Thanks very much for the Discord chat yesterday. I appreciate your time. The chat helped me understand what you’re trying to achieve. I’m mindful I’m coming into this discussion late so excuse me if I’m raising questions that have already been answered.
Let’s focus on the first question regarding momentum. iRobot’s strategy is to buy past winners in order to “buy high and sell higher”. However, winners tend to underperform in the future due to “reversion to the mean” also called the “winner-loser” phenomenon. This is consistent with investment advice not to “chase winners” or “buy into a pump”.
iRobot’s strategy therefore depends on there being positive, persistent momentum in the crypto market, i.e., winners continue to win. The literature on momentum in the crypto market is contradictory but the most recent and comprehensive studies show that momentum effects are small and short-lived (i.e., minutes to weeks) followed by large reversals. See Dobrynskaya (2021) …
Is there any evidence of positive momentum in your data set and, if so, that the momentum persists on long-enough time horizons to be relevant to our investors? Alternatively, it would be helpful to show how the “winners” chosen for the iRobot portfolio performed (out-of-sample) against the “losers” and “average” tokens not chosen for the portfolio.
My other question was whether the Sortino ratio can actually predict future performance for equity or crypto portfolios but let’s come to that after we’ve resolved the momentum question.