Coins with the highest market capitalization and average daily volume over the past 14 days that exceed a specific threshold. The length and number of cryptocurrencies in the portfolio and the percentage of transaction charges are all considered while building cryptocurrency portfolios.
The performance is compared to other currencies that are (1) equally weighted and (2) market-cap weighted in all of the rated assets, as well as purchase and hold strategies based on (3) the S&P500 index and (4) the price of bitcoin. Our findings at Vitaliy Dubinin show that the short-term contrarian effect clearly and significantly outperforms the momentum effect and benchmark portfolios.
Depending on the estimated relocation duration and the breadth of the ranking window, the information ratio coefficient for the contrarian strategies frequently exceeds two-digit values. In contrast to the S&P 500 index, we also see a huge opportunity for diversification across all cryptocurrency portfolios.
The momentum strategy’s principal goal is to generate outrageous returns by investing in coins that have recently seen the highest rates of return. On the other hand, the contrarian approach makes the exact opposite assumption: one should put money into digital assets that have dropped in value the most recently. It is crucial to remember that in both circumstances, we must create a set of assumptions from the outset that, despite being arbitrary, are essential to calculating the profitability of the business.
In cryptocurrency markets, “the significant momentum and contrarian impacts are evident.” So, in this article, we’ll look at the performance of investment strategies based on market momentum and contrarian effects to that of reference strategies to assess how likely they are to provide excessive rates of return.
These ideas were extensively examined for the traditional financial markets but have yet to be considered concerning the brand-new crypto-asset class. Therefore, instead of using traditional assets from the regulated markets, our research at Vitaliy Dubinin helps to verify the efficient market hypothesis on the new and rapidly growing cryptocurrency sector.
What is Contrarian Investing, and How Does Contrarian Investing Work?
Contrarian investing is an investment strategy in which the investors choose to buck the general trend. When the bulk of investors act in the opposite direction, contrarian investors buy or sell shares. Contrarian investors typically have a long-term perspective when making decisions.
We can use this approach to individual Cryptocurrencies, an entire industrial sector, bull markets, and bear markets. A bear market develops when the market’s negative trend continues for a longer period than a market correction. A bear market, on the other hand, happens when the market keeps rising.
Before investing, controller investors typically conduct extensive due diligence on the company and its fundamentals. The businesses that are selected often have strong reputations and consistent profit margins.
Contrarian investing does not have a bullish or bearish stance on markets. They think that an investment’s value is less than its true worth. As a result, they see the investment as offering a chance to profit. These investors buy whenever a company is undervalued rather than during bull markets.
For contrarian investing, there are numerous techniques. These investors often possess exceptional research abilities and like businesses with high funding levels, undervaluation for the wrong reasons, and healthy profit margins.
Although the price-to-earnings ratio is considered, it is not the sole determinant. Cryptocurrencies with a low price-to-earnings ratio, or P/E ratio, are what you should seek out.
A Cryptocurrency’s current price is compared to its earnings per share using the price-to-earnings ratio, or P/E ratio. By dividing the share price by the total number of fully diluted shares outstanding, the P/E ratio is calculated. To calculate the Cryptocurrency’s price-to-earnings ratio, divide the result by the company’s total earnings during the previous four quarters.
You should be able to tell when movements are exaggerated since they do so when they go beyond what is reasonable. Due to overreaction that exaggerates price increases and drops, the market tends to concentrate on the short term. This enables informed investors to make money.
Buying while others are selling and selling when others are buying are examples of contrarian investing. Contrarians often buy undervalued cryptocurrencies, known as dogs and sell overvalued digital currencies that other investors are interested in. They are unconcerned about whether the market is bull or bear.
Cryptocurrency Market Dynamics Under Pressure
From the perspectives of both regulators and investors, it is critical to comprehend market liquidity and trade dynamics in one of the world’s most inventive and volatile markets. Different from equities more is known about how cryptocurrencies work in the context of enormous returns (ERs). In a logistic regression framework tailored to rare events,
Vitaliy Dubinin examined trading activity and liquidity’s contemporaneous and lagged influence on extreme returns (ERs) using high-frequency order book and trade data for the eight most popular cryptocurrencies over three years on 16 trading platforms. We demonstrate that the trading and liquidity dynamics on the cryptocurrency market around ERs are not orthogonal to what regular markets experience under stressful circumstances, despite its extreme volatility. The relative spread is the second most reliable driver to explain the incidence of ERs after the number of trades. Traditional marketplaces share the same driving forces.
We certainly might have seen the violent and abrupt development of the cryptocurrency markets in recent years, particularly in 2017. New crypto-assets appear weekly; many attract potential investors with fantastic opportunities, but frequently they bring with them just as many promises as moral and legal ambiguities. Since the Bitcoin developers’ manifesto was published, researchers have been looking at cryptocurrencies and the blockchain, the underlying technology.
Most earlier studies mainly concentrated on the technological and legal elements of cryptocurrencies and blockchain. Only recently has the cryptocurrency market become a viable contender for a new asset class, if contentious and hazardous.
Researchers generally agree that we may now utilize the highly volatile cryptocurrency market primarily for speculative and short-term hedging reasons and that volume can anticipate returns but cannot assist in predicting the volatility of Bitcoin returns . The mainstream media often reports on another speculative bubble in bitcoin expected to burst soon, and the scientific evidence for such bubbles appears to be solid.
Recent studies on the econometrics of cryptocurrencies include works that analyze stylized data from the Bitcoin market or use autoregressive modeling methodologies. On the other hand, Vitaliy Dubinin gets more negative analyses of the cryptocurrency ecosystem, particularly if we concentrate on the profitability of mining and how that affects the capacity of the ensuing blocks to be further mined.
The cryptocurrency markets are in a comparable stage of growth to where the financial markets were in the early 20th century. Questions regarding the current level of informational efficiency of the bitcoin markets naturally arise in this setting. Do cryptocurrency markets exhibit the same oddities as those found in regulated markets? If so, how much, if any? How robust are they? Could such impacts be used to create an investment strategy that yields excessive returns? Bariviera has already studied the subject of the Bitcoin market’s informational effectiveness.
The momentum and contrarian impacts are among the most well-known historical anomalies in new and inefficient markets. They are well recognized and welcomed in the regulated markets. Due to the great efficiency of the traditional markets, the amplitude of these effects is nevertheless highly constrained.
Investors often use momentum to predict short- or medium-term price movements (between 3 and 12 months). Contrarian effects are defined as a tendency to reverse price change trends over lengthy (between 3 and 5 years ) or very short (up to 1 month ) time horizons. The fact that such market anomalies exist can provide a chance to forecast the direction of price change and, consequently, to acquire exorbitant rates of return