Pair Trading With Cryptos - A Profitable Bitcoin Trade

We've taken some looks recently at some interesting pair-trading strategies using just traditional financial instruments. The other day, a journalist friend asked if you could find a good trade involving a cryptocurrency? The answer is: YES.

We took at look at Bitcoin and the S&P 500 and did a back-test in the Distance (statistical-arbitrage) strategy. We wanted to make sure we had stationarity recently (going back more than a year showed uneven results). So, we did a back-test with a 6-month formation period and six-month trade test period. We had stationarity.

So, we decided to see whether any trades would occur if we had started monitoring this trade as of July 1. We did a one-year formation period and it passed stationarity. We set as our trade enters a trigger of .25 standard deviations and an exit of "average" standard deviation (represented as "0" on our trigger slider).

We had two good trades occur. On July 11, we crossed the trigger to enter a long spread trade (long Bitcoin, short the S&P 500). So, we enter the trade after the close that day. On July 12, we had a loss. On July 13, we had a loss. But on July 14, we had an annualized gain of +39%. EXIT.

Next trade enter was Aug. 23. same trade as above. On Aug. 24, we had an annualized gain of 271%. EXIT.

The key here is that you need to set your trading parameters i.e. if you are willing to take some paper losses for a few days if they are minimal to modest and how long you might stay in a trade that is underwater. The August trade was a no-brainer. You get out when you can make that kind of significant returns.