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Inverse ETH 20 Day MA Crossover Details
Inverse ETH 20 Day MA Crossover Details

Learn about details under the hood for the iETH20SMACO Set

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Written by Richard
Updated over a week ago

How does the Inverse ETH 20 Day MA Crossover Set work?
The Inverse ETH 20 Day MA Crossover Set implements an inverse strategy on the ETH 20 Day MA Crossover Set. Learn more about how inverse strategies work here.

On a high level, iETH20SMACO attempts to capitalize on short term price swings in sideways and choppy trading markets when moving average crossover strategies typically underperform. The Set triggers rebalances between ETH and USDC based on the same 20 Day Simple Moving Average (20 SMA) indicator. 

What is the difference between iETH20SMACO and ETH20SMACO?
Both the iETH20SMACO and the ETH20SMACO are configured to have the same rebalance criteria (i.e. 6-12 hour confirmation period, 96 hour minimum rebalance interval, 20 SMA indicator crossovers) which mean rebalances trigger at approximately the same time.

However, if iETH20SMACO rebalances into ETH, ETH20SMACO will rebalance into USDC. Conversely, if iETH20SMACO rebalances into USDC, ETH20SMACO will rebalance into ETH. Therefore, the value of the Set will move inversely from each other.

Typically, the iETH20SMACO makes a higher % of net positive trades but risk missing out on trend shifts. The ETH20SMACO makes a lower % of net positive trades but catches the big moves. As a result, iETH20SMACO depends on market timing which makes it higher risk and potentially a shorter term hold in the weeks to month timeframe.

Why use the Inverse ETH 20 Day MA Crossover Set?

  1. Portfolio hedging: Because the iETH20SMACO tracks the exact inverse price movement of the ETH20SMACO, iETH20SMACO typically outperforms in choppy and sideways markets, and underperforms in most other markets. If traders believe the 20 SMA crossover signals are "selling the bottom" or "buying the top", the iETH20SMACO can be used to hedge against the ETH20SMACO.

  2. Potential tax efficiencies: Traders simply need to mint the iETH20SMACO Set without the need to exit their ETH20SMACO position and potentially incur taxes in certain jurisdictions.

  3. Compose Custom Allocations: Individuals can compose customized allocations by using both Sets to further reduce volatility. E.g. Hold 65% ETH20SMACO and 35% of iETH20SMACO to maintain a maximum of 65% ETH or USDC exposure at any given point.

How does the Set perform?
Disclaimer: The content below is for informational purposes only, you should not construe any such information or other material as legal, tax, investment, financial, or other advice. The content below is provided for educational purposes only, and not indicative of future performance. None of the following should be interpreted as investment advice. The tools used below follow a predefined set of parameters and aren’t actively managed by Set Labs Inc.

View a model of the backtest here. The charts below compare the hypothetical performance of holding the iETH20SMACO Set against holding ETH and ETH20SMACO over the last month, 3 months and year, assuming a slippage rate of 1% during each rebalance.

Over the choppy, sideways market of last month, historical data shows iETH20SMACO would have outperformed both ETH and ETH20SMACO. Note: holding a proportion of both Sets would have given a return profile somewhere between the BLUE and RED lines.

Over the last 3 months, historical data shows iETH20SMACO tracked the price of ETH closely. This illustrates that the strategy is not as effective over a few months in which there may be multiple types of markets.

Over the last year, iETH20SMACO significantly underperforms the ETH20SMACO and ETH. Therefore, iETH20SMACO should only be used in specific types of markets when the ETH20SMACO underperforms. Or, used in combination to reduce volatility in a trend trading portfolio.

It’s important to keep in mind the the charts above are based on a number of assumptions and are only meant for illustrative purposes. As always, past performance is not indicative of future performance.

These charts use generated ETH hourly data sourced from Gemini. In production, the iETH20SMACO Set rebalances based on MakerDAO’s ETH price feed, which may output different results.  If you’d like to play around with the data yourself (and tweak the parameters), feel free to fork the spreadsheet here.

What are the additional criteria needed to trigger a rebalance?
The rebalance criteria includes a minimum interval of 96 hours between rebalances and a confirmation period after the initial price-indicator crossover to reduce false positive signals. If the signal at the time of the initial crossover (e.g. price > moving average) matches the signal after 6 hours, then the Set will kickoff a rebalance. If the signal fails to match the signal after 12 hours, then the rebalance expires and another price-indicator crossover must occur.

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