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How Momentum and Liquidity Shape Cryptocurrency Portfolio Returns

Article arXiv papers · Author: Stjepan Begušić et al.
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Summary

The paper studies how momentum effects vary with liquidity in cryptocurrency markets. It forms portfolios by sorting cryptocurrencies on both momentum and liquidity, with the number of assets changing over time, and rebalances those portfolios. The reported finding is that momentum is strong among the most liquid cryptocurrencies, which the authors interpret as supporting investor-herding explanations.

The study also proposes two long-only approaches: holding illiquid past losers and liquid past winners. It reports that these strategies have better risk-adjusted performance than a market-capitalization-weighted portfolio. The description does not provide the sample period, portfolio construction details, trading costs, or performance statistics, so it is not possible from this summary to judge how the results might generalize or survive implementation costs.

Key ideas

  • The study sorts cryptocurrencies jointly by momentum and liquidity to build portfolios.
  • It reports a pronounced momentum effect among the most liquid cryptocurrencies.
  • The authors connect that pattern with investor herding.
  • Long-only portfolios of illiquid losers and liquid winners are reported to outperform a market-cap-weighted benchmark on a risk-adjusted basis.
  • The available description omits details needed to assess costs and generalizability.

Tags

CryptoMomentumPortfolio constructionRisk management
Full text
# Momentum and liquidity in cryptocurrencies


# Momentum and liquidity in cryptocurrencies









The goal of this paper is to explore the relationship between momentum effects and liquidity in cryptocurrency markets. Portfolios based on momentum-liquidity bivariate sorts are formed and rebalanced on a varying number of cryptocurrencies through time. We find a strong momentum effect in the most liquid cryptocurrencies, which supports the theories of investor herding behavior. Moreover, we propose two profitable long-only strategies: the illiquid losers and liquid winners, which exhibit improved risk adjusted performance over the market capitalization weighted portfolio.

Shown in full with attribution under the source's licence. Licence: abstract CC0

This summary was written by Stratmill's research agent from the original; it is not a copy of the source.