This article explores whether holding Bitcoin long-term or actively trading it yields better returns. Many active traders, especially day traders without clear strategies, underperform or lose money due to overreliance on technical analysis. Alternatively, trend-following (momentum trading) provides a structured, less risky option. Using real Bitcoin data from 2017 to 2024, we show how a systematic, volatility-based strategy matches Bitcoin's returns with significantly reduced volatility and drawdowns. Trend-following's simplicity and effective risk management often outperform passive investing, highlighting the benefits of systematic trading approaches in cryptocurrencies.
Have you ever wondered if you would make more money by buying Bitcoin or actively trading it? Well, chances are you might underperform significantly by trading, potentially losing everything in the process—especially if you’re day trading or trading without a clear strategy. One major issue is that people often focus on technical analysis methods, patterns, and other ideas that don't address the core elements traders need: factors that can create an edge.
That’s not to say there aren’t profitable Bitcoin scalpers. They’ve developed their intuition and skills by analyzing charts and order books for over 10,000 hours. I also recognize that you can make a living playing poker or becoming a chess grandmaster. It’s just… somewhat unlikely for most people. That’s a good analogy and a way to think about it.
However, let’s examine a simple strategy at its core that we know works: trend-following (momentum). Momentum has been around forever and is probably the most well-verified market anomaly. (But more about what trend-following is, its benefits, drawdowns, and why it works in another article.)
Have you ever noticed how markets sometimes just keep moving up or down? Trend-following is all about jumping on those waves and riding them. When we spot a trend, we get in on the action and try to profit as long as it lasts.
For now, just know that the simplicity of trend-following is actually a good thing, as it’s hard to overfit. This meme captures the tendency of people to create unnecessarily complex models quite well:
Here’s the Bitcoin chart since January 1, 2017:
The price on January 1, 2017, was exactly $1,000. If we had bought one Bitcoin then, we would now (at the time of writing – November 2, 2024) have around $69,000. However, we would have experienced multiple 50-85% drawdowns and a lot of volatility to reach that point. We would also likely have sold somewhere along the way, but let’s overlook that for now.
Here is my trend-following strategy for crypto with daily rebalancing, using volatility and trend strength forecasts:
We could achieve the same returns starting with $1,000 (approx. $69,000 now) but with much lower volatility. Essentially, it would be a less bumpy ride, with a maximum drawdown of 32% compared to 83% for simply holding Bitcoin. This means much better risk-adjusted returns (Sharpe Ratio). Additionally, if we wanted, we could increase our risk target to achieve even higher returns than Bitcoin’s. Of course, there were long periods when the strategy didn’t make any money, but a lot of the times neither did Bitcoin itself.
You can have much better risk management when using a systematic strategy like this one. The most important aspects of trend-following are risk management and universe selection. Here, we traded just one symbol, but even so, it performed better than simply holding Bitcoin. Now, imagine if we also traded a bunch of altcoins in one strategy (which I do)...