Investment And Trading Strategies in Bitcoin

Recently, a PM at a cryptocurrency asset management company (wow, they’re starting to actually pop up now) published a small analysis on whether momentum trading could be profitably applied to Bitcoin. He found that there was a good amount of profitability with limited downside by using a 60-day momentum trading strategy.
Momentum trading is a fairly well-known approach used by both retail and institutional investors. It’s not surprising to me that it worked for Bitcoin… at least partially.
In his study, he mentions that he excluded a time period when Bitcoin was trading sideways. He also mentions that investors employing this strategy would have missed out on sudden and dramatic price reversals. We know that Bitcoin has this in droves.
We also know that Bitcoin has been up and to the right for a large portion of its history. Yes it’s had dramatic drops, but to date, those have always recovered. So ultimately, using a momentum strategy for buying the Bitcoin market until it goes up has been a fairly safe way to go.
Now, I’m not criticizing this approach at all. On the contrary, rather. In his study, the author mentioned that put options aren’t currently available for crytpocurrency traders (much to my chagrin). He also mentions that there’s limited data for these assets, making fundamental analysis all but impossible. So really all that’s left to work with are price and volume movements.
This is something I’ve been considering quite a bit lately. I personally appreciate the idea that doing an in-depth analysis of data available on an asset can lead to better investment decisions. In fact, that whole process is what we’re trying to automate and use ML for at my current startup venture. The fact that this is hard, if not impossible, in the crypto markets, means that we may have to use more traditional quant trading algorithms and more basic ML techniques to do intelligent trading in the crypto markets.
I’m okay with that for now; it’s still very early for these markets and I think that trend and momentum following will probably work. If you pair that up with trading in multiple cryptos and do volatility-based weighting, I actually think using simpler techniques could work well.
I am looking forward to the day when it’s possible to do a bit more fundamental analysis on these things (I actually have a few ideas of how that may be done now, but as with everything, we need to prioritize where our efforts go).
In any case, it’s very interesting to note that we’re starting to see crypto-based institutional funds pop up. I guarantee we’ll see a lot more in the near future.
