The March 2020 Bitcoin Flash Crash

And What it Can Teach You About Sticking to Your Investing Thesis

I was getting ready this morning to type up a few tweets on the subject since it is March 12th — the anniversary of the Coronavirus Bitcoin flash crash of 2020. I figured, might as well steer you all to my Medium account since I have slightly more to say about the experience than a few tweets can capture.

I think what’s really interesting, at least in my case, is how the Bitcoin (and wider stock market) decline in March 2020 was a perfect illustration of how important it is to come up with your investment thesis and emergency exit plans in peaceful times. How I reacted (and yes, traded) during those long weeks in March 2020 has had a huge impact on my personal performance since then. I’ll be discussing two different portfolios here, my Bitcoin only portfolio (i.e. the sats I stack in cold storage) and my regular stock market portfolio. I reacted very differently with both to the events of March 2020.

Let’s start with the stock market. My investment thesis has shifted over time quite a bit. At first, I was a prolific index ETF guy and had a portfolio that was percentage weighted across a number of different Vanguard ETFs (like “Small Cap Growth" or “Large Cap Value").

At some point I began to wonder whether all this “diversification” was helping me achieve good results. I used https://www.portfoliovisualizer.com/backtest-portfolio to check my performance versus the S&P 500 and behold, my returns were inferior. It was also around this time that Preston Pysh and Stig Broderson started to interview and experiment with momentum investing (based on price action) on The Investors Podcast and I started to research how to incorporate some momentum into an aggressive rebalancing strategy to capture gains and hedge for the downside. I came up with a portfolio structure that included three different allocation levels based on market momentum and sentiment versus the S&P 500 all time high. I would rebalance into different allocation percentages based on the price action of the market. I backtested this approach (which was a LOT of effort and time) and found this method, with the positions I had chosen, limited downside in crashes and took profits near tops. Past results are not indications of future returns, but it felt like a really good strategy.

Basically, when the model hit the rebalance point for “use caution, near a top" I’d trim back positions in stocks and buy some bonds and gold to hedge against a drop (more on why this probably won’t work well in the future later). When a “crash" of 15% or 30% from the S&P 500 all time high occured, I’d sell bonds and gold and buy back positions in stocks. Pretty simple concept, but determining what “signals” to use to trigger these rebalance points was the tough part. I went through this exercise in 2018 and deployed this strategy in my portfolio then, immediately taking the “most risk" level of allocation since, well yeah, on fundamentals the market has been insane for a long time.

Meanwhile, outside traditional securities land, I got back into Bitcoin in the last half of 2019. I took a large position in Bitcoin at a cost basis of $10,300.00 a coin and the price promptly tanked to about $7,000. Not very confidence inspiring to say the least, but my thesis on Bitcoin accounted for this and I (in my opinion rather correctly) started to put even more money into Bitcoin. My strategy for Bitcoin from the start was roughly “stack as many sats as you can into cold storage and don’t touch it for a decade or more".

Roughly around January 2020 I began to follow what was happening in China with COVID-19 really closely, became incredibly concerned about the risk, and started to take action to plan accordingly. I didn’t make any changes to my tax-advantaged accounts allocations, but I did take out a number of positions in my taxable account where I have access to options and other strategies that Vanguard just doesn’t give people in their IRAs (ya know, because retirement savings is supposed to be cautious or whatever haha). I immediately took out calls on 20 year Treasuries, 10 year Treasuries, shorted corporate high yield bonds, shorted several banks, and shorted the S&P 500.

The match was lit and all I could do was watch in slow motion as the fuse slowly burned, getting ever closer to the pile of TNT. I’ve had an uncanny ability throughout my adult life to just know deep in my gut when something is wrong in the macro landscape. I had (with some help from helpful bears on twitter) correctly seen the future, but the only question was timing. The answer was, March 2020.

My taxable positions all exploded to the upside. I probably cashed out slightly early, but I still made a hefty gain that offset a lot of my losses.

Here’s the fun part, and tying it all back to the beginning about sticking to your investment thesis and coming up with strategies in peacetime… I let my emotions get the best of me. I traded in my IRA pretty heavily that week, off script, and it lost me money. It’s a very illustrative lesson in this case, because with the use of portfolio backtesting, I can evaluate the panicked moves I made against the strategy I had come up with in peacetime. There are three outcomes we’ll evaluate as far as my traditional portfolio is concerned: what would have happened had I stuck to the plan perfectly, what would have happened had I done absolutely nothing and just held, and what has actually happened since then.

First, let’s look at what would have happened had I done nothing but held — same positions I had on March 1st 2020 with no changes. The crash would have been bad for about 2 months, then I would have been even, and thereafter I would have achieved moderate gains thanks to this bizarre Fed-backed world we all now live in.

