How Does the Crypto Autopilot Work?
We get that a lot and we will keep trying to answer it any way we can until we get it right!
“The Crypto Autopilot looks at several months of past price data to build a portfolio for the medium to long term (2.5 to 5 years) with the objective of achieving stable growth - which means avoiding drawdowns. It optimises for a 4th generation risk measure - iVaR - which can roughly be described as the time it takes to recover any losses. It can choose from a list of assets we add to its investable universe”.
We have an article that details those points and explains why avoiding drawdowns is more interesting than looking for high returns on our blog (hint: it makes you more money in the end).
How Can I Easily Start?
That one’s easy: we have a video of our onboarding flow here: https://youtu.be/goHHXVA0FwY
TIP: If you want to invest regularly, you can find your unique code to put in your bank transfer so we put the money directly into the Autopilot for you.
In the App go to Crypto Autopilot > Add Funds > Add Euros > Bank Transfer. There, you will find a deposit code with the following format “ATP00000XXXXXX”. In your bank app, make a standing order every week/month/quarter/… with that code as communication/reference and really put your investments on Autopilot!
When is the best time to deposit in the Autopilot?
We don’t provide financial advice. You should evaluate yourself or with your financial advisor what is best for you.
What we have seen is that many professionals cite “Dollar Cost Averaging” as a sensible, risk-reducing way of entering any market. It means putting in a little over time as opposed to a lot at one time 💰. This made sense to us and we wanted to make it easy to implement with the Crypto Autopilot for those who think it’s a right move for them. We created a unique Autopilot deposit ID for each customer which you can use if you want to make deposits into the Autopilot directly via a bank transfer. You can find it in the App by going to Crypto Autopilot > Add Funds > Add Euros > Bank Transfer.
There, you will find a deposit code with the following format “ATP00000XXXXXX”.
If you use that as the communication field in your bank transfer, your Euros will be converted automatically into BTC and put into the Autopilot upon arrival. There is nothing for you to do manually! It also means that you can set up a recurring payment with that communication to deposit into the Autopilot regularly without ever needing to open the app!💸
If you want to make a deposit into the Autopilot regularly, this is more convenient than having to deposit on the OSOM Euro wallet (for which the format is “OSM00000XXXXXX” ) and then manually depositing into the Autopilot once the money has arrived. However, if you don’t want to use the Autopilot and just want to buy BTC or ETH on the exchange, the OSOM Euro wallet is still the way to go.
How Long Should I Stay in the Crypto Autopilot for?
We don’t tell you what you should do, but if you read the answer to all the above questions, you might have a sense already of what we built it for: the Autopilot works on a timeline of 2.5 to 5 years, and looks at the price data from several months ago to make its investment decisions. It does not care much about what happened last week or what happens next week. It does not look for short-term gains, it is not momentum-driven.
To help make things more understandable, based on our past data of running the Autopilot live with our model basket, we calculated the average, minimum, and maximum returns (%) when investing in the OSOM Crypto Autopilot between Sept 26, 2019 and March 23, 2021 (545 days in total), depending on the time horizon of the investment, excluding fees and in EUR.
What it shows is that those who held their investment for 300 consecutive days at any time in the 545 days would on average have made a return of +161.95%. Even when buying and exiting their investments at the very two worst points in time they would still have enjoyed a return of +6.21%. At the very best two days, they would have enjoyed returns of 660.49%.
On the other hand, those who stayed for 30 days would on average have made a return of +16.31%, but if they bought and exited at the very worst point they would have seen losses of -58.48%!
Over 2 days, the average gain is +1.04%, but it goes from minimum -44.03% to maximum +30.25%.
Someone who would have bought on day 1 (26 September 2019) and stayed in the Autopilot the whole time to 23 March 2021 would have seen 932% returns.
We see some people withdraw after 2 days. And amongst the ones whom we saw withdraw and never come back to the Autopilot as of 25 March 2021, the biggest contingent ( 32% ) withdrew after 18.5 days, 45% withdrew under 37 days, and 72% under 93 days. 82.2% of those exiting before 18 days do so with a loss. We can say unequivocally that using the Autopilot for 2 days is a gamble, and not what it was built for.
