Why Crypto Momentum Backtests Can Mislead Investors

Momentum Trading & Bias

As one of the hottest asset classes of the decade, cryptocurrencies have been of great interest to long-term investors and technologists, but also to traders.

One method to trade crypto is to rely on momentum, a similar technique to the one used for stocks. Momentum trading does not pay much attention to financial fundamentals. Instead, it uses technical analysis to ride the “wave” of market psychology and locks in profits before the trend reverses.

In theory, this can be a powerful tool for traders, as it allows them to “go with the flow” of the market and the investing community as a whole. But of course, it also means a good trader will need to know when not to overstay his welcome in such a trade, or risk getting caught in a downturn.

In order to test a trading strategy, including a momentum strategy, looking backward is often a favored method. By “backtesting” a strategy with historical data, we can see if it would have worked in the previous weeks, months, or years, and therefore assess if it is likely to work in the future as well.

However, backtesting for both stocks and cryptos is a technique fraught with potential bias and errors that can lead to the wrong conclusion. A recent economic scientific paper by researchers at the University of Vaasa (Finland) and the University of Turin (Italy) just confirms such risks.

In a study published in Finance Research Letters¹, titled “On survivor cryptocurrency momentum”, they found that significant payoffs documented for momentum strategies are an artefact of coins that are only temporarily accessible for trading. For coins that have lasted longer, there seems to be no significant payoffs, putting into question whether momentum strategies are a viable strategy for crypto trading.

How Does Momentum Trading Work?

One saying going about momentum trading is “Buy High, Sell Higher”. It reflects the core idea of just riding the waves of rising prices. The idea is to buy assets already on the move, hold onto them until momentum slows down, then sell to lock in gains.

A core metric used by momentum traders is trading volume, as a strong price movement accompanied by heavy trading volume suggests widespread market participation that can be sustained for long enough for traders to join.

Some of the popular technical indicators used by momentum traders include:

• Relative Strength Index (RSI): An oscillator that measures the magnitude of recent price changes, ranging between overbought and oversold.
• Moving Averages: Used to smooth out price data by taking as a data point the average over several hours or days.
• Moving Average Convergence Divergence (MACD): A trend-following indicator that shows the relationship between two moving averages of a security’s price.

In general, higher volatility will be beneficial to momentum trading strategies, as it gives a trader more opportunities to profit from wild short-term swings in prices.

High volatility also increases the potential for large losses, so strict risk control, stop loss orders, and other similar methods are often required for a successful momentum trading strategy.

Why Survivor Coins Matter

What the Study Tested

For momentum strategies to work, asset prices must have sufficiently smooth and persistent trends for momentum strategies to exploit, rather than patterns of high return volatility and discontinuity.

So the researchers investigated whether “survivor coins” were the ones responsible or not for the reported profitability of the momentum strategy.

They defined survivor coins as the free-floating cryptocurrencies that remained among the top 100 altcoins by market capitalization throughout the sample period (January 2017 to August 2024), showing stability and liquidity over time.

Survivor coins are rare: coinmarketcap.com shows that of the top 100 by market capitalization in December 2016, only nine remain in the top 100 in 2024: Bitcoin (BTC), Ethereum (ETH), XRP (XRP), Dogecoin (DOGE), Litecoin (LTC), Stellar (XLM), Ethereum Classic (ETC), Monero (XMR), and Neo (NEO)

They also used another data set with the top 30 coins by market capitalization at the end of each calendar year, with many known to have crashed or outright collapsed in the interval after a brief moment in the spotlight.

Using these data, the researchers created the equally weighted Survivor Cryptocurrency Momentum Portfolios (SCMP), using a trading method similar to the ones used with G10 national currencies.

The Impact Of Default

The researchers backtested the momentum strategy versus the top 9 survivor coins, and the top 30 coins for a given year.

At first, it seems that the survivor group is performing less than the top 30 group, bringing virtually no gains.

Source: Finance Research Letters

But since the vast majority of coins that comprise PCMP exit the group of selected coins on an annual basis, its trimmed profitability must arise from coins that eventually end up in “default”.

So the researchers went to investigate if indeed this was the case.

“Although SCMP has average returns statistically not different from zero, it is possible that the PCMP strategy occasionally leverages survivor coins during periods in which their returns are positive, resulting in better risk-adjusted performance.”

They concluded through statistical and mathematical analyses that the cryptocurrency momentum positive effect appears to be driven by digital coins that temporarily gain popularity and become actively traded, before eventually falling into a passive management space.

In contrast, a cryptocurrency momentum strategy built on coins exhibiting stability and liquidity does not earn a significant payoff.

Why Crypto Backtests Are Easy to Distort

The main issue is that in a back test, it is easy to assume that a trader would just go in and out at the right moments, which are the ones back tested.

But in practice, a coin can “die” before the end of the year, and is replaced that year in the backtest by another one that has risen in popularity.

However, a real trader would have been stuck with the wrong coin and lose money before he would, maybe, and if he his lucky, move to the new popular coin.

The main issue is that such a backtest might seem robust, but can completely miss this bias in practice.

What This Means for Investors

This can be dangerous for traders, as they will overestimate the real past success of a given strategy, and then completely miscalculate the potential for future returns. This can mean little to no gain, but In the worst case, a trader would have been wiped out in a situation the back test say was profitable.

Maybe this should not be surprising, as momentum strategy on other currencies led to the same result as with cryptocurrencies (and can significantly differ from momentum strategies with stocks).

“The implications of this study are relevant for investors and asset management firms looking to implement momentum strategies in the cryptocurrency market. Our findings suggest that such strategies may be infeasible in practice, as the apparent profitability might be driven by financial frictions.”

In addition, this result suggests that with the prominent entrance of banks and financial intermediaries into this market, traditional financial products of the FOREX market, such as the Deutsche Bank index, would offer little interest to realize real gain for crypto traders.

Study Referenced

^{1. Klaus Grobys, Davide Sandretto, Janne Äijö. On survivor cryptocurrency momentum. Finance Research Letters. Volume 92, March 2026, 109602. https://doi.org/10.1016/j.frl.2026.109602}