BTC Dominance based Portfolio

1. Strategy Background

This research is based on the following key observations about market behavior over time:

  1. Bitcoin tends to outperform alt coins over the long term.

  2. While large-cap alt coins may temporarily generate higher returns than Bitcoin, this advantage typically does not persist over time.

  3. Periods when alt coins outperform Bitcoin—reflected by low Bitcoin dominance—often coincide with overheated market conditions.

  4. In bear markets, Bitcoin dominance tends to rise, as capital consolidates into the more established asset.

Based on this market behavior, we interpret altcoin dominance (1-bitcoin dominance) as a proxy for market risk. We design two portfolio strategies that dynamically allocate between long positions in Bitcoin and short positions in top alt coins, based on market dominance. We then simulate and evaluate their performance.

2. Simulation Results

⏳Period : We tested both strategies using historical market data from 2021. 08 to 2024.08, evaluating performance for 3-years.

🧮 Portfolio Configurations:

  • Strategy A (BTCDOM):

    Takes a long position in Bitcoin according to its market cap dominance, and short positions in alt coins according to their respective market cap dominance.

  • Strategy B (BTC1DOM):

    Takes a long position in Bitcoin with 100% notional exposure, and a short position in alt coins according to their respective market cap dominance., giving Bitcoin a higher weight compared to Strategy A.

📊 Performance Summary:

The table and chart below compares BTCDOM, BTC1DOM, their respective 2x leveraged versions, and a simple buy-and-hold strategy for Bitcoin.

Performance statistics
Performance chart

3. Conclusion

Both BTCDOM and BTC1DOM strategies demonstrate more favorable risk characteristics compared to simply holding Bitcoin for simulation period, with the BTCDOM 2x strategy showing the most attractive risk-reward profile. By using market dominance, these strategies adapt to shifting market regimes and offer better downside protection during periods of market stress, while still maintaining exposure to Bitcoin’s long-term upside.

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