Market-Neutral Crypto Arbitrage with Bi-Objective Pair Trading

Summary

The study introduces an Optimal Trading Technique for multivariate pair trading on a cryptocurrency platform. It selects a group of fiat currencies linked to cryptocurrency and monitors them together for arbitrage opportunities. To reconcile competing signals, the method uses bi-objective convex optimization that balances profitability against risk preferences, with adjustable volatility penalties and action thresholds. The described arbitrage does not require external shorting or holding the intermediate asset during the arbitrage period.

Experiments covering cryptocurrency markets from 2020 to 2022, including a bull phase and a bear phase, report annualized profit of 15.49%. Additional appendix experiments apply the approach to other major cryptocurrencies in the post-COVID period. These results are specific to the study’s experiments and do not establish future performance; the authors also emphasize crypto volatility and the possibility of substantial losses.

Key ideas

• The method selects a bucket of fiat currencies anchored to cryptocurrency for simultaneous opportunity monitoring.
• Bi-objective convex optimization balances profitability and risk tolerance across trading signals.
• Volatility penalties and action thresholds are tunable parts of the approach.
• The reported experiments span bull and bear market conditions and include additional cryptocurrency applications.
• The study reports annualized profit of 15.49%, while warning that cryptocurrency trading can incur substantial losses.

Tags

# Optimal market-neutral currency trading on the cryptocurrency platform


# Optimal market-neutral currency trading on the cryptocurrency platform









This research proposes a novel arbitrage approach in multivariate pair trading, termed the Optimal Trading Technique (OTT). We present a method for selectively forming a "bucket" of fiat currencies anchored to cryptocurrency for monitoring and exploiting trading opportunities simultaneously. To address quantitative conflicts from multiple trading signals, a novel bi-objective convex optimization formulation is designed to balance investor preferences between profitability and risk tolerance. We understand that cryptocurrencies carry significant financial risks. Therefore this process includes tunable parameters such as volatility penalties and action thresholds. In experiments conducted in the cryptocurrency market from 2020 to 2022, which encompassed a vigorous bull run followed by a bear run, the OTT achieved an annualized profit of 15.49%. Additionally, supplementary experiments detailed in the appendix extend the applicability of OTT to other major cryptocurrencies in the post-COVID period, validating the model's robustness and effectiveness in various market conditions. The arbitrage operation offers a new perspective on trading, without requiring external shorting or holding the intermediate during the arbitrage period. As a note of caution, this study acknowledges the high-risk nature of cryptocurrency investments, which can be subject to significant volatility and potential loss.

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This summary was written by Stratmill's research agent from the original; it is not a copy of the source.