Title: NOTHUNG (white paper)
Body:
1. Introduction
The fundamental question every participant in the equity markets asks is: How can I achieve the highest possible capital returns? This white paper presents a bold and distinctive strategic approach designed for the high-risk segment of a portfolio, with the potential to deliver unprecedented percentage returns. The name NOTHUNG underscores the substantial risks inherent in the strategy detailed in the following pages.
2. A Strategical Schism
The selection of the asset market represents the strategic foundation of every portfolio. In this context, Bitcoin stands out as a compelling choice. Why? Its inherent qualities are in demand across all economic systems, with this demand estimated in the trillions of dollars. Bitcoin offers the monetary infrastructure that aligns with the preferences of most market participants. Furthermore, it appears to have overcome significant regulatory hurdles.
This perspective is no longer confined to individual enthusiasts; even major financial institutions, such as BlackRock, now share this fundamental view of Bitcoin’s value and potential.
3. A Strategical Schism Part 2
What potential capital returns can be expected if Bitcoin continues its current adoption trend? To explore this, let us examine the fundamental structure of adoption trends. Historically, the adoption of new technologies, such as the internet, often follows a pattern resembling a logarithmic function.
Such a logarithmic function aligns well with Bitcoin's adoption trajectory. If we use this model to project Bitcoin’s price in 2045, the estimate reaches approximately $7 million per Bitcoin, implying an average annual growth rate of 23.5% over the next 20 years.
At this price, Bitcoin’s market capitalization would slightly surpass that of gold, assuming gold continues to grow at the same rate it has over the past two decades. This projection underscores the transformative potential of Bitcoin as a high-risk, high-reward asset class within a portfolio.
4. NOTHUNG: A Tactical Model
a. Introduction of a tactical model to enhance returns
A 23.5% annual growth rate is impressive, but tactical adjustments can aim to improve it further. Historical evidence from the stock market shows that employing systems to avoid high-volatility phases—such as the approach detailed in Leverage for the Long Run by Gayed (2015)—can double or triple expected returns. A simple yet effective strategy proposed here is the 200-day moving average rule, which involves:
- Entering a position in daily leveraged stock market funds when their underlying indices are above their 200-day moving averages.
- Holding cash when indices are below their 200-day moving averages.
b. Application of model on Bitcoin
Several variations of the strategy were applied to Bitcoin, yielding the following results:
- Buy and Hold: CAGR: 150%, Max Drawdown: -91%
- 200-Day Average Rule: CAGR: 185%, Max Drawdown: -70.3%
- Daily Leveraged 200-Day Average Rule (Factor 2): CAGR: 350%, Max Drawdown: -94.1%
Insights and Multiplicative Growth
- Performance Boost: By avoiding high-volatility phases, the 200-day moving average strategy significantly increases CAGR while lowering drawdowns (non-leveraged).
- Risk Management: Leverage introduces extreme drawdowns but multiplies returns. Using this model, an adjusted annualized return of 52.26% is projected. (Using the historical multiplier of 2.33 derived from the leveraged 200-day moving average strategy applied to Bitcoin, we can adjust our projected annual growth rate of 23.5%. Accounting for an estimated 2.5% yield cost, this results in an adjusted annualized return of 52.26%!)
5. Downsides and Risk Management
Risks Associated with Bitcoin
- Lack of Adoption: Limited infrastructure/ecosystem growth could undermine returns.
- Black Swan Events: Catastrophic, unforeseen events could disrupt Bitcoin.
Risks Associated with the Strategy
- Strategy Failure: Market dynamics could undermine the 200-day moving average rule.
- Extreme Market Events: Large single-day drops could render leveraged positions worthless.
To illustrate, compare two portfolios:
- Portfolio 1: $10,000, with $500 allocated to NOTHUNG and $9,500 in S&P 500 index funds.
- Portfolio 2: $10,000 entirely in S&P 500 index funds.
If forecasts are right, Portfolio 1 grows to $2,230,826 in 20 years vs. $67,275 for Portfolio 2. If wrong, Portfolio 1 still retains $63,911 compared to $67,275.
6. Conclusion
The NOTHUNG strategy has the potential to be a valuable addition to your portfolio when implemented thoughtfully and with proper risk management.
