Quant Traders Outper...

Quant Traders Outperform ‘Buy and Hold’ Strategy in Bitcoin’s Roller-Coaster Market, Studies Show

By Jody McDonald April 04, 2024 In Bitcoin, ETF, Investing, Quant

Research is starting to show that a trend-following strategy—which capitalises on market momentum—is superior to ‘buy and hold’ for Bitcoin trading.
Similarly, copy-cat strategies are starting to go mainstream; an ETF has launched that tracks Bitcoin trends and allocates capital accordingly.
Experts warn this strategy is not without risks and doesn’t work for all cryptocurrencies, saying stablecoins and memecoins are particularly unsuitable for trend-based investing.

Most Bitcoin investors prefer to use the ‘buy and hold’ strategy to maximise their gains, or perhaps the ‘buy high, sell low’ strategy if they’re particularly galaxy-brained. But now, a bunch of hedge fund types and some academic researchers say there’s a new and improved way to trade Bitcoin for fun and profit—copying what everyone else does.

According to a report from Bloomberg, a growing body of research is showing that the quantitative strategy of trend following is superior to simply buying and holding when it comes to Bitcoin, because of the asset’s huge, and somewhat predictable, swings in sentiment.

Trend Following Strategy All About Capitalising On Momentum

The essence of this trend following strategy is to:

Build long Bitcoin positions when everyone is aping in, harnessing the power of FOMO to make big gains;
And then when the inevitable panic sets in and the crowd starts mass selling, taking short positions to continue making profits on the way down.

Tarek Abou Zeid, partner and senior client portfolio manager at investment firm Man Group, describes the strategy in somewhat more technical language:

Trend following is all about extracting behavioural biases. In crypto you see excesses, you see FOMOs, you see panics — which can be captured with those systemic strategies.

Tarek Abou Zeid, Man Group

According to Bloomberg, a few investing firms — including Man Group Plc, Florin Court Capital LLC and AQR Capital Management — have implemented this strategy over the past several years and have found it to be more profitable than simply buying and holding Bitcoin.

Research conducted by Man Group has found that a proxy long-short trend strategy, a fancy way of saying following the crowd, applied to both Bitcoin and Ethereum has been found to be more profitable than a straight buy and hold strategy.

Of course, following the crowd on an asset as volatile as Bitcoin is not without risks. Doug Greenig, founder of Florin Court Capital, says his firm takes a relatively conservative approach, avoiding unregulated crypto exchanges and taking other measures to minimise counterparty risk and working hard to understand trend data:

You need good risk models and systemic risk control…the biggest concerns have been non-market risks in the space.

Doug Greenig, founder of Florin Court Capital

The benefits of this trend following approach have also been backed up by academic researchers — teams from both Monash University and The University of Cambridge have found this strategy to consistently generate better returns than simply buying and holding.

ETF Implements Similar Strategy, Experts Urge Caution

An ETF that implements a similar trend following strategy was launched recently, the Global X Bitcoin Trend Strategy ETF (BTRN). This ETF tracks the CoinDesk Bitcoin Trend Indicator: when it’s up the fund allocates more to Bitcoin and when it’s down it allocates more to US Treasury bills — unlike the hedge funds mentioned earlier it never shorts Bitcoin.

Despite the advantages of this strategy, Andre Ryzm, partner and portfolio manager at Man AHL, cautions that it doesn’t necessarily work for all cryptocurrencies, singling out stablecoins and memecoins as being particularly risky to trade in this way:

One should be very cautious about applying traditional momentum models to pegged currencies — stablecoins would fall into that bucket…I’m also cautious about what you might call memecoins, they exhibit price dynamics which might not be suitable for traditional momentum models.

Andre Ryzm, partner and portfolio manager at Man AHL

It should also be noted that these hedge funds have access to far more resources and data than the average Bitcoin investor and can therefore manage risk much more effectively.