What have we learned from the past, from the rules and strategies for technical trading in the cryptocurrency market?
In a recent study prepared by Klaus Grobys, who is a professor of financial economics at the University of Jyväskyla and an assistant professor of finance at the University of Vaasa. The study was conducted along with Shaker Ahmed and Niranjan Sapkota, who are P.H.D students in finance at the University of Vaasa in Finland.
The group examined the technical trading rules in the cryptocurrency market and the profitability of technical trading rules amongst cryptocurrencies with a discretion function.
The first study was conducted for 11 cryptocurrencies from a period of Jan. 1, 2016 to Dec. 31, 2018. The sample consisted of cryptocurrencies displaying the maximum market capitalization as on Jan. 3, 2016. The main sample encompassed Ripple (XRP), Litecoin (LTC), Ether (ETH), Dogecoin (DOGE), Peercoin, BitShares, Stellar Lumen (XLM), Nxt, MaidSafeCoin and Namecoin.
It was concluded that using a simple buy-and-hold tactic of a similarly weighted portfolio, the sample of 11 cryptocurrencies gave an average return of 36.87% per year over the period.
The group applied the simplest and most widely used technical trading rule known as Variable Moving Average oscillator, which makes trading signals using a short period and a long period, both moving by the average level of a price index.
While running a (1, 20) strategy meant taking a long holding position on a cryptocurrency whenever its present price surpassed the 20-day moving average and holding the spot until a sell signal was created. A sell signal, in turn, was produced when the current price of a cryptocurrency was fell below the 20-day moving average. In this case, the group kept the money in cash. Similarly, they implemented the (1, 20), (1, 50), (1, 100), (1, 150) and (1, 200) strategies.
When implementing the (1, 20) strategy, it was found that five of the 10 cryptocurrencies produced payoffs that were statistically noteworthy on at least a 5% level. This technical trading rule generated around 8.76% per year in surplus return over the said period. These results also gave an idea that a longer time period used for implementing the VMA strategies resulted in less profitable technical trading.
The group also performed a second test, but instead used data on the 10 most-traded cryptocurrencies that provide a so-called “privacy function.” The privacy function enables the users to maintain anonymousness on either the user level, the transaction level, the account-balance level, or full privacy on all levels.
The group chose the following cryptocurrencies: Dash, Bytecoin, DigitalNote, Monero, CloakCoin, AeonCoin, Stealth, Prime-XI, NavCoin, Verge. This test was also conducted for the same time as the first test.
The test results show that VMA strategies are positive only for Dash and bore returns of 14.6% to 18.25% per year in surplus of the simple buy-and-hold trading strategy for this coin. Astonishingly, the group averaged the average returns across the entire set of 10 privacy coins and did not find any positive average portfolio revenues in surplus of the equally-weighted buy-and-hold portfolio.
Hence it was concluded that, on the one hand, technical trading seems to generate profits when implementing strategies among non-privacy cryptocurrencies. But, the profitability is restricted only for shorter time periods of the VMA’s long-period moving average appear to provide useful information. While on the other hand, privacy cryptocurrencies appear to be more efficient, as technical trading does not seem to offer noteworthy payoffs over the simple buy-and-hold strategy from a market-wide standpoint.