To HODL or Not to HODL?

Given the volatile price movements in cryptocurrency, it’s a question worth asking yourself. Three researchers from the University of Vaasa have tried to uncover an answer.

The recent paper, which was published in Finance Research Letters, suggests that a variable moving average strategy outperforms ‘HODLing’ for a market-wide cryptocurrency portfolio (and for most major cryptocurrencies individually).

The study fills a gap in the existing literature by examining not just bitcoin (BTC), but also other major cryptocurrencies. Furthermore, while a lot of work has been done on technical trade rules in traditional markets over the years, this avenue of research is strangely lacking in the cryptocurrency industry.

Using data from 2016 to 2018, the paper looks at the top cryptocurrencies by market capitalisation (excluding bitcoin) and assesses a simple variable moving average oscillator strategy to see if it outperforms a buy and hold (or ‘HODL’) strategy. Privacy-focused coins were excluded and the top ten coins by market capitalisation from January 1, 2016 were used (namely XRP, ETH, LTC, DOGE, PPC, BTS, XLM, NXT, MAID, and NMC).

The moving average (MA) strategy used in the study is not the one that traders might be thinking of. Typically, an MA is the average of the price of a cryptocurrency over a certain number of trading sessions (read more about moving averages to trade cryptocurrency here).

A typical MA strategy

However, the research paper defines the long-term MA is the average of the logarithm of prices, while the short-term MA is log of the price of the cryptocurrency at a particular time. The equations for each are displayed below:

Pt is the price of a cryptocurrency on a particular day t, and

n is the number of trading days used to calculate a moving average, (where n = 20, 50, 100, 150 and 200).

The variable MA strategy focuses on buy positions only, where a buy signal is given if the short-term MA moves above the long-term MA. The long position is held until the short-term MA moves back below the long-term MA.

To draw market-wide conclusions, a multivariate model is employed to test whether the returns from the MA strategy are greater than a buy and hold strategy (and whether these differences are statistically significant).

The results show that using a period of 20 for the variable MA, five of the ten cryptocurrencies generated payoffs that were statistically significant and produced a return of 46.53 percent per annum (as compared to an annual return of 36.87 percent for the HODL strategy).

Therefore, the 20-period MA strategy produced excess returns of 8.76 percent over the course of 2016–2018.

Using a period of 50 also produces excess returns, but slightly lower at 3.65%. For longer periods, the HODL strategy performs better when considering all coins together.

When comparing these strategies for just bitcoin, the researchers found that positive returns are statistically significant for all variable MA strategies, with the 20-period MA being the most significant. The excess returns rise slightly to 8.96% when including BTC in a portfolio as compared to the top 10 excluding BTC. Ethereum (ETH) shows similar results as all MA strategies were profitable, as shown below.