A few issues ago I asked for reader feedback. I love spreading knowledge about crypto and want to help other people embrace this asset class.

One reader, Joey, was kind enough to send an email to mailbag@investingdaily.com with a question of his own:

You asked for feedback from subscribers so just thought I would reach out directly since we have communicated before.

First, thanks for your continued guidance, update, and commentary about the crypto markets and our investments during these turbulent times.

Also, appreciate the recommendations too. Great call recently on memes and Aave!

This leads to my first question. Do you think that projects that have shown strength so far will continue to outperform during the peak bull run and vice versa (weaker projects will continue to underperform)?

As a De-fi example Aave and Maker are doing much better so far than something like Compound. Do you think it makes sense to consolidate into the projects that have shown strength or do you think some of these previous performers that are now laggards will eventually bounce back?

How And When To Invest In Lagging Assets

First I want to thank Joey for being such an active reader and for his astute feedback and question. Second, I realized that today is a great day to answer his question and ask for more feedback from you all. It’s also a great time to talk about some Decentralized Finance (DeFi) projects that have been doing well.

Joey’s question centers around Aave (AAVE) and how to tell when to buy projects with momentum or projects that have been lagging. Those of you who also subscribe to my premium service, Crypto Trend Investor, would know that we bought AAVE back in May. We were able to buy some tokens at $87 all the way back on May 17th. We’re now up more than 40% on that trade in just over three months.

Now, how did I know that buying Aave back in May was a good idea? It was lagging behind the majority of the other major cryptocurrencies back then. In fact, in May AAVE was trading for less than it was at the start of the year! Almost as if its bull run had not even started yet.

The reason I felt comfortable buying that lagging asset was that Aave is an established blue chip cryptocurrency with great fundamentals. I knew that even if I got the timing wrong and Aave didn’t rise in price in the next few months, I would be left holding onto a quality asset with long term sustainability.

Investing in lagging assets is a bit of a gamble. You can’t ever be completely certain that the lagging asset is going to catch back up with the rest of the market. However, the best time for investing on lagging assets is right around the time of a major market shift. This past spring was a big market turning point.

Most major cryptocurrencies were just starting to cool off after their first big leg of the bull market. AAVE had made a decent run in March and April, but by May it had completely erased that whole move. I was pretty confident that while AAVE was lagging behind the market it would at least retrace its move to $150 in the months ahead. Right now it’s well on its way to doing that.

While investing in lagging assets can be very exciting and rewarding when you’re right, its often a much more risky investing strategy. When you execute a successful trade on a lagging asset it often outperforms the rest of the market or trends in an uncorrelated fashion to the rest of the market. That can help out a portfolio. However, investing in assets with established momentum tends to have a higher hit rate with less complications.

Riding Assets With Momentum

Investing in assets with strong momentum or those breaking out to the upside is often a more effective and less risky strategy compared to chasing underperforming or lagging assets. Historical data and market behavior suggest that momentum tends to be a powerful force in asset pricing.

For instance, studies on momentum investing have shown that stocks and other assets that have performed well in the past three to twelve months often continue to outperform in the following months. This trend-following approach capitalizes on the herd mentality and positive feedback loops that often drive prices higher, as more investors jump on board to ride the wave.

An example from recent years can be seen in the technology sector during the COVID-19 pandemic. Companies like Apple (NSDQ: AAPL), Amazon (NSDQ: AMZN), and Zoom (NSDQ: ZM) experienced significant momentum as their stock prices surged in response to increased demand for digital services.

Investors who identified and rode this momentum early saw substantial returns, while those who held onto lagging sectors like traditional retail faced prolonged losses. Conversely, those who tried to countertrade and bet against the rising tech stocks often found themselves caught in a losing battle as prices continued to climb.

Additionally, research by Jegadeesh and Titman (1993) highlighted that simple momentum strategies, on average, have produced abnormal returns of about 12% per year. That means simply investing in assets with momentum or assets breaking above resistance can outpace the returns of investing in the S&P 500, the standard benchmark.

This data reinforces the idea that investing in assets already demonstrating strong upward movement is often more profitable than trying to pick bottoms or time a turnaround in struggling assets. By focusing on riding winners and cutting losers, investors can better align themselves with market dynamics, capturing gains from established trends rather than taking unnecessary risks on speculative reversals.

Final Thoughts

The simple answer to Joey’s question is that there are some rare instances where it makes sense to invest in an asset that is lagging behind the market or the rest of its sector. However, you need to be highly confident in that specific asset. The majority of the time it pays off to ride the momentum and the hot hand.

In this instance we nailed the investment into a lagging asset like AAVE. Now, AAVE has momentum, so we will continue to ride with our winning trade. Hopefully, those of you reading this were able to join in the action with us. If not, make sure to check out Crypto Trend Investor by following the link in the Editor’s Note below.

Editor’s Note: Cryptocurrency has been the best returning asset class of the last decade and is know for its parabolic bull markets. It is also a key to a truly diversified portfolio and one of the best hedges against the potential risks that lie ahead in markets. But you need to act now before institutions gobble it all up.

If you’re worried you can’t figure out crypto… don’t be. Our in-house crypto expert, Alex Benfield, will walk you through everything you need to know about crypto, step by step.

To learn more about Alex’s new trading service, Crypto Trend Investor, click here.

This article previously appeared on Investing Daily.