Catching Crypto Trends; A Tactical Approach for Bitcoin and Altcoins

Discover how a diversified trend-following strategy outperforms Bitcoin and altcoins with robust risk-adjusted returns

Everyone wishes they had invested more in Bitcoin. After all, Bitcoin was under 500 USD in 2015 and is now worth over $90,000 USD, an even better return than Nvidia’s meteoric rise. If there were an investment strategy that could outperform Bitcoin itself, wouldn’t you be curious? I know I would. I’m very curious about how to do it and get rich. Haha.

Paper reviewed:

Zarattini, Carlo and Pagani, Alberto and Pagani, Alberto and Barbon, Andrea, Catching Crypto Trends; A Tactical Approach for Bitcoin and Altcoins (April 08, 2025). Swiss Finance Institute Research Paper No. 25-80, Available at SSRN: https://ssrn.com/abstract=5209907 or http://dx.doi.org/10.2139/ssrn.5209907

Summary

This research paper presents a tactical trend-following approach using Donchian Channels, achieving a Sharpe ratio above 1.5 and an annualized alpha of 10.8% versus Bitcoin. The ensemble trend model outperformed individual models, delivering a Sortino ratio of 2.03 and a maximum drawdown of 19%. The study highlights the importance of lookback periods, transaction costs, and diversification in crypto trend-following strategies.

Key Findings

The paper evaluates a trend-following strategy using Donchian Channels on Bitcoin and a broader set of cryptocurrencies, achieving a Sharpe ratio above 1.5 and an annualized alpha of 10.8% versus Bitcoin.
The ensemble trend model, which aggregates multiple Donchian channel-based trend models with different lookback periods, outperformed individual models, delivering a Sortino ratio of 2.03 and a maximum drawdown of 19%.
Shorter lookback periods (5 to 30 days) exhibited the strongest risk-adjusted returns for Bitcoin, while longer periods were less effective.
Transaction costs significantly impact performance, particularly for high-turnover strategies; a 20% rebalancing threshold reduced unnecessary turnover and improved net returns.
A diversified trend-following program across the top 20 most liquid cryptocurrencies achieved a net-of-fees Sharpe ratio of 1.57 and an alpha of 10.8% relative to Bitcoin.
The crypto trend-following strategy showed low correlation with traditional trend-following strategies, offering diversification benefits.

Implications

Business and Policy Implications

Businesses and investors can use trend-following strategies to capitalize on cryptocurrency market trends, potentially enhancing returns and managing risk.
Policymakers should consider the implications of growing institutional investment in cryptocurrencies and the need for robust regulatory frameworks.
The low correlation between crypto and traditional trend-following strategies suggests opportunities for diversification in investment portfolios.
Companies can leverage the insights from this research to develop cryptocurrency investment products or strategies.
Investors should be aware of the risks associated with cryptocurrency investments, including volatility and regulatory uncertainties.

Introduction

The cryptocurrency market has experienced rapid growth, with total market capitalization surpassing $3 trillion by early 2025. As institutional investors increasingly enter this space, the need for robust investment strategies becomes more pressing. This paper examines the application of a trend-following strategy using Donchian Channels to Bitcoin and a broader set of cryptocurrencies. By evaluating the performance of this strategy across various lookback periods and asset selections, the research aims to provide insights into its potential benefits and risks.

Background and Context

The cryptocurrency market is characterized by high volatility, liquidity, and a diverse participant base, making it an attractive environment for systematic trading strategies. Trend-following strategies, in particular, have been successful in traditional asset classes and are now being applied to cryptocurrencies. Previous research has documented the presence of momentum effects in cryptocurrency markets, similar to those observed in traditional assets. However, the existing literature often focuses on Bitcoin or employs methodologies that diverge from real-world applications. This paper aims to bridge this gap by testing a diversified trend-following approach across multiple cryptocurrencies and time horizons, while explicitly accounting for transaction costs and operational details.

