Momentum and contrarian effects on the cryptocurrency market

We report the results of investigation of the momentum and contrarian effects on cryptocurrency markets. The investigated investment strategies involve 100 (amongst over 1200 present as of date Nov 2017) cryptocurrencies with the largest market cap and average 14-day daily volume exceeding a given threshold value. Investment portfolios are constructed using different assumptions regarding the portfolio reallocation period, width of the ranking window, the number of cryptocurrencies in the portfolio, and the percent transaction costs. The performance is benchmarked against: (1) equally weighted and (2) market-cap weighted investments in all of the ranked assets, as well as against the buy and hold strategies based on (3) S&P500 index, and (4) Bitcoin price. Our results show a clear and significant dominance of the short-term contrarian effect over both momentum effect and the benchmark portfolios. The information ratio coefficient for the contrarian strategies often exceeds two-digit values depending on the assumed reallocation period and the width of the ranking window. Additionally, we observe a significant diversification potential for all cryptocurrency portfolios with relation to the S&P500 index.