Abstract: This paper selects capital gains overhang as a proxy variable for disposition effect, using public data and measurement methods to empirically test and confirm the existence of disposition effect and momentum effect in the cryptocurrency market. Three types of investment strategies have been designed for an investment pool that contains only cryptocurrency assets and no other traditional assets under the guidance of disposition effect and momentum effect. The investment targets of this paper are not only some cryptocurrencies with large market capitalization, such as Bitcoin and Ethereum, but more varieties, accounting for more than 95% of the total market value of all cryptocurrencies. Under various parameter settings, the investment strategy that combines these two effects outperforms any strategy based on a single effect, and the three types of investment strategies directed by investor irrational behavior guidance are all better than the equal weight model which are robust and universal. In particular, this paper also discusses the duration of the momentum effect and disposition effect in the cryptocurrency market, the parameter selection of capital gains overhang and the ordering period parameter setting of the momentum strategy. It is found that the cryptocurrency market changes faster than the stock market, and the iteration cycle is shortened a lot. In addition, the momentum effect lasts no more than two weeks and the impact of disposition effect on the rate of return are within half a month in the cryptocurrency market. It is only valid to use daily data or higher frequency data to calculate the amount of capital gains overhang and to conduct back-testing to test the existence of disposition effect. On the contrary, the use of low-frequency weekly data is invalid. When the ordering period of the momentum strategy exceeds half of the duration of the momentum effect, the momentum strategy is not significantly affected by the ordering period parameter.

Key words: cryptocurrency, disposition effect, behavioral finance, capital gains overhang, investment strategy