Cross-Sectional Cryptomentum
The problem
Holding cryptocurrencies for the long term looks like a promise of serious growth, until it’s your turn to lose. Momentum strategies are popular in nearly every tradeable asset, and crypto is no exception: the literature finds that the largest, most liquid cryptocurrencies show a momentum effect across several horizons. But knowing momentum exists doesn’t immediately make you capable of stomaching drawdowns of more than 40%. Daniel and Moskowitz studied these “momentum crashes”, the periods when momentum strategies sharply underperform, and how to soften them.
The idea
This is a cross-sectional momentum strategy on large, liquid cryptocurrencies, with hard regime gates that keep it out of bear markets. The universe is filtered by size and liquidity, where only the top quintile is considered, and then ranked on momentum, with positions sized by inverse volatility. Transaction costs dominate this sort of strategy, and therefore there are hard limits on the minimum change for a position to avoid overtrading. Two gates set exposure: price against a composite weighted moving average of the universe, and the same test on bitcoin alone. With both gates on, the book is fully invested. With one on, exposure drops to 50% and the rest earns interest. With both off, the account sits in a stablecoin and earns steady interest on it.