How To Ride The Best-Performing Crypto In The Best-Performing Crypto Sectors

How To Ride The Best-Performing Crypto In The Best-Performing Crypto Sectors
Reda Farran, CFA

about 2 years ago4 mins

  • We can apply dual momentum investing to the crypto market by first selecting five different crypto sectors and allocating an equal amount (20%) of the portfolio to each.

  • Then for each sector, select the best-performing coin out of the biggest five ones and invest in it if its recent returns were positive. If not, put that portion into cash.

  • Hold this crypto portfolio till the end of the month (or the end of the week) and then repeat the steps above.

We can apply dual momentum investing to the crypto market by first selecting five different crypto sectors and allocating an equal amount (20%) of the portfolio to each.

Then for each sector, select the best-performing coin out of the biggest five ones and invest in it if its recent returns were positive. If not, put that portion into cash.

Hold this crypto portfolio till the end of the month (or the end of the week) and then repeat the steps above.

The very best stock market investors diversify across a whole host of different sectors – tech, energy, healthcare, and more – and aim to find the very best stocks in each of them. Crypto’s no different: coins can be split into different “sectors” based on theme or function, and your job is to find the biggest potential among them without getting caught out by market downturns. And with this simple four-step strategy, you’ll put yourself in the best position to do exactly that…

Step 1: Pick five crypto sectors

There are any number of sectors in the crypto world: coins used in decentralized finance (DeFi) applications, coins powering the metaverse, coins associated with artificial intelligence, file-sharing, gaming – the list goes on and on.

So the first step in our strategy – which we'll call the "dual momentum crypto strategy" (you'll see why later) – is to select five different sectors from the links above that have compelling investment cases. I’ve gone with smart contracts (key enablers of blockchains), DeFi (disrupting the finance industry), NFTs (unlocking more value for creators), metaverse (potential future of the web), and decentralized exchanges (essential for crypto trading).

We’ll allocate an equal amount (20%) of our crypto portfolio to each of the five sectors. And for each sector, the strategy will either select the best-performing coin in that sector or cash (you’ll see how in a minute).

Step 2: Calculate your momentum scores

For each of the sectors, calculate a momentum score for the five biggest coins by market value. The momentum score is calculated by averaging the coin’s price return over the past seven, 30, 60, and 90 days, and you can find it by going to CoinMarketCap, clicking on filter, and setting the coin category to one of the sectors you’ve chosen (decentralized exchange in the example below).

Source: CoinMarketCap
Source: CoinMarketCap

Then click on customize and select the “7d%”, “30d%”, “60d%”, and “90d%” metrics as shown below, and hit “apply changes”.

Source: CoinMarketCap
Source: CoinMarketCap

You’ll see the coins’ price returns over the past seven, 30, 60, and 90 days. Finally, just take the average of these four data points for the top five coins in the list, since they also happen to be the five biggest coins (CoinMarketCap lists coins in descending order of market value).

Step 3: Use dual momentum to determine your final portfolio

Dual momentum refers to two types of momentum: relative and absolute. Relative momentum measures how an asset has performed relative to other assets over a certain time period, while absolute momentum measures whether an asset has actually risen in value over a certain period of time. Dual momentum is a well-known investment strategy within the academic and investment communities.

So our dual momentum crypto strategy means investing in the best-performing coin in the sector (relative momentum), but only if its recent returns are positive (absolute momentum). If neither of these criteria is met, the strategy calls to shift the amount that would’ve been invested in that coin to cash.

For example, below is the list of the five biggest coins belonging to the smart contracts sector, and their respective returns.

Source: CoinMarketCap
Source: CoinMarketCap

And below is each one’s momentum score.

Momentum scores

Avalanche (AVAX) has the highest momentum score of 29.6% out of the lot, so we select this coin from the smart contracts sector. And because 29.6% is positive, we’ll put 20% of our crypto portfolio in it. If its momentum score was negative, we’d put the 20% into cash instead. Repeat this exercise for each of the five sectors you selected in step one.

After doing this, you could end up in a portfolio with 20% invested in each of the top-performing coins by sector, or in a portfolio fully invested in cash if all the coins are experiencing a downtrend, or something in between. Moving into cash to avoid investing in falling coins is how this strategy tries to avoid big investment drawdowns.

Step 4: Hold till the end of the month and rebalance

Hold this crypto portfolio till the end of the month, then, on the last day of the month, go back and repeat the three steps above. So this strategy essentially trades and rebalances monthly.

Note that I say monthly here because that’s how often most tactical asset allocation strategies rebalance. But I’m aware how fast things move in the crypto world, so I’m not against tweaking this strategy to trade and rebalance weekly. Best to experiment and see what makes the most sense for you.

Finimize

BECOME A SMARTER INVESTOR

All the daily investing news and insights you need in one subscription.

Disclaimer: These articles are provided for information purposes only. Occasionally, an opinion about whether to buy or sell a specific investment may be provided. The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment advisor.

/3 Your free quarterly content is about to expire. Uncover the biggest trends and opportunities. Subscribe now for 50%. Cancel anytime.

Finimize
© Finimize Ltd. 2023. 10328011. 280 Bishopsgate, London, EC2M 4AG