Momentum trading: an alternative to “buy the dip”

In this guest post, Philipp Kallerhoff from Protos Cryptocurrency Asset Management explains the advantages of momentum trading and why it can be an alternative to the “buy the dip” strategy.

The graph below shows the performance of the cryptocurrency market since our first trading day on December 15, 2017 to March 17, 2020 as well as the performance of the various investment strategies such as “Momentum” and “Small Cap”. We also show the performance of Bitcoin for comparison. So far, only the momentum strategy has returned, while all other investment strategies have lost money.

 

Why was momentum trading so successful?

Since momentum trading has such a strong performance compared to the other investment strategies, we want to delve deeper into the matter. The key point is that momentum trading mimics call options.The idea behind a call option is to only let an investor participate in a high level market. Ideally, the call option would only have one positive side. The call option must be bought at a fixed price, which we call “Option Momentum”.

Currently, the call option for Bitcoin costs around 20 percent of the nominal investment per quarter. That means the investor will lose 80 percent of their investment over a year if Bitcoin does not recover and the call option does not change to cash. We estimate that the momentum strategy is eight times cheaper than pure call options.