How do you select the coins and what do you do with our money, exactly
The first image shows you how, and with whom, we screen the universe of available Crypto and how we come to consider them “investible” and how we actually build the portfolio. The second shows how money travels from your wallet to a diversified portfolio (selected thanks to the process detailed in the first image), and back to your wallet.
Why does the Autopilot only work with Bitcoin?
Because we needed one reference Crypto asset with which we could buy and sell all other assets. And today, outside of stablecoins - which we didn’t want to save on fees - Bitcoin is the only “universal pair”. You can buy any crypto-asset with Bitcoin.
Can you add even more Crypto assets?
We do, all the time. We already have over 64 while we started in Sept 2019 with about 30. But we can only add them when they meet the quality, ownership distribution, liquidity, and market cap criteria.
Allowing even more coins - which wouldn’t satisfy those conditions - would mean getting potentially very illiquid stuff, which, if we had to sell them, would be done at a great loss. So it wouldn’t be very wise.
Is the algorithm learning?
Yes, in some parts, but no on other parts. And it’s not all about the algorithm! So let’s break it down: To start, you might know the saying “garbage in, garbage out”. That’s because as with most models, it’s only as good as the data you give it and, in this case, the coins it can choose from. That’s why our team reviews coins daily to see whether or not they are good enough to make it into the investable universe. We also impose the constraints (such as the maximum and minimum it can hold in any one coin). Our team is made of real people, and they learn.
Next is the “algorithm”. The portfolio construction Artificial Intelligence (A.I). We say it’s “Artificial Intelligence” because it’s made up of two subfields of AI. : Machine Learning (ML) and Operations Research (OR). OR-based techniques have demonstrated the ability to identify optimal and locally optimal solutions for well-defined problem spaces, and the ML part is ideal for learning with constraints. So it’s good at learning from the ever-increasing amount of data that it gets, but it benefits from the OR-side for portfolio construction, which is all about finding an “optimal” portfolio.
Then there is the aspect of translating all that into actions: how to trade, when, how much, where,... To make sure that the portfolio we’re holding is identical to the optimal one. And that is also up to the team, not the A.I. And careless execution would result in a worse portfolio than the optimal one recommended by the A.I., so we need to do a good job there too. In conclusion: it learns some, but it isn’t alone. We learn too.
How diversified is the Autopilot?
We talked about the Herfindahl Index (a concentration index) back in December, which indicated that it is 5x less concentrated than simply holding Bitcoin alone. It’s an “OK” index, but a somewhat simplistic one that doesn’t account for how correlated those assets are to each other in terms of prices.
Therefore this month, we wanted to talk about another way of looking at it, with the “Diversification Ratio” (D-ratio). This expresses the weighted average volatility of the portfolio instruments as a multiple of portfolio volatility. The higher the ratio, the more risk is reduced by combining assets that behave differently rather than concentrating in assets which more or less behave the same way, price-wise. And by picking up negative correlations between asset prices to reduce portfolio risk.
The result is the following: Bitcoin has a D-ratio of 1, as the portfolio risk will be equal to the risk of the single instrument BTC (duh!😉 ). An index strategy like Crypto20 has an average D-ratio of 1.2 over 2020, meaning limited diversification was offered since there is a concentration in the largest assets that tend to behave very similarly.
A broad universe like S&P 500 has an average D ratio of 1.7 over 2020 by using market cap weights. The Crypto Autopilot had an average of D-ratio of 2.2, a substantial decrease in risk, by diversifying more than an Indexing Strategy. In the short run (single-year 2020), especially when one asset is really on a tear, the benefits of spreading out might not be apparent immediately but in the longer term (multi-year), there is a proven link between higher D-ratio and outperformance since the portfolio picks up codependence as well. That’s why we keep saying that a good holding horizon for the Autopilot is 2.5 to 5 years.
Why do I never see Ethereum in the Insights panel of the Autopilot? Is it not in the addressable universe?
