Abstract
Market predictability is an essential aspect for both regulators and investment companies. There have been substantial discussions regarding whether security returns are predictable; however, limited research has been done to look into the predictability of cryptocurrency returns. Although practitioners widely use technical analysis (TA), current academic evidence on its efficacy is controversial, and extant literature on Bitcoin’s TA studies does not account for the element of risk. Using the Bitcoin exchange rates as a case study, the current study investigates the usefulness of technical trading rules (TTR). The study applies TA rules to two versions of returns, namely, actual Bitcoin returns, and equilibrium returns that were using the dynamic Capital Asset Pricing Model (CAPM). In this regard, the time-varying beta was modelled as a ratio of covariance and market variance generated from the VAR-GARCH (1,1) system. As a standard practice, the data and models used in this study followed the necessary validation procedures. The daily Bitcoin exchange rates, particularly BTC/AUD, BTC/EUR, BTC/JPY, and BTC/ZAR, were utilised to analyse TA profitability from 19 June 2010 to 31 October 2019. The research period was determined based on the availability of Bitcoin daily data and to avert the structural change emanating from the 2019 Corona virus. Fixed long and short moving averages (MAs) with and without a band are used, totalling 24 TTR. The results indicate that TA is profitable even after accounting for time-variable risk premiums. However, it is worth noting that, as revealed by the results, profits diminish after time-varying risk premiums are discounted. The study further evaluates and confirms the presence of a momentum effect in the Bitcoin market. This is therefore similar to other studies that find TA profitable in different assets. The findings confirm that return predictability in Bitcoin markets can be achieved using the chosen TTR even after accounting for a time-varying risk premium. Further studies into the profitability of other cryptocurrencies using different TA rules or a combination of the rules used with other TTR is recommended. The study has documented that technical analysis in the form of moving averages can predict the returns and be profitable in four Bitcoin exchanges even after accounting for time-varying risk premiums. The evidence supporting the risk-adjusted profitability of trading rules (with a focus on the Bitcoin market) is presented in the current study.