FFA Working Papers 5:003 (2023)710

Impact of size and volume on cryptocurrency momentum and reversal

Milan Fičura

Faculty of Finance and Accounting, Prague University of Economics and Business

We analyse how cryptocurrency size and trading volume impact the momentum and reversal dynamics of their returns. We show that the previously reported weekly return reversal occurs for small and illiquid coins only (t-stat = -7.31), while the large and liquid coins exhibit weekly momentum effect instead (t-stat = 2.33). Long-term returns exhibit reversal effects, which are, however, insignificant for the large and liquid coins. We further analyse the impact of high momentum on future cryptocurrency returns, measured as the distance of previous-week closing price from the k-week high. High momentum has not been analysed on cryptocurrency markets before, and we show it to be a superior predictor of future returns when compared to regular momentum. The distance from the 1-week high predicts negatively future returns of small and illiquid coins (t-stat = -9.03) and positively future returns of large and liquid coins (t-stat = 4.93). The results are highly robust to different settings of the size and liquidity thresholds. We further show that the short-term reversal of small and illiquid coins is driven mostly by their low trading volumes, while the short-term momentum of large and liquid coins is driven mostly by high market capitalizations and to a lower degree by high trading volumes.

Keywords: Cryptocurrency, momentum, reversal, high-momentum, size, liquidity, asset pricing

JEL classification: G11, G12, G17

Received: April 5, 2023; Revised: April 5, 2023; Accepted: April 26, 2023; Published online: January 1, 2023  Show citation