Backtesting Indicator Strategies: Social Interest vs. Fear and Greed

Definition of the compared strategies

Social Interest Indicator

This newly developed indicator (version 1) measures public interest in an asset such as BTC by tracking online engagement. Depending on public engagement with an asset, the indicator varies between 0 and 100. This range quantifies the social interest on a weekly basis from no interest (0) to everyone engaging with the topic online (100). The premise is that low public engagement corresponds to accumulation phases, where retail investors are inactive, creating a strong buying opportunity to position yourself as a long-term investor. Conversely, as Bitcoin’s price increases, more people discuss it, instigating a hype cycle with increasing social interest indicator values. At peak public excitement, high social interest value suggest an imminent market top. This signal would be a good opportunity to take profits.

The Social Interest Strategy executes trades as follows, following the 80/20 rule:

• Buying Phase: In any given week where the indicator falls below 20, BTC is accumulated by allocating 20% of the initially available capital at the beginning of the cycle. This process continues for up to five separate weeks, whenever the condition is met, distributing the investment over time.

• Selling Phase: In any given week where the indicator exceeds 80, 20% of the accumulated BTC is sold. This continues for up to five separate weeks, whenever the condition is met, gradually exiting the position.

Fear and Greed (FnG) Index

This public indicator aims to represent the overall sentiment of the cryptocurrency market. It combines multiple data sources such as volatility, market momentum / volume, social media, dominance and trends into a single value, ranging from 0 to 100. While this score categorizes the market sentiment from extreme fear (0-24) to extreme greed (75-100), for this strategy only the most extreme levels are used for trading decisions. Buy orders are triggered when the FnG index falls below 11, signaling maximum fear in the market. On the other hand, sell orders occur when the FnG index exceeds 93, indicating excessive greed.

Since the FnG index is reported daily, trades are executed on a daily basis, distributing orders across multiple days:

• Buying Phase: When the FnG index falls below 11, one of five equally sized capital position is deployed in a buy order.

• Selling Phase: When the FnG index exceeds 93, 20% of the total BTC holdings are sold

Buy and Hold

This serves as a benchmark to compare whether active investment strategies can outperform. Buy and Holding, and thus are capable of increasing profit. The period for back testing is chosen from 01 January 2020 to 31 March 2023.

Backtesting Results

Buy and Hold Strategy

The Buy and Hold strategy yielded a total return of 530.79% over the testing period. Despite this impressive gain, the value of BTC had declined 58.75% from its cycle all-time high of 69 000 USDT by March 2023. Nevertheless, holding through the full cycle with the bottom after the cycle (15 476 USDT) higher than the buy-in level, remains a solid long-term approach.

FnG Strategy

The FnG index based strategy managed to secure a lower entry price, on average 5 460.13 USDT compared to the Buy and Hold strategy (7 195.24 USDT). However, its reliance on extreme sentiment values led to premature sell order in November 2020, at the early stages of the bull market. When the market corrected in May 2021, the strategy triggered buy orders at higher prices than the earlier sell orders, reducing overall gains. Due to BTC’s lower dominance in late 2021, the index never reached extreme greed levels again, resulting in no additional sell triggers. As a result, the total BTC holdings decreased from 0.92 BTC to 0.48 BTC, leading to a final return of 172.56%, significantly underperforming the Buy and Hold approach.

Social Interest Strategy

This strategy had a higher initial entry price of 8 392.44 USDT compared to the other two strategies. However, it proved more effective in identifying the cycle top, with sell orders executed later in the bull market, specifically in January and February 2021. This allowed for higher exit prices than the Fear and Greed strategy. Additionally, the second round of buy orders (October 2022) were placed closer to the cycle bottom, with an average repurchase price of 19 589.33 USDT, allowing the BTC holdings to increase from 0.50 BTC to 1.10 BTC. As a result, the strategy outperformed the Buy and Hold method, achieving a final return of 650.79% at 31.03.2023, an increase of 120.3% over the passive Buy and Hold strategy. While not perfectly timed, particularly selling at the absolute peal, the Social Interest Indicator (Version 1) effectively identified accumulation phases at cycle lows, demonstrating its potentials as a valuable indicator for long-term investors.