Trading Fundamentals: Creating a Portfolio Investment Graph

Together with Vitaly Tontin, who leads an educational channel on trading, we will understand how to conduct a technical analysis of cryptocurrency investment portfolios.

To do this, we will need the TradingView service, which is convenient for trading cryptocurrencies. With the help of this service, anyone can create a synthetic graph and monitor the status of cryptocurrency portfolios.

A synthetic graph is created using a mathematical formula and reflects the behavior of at least two financial instruments, cryptocurrencies in our case.

What For?

The technical analysis of a portfolio will help visually assess the volatility of future or existing crypto portfolios, as well as compare their investment attractiveness by comparing past yields with the yield of the main currency, namely BTC.

How?

To begin with, we will need to compile a list consisting of two elements, the cryptocurrencies included in your investment portfolio and their amounts.

For example, take the top 5 cryptocurrencies with the highest capitalization, except Bitcoin, and invest in each of them about \$1,000. We get the following distribution:

Next, we need to go to the TradingView website and register an account, if you have not already done so, and, using a simple mathematical formula, draw up a graph of your portfolio.

where Crypto is the quotation of the selected cryptocurrency in pair with BTC (for example, ETHBTC); V is the number of coins.

Using the data from the graph and the formula, we create a query for TradingView, which we will enter in the quote input field:

(ETHBTC * 1.03 + XRPBTC * 847.46 + BCHBTC * 0.65 + LTCBTC * 3.92 + ADABTC * 2439.02) * BTCCSD

At the output stage, we obtain a synthetic graph of our cryptocurrency portfolio, which we can analyze as a normal graph of any cryptocurrency. Now we can already visually assess behavior:

determine the average and maximum historical levels of drawdown

and average daily volatility.

Evaluation of Portfolio Attractiveness

An important point in creating investment portfolios is the evaluation of an alternative. In simple terms, we need to make sure whether it was profitable to invest in such a portfolio in the past, or would it be better to simply invest everything in Bitcoin from the get-go. To do this, we must add the so-called benchmark to the previously created synthetic graph, in our case it is BTCUSD.

In the end, we should obtain the next graph allowing for comparing the past return of an investment portfolio with the yield of Bitcoin for the same timeframe.

In this case, investments in today’s top 5 cryptocurrencies would have brought about as much as 900% of profit starting from October 2017, while at the same time investments in Bitcoin could have shown a maximum of about 320% revenue. Both indicators are immensely large, but investments in altcoins would have been more attractive.

The next thing we can do is visually assess how correlated the two graphs are, that is, the value of our portfolio and the cost of Bitcoin. To do this, just change the candlestick chart to the line and watch:

As you can see, approximately from January 15, 2018, our synthetic graph (portfolio) has had a strong enough positive correlation with Bitcoin. This means that it almost completely repeats the character of fluctuations in Bitcoin price.

Such behavior may exist due, first of all, to the absence of any external factors affecting exclusively our portfolio, for example, important news related to our cryptocurrencies.

On the other hand, such behavior on the graphs may indicate a strong influence of global (in the context of the cryptocurrency industry) news on the whole market in general and the strong statistical dependence of altcoins on Bitcoin.