New York
CNN
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Crypto’s biggest critics often claim that the digital assets have virtually no intrinsic value, that the underlying technology has failed to prove its usefulness, and that the digital currency market is built on little more than hype.
And it’s all true, according to a report from researchers at Starkiller Capital, a crypto-focused hedge fund. But that doesn’t mean you can’t make money from it.
Crypto trading is essentially a “hot ball of money” that jumps from one digital asset to the next, driven by an ever-changing narrative of innovation and potential future value, according to the paper’s authors, Leigh Drogen, Corey Hoffstein and Kevin Otte. At any given time, they write, there are a few dominant narratives driving cash into the crypto space, reinforced by the fact that crypto market participants are “very online.”
To be clear, traditional currencies like the dollar lack intrinsic value, but they are backed by the full faith and credit of the institutions that issue them, such as the US government. Cryptocurrencies are supported by a decentralized network of computers and secured by blockchain technology.
Narrative events for crypto—think Elon Musk linking to dogecoin on Twitter, or Mark Zuckerberg changing Facebook’s name to Meta—are constantly changing.
“It’s a constant rotation from one game to another,” Drogen said in an interview.
The still young crypto industry is in a difficult phase. Skeptics and naysayers have more ammunition than ever to cast doubt on the entire prospect of crypto, whether it’s a stock-like investment vehicle or a store of value like gold or a real currency that can buy tangible goods and services.
Devotees are on the defensive. They say the tumult of the past year — a so-called “crypto winter” — is the kind of creative destruction that any new technology must endure to weed out the bad players. But these aren’t just some bad actors… the crypto winter has been marked by the collapse of industry giants including Celsius, BlockFi and FTX, potentially one of the biggest investment scandals of all time.
It might seem strange for a digital asset-focused firm to publish a report about how crypto is essentially a hype beast with no fundamental value proposition that also happens to be “riddled with insider trading and market manipulation.” But the absence of fundamentals is hardly a problem for Starkiller, a quant store that relies on mathematical modeling and algorithms, not human judgment, to make investment decisions.
“We might have a slightly different view than some of the more… religious crypto people,” Drogen said. “When we talk about utility and intrinsic value, there’s not a lot there yet … But we’re definitely believers in the long-term trajectory of the actual utility.”
In short, crypto is an emerging technology and investment that isn’t for everyone — not yet, at least. For now, crypto is a pure momentum play – and not for the faint of heart.
For the uninitiated: Momentum trading is an investment strategy that aims to capitalize on a trend. If a stock goes up, you should buy it because it has the momentum to keep going up, the thinking goes.
It has been a particularly popular strategy for retailers who started out during the early pandemic bull run. Watch a stock go up, buy the stock, make money. Watch a stock go down, short it, make money. Investing is easy!
Of course, nothing lasts forever, as many learned the hard way when the intense, Reddit-fueled FOMO fueling meme stocks like GameStop and AMC evaporated.
The crypto trading world works much the same way.
In Starkiller’s study, digital assets that performed best over a 30-day period tended to continue to outperform over the following seven-day period. That’s the momentum at work.
Trading strategies that take advantage of this phenomenon have consistently outperformed bitcoin, which the researchers used as a benchmark.
The momentum effect becomes self-fulfilling “when market participants try to chase the hot ball of money”.