Second, let’s look at what would have happened if I had stuck to my strategy of rebalancing to capture market momentum and sentiment. Had I kept a cool head and had the discipline to execute my strategy as the world was crumbling, I would have limited my downside in the slide by about 10% versus my actual realised losses. I also would have outperformed the S&P 500 by 15% on the way back up. Those are respectable numbers, but alas, I didn’t achieve those because I didn’t have the fortitude to trust my past planning in peacetime — my strategy fell apart under the pressure of “wartime" (i.e. actual volatility). To be fair, this time truly felt different, and had the Fed not come to the rescue, I’m still convinced that this crazy climb post March 2020 would not have materialised in the stock market. But… again, the numbers don’t lie and had I stuck to the plan, I would have done well to weather the storm and would have larger positions coming out of the crash.

Here’s what actually happened (and I am very, very lucky I didn’t wreck myself like so many other people do in these situations). I sold a LOT of my positions in my traditional portfolio on the second day of major decline. I wanted the safety of cash like so many other people. When bonds and gold started to crash as well, that’s when I panicked as literally no asset class on earth (including Bitcoin) was providing any semblance of security. I abandoned my allocation rebalancing strategy because I thought the system was on the brink of collapse (which in hindsight, it kind of was, but the Fed stepped in and saved the day).

When the stock market bottomed that week, I made a decision. I was sitting on a large cash position in my portfolio and I had choices to make about what to do with it. Given the Fed had taken truly unprecedented action to prop up the markets, I felt my past thesis and strategy would be dead going forward (this remains to be seen, but I suspect this is the case). As I already had a small allocation to the Grayscale Bitcoin Trust, I went ahead and said “fuck it" and threw the vast majority of my cash at GBTC. Yep. In March and April 2020 that’s what I did. Completely emotion-based. But hey, it worked out. My performance since then has been nothing short of meteoric. I’ve also since grown my GBTC position. My current allocation is about 10% S&P 500, 5% foreign stuff (mostly India, Brazil, Europe, Korea, and Canada), 5% dividend kings, 5% REITs, and 75% GBTC (and some MSTR and RIOT for fun). It’s worked very well the last 12 months. Then again, it’s impossible to do badly in the post March 2020 world. I think the game has changed permanently. The stock market is a public utility now and it will not be allowed to correct. At least until the dollar fails, but hey, that’s what Bitcoin is for baby.

Oh, and my Bitcoin portfolio. Yeah, it was disheartening that Bitcoin crashed the hardest of all when our thesis was it would be a great hedge. I think what we learned is that institutions buy and sell Bitcoin in tandem with the S&P 500 when volatility is high, but that long term our thesis is sound.

At any rate, I had a serious gut check moment as I watched Bitcoin cascade down. Keep in mind, my major buy at that point was already -30% in the red. And now Bitcoin was crashing parabolically down, all the way to $3,800.00 a coin.

I can’t lie, the peer pressure of Bitcoin Twitter kept my head in the game and I stacked HARD all the way down and back up between March 11 and March 15. You guys rock, you saved me from myself and we are so much better off today than we were a year ago because of it.

I was tweeting with confidence in those days, but I will happily admit, I was scared. I made the gutsy decision to double down with a YOLO mindset and it’s paid off.

Now, what lessons should we take away here. I think there’s two valuable ones we can examine.

A) I would have done better had I stuck to my investment plan I had forged in peacetime. Had I executed perfectly according to my model, my backtesting shows it would have worked splendidly to limit downside and achieved greater upside in the recovery. That’s a hugely valuable lesson. Make investment plans in peacetime, based on sound data, logic, and testing, and have the fortitude to trust your past planning when shit hits the fan. That’s valuable for any investor.

B) Bitcoin saved me and has given me returns better than anything else possible. The timing of allocating a huge part of my cash to GBTC and just Bitcoin itself in March 2020 may well be one of the best “gut" decisions I’ve ever made. Don’t bet against Bitcoin. It doesn’t work out long term.

Last but not least, what about my momentum and rebalancing strategy? At this point, I consider it dead. It relies heavily on bonds being a good hedge and moving opposite of stocks in bad environments. Unfortunately, the manipulation of bonds has completely broken their traditional trading behaviour. They can no longer be relied upon, they are toxic. Gold? No, gold has shown it does not perform well as a hedge, again and again, and it’s had an abysmal back half of 2020 into 2021 when it should have been performing well. What does that leave, Bitcoin? Well, yes but it’s also highly correlated to the downside in macro risk off events. So what does this leave me? Everything is manipulated and I don’t see how any of this can be walked back. I think traditional theses are completely dead now. The models are all destroyed. So for the foreseeable future, I’m going to stick to my allocation listed above. I might toy with the idea of using some of the traditional Bitcoin trading models to reduce some of my GBTC allocation later in 2021, but I’m not convinced that’s a great idea.

Anyway, I hope you find some value in looking at how I handled March 2020. Just for the record, anything I’ve discussed here is based on strategies I came up with for myself only, based on my own personal risk tolerances, and should not be relied upon by you for any decisions you may make in regards to your own money. While I hope this content is educational for you, none of it is specific advice for your situation and you should plan accordingly based on your own goals and attitudes toward risk, preferably with the help of someone who has a fiduciary responsibility to you.

As always, my DMs are open on Twitter. Hodl onward my friends.