Crypto’s biggest critics often argue that digital assets have virtually no intrinsic value, that the technology behind it has failed to prove its usefulness, and that the digital currency market is built on little more than hype.
And it’s all true, according to a report by researchers at Starkiller Capital, a hedge fund focused on cryptocurrencies. But that doesn’t mean you can’t make money.
According to the authors of the article, Leigh Drogen, Corey Hoffstein and Kevin Otte, 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 on potential future value. At any moment, they write, there are a few dominant narratives pushing money into the crypto space, amplified by the fact that crypto market participants are “very online.”
To be clear, traditional currencies like the dollar also lack intrinsic value, but they are backed by the full trust and credit of the institutions that issue them, such as the US government. Cryptocurrencies are backed by a decentralized network of computers and protected by blockchain technology.
The narrative events for cryptocurrencies — think Elon Musk putting dogecoins on Twitter or Mark Zuckerberg changing Facebook’s name to Meta — are constantly changing.
“It’s a constant rotation from bet to bet,” Drogen said in an interview.
The still young cryptocurrency industry is in an awkward phase. Skeptics and naysayers have more arguments than ever to question the whole perspective of cryptocurrencies, whether as a security-like investment vehicle or as a store of value like gold or a real currency that can purchase tangible goods and services. .
Devotees are on the defensive. They say last year’s turmoil — a 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 cryptocurrency winter has been marked by the collapse of industry giants including Celsius, BlockFi and FTX, potentially one of the biggest investment scandals of all time.
It might seem strange that a company focused on digital assets releases a report on how cryptocurrencies are essentially a publicity beast without a core value proposition that is also “riddled with insider trading and market manipulation.” But the absence of fundamentals is hardly a problem for Starkiller, a quantum shop that relies on mathematical models and algorithms, not human judgment, to make investment decisions.
“We might have a little different view from some of the more…religious type of crypto people,” Drogen said. “When we talk about utility and intrinsic value, there isn’t much yet… But we’re definitely big believers in the long-term trajectory of actual utility.”
In short, cryptocurrencies are an emerging technology and not an investment for everyone, at least not yet. For now, cryptography is a game of pure momentum and not for the faint of heart.
For the uninitiated: Momentum trading is in an investment strategy that aims to capitalize 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 retail traders who started out during the bull run at the start of the pandemic era. Watch a stock go up, buy the stock, make money. Watch a stock go down, short it, make money. Investing is easy!
Of course, nothing goes forever, as many learned the hard way when the intense Reddit-fueled FOMO that propelled meme stocks like GameStop and AMC to the top evaporated.
The world of cryptocurrency trading works in much the same way.
In Starkiller’s study, digital assets that performed best in a 30-day period tended to continue to outperform over the next seven days. This is momentum at work.
Trading strategies that exploit this phenomenon have consistently delivered returns in excess of bitcoin, which researchers have used as a benchmark.
The momentum effect is self-fulfilling “as market participants attempt to get ahead of the hot ball of money.”