It is in the addressable universe, and it has been chosen a few times, but as explained above, the correlation between the larger assets is much larger than the ones between smaller assets (and the ones between large and small assets). From a portfolio construction perspective, it does not make sense to include 2 instruments that exhibit highly-correlated return characteristics, which comes down to buying more of the same (albeit with a different name). In other words, risk cannot be reduced by combining these two assets.
ETH and BTC have moved concurrently showing similar performances, with a correlation in returns of more than 64%, while the average correlation of altcoins with BTC is approximately 35%.
The aim of portfolio construction is to achieve a better risk-adjusted performance by combining assets rather than concentration in the best-performing assets. And there is nothing to be exploited in the joint behaviour of the two largest assets from a portfolio construction perspective.
Why don’t you have stablecoins in the universe so that the Autopilot can “retreat” when the market takes a dive like it did this month?
Indeed, we have no stablecoins, no fiat, no gold or commodities (which you can easily find tokenized), or anything other than true crypto projects in the investable universe. The point here is that you can get exposed to the best of what crypto has to offer, but nothing else. And all positions are long so there are no shorts, no derivatives, no options, or anything else. Just plain crypto. The reason is twofold:
1/ The algorithm seeks "a monotonic growth" which is done by minimizing length and depth of drawdowns and diversifying aggressively (which is the reason why it rarely holds ETH for example because ETH and BTC move in tango, but BTC has less downward volatility, so it sees it as better to satisfy the goals). Also, it invests for the long term whenever it makes a decision (2.5 to 5 years). So, knowing this and taking into account the volatile nature of crypto, and we saw this in all our backtests, the result is that if you give it cash, it pretty much (not always, but still) takes the largest position in cash that it can. It’s important to remember that there is no “momentum” built into this algorithm. It builds portfolios but doesn't trade (scalping, intraday or swing).
So it would not "try to retreat" very much to cash when seeing the market going down because it’s looking at the long term and long term the market is going up. With a great deal of volatility, but up nonetheless. So yes, if the market is down it follows. And when it's up it follows. We chose this route because we think that time in the market is more important than timing the market. Morningstar proves this about once a year in their “active/passive” barometer. It’s also the reason why you can find a lot of literature about why investors have lower returns than investments, regardless of the asset class.
2/ Understanding the above, we assume holding cash is not that complicated and most investors have some already. The more cash we would have, the least you would be invested in crypto. So build a portfolio that suits you with a crypto allocation that matches your appetite, but if you want to hold some cash, hold it on the side. The follow-up question is often: “so you are like an index?” Not exactly, but not completely different either 😀 We are like an index in the sense that we have a lot of coins potentially investable. But we are different because we don’t rely on market capitalization to decide the weights that each coin gets, and we never hold all of them at once. And that comes with some advantages, because the Index Crypto 200 by Solactive grew 427.47% since 26 September 2019, but the OSOM Crypto Autopilot grew by 673.47%. That’s 250% more.
We think that because crypto is an asset class more like high-growth software startups than established companies, it makes more sense to build a portfolio intelligently than just to go by market cap weights in an index. If you disagree, we’d love to hear you out, let us know by answering this email.
The returns have been amazing lately. Have you changed anything to the algorithm?
We haven’t. We review and populate the list of addressable assets and we tweak the maximum holding between 30% and 40% depending on market dynamics, but that’s the extent of our involvement. The rules and the logic followed by the algorithm have remained the same since Sept 26, 2019.
It goes to prove that smart diversification reduces risk and is linked to outperformance. We talked about it previously. It’s very visible in the long run (2.5 to 5 years), but can be glimpsed in the short term too.
As in October and November - when the Autopilot was trailing Bitcoin following the summer of DeFi - one might want to be cautious about drawing too many conclusions from short-term movements anyways. It is best to look at longer-term trends, and if you can’t make sense of all the numbers, consult your own financial advisor to see how this plays in your overall portfolio. You’ll find the details, data and benchmarks for performance here: http://bit.ly/OSOMPerfBenchmark
Why does the Autopilot seem to be moving in the opposite direction of Bitcoin in the app?
