Putting digital currencies, strategic modelling and investible signals in the same sentence seems optimistic at best, foolhardy at worst. An asset that has seen explosive growth, comes in multiple iterations, is beloved by ransomware criminals, and can be taken permanently out of circulation by a lost or forgotten password hardly seems like a good foundation for value-adding quantitative models.
However, with faith in fiat currencies at a low ebb and regulators in major markets creating credible frameworks, what seemed incredible a few years ago is now possible. Furthermore, a proven building block for quantitative analysis – mutual funds and ETFs – is now available.
After years of relatively subdued interest, flows into cryptocurrency funds surged sharply in early 2024. This turning point was largely driven by the long-anticipated approval of spot Bitcoin ETFs by the SEC, which allowed investors to gain direct exposure to the stock without the complexities of managing digital wallets or navigating the exchanges.
In 2024, flows into all EPFR-tracked Cryptocurrency Funds surpassed the $45 billion mark, more than eight times the size of any previous yearly inflow. The momentum carried through into this year, with inflows climbing towards $50 billion total just 10 months into 2025.
In a previous Quants Corner “Crypto: Digital gold or fool’s gold?”, we used this growing universe of Cryptocurrency Funds to examine the return characteristics of major digital currencies using principal components analysis. We concluded that, “PCA of EPFR’s custom asset groupings — such as those focused on Bitcoin, Ether, Ripple, and Solana — shows a tendency to cluster together. This clustering indicates that the funds within each of these groups have similar return profiles, which not only validates our classification framework but also suggests that these assets are driving distinct and coherent performance patterns within the fund universe.”
This Quants Corner takes the next step, building on that finding of coherence and utilizing the nearly 500 Cryptocurrency Funds tracked by EPFR to create a momentum-based rotation strategy.
Tracking one coin at a time
While there are some ETFs that hold several crypto currencies or blend bitcoin with a more traditional asset like gold, this particular fund market is largely dominated by single-stock funds. As of October 1st, funds tracking a single cryptocurrency account for 96% of the entire crypto fund universe, by total assets, with bitcoin funds alone representing 76%.
The Cryptocurrency Fund universe has seen dramatic growth in their total net assets since 2023, with the latest standing at nearly $240 billion spanning across 487 funds. Bitcoin, however, remains the dominant player with the second largest, Ethereum, just a fifth of their size.
While bitcoin remains the dominant player in the crypto space, investor sentiment towards other stocks has increased throughout this year with the creation of new funds tied to both established and startup blockchain currencies. As of July this year, the number of funds tracking currencies other than the two largest – Bitcoin or Ethereum – has surpassed the number of funds solely focused on Bitcoin.
With the granularity of EPFR Fund Flows data, nearly 70 distinct single-stock cryptocurrency groupings were identified. Just over half of these groupings are tracked by multiple ETFs, while the rest are covered by a single fund, highlighting the growing investor appetite for broad and diversified crypto exposure.
The value behind the coin
Another way to measure investor sentiment in an asset class is to consider its flow percentage, which is a fund group’s discrete flow (US$ millions) divided by their AuM. This is especially useful when comparing asset classes of differing sizes, a dynamic common in crypto market where Bitcoin’s outsized asset base towers over smaller players like Solana, Chainlink and Algorand.
Year-to-date cumulative flows as a percentage of assets for Bitcoin, Ethereum and other single-coin funds show a similar trend to the growth in the number of funds tracked. We observe that over time, as the number of funds tracking these single coins increased, this was met with a similar increase in their flow percentage. These types of funds are fulfilling an investor demand, providing more avenues to invest in the crypto space, and diversifying their portfolios beyond the biggest coins.
The rapid expansion of both investment activity and product options in the crypto space has provided a compelling backdrop for a flow momentum-based rotation strategy. While this approach has been traditionally applied to other asset classes, it will be reapplied here to target single-stock cryptocurrency fund groups.
Strategy in motion
This strategy employs a 15-day flow lookback with a 5-trading day horizon, meaning fund flows for each coin were aggregated and compounded over the preceding 15 days. The flows for each day are normalized using the fund group’s total assets, resulting in a flow percentage. The single-coin fund groups with the greatest percentage flow were held for five days, and the coins with the lowest percentage flows (or the highest percentage outflow) were shorted for five days.
As crypto emerged as a major investment theme in recent years, the breadth of available, investable asset classes has expanded significantly. The number of unique coins tracked grew from just eight in 2020 to 20 coins in 2022, and climbed further to 29 by 2024 – more than tripling in size in just three years. This strategy was tested across these three distinct starting points: 2020 (Group A), 2022 (Group B), and 2024 (Group C).
As shown in the table above, the returns and Sharpe ratios vary significantly across the three coin groups. But they also fluctuate markedly from year to year, with 2024 the first year all groups reported returns and the only year where returns differ in sign for each of the groups. That year, Group B showed a positive performance, while Groups A and C posted steep negative returns.
In its second year, Group B outperformed Group A by 90 percentage points, whereas Group C underperformed Group A by 9 points. The chart below shows this volatility in a still-maturing crypto market, and suggests that the excitement of new coins entering the ETF space is not a good sole predictor of returns.
Group C’s performance in 2025 reveals several instances where the strategy signalled long positions based on a high percentage flow that ultimately delivered negative returns. These underperforming long baskets disproportionately featured the newer coins to markets. Coins first appearing in Group C accounted for 36 – double the frequency of Group A and B coins, which each appeared 18 times.
If each coin had an equal likelihood of appearing in the top-performing basket, the new coins featuring in Group C would be expected to represent roughly 30% of the sample. Instead, these coins account for 50%, indicating that the newest funds tracking cryptocurrencies have outsized flow momentum but fail to deliver outsized returns. Investor enthusiasm may not be translating into reliable performance.
Trading tokens like currencies: Does the FX framework hold?
Expanding on the idea of volatility in the crypto market, we can compare the crypto flow momentum trading strategy to the traditional FX currency flow momentum trading strategy. This chart compares Group A’s annual returns to the FX strategy annual returns using a 5-day lookback and trading horizon.
This currency rotation strategy shows how the crypto market does not mirror the FX currency market, with the two strategies not correlated nor inversely correlated (-0.35 across the 5 datapoints). Since these strategies do not complement one another, the results suggest that applying traditional currency trading strategies to the cryptocurrency may be fundamentally flawed, and rather require a more distinct approach.
As we observed in the opening section, the growth of digital currencies has been explosive, disorderly and prolific when it comes to new varieties. Not surprisingly, while it is now possible to build a rotation strategy around single cryptocurrency funds that produces positive returns, aspects of that strategy such as Sharpe ratios, correlations with other asset classes and the relationship between flow momentum and future gains are frequently atypical.
Furthermore, the continued growth of single-stock cryptocurrency ETFs raises some thorny questions. Will this expansion eventually plateau, or is this asset class still in its early stages of development? At what point might the continued launch of new funds begin to dilute signals and investor returns? And looking ahead, how will investor demand for cryptocurrency evolve in 2026 as the asset class becomes more mainstream?
Digital currencies may well need new quantitative tools and techniques to unlock investible signals while containing the volatility that has surrounded Bitcoin and other crypto assets. Future Quants Corners will seek to deepen our understanding of cryptocurrencies as currencies and refine methods of integration with traditional FX trading.
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