few years down the line, thus making a backtest today pretty unreliable.

The trading rules of the strategy backtest are as follows:

  • If the close is higher than the close 25 days ago, go long at the close.
  • If the close is lower than the close 25 days ago, sell at the close.

This is all there is to it. No complex rules and certainly easy to put into trading software.

The equity curve of the strategy looks like this:

Cardano trading strategy backtest

As you can see, it’s been pretty wild swings along the way! And the max drawdowns are gut-wrenching (how big a drawdown can you handle before you give up?). The average gain per trade is 15.4% and the CAGR/annual returns are 114%. The gains are much better than buy and hold, but we suspect the element of randomness is high.

This is not a tradable strategy, in our opinion, and we struggled to make it better. We also did a trading strategy optimization plus we backtested other strategies, but due to the wild price swings, we believe most of the backtests on Cardano are not to be trusted and will fail any incubation period.

Amibroker code and plain English

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Other relevant crypto trading strategies

We have made many other crypto trading strategies that you might find interesting. The strategies are taken from our free strategies, but we keep our best strategies exclusive for our paying members:

Cardano trading strategy backtest – conclusion

Cardano is one of many coins that have very wild and gut-wrenching price swings. We made a Cardano trading strategy backtest in this article, but we would be very careful in making much reliance on that one. The time series is far too short and thus making any observations much less significant. Furthermore, we feel that the crypto market is still in its early stages of “settling in”.

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