Portfolio Construction Memo: BTC NAV Portfolio
Date: 2026-01-14 Analysis Period: 2024-01-01 to 2025-08-01 (431 trading days) Universe: 7 strategies (highwater, mt2x, persistent, tellurian, quantstrat, syntax, velox) Denomination: BTC (Bitcoin)
1. Executive Summary
This memo presents the portfolio construction analysis for a multi-strategy allocation denominated in BTC. All optimization objectives converged to equal-weight or failed to find superior allocations, revealing a critical insight: these strategies are USD-generating engines, not BTC-accumulation vehicles.
Key Finding: Optimization Failure is Informative
During the analysis period, BTC appreciated approximately 74.7%. Every strategy in the universe underperformed this benchmark when measured in BTC terms:
| Strategy Performance vs. BTC | Result |
|---|---|
| Best performer (tellurian) | -0.9% relative to BTC |
| Worst performer | Significant underperformance |
| Average strategy | Negative BTC-denominated returns |
Strategic Implication: These strategies excel at generating USD income but are not designed for BTC accumulation. For BTC accumulation objectives, holding BTC directly is the optimal strategy.
2. Strategy Universe Overview (BTC-Denominated)
When denominated in BTC, the strategy characteristics fundamentally change:
| Strategy | BTC-Denominated Behavior |
|---|---|
| tellurian | Best relative performer; nearly matched BTC (-0.9% underperformance) |
| mt2x | Moderate BTC correlation; leveraged USD exposure |
| highwater | USD-generating; significant BTC underperformance |
| persistent | Strong USD returns; weak BTC accumulation |
| quantstrat | Systematic USD strategy; BTC-denominated losses |
| syntax | USD alpha generator; BTC underperformer |
| velox | Top USD performer; poor BTC accumulator |
3. Optimization Results
3.1 Performance Comparison Across Objectives (BTC-Denominated)
| Portfolio | Expected Return | Volatility | Sharpe | Max Drawdown | CDaR (5%) |
|---|---|---|---|---|---|
| EqualWeight | -8.95% | 47.97% | -0.27 | -40.11% | -37.43% |
| MaxSharpe_MV | -8.95% | 47.97% | -0.27 | -40.11% | -37.43% |
| MinVar | -0.47% | 43.92% | -0.10 | -32.44% | -30.77% |
| MaxSharpe_CDaR | -8.95% | 47.97% | -0.27 | -40.11% | -37.43% |
| MinCDaR | -1.81% | 44.92% | -0.13 | -32.18% | -30.62% |
| MinMDD | -1.81% | 44.92% | -0.13 | -32.18% | -30.62% |
Critical Observation: MaxSharpe_MV and MaxSharpe_CDaR both defaulted to EqualWeight, indicating no allocation could achieve positive risk-adjusted returns in BTC terms.
3.2 Why Optimization Failed
The optimizer could not find a superior allocation because:
- All strategies have negative expected returns in BTC terms
- Correlations are extremely high (0.79 to 0.99) when BTC-denominated
- No diversification benefit exists - all strategies move together relative to BTC
- Sharpe ratios are negative - no allocation improves risk-adjusted returns
3.3 Default Allocation: EqualWeight (Fallback)
| Strategy | Weight |
|---|---|
| highwater | 14.29% |
| mt2x | 14.29% |
| persistent | 14.29% |
| tellurian | 14.29% |
| quantstrat | 14.29% |
| syntax | 14.29% |
| velox | 14.29% |
4. Correlation Analysis (BTC-Denominated)
The BTC-denominated correlation matrix reveals near-perfect positive correlations:
| highwater | mt2x | persistent | tellurian | quantstrat | syntax | velox | |
|---|---|---|---|---|---|---|---|
| highwater | 1.00 | 0.95 | 0.96 | 0.79 | 0.96 | 0.96 | 0.96 |
| mt2x | 0.95 | 1.00 | 0.98 | 0.83 | 0.98 | 0.98 | 0.98 |
| persistent | 0.96 | 0.98 | 1.00 | 0.85 | 1.00 | 0.99 | 1.00 |
| tellurian | 0.79 | 0.83 | 0.85 | 1.00 | 0.84 | 0.84 | 0.85 |
| quantstrat | 0.96 | 0.98 | 1.00 | 0.84 | 1.00 | 0.99 | 1.00 |
| syntax | 0.96 | 0.98 | 0.99 | 0.84 | 0.99 | 1.00 | 0.99 |
| velox | 0.96 | 0.98 | 1.00 | 0.85 | 1.00 | 0.99 | 1.00 |
Key Observations:
- Average pairwise correlation: 0.94 (vs. 0.04 in USD terms)
- All strategies effectively behave as a single asset relative to BTC
- Diversification benefit: None - the portfolio behaves like holding USD
- Tellurian shows lowest correlations (0.79-0.85) due to higher BTC beta
Interpretation: When measured in BTC, these strategies are all functionally equivalent to being short BTC. Their USD returns are dominated by the inverse BTC price movement.
