Momentum methods don’t seem to work with bitcoin
The previous couple of weeks present a great illustration of why. From an Oct. 19 excessive of virtually $67,000, bitcoin fell $9,000 over the following eight days to simply above $58,000 — indicating that the short-term development was most undoubtedly down. However, removed from that development persevering with, bitcoin turned again up and over the following 12 days utterly erased that decline.
The identical reversal tendency seems to be the case with longer-term traits. Within the early months of this 12 months bitcoin greater than doubled, for instance, rising from its year-end 2020 worth of $29,000 to greater than $63,000 in April. That development then reversed itself, and over the next three months bitcoin erased all of its year-to-date achieve. However then, in July, the development reversed once more, and by October bitcoin was buying and selling at a brand new all-time excessive.
Such development reversals wreak havoc with the portfolios of trend-following programs. As a result of trend-following bitcoin merchants are shopping for excessive and promoting low, many have been shedding cash even whereas bitcoin itself is skyrocketing. The funding implication: If you wish to put money into bitcoin, you should purchase and maintain. Or higher but, “purchase and HODL.”
The development reversals bitcoin has skilled this 12 months, whereas breathtaking, will not be distinctive, primarily based on my evaluation of the cryptocurrency’s worth historical past since 2010. To find out if development following with bitcoin holds promise, I calculated the efficiency of transferring common programs of various lengths — 10-weeks, 25-weeks,and 39-weeks. Discover from the chart under that, whatever the transferring common size, bitcoin carried out extra poorly within the wake of a purchase sign than it did the remainder of the time.
Shifting averages aren’t the one manner of capturing a development, after all. However these outcomes are definitely discouraging.
I subsequent utilized to bitcoin the usual educational definition of inventory market momentum, which focuses on a look-back interval of 12 months and a look-forward interval of 1 month. I did so as a result of, within the inventory market, this definition of momentum has had a protracted and illustrious historical past — courting again to the mid-Twenties, the truth is.
In bitcoin, this strategy would have been a giant disappointment lately. Although the strategy did nicely in a few of bitcoin’s early years, since 2018 it’s been worse than a coin flip. Over a interval simply shy of the previous 4 years, bitcoin has produced a mean month-to-month achieve of 5.1% at any time when the cryptocurrency’s trailing 12-month return was constructive. In distinction it has produced a mean month-to-month achieve of 8.8% at any time when bitcoin’s trailing 12-month return was adverse.
I couldn’t measure all attainable combos of look-back and look-ahead durations of varied lengths. However among the many mixture of durations I did concentrate on, I discovered no sturdy proof that development following with bitcoin has labored constantly. This isn’t to say that none will ever be discovered. However primarily based on the expertise of current years, I wouldn’t maintain your breath.
Mark Hulbert is an everyday contributor to MarketWatch. His Hulbert Scores tracks funding newsletters that pay a flat price to be audited. He might be reached at email@example.com