Size & Momentum in the Cryptocurrency Market
In the cryptocurrency markets, there is a small (and growing) literature of factor analysis. In this piece, I explore the relationship of size and momentum in explaining future returns in crypto.
This article is more technical so for those seeking the big picture, the TLDR should do just fine.
TLDR
The larger the coin by market cap, the more that momentum plays a role in explaining future expected returns
2-week momentum (MOM2) outperforms 1-week and 4-week momentum by a wide margin
Coins bucketed into 3 sizes based on market cap (Large, Mid, Small). The below shows the cumulative portfolio returns of separating coins by size and running a LS momentum strategy on each size
Setup
Rather than going into technicals, I’ll do a quick summary how how these portfolios are set up.
Pricing data is sourced from coinmarketcap and coingecko
Coins are only included if closing price, volume, and market cap are available and the market cap is greater than $1,000,000
Weighting of each portfolio is based on signal rank. The signals I explore are size (market cap) and momentum (1-week, 2-week, and 4-week). Rebalanced weekly.
LS portfolio where top half of signal is long and bottom is short.
Data is from January 2013 to November 2021
Summary Statistics
Below, I show 4 different LS portfolios with weekly returns. This shows that on average, small coins outperform large ones and high momentum outperforms low momentum (MOM2 and MOM4).
But was is even more interesting is the difference in momentum portfolios when splitting them by size. With MOM2, the large coin bucket has a 2.7% weekly return! The small bucket is -0.5%. That is a huge difference when simply separating using one factor. Same is true with MOM1 and MOM4 but less so.
The difference is even more clear showing cumulative returns. The 3 charts below show MOM1, MOM2, and MOM4 by all coins, large, and small.
And what is even more intriguing is how much more MOM2 performs compared to MOM1 and MOM4 for the large size bucket.
More analysis needs to be done to make this finding more robust; however, it is clear that size plays a large role in the importance of momentum explaining cryptocurrency returns.
For a more detailed report on this research, feel free to contact me.
Authored by Derman Capital (Twitter)