What Can A Crypto Portfolio Backtest Really Show?
21shares' hypothetical results show why a better return measure can coexist with a larger loss, and why the test's rules matter.
Imagine two versions of the same portfolio. One finishes the test with more money, but falls further from its highest value along the way. Which performed better? A backtest can describe both outcomes. It cannot decide which experience a person could tolerate or promise the same result next time.
A backtest applies a set of investment rules to past market data. The US Securities and Exchange Commission's investor bulletin on performance claims explains that these are hypothetical results, rather than a record of money actually invested under those rules.
Why Can A Better Ratio Mean A Bigger Fall?
A 21shares research article published on 5th November 2026 provides a useful example. Its hypothetical October 2023 to September 2026 test compared a portfolio of 60% equities and 40% bonds with versions that replaced some equities with digital assets. Each used quarterly rebalancing, restoring the intended proportions every three months.
The issuer reported a Sharpe ratio of 0.57 for the benchmark and 0.74 for its profile containing Bitcoin (BTC), Ethereum (ETH) and Solana (SOL). Yet maximum drawdown increased from 13.48% to 14.82%. These are 21shares' reported results, not an independent Bored Node calculation.
The measures answer different questions. William F. Sharpe's explanation of the ratio measures average excess return relative to its variability. The usual comparison subtracts a risk-free return. A higher result describes more excess return for that measured variability, rather than a limit on losses.
Maximum drawdown records the largest fall from a previous peak. In a simple invented example, a portfolio reaching £120 before dropping to £90 has a 25% drawdown. Its eventual recovery does not erase that fall. A return statistic covering the whole test and a statistic describing its worst decline need not improve together.
What Changes When The Rules Change?
Rebalancing changes the path too. In the same recent test, 21shares reported that its digital asset growth profile's maximum drawdown was 17.83% without rebalancing, compared with 14.82% with quarterly rebalancing. That is evidence about these particular rules and dates, rather than proof that one frequency always works best.
The SEC bulletin identifies other important choices: fees, dividends, taxes, market conditions and the benchmark. A comparison needs consistent assumptions. A result before trading costs answers a different question from a result after them. Selecting only a favourable period can also hide how the same strategy behaved in falling markets.
Our guides to Bitcoin and Ethereum explain the assets behind portfolio labels. Sharpe's original explanation also notes that the ratio depends on the period over which it is measured. A monthly ratio and an annual ratio need a consistent method before they can be compared.
