State transitions and momentum effect in cryptocurrency market

In this study, we examine how market-state transitions shape momentum profitability in cryptocurrencies. Unlike Asem and Tian (2010), who find that equity momentum profits arise whenever markets persist in the same state, we show that crypto momentum arises only in UP–UP regimes, whereas other transitions disrupt conviction and suppress momentum. This asymmetry suggests that market-state transitions serve as signals of shifts in investor beliefs, consistent with Kogan et al.’s (2024) perspective on belief-updating asymmetry. Furthermore, we find a similar but weaker UP–UP momentum pattern in meme stocks, providing external validation that our findings extend beyond crypto assets to other retail-driven speculative markets. These results suggest that momentum in speculative markets depends on regime continuity and investor psychology, not simply on static conditions or overreaction.