Momentum versus buy-and-hold in crypto

Momentum versus buy-and-hold in crypto

Two approaches dominate the conversation among crypto investors. One buys and holds on, whatever the market does; the other moves with the trend and steps aside when it turns. Each has its own logic and its own price. An honest comparison is therefore not about which approach wins, but about which risk profile and which kind of discipline an investor is prepared to carry.

Buy-and-hold: the power of simplicity

Buy-and-hold means exactly what it says: buy and keep holding. In crypto the approach is known as hodl, slang for refusing to sell no matter what the price does. Its strength lies in simplicity. There are no signals to follow, hardly any transactions and therefore few costs or decision points; the investor does not need to watch the market daily. In markets that rise for years, a buy-and-hold investor takes part in the advance in full; no phase of it is missed.

That simplicity does carry a price, however. The crypto market goes through deep interim drawdowns (declines from an earlier peak), and a buy-and-hold investor lives through every one of them in full. Sitting still sounds easy on paper; in the middle of a sharp decline it demands considerable staying power. That discipline often proves harder to sustain than expected. Anyone choosing to hodl should account for that in advance: the approach is only simple if the holding actually succeeds.

Momentum: moving with the direction

Momentum investing (moving with the direction in which the market is already heading) takes the opposite route. Momentum and trend following sit close together without being the same thing: trend following is one way of capturing that movement in rules. Trend-following rules, for instance based on moving averages (the average price over an extended period), reveal the market’s underlying direction. While the trend points upwards, the strategy stays invested; when the trend turns, it steps out. In doing so, it tries to limit part of the deep drawdowns that buy-and-hold absorbs in full.

This, too, carries a price tag. Trading happens more often, which brings costs. Signals are sometimes false as well: the strategy exits, after which the market recovers and re-entry comes later. In a sideways market without clear direction, such false signals can pile up. Whoever follows momentum has to accept them as the cost of the chance to sidestep part of a genuine downturn.

No winner, but a different profile

Which approach is better cannot be said in absolute terms; the answer depends on the market that follows and on the investor who chooses. The real difference lies in the risk profile. Buy-and-hold accepts deep drawdowns in exchange for simplicity and permanent exposure to the market. Momentum accepts more frequent trading and false signals in exchange for an attempt to sidestep the heaviest declines.

The discipline each demands differs just as much. The hodl investor must do nothing while the portfolio sits deep in the red. The momentum investor must act on every signal, including the uncomfortable ones. Both kinds of discipline sound simple and are anything but in practice; which one fits best ultimately comes down to temperament and to the drawdowns an investor can endure without abandoning the plan. Being honest about one’s own behaviour in a decline is half the work.

Callisto Capital’s own choice

Within this spectrum, Callisto Capital has chosen the systematic side: an algorithmic, trend-following strategy based on fixed, predefined signals. This article expresses no preference for either approach for individual investors.

Callisto Capital is a Dutch fund for joint account; its manager is registered with the AFM under the AIFMD-light regime and is not subject to ongoing supervision. Participation is open from an investment of 100,000 euro. This article is for information only and does not constitute investment advice.