Memecoin active trading strategy on Base

This is an automated trading strategy that trades Base memecoins based on their recent volatility and returns.

This is a backtesting notebook prepared for the strategy deployment as a Velvet vault.

Benefits

• Get directional exposure in exciting small-cap memecoin market
• No need to pick memecoins yourself; the strategy will buy all of them
• Small cap memecoins are often uncorrelated with the rest of cryptocurrency markets

Trading rules

Trading rules are constructed so that strategy attempts to capture the momentum of memecoins when they go up and exit and not take any positions otherwise.

• This trading strategy trades memecoins on Base.
• This strategy is designed to be used with Velvet vaults. This is an active trading strategy that takes short-lived positions in assets that enjoy upward volatility. Upward volatility is defined as volatility * rolling returns, which is also called "the trading signal" for this strategy.
• The strategy trades open-ended universe: new memecoins added on Uniswap v2 and v3 will be automatically included in the strategy. The assets have minimum TVL and volume criteria to be included in the trading universe.
• The strategy picks top N assets based on the signal and rebalances every four hour. The signal must be above the base signal threshold. The assets are weighted by their signal strength.
• Any position is size capped for the risk management by the lit liquidity. The strategy does not take more than x % positions of the lit liquidity.

Trading rules are written in Python and the exact source code of these trading rules is available on Source code page.

Coingecko is used for defining memecoin category and TokenSniffer is used for risk scoring traded assets.

Expected performance

The strategy is a memecoin index and reflects the performance of memecoin markets. The strategy is expected to give profits as long as there are viable memecoin markets on Base. Both maximum drawdown and absolute profit should be less than holding memecoins, as the strategy tries to manage risk with the trading rules.

See the backtesting page for historical estimated performance. Past performance is no guarantee of future results. Due to the young age of memecoin markets, being a very recent phenomenon, there is no backtesting data about memecoin market downturns.

Benchmark

For the same backtesting period, here are some benchmarks of performance of different assets and indices:

	This strategy	AIXBT (memecoin)	KEYCAT (memecoin)	ETH	Bitcoin (cbBTC*)
Start Period	2024-02-05	2024-02-05	2024-02-05	2024-02-05	2024-02-05
End Period	2025-02-09	2025-02-09	2025-02-09	2025-02-09	2025-02-09
Cumulative Return	5,370.19%	411.78%	-63.88%	-14.88%	1.9%
CAGR﹪	1426.58%	204.05%	-50.02%	-10.39%	1.29%
Sharpe	5.23	1.74	0.14	-0.36	0.19
Sortino	12.97	3.67	0.24	-0.49	0.29
Max Drawdown	-22.36%	-72.26%	-80.2%	-34.61%	-12.82%
Longest DD Days	107	24	65	64	53
Volatility (ann.)	81.69%	152.17%	164.27%	30.86%	21.86%

• Coinbase custodied Bitcoin (cbBTC) was not available on Base chain at the start of the backtesting period.

Note: Due to the short history of Base blockchain and memecoins, the future performance is likely much worse.

Sources:

• Our strategy
• The full benchmark results are available in a separate Jupyter Notebook

Risks

This strategy is ultra-high-risk. Only allocate small amounts of capital you may lose. Before investing large amounts of capital, speak with the strategy developers.

This strategy, paired with onchain execution, is the first in the world. Because of the novelty, multiple risks are involved. Consider it beta-quality software.

Trading risk: Small-cap tokens traded are highly volatile, may include rug pulls and other questionable activities. Despite the strategy of automated filtering for tokens, some of the tokens may go to zero. The whole memecoin market can go to zero and is likely to do so at some point. There is little liquidity for these tokens, and trading costs are high, so they may change abruptly.

Technical risk: The strategy relies on ERC-7540: Asynchronous ERC-4626 Tokenized Vaults standard. This standard is new and not yet time-proven. The onchain trade execution contains unaudited smart contracts. There are centralised price oracles. The redemption process relies on a centralised valuation committee.

The strategy includes risk mitigations like:

• Use third-party security services to check the reputation of traded tokens
• Strategy limits position sizes based on the available lit liquidity
• Strategy limits position sizes based on the overall maximum % of the portfolio
• DAO and/or security committee holding multisignature keys can take manual actions in the case of unexpected issues: The strategy can be halted and manually wind up

The technical risks will be mitigated in the future by working with other protocols, by increasing the quality of onchain trading venues, data and decentralisation.

Further information

Any questions are welcome in the Trading Strategy Discord community chat.

This is the second version (v2.0) of this strategy.