Quant Strategies In The Cryptocurrency Space

Written by Nicolas Rabener, FactorResearch

INTRODUCTION

The year 2017 might be regarded as the year where cryptocurrencies became mainstream. Investment funds focused on cryptocurrencies were launched, the CBOE announced Bitcoin futures for the end of the year and some everyday expenses like booking flights at Expedia can be paid in Bitcoins. Institutional investors have been cautious entering the space, but are slowly getting more active given that the market capitalisation of cryptocurrencies reached $150 billion and returns for many cryptocurrencies are up several hundreds of percent year-to-date. Fundamental analysis of cryptocurrencies is challenging as there are limited fundamental data points; however, quantitative trading strategies might be attractive. In this short research note we will analyse the performance of quantitative strategies in the cryptocurrency space.

We need to emphasize that executing strategies in cryptocurrencies is currently difficult given high transaction costs and the inability to short efficiently, so the results from this research note are more theoretical than practical in nature.

METHODOLOGY

We focus on seven cryptocurrencies namely Bitcoin, Ethereum, Ripple, Litecoin, Dash, NEM and Monero that were selected on having at least one year of trading history, which is essential for backtesting. The analysis covers the following strategies: Size, Momentum, Low Volatility, Mean-Reversion and Short-term Momentum. The quantitative strategies are created by constructing long-short portfolios of the top and bottom 30% of the cryptocurrency universe. Portfolios are rebalanced monthly for all strategies, except for Mean-Reversion and Short-term Momentum, where portfolios are created daily and held for a week. The analysis includes 25bps of costs per transaction.

CRYPTOCURRENCY UNIVERSE OVERVIEW

The cryptocurrency universe has reached a market capitalization of more than $150 billion recently, which is mainly due to the significant increase in prices since the start of the year. The chart below shows the current market capitalisations for selected cryptocurrencies, where we can observe that Bitcoin dominates the universe with a market share of approximately 70%.