The biggest critics of cryptocurrencies often argue that 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 this is all true, according to a report by researchers at Starkiller Capital, a crypto-focused hedge fund. But that doesn’t mean you can’t make money from it.
Cryptocurrency trading is essentially a “hot ball of money” bouncing from one digital asset to another, driven by an ever-changing narrative about innovation and potential future value, according to the paper’s authors Leigh Drogen, Corey Hoffstein and Kevin Otte.
They further write, there are some dominant narratives driving money into the crypto space, amplified by the fact that crypto market participants are “very much online”.
To be clear, traditional currencies like the dollar also lack intrinsic value but are backed by the full faith and credit of the institutions that issue them, such as the US government. Cryptocurrencies are backed by a decentralized network of computers and secured by blockchain technology.
Storytelling events for crypto – think Elon Musk connecting dogecoin on Twitter, or Mark Zuckerberg renaming Facebook to Meta – are constantly changing.
“It’s a constant rotation from one bet to another,” Drogen said in an interview.
The still young cryptocurrency industry is in a rough patch. Skeptics and naysayers have more ammunition than ever to cast doubt on the whole prospect of cryptocurrency, whether as a stock-like investment vehicle or a store of value like gold or a real-life currency that can buy tangible goods and services. .
Devotees are on the defensive. They say last year’s turmoil – the so-called “crypto winter” – is the kind of creative destruction any new technology must endure to weed out bad players. But these aren’t just bad actors. […] the crypto winter was marked by the collapse of industry giants including Celsius, BlockFi and FTX, potentially one of the biggest investment scandals of all time.
crypto is not dead
It might seem strange for a company focused on digital assets to publish a report about how crypto is essentially a beast with no fundamental value proposition that is also “riddled with insider trading and market manipulation”.
But the lack of fundamentals is hardly an issue for Starkiller, a quantitative analytics firm that relies on mathematical modeling and algorithms, not human judgment, to make investment decisions.
“We might have a slightly different view from some of the more religious crypto-type people,” Drogen said. “When we talk about utility and intrinsic value, there is still not much […] But we definitely believe in the long-term trajectory of real utility.”
In short, crypto assets are an emerging technology and an investment that is not for everyone – at least not yet. For now, crypto is a game of pure momentum – and not for the faint of heart.
For the uninitiated: “Momentum” trading is an investment strategy aimed at capitalizing on a trend. If a stock is going up, you should buy it because it has the momentum to keep going up, the thinking goes.
It has been an especially popular strategy for individual buyers starting out during the boom at the start of the pandemic era. See a stock going up, buy the stock, make money. See a stock go down, sell it, make money. Investing is easy!
Of course, nothing goes up forever, as many learned the hard way when the intense FOMO (short for “fear of being left out”) fueled by Reddit that boosted stockpiles of memes like GameStop and AMC evaporated.
The world of cryptocurrency trading works the same way.
In Starkiller’s study, digital assets that performed best over a 30-day period tended to continue to outperform over the next seven days. This is called momentum.
Trading strategies that exploit this phenomenon consistently delivered excessive returns against bitcoin, which the researchers used as a benchmark.
The momentum effect becomes self-fulfilling “as market participants try to ride the hot money ball”.
Source: CNN Brasil
I am an experienced journalist, writer, and editor with a passion for finance and business news. I have been working in the journalism field for over 6 years, covering a variety of topics from finance to technology. As an author at World Stock Market, I specialize in finance business-related topics.
