According to CoinDesk, cryptocurrency markets offer unparalleled opportunities for active traders and investors due to their highly dynamic and global nature. The introduction of the CoinDesk Trend Indicator suite of signals aims to assist crypto investors in identifying new opportunities and managing risk in this volatile asset class. In this article, we will explore the reasons why price trends exist and tend to persist in digital asset markets.
One of the key reasons momentum trading thrives in cryptocurrency markets is the limited attention of investors. Unlike traditional stock markets with set trading hours, cryptocurrency markets are open 24/7, 365 days a year. This continuous trading environment means investors may miss important developments, and their portfolios and trading activities may lag to market news headlines or price changes. The net effect of these constraints on attention to the market creates opportunities for rules-based momentum traders to capitalize on the delayed reactions of market participants.
Mechanical feedback trading, such as leveraged trading and stop-loss orders, often leads to feedback trading in cryptocurrency markets. When prices move in a sustained direction, stop-loss orders can be triggered, and leveraged traders can be forced out of their losing positions, which adds to marginal buys or sells in the direction of the price move. This technical phenomenon can support and reinforce trending behavior, making momentum trading strategies particularly effective.
Network effects also play a role in the success of momentum trading in cryptocurrency markets. Cryptocurrencies like bitcoin, ether, and native blockchain tokens are supported and driven by network effects, meaning the value and utility of these token assets increase as more users and developers join the ecosystem. This compounded growth inherently promotes momentum, attracting more investors and leading to a continuous upward trajectory in prices.
Lastly, investor behavior is often characterized by a delay in updating views and an inclination to stick to strongly held prior beliefs. This psychological bias can lead to investors holding outdated market views, despite contradictory market price developments. For these reasons, we should expect trending prices to persist in digital asset markets, making momentum indicators a useful strategy tool for any manager of crypto assets.
