Backtesting the Social Index

In our last article, we went through the motivation and basic ideas of a strategy that uses a social indicator, the Social Score, to allocate capital in a portfolio of selected cryptocurrencies. In addition, we have shown that a portfolio based on this strategy can outperform a usual portfolio weighted by relative market cap.

This present article will show more backtests with other themes of investment and different tokens, and benchmark them against one of the most popular ways of allocating money in a portfolio: by market cap. We believe that it will help to illustrate the advantages of social investing. Let’s get going!

But first, some important metrics you should know: Sortino Ratio, Sharpe Ratio, Skewness, Mean Return, and volatility.

The DPI 7

Let’s start with a regular idea: investing in blue-chips DeFi protocols. This can be compared to the DeFi Pulse Index.

The portfolio to be simulated is composed of the 7 major tokens in the DPI, which are: aave, comp, lrc, mkr, snx, sushi, uni.

Social Index: portfolio weighted by Social Score. Market Cap: portfolio weighted by Market Cap.
Allocation over time.

In this example, we can observe that our portfolio is slightly more volatile but offers a greater daily return, and it profits more from upwards volatility as shown by the Sortino Ratio. The allocation curves show that the coins vary more in weight, meaning that the Social Index strategy can gain more from good-performing tokens.

Shiba and Doge

Sometimes, projects are 100% about community. So we decided to test the strategy of socially investing by allocating money only to Shiba and Doge, and to compare the performance of it versus a regular Market Cap weighted portfolio.

Shib-Doge Social: portfolio weighted by Social Score. Market Cap Shib-Doge: portfolio weighted by Market Cap.
Allocation over time.

Here we have one very interesting example. The allocation of the Social Index portfolio changes from doge to shib in October and shib already dominates the portfolio in the same month. While in the Market Cap Index, even though shib gets more weight, it is not sufficient to become the major share in the portfolio. The result: the Market Cap portfolio does not gain what could be gained from the impressive rise in the price of shib.

Gaming Madness

What about investing in the recent surge of metaverse and gaming? Let's compare the social investing thesis versus the regular market cap strategy by using a portfolio composed of: axs, enj, mana, and sand.

Social Index: portfolio weighted by Social Score. Market Cap: portfolio weighted by Market Cap.
Allocation over time.

Again another example of the absolute madness of crypto returns. We don’t see that very often anywhere in the market. The allocation curves show once again that the Social Index portfolio was ready to allocate more axs and gain greater returns. And later to sell axs and start buying mana and sand, both of these coins performing very well in November. However, we can not fail to notice the high skewness of both portfolios, that is, high positive skewness, meaning that even with very high mean daily returns, we can expect frequent losses but bigger, although less frequent, gains. Not too bad. In the end, the Social Index portfolio surpasses the Market Cap once again.

Conclusion

Observing the results above it is clear that the Social Score portfolio is a worthy investment idea. It might not mean that it can always outperform other portfolios, but it sure can take advantage of some coins that have a good probability of going to the “moon”. In the end, we have a strategy that can allocate capital in a more effective way, but the selection of the coins in the portfolio is, as expected, the most important part.

Meet the Avalanche Social Index

If you bought the idea, it’s time to meet the first of a series of multi-chain products, done using Kassandra Protocol, that will automagically socially invest:

Learn more about Kassandra:

--

--

--

The decentralized autonomous organization that governs tokenized data-driven investment funds

Love podcasts or audiobooks? Learn on the go with our new app.

Recommended from Medium

On Scaling Solutions

Understanding Bitcoin & the 5 Axes of Power

Why Do Troptions Have Value?

✅ Warena Dual IDO on RedKite/GameFi

Understanding What Makes Revuto Tick

“Contactless” society and digital currencies

Loopring Welcomes Julien Bouteloup As Advisor

dotmoovs leverages Exeedme technology to bring Play2Earn to Sports

Get the Medium app

A button that says 'Download on the App Store', and if clicked it will lead you to the iOS App store
A button that says 'Get it on, Google Play', and if clicked it will lead you to the Google Play store
Kassandra Foundation

Kassandra Foundation

The decentralized autonomous organization that governs tokenized data-driven investment funds

More from Medium

Pangolin Introduces ‘Super Farms’ — The New Yield Farming Model Changing DeFi

Yak Guides take you through how to leverage YAK as collateral and the Moremoney partnership

Kassandra Humble Farmer Strategy

Penguin Rush Phase 3: Turbo Igloos! 🧊🔥