Quant Strategies in the Cryptocurrency Space
This article from Factor Research discusses several traditional quantitative investment strategies applied to seven popular cryptocurrencies—Bitcoin, Ethereum, Ripple, Litecoin, Dash, NEM and Monero, which were selected because they each have at least 1 year of available historical price data. The first strategy, size factor, puts small-cap cryptocurrencies into a long portfolio and large-cap cryptocurrencies into a short portfolio. This strategy has positive returns but significant volatility. The momentum factor buys winning cryptocurrencies and shorts losing cryptocurrencies, however this strategy demonstrated extremely negative results. The author attributes the negative results to a lack of diversification (diversification opportunities are limited due to the few number of cryptocurrencies available).
The low volatility model also has less than optimal results on cryptocurrencies. This strategy buys cryptocurrencies with low volatility and shorts those with high volatility, adjusting for beta. A short-term mean reversion strategy buys last week’s losers and sells last week’s winners. This is a common strategy in other financial markets, however performs very poorly in this market. Oppositely, a momentum strategy buys last week’s winners and sells last week’s losers and generates strong returns in the backtest.
The results of this article indicate traditional quantitative strategies may not perform well on cryptocurrencies based on the backtests performed on the aforementioned products. The exception however is short-term momentum, which performed positively.
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