Buy the Pump, Sell the Dump — Does Momentum Investing Work in Bitcoin?
Since the begin of the 12 months, Bitcoin (BTC) value has been as excessive as $9,200 — a 2-month excessive — whereas going as little as $6,900 on Jan. three. Bitcoin’s volatility is considered one of the most incessantly mentioned points that come up when buyers consider Bitcoin as an asset class. However, its unstable habits is what supplies a chance for buyers to make the most of the value actions and make a revenue.
Following predictions as optimistic as the $100,000 forecast primarily based on the stock-to-flow mannequin, buyers could foresee one other interval of excessive value hypothesis, opening the door for a wider set of funding methods.
On the different aspect, if buyers find yourself experiencing a bearish state of affairs like the majority of 2018 and a portion of 2019, bolder methods primarily based on extensive value actions could function a great various for market makers.
Cryptocurrency market weekly overview. Source: Coin360
Strategies primarily based on giant value actions have been exploited for many years in conventional markets, particularly in shares. One of these methods is momentum investing. An investor evaluates the each day returns for a pattern of shares and identifies which one was the largest loser and winner in the value for that day.
In conventional markets, it was discovered to be profitable to purchase the winner inventory that day and maintain it for a sure interval (as much as investor discretion) and promote (quick) the loser inventory. Usually, buyers develop this technique primarily based on portfolios of finest and worst-performing shares as a substitute of solely selecting the finest and worst performer from the chosen pattern.
However, it’s not unusual for the particular person momentum technique to even be utilized amongst buyers regardless of elevating questions on funding diversification. Nevertheless, if diversification is discovered to be ineffective in the crypto area, as reported by Cointelegraph, an investor may anticipate higher outcomes from a person momentum technique as a substitute of specializing in portfolios.
How does Momentum investing work in the crypto atmosphere?
Firstly, we establish the top-20 cryptocurrencies in the market as we speak and get the each day returns for every forex throughout 2019. Throughout a portion of final 12 months, we now have seen a bearish state of affairs in the market. However, Bitcoin picked up and ended the 12 months with a cumulative return of 65%.
By analyzing this technique for a interval with such traits, we will current a bolder technique for buyers to make the most of larger swings in smaller currencies since the largest cash confirmed modest beneficial properties.
Secondly, we establish which was the forex that had the highest (winners) and the lowest (losers) return from the top-20 currencies for every day in 2019.
After figuring out the each day winners and losers, we assume that an investor buys its closing value that day and sells it the following day, additionally at the closing value. The closing value (newest information in the vary at UTC time given by Coin360) is assumed for simplicity functions as it’s open for buyers to determine the desired time to purchase and promote throughout these days. Another variation of the technique can include holding the coin for greater than at some point.
By using this technique every single day in 2019, we discover that an investor who buys the winners will get the finest cumulative return of 140%. Whereas, an investor that buys the losers and sells them the following day retrieves a unfavorable return for this era (-105%). In conventional markets, the technique works in the similar means with the investor shopping for the winners and sells the losers.
Such unstable habits leads us to additionally have a look at a risk-adjusted efficiency measure since an investor have to be compensated by the publicity to greater threat funding. When exploring this technique — shopping for the winners — a Sharpe ratio (the measure of risk-adjusted return of a monetary portfolio) of 1.11 is achieved, excluding transaction prices, which is an appropriate efficiency for the technique.
January 2019-December 2019 momentum methods (Buying Winners & Buying Losers) cumulative returns
The similar currencies seem in each situations rather more usually than with different currencies. As we’d anticipate, the greater market capped cash seem much less incessantly as the highest/worst performers (e.g. BTC, ETH, LTC, XRP).
Currencies with most appearances as finest and worst-performing forex throughout the pattern interval
Key elements in a crypto momentum technique
Looking ahead, an investor delving into a lot of these methods ought to pay attention to sure elements. The first is that we checked out the top-20 currencies in the market as we speak and examined their returns for the final 12 months.
Hence, a few of the cash analyzed could not have been in the top-20 throughout some durations of 2019 as some could have simply been not too long ago launched or their volatility dislodged them from the pattern. At the similar time, currencies with unstable value swings could also be included in some durations, elevating the threat of the technique but additionally the attainable beneficial properties.
Another issue is the liquidity threat of using such a technique. When a decrease market-capped coin sees a big achieve in value, it could be more durable to purchase it throughout a 24-hour interval as most holders may anticipate the coin to go even greater or set very excessive promote limits for brand new buyers to make the most of this chance.
Finally, a technique that’s primarily based on each day buying and selling will incur excessive transaction prices. In this instance, we exclude these bills from the cumulative returns and Sharpe ratio calculations, which can trigger a lower in efficiency after computing the impression of operational prices.
The views and opinions expressed listed here are solely these of the creator and don’t essentially replicate the views of Cointelegraph. Every funding and buying and selling transfer entails threat. You ought to conduct your individual analysis when making a call.
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