Backtesting and historical analysis

Backtesting (testing a strategy against past data) — the process of checking how our strategy would have performed in the past. It helps us understand the risk/return profile across different market phases.

A simple analogy

Backtesting is like reviewing an old football match with a new tactic in hand. You know the final score — but you check whether your plan would have worked in every situation.

How to read a backtest correctly

Backtesting shows what the strategy WOULD have done in the past — the future will be different, and that's normal. So use a backtest as a training tool: it shows how the plan behaves across different phases, so you know where to act. Judge the behavior, not a promise.

SOL price history

Period	Start	End	Change	Phase
Jan-Nov 2021	$1.50	$260	+17,233%	Mega bull
Nov 2021-Jun 2022	$260	$30	-88%	Bear
Jun 2022-Dec 2022	$30	$8	-73% (FTX)	Crisis
Jan-Dec 2023	$8	$100	+1,150%	Recovery
Jan-Mar 2024	$100	$200	+100%	Bull
Mar-Sep 2024	$200	$130	-35%	Correction
Oct 2024-Jan 2025	$130	$250	+92%	Bull

Scenario 1: 2022 Bear Market

Start: June 2022, SOL = $30, portfolio = 100 SOL

Without a strategy (just holding SOL)

June 2022: 100 SOL x $30 = $3,000
December 2022 (FTX): 100 SOL x $8 = $800
Loss: -$2,200 (-73%)

With our strategy

Collateral: 100 SOL x $30 = $3,000
Debt: $900 USDC (LTV 30%)
LP: $600 USDC (single-sided)
Put Spread: Long $25 / Short $15

SOL falls to $8:
  Collateral value: 100 x $8 = $800
  Debt: $900
  LTV: $900 x 1.05 / ($800 x 0.90) = 131% -> LIQUIDATED! ❌

Problem: even a 30% LTV wasn't enough for a -73% drop!

What to take from this

A -73% drop is extreme, so a starting LTV of 30% alone isn't enough in a scenario like this — you need to act before that point. The good news: that's exactly what the crisis protocol is for, with clear thresholds that trigger EARLIER:

LTV > 45% -> start paying down debt
LTV > 55% -> pay down aggressively
Put Spread profit -> goes to collateral

That's what the backtest shows: you don't wait for the bottom — you act on the number.

With the crisis protocol

SOL = $20 (LTV reaches 45%):
  -> Close the LP (+$400 USDC)
  -> Pay down part of the debt: $900 - $400 = $500
  -> LTV: $500 x 1.05 / (100 x $20 x 0.90) = 29%

SOL keeps falling to $12 (LTV hits 45% again):
  -> Put Spread profit: ~$800
  -> Pay off the rest of the debt: $500 - $500 = $0
  -> LTV = 0% (no debt at all!)
  -> The 100 SOL survives ✅

SOL recovers to $100 (2023):
  -> 100 SOL x $100 = $10,000
  -> Starting investment: $3,000 + options costs (~$200)
  -> Return: +213%

Scenario 2: 2023 Recovery

Start: January 2023, SOL = $10

Collateral: 100 SOL x $10 = $1,000
Debt: $300 USDC (LTV 30%)
LP: $200 USDC (single-sided, range $7-$10)
Daily fees: ~$0.50/d (small capital)

Over 12 months:
  SOL rises to $100 (+900%)
  LP fees: ~$180 (collected and reinvested)
  Collateral value: 100 x $100 = $10,000
  Debt: $300 (unchanged)
  LTV: 3% (very safe)

Options (Covered Call $20 assignment):
  50 SOL sold at $20 -> $1,000
  But SOL reached $100 -> missed $4,000 of upside
  Remaining 50 SOL x $100 = $5,000

Result: ~$6,000 + $180 fees - $300 debt = $5,880
Return: +488% (vs +900% without the strategy)

A Covered Call caps the upside

In a strong bull market, a Covered Call limits growth. That's a trade-off: you got the premium and protection, but you give up part of the upside. In 2023 we give up some profit — but we're covered if the market had turned back down.

Scenario 3: 2024 Bull + Correction

Start: January 2024, SOL = $100

Collateral: 100 SOL x $100 = $10,000
Debt: $3,000 USDC (LTV 30%)
LP: $2,000 USDC (range $72-$100)
Put Spread: $85/$60
Covered Call: $200

Phase 1: SOL rises to $200 (Jan-Mar)
  -> LP generates fees (~$8/d x 90d = $720)
  -> Covered Call $200 assignment -> 50 SOL x $200 = $10,000
  -> Great — sold at 2x!
  -> Remaining 50 SOL x $200 = $10,000

Phase 2: SOL falls to $130 (Mar-Sep)
  -> If we'd held 100 SOL: -35% from the peak
  -> Ours: we already sold 50 at $200 (assignment)
  -> 50 SOL x $130 = $6,500 + $10,000 cash = $16,500
  -> Starting investment: $10,000
  -> Return: +65% (steady, no panic)

What did we learn from history?

Lesson	Detail
30% LTV isn't enough at -70%+	A crisis protocol is essential
A Put Spread saves you in a crisis	Options profit covers the debt
A Covered Call limits growth	But that's a trade-off — not a flaw
LP fees generate income	Even small amounts add up over time
The crisis protocol is the safety net	A clear plan matters more than "faith"
The strategy works long-term	A bad month ≠ a bad strategy

Summary

Scenario	Without strategy	With strategy
2022 Bear (-73%)	-73%	~-30% (with crisis protocol)
2023 Recovery (+1150%)	+1150%	+488% (capped by CC)
2024 Bull+Correction	Volatile	+65% (stable)

Main takeaway: the strategy reduces both losses and peaks. The result is steadier, more manageable returns over the long run.

Once you've run the strategy through real history, you stop guessing how it would behave in a crisis — you've already seen it in numbers, and you know exactly what you'll do and when.

The DeFi Risk OS platform helps you run this strategy with real-time monitoring and alerts.

Quick check

What did the 2022 bear-market backtest show without a crisis protocol?

Practice task

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Run a paper backtest

The best way to trust (or doubt) a strategy is to run it yourself through a historical drop. This is a paper task — no trades (~25 min).

This is learning, not investing — use only small amounts you treat as tuition.

You just ran a paper backtest through a historical drop and saw exactly where the crisis protocol kicks in — most investors never do this.

Portfolio tracking Exit strategy