Primers
INTRODUCTION
In this week’s edition we’re focusing on momentum strategies, looking at how investors can capitalise on rising prices. While pioneered in traditional markets, momentum strategies are particularly relevant to digital assets. Trends in the burgeoning digital asset space are often driven by hype and rising prices can reinforce these narratives. This is similar to the thesis behind momentum investing, which we will discuss in more detail later.
We explore all of this and more below, looking at a custom index, the VHASHMOM, and comparing it with the broader market.
KEY TAKEAWAYS
- Crypto markets naturally cater to momentum strategies.
- Capped weighting leads to unexpected winners.
- VHASHMOM has a cumulative annual growth rate of nearly 40% since inception.
- On a risk-adjusted basis, VHASHMOM outperform a broad range of indices.
MOMENTUM INVESTING IN CRYPTO
The momentum premium—extra returns from a momentum strategy—is well-known across traditional asset classes. This strategy has grown in popularity due to its simplicity and effectiveness. Momentum trading takes advantage of investor biases like herd mentality, chasing winners, and overreacting to news.
Crypto markets, driven by sentiment and network effects, offer strong momentum opportunities. Network effects drive value by attracting more users, developers, miners, and investors, reinforcing growth and adoption.
However, the risk of sudden trend reversals is also magnified in crypto markets due to its unique characteristics such as high volatility, liquidity fragmentation, regulatory uncertainty and sudden price shifts. This means that while the crypto market offers opportunities for momentum traders, a reliable crypto momentum strategy must consider the sector’s specific risks in order to effectively deliver a momentum premium.