The cryptocurrency ecosystem has evolved significantly since the introduction of Bitcoin in 2009. The market now includes over 100 cryptocurrencies with individual market capitalizations exceeding $1 billion. The entry of institutional investors, facilitated by the launch of Bitcoin futures and ETFs, has contributed to the market's growth and maturity. However, the inherent volatility and structural risks of crypto markets highlight the importance of adopting robust and adaptive investment frameworks.

The remainder of this part will discuss the trend-following model, its application to Bitcoin, and the extension to a broader universe of cryptocurrencies, setting the stage for the continuation of the analysis in Part 2.

Main Results

The paper presents a comprehensive analysis of a trend-following strategy applied to Bitcoin and a broader universe of cryptocurrencies. The main findings are summarized below.

Performance on Bitcoin

The trend-following model is first applied to Bitcoin, with the results indicating that shorter-horizon models (5 to 30 days) exhibit the strongest risk-adjusted returns. The ensemble Combo model, which aggregates signals from multiple trend horizons, achieves a compound annual growth rate (CAGR) of 30%, a Sortino ratio of 2.03, and an annualized alpha of 14% versus Bitcoin.

Trade-Level Statistics

The trade-level statistics for each model are presented, revealing that as the look-back horizon increases, the number of trades decreases significantly. The hit ratio, average PnL, and return per trade are also reported, providing insights into the performance of each model.

Impact of Transaction Costs

The results are sensitive to transaction costs, particularly for short-horizon models. To mitigate this effect, a threshold-based rebalancing rule is implemented, which reduces unnecessary turnover and improves the historical viability of the strategy.

Methodology Insights

The research approach involves applying a well-established trend-following methodology to Bitcoin and a broader universe of cryptocurrencies. The use of Donchian Channels as a trend indicator is a key aspect of the methodology.

Why This Methodology is Important

The Donchian Channel-based trend-following strategy is significant because it has been successfully deployed in traditional asset classes for decades. Its application to cryptocurrencies provides a robust and adaptive investment framework, which is essential for navigating the inherent volatility and structural risks of crypto markets.

Analysis and Interpretation

The findings suggest that a tactical trend-following approach in crypto markets may be particularly appealing to investors seeking to enhance diversification within a traditional trend-following portfolio or capture the upside potential of crypto markets while avoiding severe drawdowns.

Patterns and Trends

The results indicate that:

Shorter-horizon models perform well on Bitcoin, with Sharpe ratios near 1.60.
The ensemble Combo model achieves a CAGR of 30% and a Sortino ratio of 2.03.
Transaction costs significantly impact the performance of short-horizon models.
A diversified portfolio of approximately 10 to 20 cryptocurrencies represents an optimal balance between capturing broad market trends and maintaining capital efficiency.

The analysis also reveals that the correlation between crypto trend-following and traditional trend-following strategies is generally low, with a 6-month rolling correlation averaging around 7.4%. This suggests that crypto trend-following offers meaningful diversification benefits when included in a broader trend-following allocation.

Strategic Implications

The findings have several strategic implications for companies and managers:

A tactical trend-following approach can provide a robust and adaptive investment framework for navigating crypto markets.
Diversification across a range of cryptocurrencies can help reduce single-asset risk and preserve strategy efficiency.
The low correlation between crypto trend-following and traditional trend-following strategies makes it an attractive addition to a broader investment portfolio.

Real-World Implementation Considerations

To implement this strategy in practice, investors should consider the following:

Transaction costs and operational details, such as rebalancing thresholds and liquidity conditions.
The importance of diversification across a range of cryptocurrencies to reduce single-asset risk.
The need for a robust and adaptive investment framework to navigate the inherent volatility and structural risks of crypto markets.

