Since the start of the year, Bitcoin (BTC) cost has been as loftier every bit $ix,200 — a ii-month high — while going as low every bit $6,900 on Jan. 3. Bitcoin's volatility is one of the almost frequently discussed problems that ascend when investors evaluate Bitcoin as an asset class. However, its volatile behavior is what provides an opportunity for investors to take reward of the toll movements and make a profit.

Following predictions every bit optimistic equally the $100,000 forecast based on the stock-to-menstruation model, investors may foresee another menstruation of loftier price speculation, opening the door for a wider set of investment strategies.

On the other side, if investors end upwardly experiencing a bearish scenario like the majority of 2022 and a portion of 2022, bolder strategies based on wide price movements may serve as a good alternative for market makers.

Cryptocurrency market place weekly overview. Source: Coin360

Strategies based on large cost movements accept been exploited for decades in traditional markets, particularly in stocks. One of those strategies is momentum investing. An investor evaluates the daily returns for a sample of stocks and identifies which ane was the biggest loser and winner in the price for that mean solar day.

In traditional markets, it was plant to be lucrative to buy the winner stock that 24-hour interval and concord it for a certain flow (up to investor discretion) and sell (short) the loser stock. Usually, investors develop this strategy based on portfolios of best and worst-performing stocks instead of just choosing the best and worst performer from the chosen sample.

However, it'southward not uncommon for the individual momentum strategy to also be applied among investors despite raising questions near investment diversification. All the same, if diversification is found to be ineffective in the crypto space, as reported past Cointelegraph, an investor might wait better results from an individual momentum strategy instead of focusing on portfolios.

How does Momentum investing work in the crypto surround?

Firstly, we place the top-twenty cryptocurrencies in the market today and get the daily returns for each currency during 2022. Throughout a portion of final year, we have seen a bearish scenario in the market place. However, Bitcoin picked up and ended the yr with a cumulative render of 65%.

By analyzing this strategy for a period with such characteristics, we can nowadays a bolder strategy for investors to have reward of bigger swings in smaller currencies since the biggest coins showed modest gains.

Secondly, we place which was the currency that had the highest (winners) and the lowest (losers) render from the top-20 currencies for each day in 2022.

After identifying the daily winners and losers, we assume that an investor buys its closing price that twenty-four hours and sells it the post-obit twenty-four hours, as well at the endmost toll. The endmost price (latest information in the range at UTC fourth dimension given past Coin360) is assumed for simplicity purposes every bit it is open for investors to decide the desired time to buy and sell during those days. Another variation of the strategy can consist of property the coin for more than one day.

By employing this strategy every day in 2022, we detect that an investor who buys the winners gets the best cumulative return of 140%. Whereas, an investor that buys the losers and sells them the following 24-hour interval retrieves a negative render for this period (-105%). In traditional markets, the strategy works in the same way with the investor ownership the winners and sells the losers.

Such volatile behavior leads us to also look at a risk-adapted functioning mensurate since an investor must be compensated past the exposure to college gamble investment. When exploring this strategy — buying the winners — a Sharpe ratio (the measure out of risk-adjusted return of a financial portfolio) of i.11 is accomplished, excluding transaction costs, which is an acceptable performance for the strategy.

January 2022-December 2022 momentum strategies (Buying Winners & Buying Losers) cumulative returns

Every bit we would expect, lower market-capped coins appear more often equally the all-time or worst performing currency in the market: Chainlink (LINK), Tezos (XTZ) and Cosmos (Atom).

The aforementioned currencies appear in both scenarios much more often than with other currencies. As nosotros would expect, the higher market capped coins appear less frequently as the highest/worst performers (e.g. BTC, ETH, LTC, XRP).

Currencies with virtually appearances as best and worst-performing currency during the sample menstruation

Key factors in a crypto momentum strategy

Looking forwards, an investor delving into these types of strategies should be enlightened of certain factors. The first is that we looked at the top-twenty currencies in the market today and examined their returns for the concluding year.

Hence, some of the coins analyzed may not have been in the elevation-20 during some periods of 2022 every bit some may accept just been recently launched or their volatility dislodged them from the sample. At the same fourth dimension, currencies with volatile toll swings may exist included in some periods, raising the chance of the strategy but also the possible gains.

Another factor is the liquidity risk of employing such a strategy. When a lower market-capped coin sees a pregnant gain in toll, it may be harder to buy information technology during a 24-60 minutes period as nearly holders might expect the coin to become even higher or fix very high sell limits for new investors to have advantage of this opportunity.

Finally, a strategy that is based on daily trading volition incur high transaction costs. In this example, we exclude these expenses from the cumulative returns and Sharpe ratio calculations, which will crusade a decrease in functioning afterwards calculating the impact of operational costs.

The views and opinions expressed here are solely those of the author and exercise not necessarily reflect the views of Cointelegraph. Every investment and trading move involves take a chance. You should conduct your own research when making a decision.