The answer to that question is that this is a recurring short-term phenomena. If the global crypto market cap doesn’t move much while the price of Bitcoin increases, it means that the money going into Bitcoin is not new money to the crypto sphere. It is simply a reallocation of value from altcoins to Bitcoin. Since the Autopilot can only hold 30% of any asset, it can’t completely move into Bitcoin to follow the trend. But historically, we’ve witnessed that over the weeks and months that follow, this rising tide lifts all boats, therefore all asset prices benefit, sometimes in much greater proportions than Bitcoin. It is not easy to time such tides, and therefore, it may be wise to always hold some altcoins.
The Autopilot offers balanced and optimal exposure to crypto markets, as it always has. But if you’d rather go fully into BTC or ETH, OSOM Finance does offer a very competitive exchange service.
Prices have been going up so much recently, I’m probably too late to crypto, am I not?
It’s for you to appreciate, but you might want to take a look at the long-term perspective to understand whether it is indeed too late.
Since 2013, the Total Market Capitalization of Crypto has gone from roughly €830M to €830B.
And if you trust the CEO of Paypal, we should see more changes in the financial industry over the next 10 years than we have seen over the past 20. Since Blockchain and Crypto are projected to be a big contributor to the reworking of the financial industry, one could reasonably assume that what has doubled in the past 10 years will quadruple in the next 10 years. There is between 1% and 10% of the world’s population that has a crypto address or account. That leaves 90% of the world to conquer.
As an illustration, the week of April 26, the European Investment Bank registered a 100M euro of bonds on the Ethereum network. Also, Visa announced that they’re going to move into crypto “in a very big way” and the PayPal CEO said “crypto is the real deal”, in “Time”, no less.
If Bitcoin is accepted as Digital Gold, its total addressable market (roughly that of gold) is around US$ 10 Trillion; so it could still go roughly 10x. That’s at least what the CEO of Goldman Sachs thinks. Ethereum and the other smart-contract Blockchains can easily reimagine entire parts of our current digital infrastructure: Domain names, Collectibles, Cloud Storage, Banking & Fintech, … which are worth several trillion together.
So Crypto’s Total Market Capitalization is 2.293 Trillion today, but its addressable market is several times larger than that.
One could have thought that the Nasdaq 100 was at an all-time high in 2003 after the .com boom and that there was very little more that could be done in the way of tech and that, with the internet, everything had been invented. One would have been mistaken.
Not only did everything have to be re-built for the Digital Transformation but many new businesses previously un-realistic became doable. So not only did old businesses get digitized but new businesses emerged, thereby growing the pie.
When investing with a long-term outlook, it makes sense to look at long trends. For diversified portfolios, the long trend appears to be up, so we see no reason to stop offering our services because it’s “too late”. The old adage says “time in the market is more important than timing the market”.
Doesn’t it make more sense to just hold a market cap weighted index fund than to invest in something actively managed?
We came to the answer that, no, in Crypto it’s better to go for something actively managed.
But here are the facts, you decide: http://bit.ly/OSOMPerfBenchmark
And if you want even more of a run-down, we have a long post about it here
Why Own Crypto and When Should I Buy it?
We do not give advice and you should consult your financial advisor to know what’s right for you. What we can do is give you some tools to think about the question, so you can have an informed discussion with your advisor. In that intellectual toolbox we have the following:
- Understand asset classes, assets, asset allocation and maybe take a goal-based approach to investing
- Then ask “why a crypto allocation” We wanted you to have that toolbox easily available all in one place so we wrote a guide with the basics here.
As to when to buy, as we said in January: Dollar-Cost-Averaging (DCA) is generally promoted as a smart way by anyone who has anything to say on the topic. We wanted to make more tangible “why” DCA is promoted by most and give you an idea of what it looks like with the Autopilot. So we explained what DCA is in more detail & simulated a retirement plan that includes crypto. With forecasting to the end of 2021! You’ll probably be interested to read that a 10% allocation in Crypto over 529 days would have increased returns by 40% over investing in a fund of stocks only!