Competitive Advantages and Market Opportunities

The trend-following strategy in crypto markets offers several competitive advantages and market opportunities:

The ability to capture the upside potential of crypto markets while avoiding severe drawdowns.
The potential to enhance diversification within a traditional trend-following portfolio.
The opportunity to capitalize on the unique characteristics of crypto markets, such as high volatility and liquidity.

Actionable Recommendations

Based on the findings, business leaders can consider the following actionable recommendations:

Implement a tactical trend-following approach in crypto markets to capture the upside potential while managing risk.
Diversify across a range of cryptocurrencies to reduce single-asset risk and preserve strategy efficiency.
Monitor and adjust the strategy as needed to respond to changing market conditions and liquidity dynamics.

Practical Implications

The study's findings have significant practical implications for businesses and investors looking to capitalize on the opportunities presented by cryptocurrency markets. The tactical trend-following approach demonstrated in the research offers a robust and adaptable investment framework for navigating the inherent volatility and structural risks of crypto markets.

Real-World Applications

The trend-following strategy can be applied to a diversified portfolio of cryptocurrencies, allowing investors to capture the upside potential of the market while minimizing risk.
The approach can be used to enhance diversification within a traditional trend-following portfolio, providing a unique source of returns that is not highly correlated with traditional assets.

Strategic Implications

Businesses and investors should consider incorporating a tactical trend-following approach into their investment strategies to capitalize on the opportunities presented by cryptocurrency markets.
The study's findings suggest that a diversified portfolio of 10-20 cryptocurrencies may represent an optimal balance between capturing broad market trends and maintaining capital efficiency within a long-only trend-following framework.

Who Should Care

Institutional investors and asset managers looking to diversify their portfolios and capitalize on the opportunities presented by cryptocurrency markets.
Businesses and investors seeking to enhance their returns through a robust and adaptable investment framework.
Risk managers and portfolio managers looking to minimize risk and maximize returns in cryptocurrency markets.

Actionable Recommendations

Based on the study's findings, the following actionable recommendations can be made:

Implement a tactical trend-following approach: Businesses and investors should consider implementing a tactical trend-following approach in crypto markets to capture the upside potential while managing risk.
Diversify across a range of cryptocurrencies: Diversification across a range of cryptocurrencies can help reduce single-asset risk and preserve strategy efficiency.
Monitor and adjust the strategy: The strategy should be continuously monitored and adjusted as needed to respond to changing market conditions and liquidity dynamics.
Consider a diversified portfolio of 10-20 cryptocurrencies: A diversified portfolio of 10-20 cryptocurrencies may represent an optimal balance between capturing broad market trends and maintaining capital efficiency within a long-only trend-following framework.
Implement risk management techniques: Businesses and investors should implement risk management techniques, such as volatility targeting and position sizing, to minimize risk and maximize returns.

Implementation Considerations

Transaction costs: Transaction costs should be carefully considered when implementing a tactical trend-following approach in crypto markets.
Liquidity dynamics: Liquidity dynamics should be continuously monitored to ensure that the strategy is not exposed to excessive liquidity risk.
Market conditions: Market conditions should be continuously monitored to ensure that the strategy is adapted to changing market conditions.

Conclusion

The study's findings demonstrate the potential benefits of a tactical trend-following approach in cryptocurrency markets. By implementing a robust and adaptable investment framework, businesses and investors can capitalize on the opportunities presented by crypto markets while minimizing risk. The actionable recommendations provided in this study can help businesses and investors navigate the complexities of cryptocurrency markets and achieve their investment objectives.

The key takeaways from this study are:

A tactical trend-following approach can be used to capture the upside potential of cryptocurrency markets while minimizing risk.
Diversification across a range of cryptocurrencies can help reduce single-asset risk and preserve strategy efficiency.
A diversified portfolio of 10-20 cryptocurrencies may represent an optimal balance between capturing broad market trends and maintaining capital efficiency within a long-only trend-following framework.

By following these recommendations, businesses and investors can capitalize on the opportunities presented by cryptocurrency markets and achieve their investment objectives.