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‘Know When to Hodl ’Em, Know When to Fodl ’Em’: An Investigation of Factor Based Investing in the Cryptocurrency Space

Last Updated on 10 February, 2024 by Rejaul Karim

In “Know When to Hodl ‘Em, Know When to Fodl ‘Em’: An Investigation of Factor-Based Investing in the Cryptocurrency Space,” Stefan Hubrich delves into the intriguing realm of predictive factors in asset returns, particularly within the cryptocurrency domain.

Drawing inspiration from Fama and French’s seminal work, the paper explores the potential of specific attributes, known as factors, in forecasting returns of individual assets beyond broader market trends.

With a focus on factors like value, momentum, and carry, historically proven effective across diverse asset classes and timeframes, the study offers a pioneering application of factor-based investing to the relatively uncharted territory of cryptocurrencies.

By demonstrating the efficacy of these factors in facilitating excess returns within this evolving asset class, the research unveils promising opportunities for portfolio construction and investment strategies in the cryptocurrency market.

Abstract Of Paper

It has been known since at least the groundbreaking work of Fama and French (1992) that there are specific attributes, so called factors, that can help predict the returns of individual assets above the return of the broader market. Since these predictive characteristics arise out of sample (with currently observable factor values predicting future returns), investors can earn excess returns with portfolios that are constructed to align with the factors. First introduced in the cross section of returns and focusing on individual equity securities, the efficacy of such factors has since been demonstrated at the asset class level as well, and found to work not only in the cross section but also longitudinally (for individual assets, through time). Factors like value, momentum, and carry have been found to work so broadly across different asset classes, security universes, countries, and time periods, that Asness et al. simply titled their influential 2013 Journal of Finance paper “Value and Momentum Everywhere”. Our paper provides a first application of momentum, value, and carry based factor investing to the cryptocurrencies. We show that these same factors are effective in this relatively new and unexplored asset class, permitting the construction of portfolios that can earn excess returns over the cryptocurrency “market” as a whole.

Original paper – Download PDF

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Author

Stefan Hubrich
T.Rowe Price

Conclusion

In conclusion, “Know When to Hodl ‘Em, Know When to Fodl ‘Em’: An Investigation of Factor-Based Investing in the Cryptocurrency Space” pioneers a compelling application of predictive factors to the dynamic landscape of cryptocurrency investments.

Building on the seminal work of Fama and French, the study showcases the potential of factors like momentum, value, and carry in forecasting returns of individual cryptocurrency assets.

By extending the efficacy of these factors, historically proven across diverse asset classes, security universes, and time periods, to the cryptocurrency market, the research lays the groundwork for portfolios designed to outperform the broader cryptocurrency “market.”

With its innovative approach, the paper not only provides valuable insights into the evolving realm of cryptocurrency investments but also illuminates the prospect of earning excess returns through factor-based portfolio construction within this burgeoning asset class.

Related Reading:

Trading volume and liquidity provision in cryptocurrency markets

Cryptoasset Factor Models

FAQ

Q1: What is the main focus of the research paper “Know When to Hodl ‘Em, Know When to Fodl ‘Em’: An Investigation of Factor-Based Investing in the Cryptocurrency Space” by Stefan Hubrich?

A1: The main focus of the research paper is to investigate the application of factor-based investing in the cryptocurrency space. The paper explores the potential of specific attributes, known as factors (including momentum, value, and carry), in predicting the returns of individual assets within the cryptocurrency domain. The study draws inspiration from the established concept of factors in asset pricing and extends its application to the relatively uncharted territory of cryptocurrencies.

Q2: What are the key factors examined in the study, and how have they been historically proven in different asset classes?

A2: The study examines key factors, namely momentum, value, and carry, which have been historically proven effective in predicting returns across different asset classes, security universes, countries, and time periods. These factors have been extensively studied and documented in financial literature, and their efficacy has been demonstrated in various contexts. Notably, the paper refers to the influential 2013 Journal of Finance paper titled “Value and Momentum Everywhere” by Asness et al., highlighting the broad applicability of these factors.

Q3: How does the research contribute to the understanding of factor-based investing in the cryptocurrency market?

A3: The research contributes to the understanding of factor-based investing in the cryptocurrency market by providing a pioneering application of well-established factors to this emerging asset class. By demonstrating that factors like momentum, value, and carry, which have historically worked across diverse asset classes, are also effective in the cryptocurrency space, the study opens up new possibilities for investors. It showcases the potential for constructing portfolios based on these factors to achieve excess returns in the cryptocurrency market.

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