5. Risk Analysis
5.1 Drawdown Profile (BTC-Denominated)
All portfolios experienced severe drawdowns relative to BTC:
- Maximum Drawdown: -32% to -40%
- CDaR (5%): -31% to -37%
- Drawdowns track inverse BTC rallies
5.2 Volatility Analysis
The 44-48% volatility in BTC terms is driven by:
- BTC's own volatility (primary factor)
- All USD returns appear as BTC losses during rallies
- No hedge exists within the strategy universe
5.3 Regime Dependency
BTC-denominated performance is highly regime-dependent:
- BTC Bull Market: All strategies underperform (as observed)
- BTC Bear Market: Strategies would outperform BTC
- BTC Sideways: Strategy alpha becomes visible
6. Strategic Interpretation
6.1 This is NOT a Failure - It's an Insight
The optimization "failure" reveals critical portfolio design information:
| Question | Answer |
|---|---|
| Are these good strategies? | Yes - exceptional in USD terms (Sharpe > 8) |
| Do they accumulate BTC? | No - they generate USD, not BTC |
| Should you use them for BTC goals? | No - hold BTC directly |
| Should you use them for USD income? | Yes - that's their purpose |
6.2 Strategy Classification
These strategies should be classified as:
- Asset Class: USD-generating trading strategies
- BTC Correlation: Low-to-negative in absolute terms
- Use Case: Income generation, not BTC accumulation
6.3 When Would BTC-Denominated Allocation Make Sense?
A BTC-denominated portfolio would be appropriate if:
- Strategies had consistent positive BTC-denominated returns
- Strategy correlations in BTC terms were low/negative
- Investors sought BTC accumulation through active trading
None of these conditions are met with the current strategy universe.
7. Recommendation
Primary Recommendation: Separate Objectives
For BTC Accumulation:
- Hold BTC directly (74.7% return over analysis period)
- These strategies are not suitable for BTC accumulation
- No allocation of USD-generating strategies will outperform holding BTC in a bull market
For USD Income Generation:
- Use the USD NAV portfolio (MaxSharpe_CDaR)
- Expected return: 19.7% annualized in USD
- Sharpe ratio: 8.82
- These strategies excel at their intended purpose
Portfolio Architecture Recommendation
Consider a barbell approach:
| Allocation | Purpose | Vehicle |
|---|---|---|
| X% | BTC Accumulation | Direct BTC holdings |
| Y% | USD Income | MaxSharpe_CDaR strategy portfolio |
This separates the objectives and uses each vehicle for its intended purpose.
Do NOT Attempt
- Forcing BTC-denominated optimization on USD strategies
- Expecting USD-generating strategies to outperform BTC in bull markets
- Using leverage to "catch up" to BTC returns (increases risk without changing correlation)
8. Conclusion
The BTC NAV analysis confirms that portfolio optimization is only as good as the underlying strategy universe. When the universe consists of USD-generating strategies:
- USD-denominated analysis reveals excellent risk-adjusted returns (Sharpe 8.82)
- BTC-denominated analysis reveals systematic underperformance vs. BTC
This is not a flaw - it's a feature. These strategies provide uncorrelated USD returns, which is valuable for:
- Funding living expenses
- Portfolio rebalancing
- Risk management during BTC drawdowns
For BTC accumulation, the optimal strategy remains: hold BTC.
This analysis was generated using Riskfolio-Lib optimization framework with historical return data from the specified analysis period. The BTC benchmark return of 74.7% represents the opportunity cost of deploying capital in USD-generating strategies during a BTC bull market.