Practical Applications of Cryptocurrency Momentum and Reversal

Abstract

In <ext-link><bold><italic>Cryptocurrency Momentum and Reversal</italic></bold></ext-link> from the Summer 2023 issue of <bold><italic>The Journal of Alternative Investments</italic></bold>, <bold>Victoria Dobrynskaya</bold> of <bold>HSE University</bold> in Moscow finds that cryptocurrencies display a momentum effect over short time horizons of two to four weeks and a reversal effect over long time horizons. Returns from capturing those effects are statistically significant and not tied to other cryptocurrency risk factors. In a comprehensive study of hundreds of strategies with varying sorting and holding periods, utilizing virtually all available cryptocurrencies, Dobrynskaya is the first to look at holding periods beyond one month for these strategies in the cryptocurrency market. She uses a winner-minus-loser (WML) portfolio approach to make her initial findings but also looks at winners and losers separately, multifactor alphas, and upside and downside betas. One important finding is that the loser side drives the WML portfolio performance. She finds significant alphas for short-horizon momentum strategies and long-horizon reversal strategies, and upside betas are significantly negative, particularly at longer horizons. Her results provide clarity to some of the contradictory results of past research on these effects in the relatively new asset class of cryptocurrencies.