Testing a BTC–ETH Beta-Hedged Relative-Strength Strategy

Summary

This article tests a proposed strategy that pairs Bitcoin and Ether positions according to their relative strength. It first illustrates the weakness of using equal contract counts, then estimates a hedge ratio from the assets’ historical price ratio and return covariance. The calculated quantities are converted into exchange contract counts, with rounding to tradable sizes. Entry rules require a Bitcoin move above a threshold and stronger performance than Ether; the opposite relationship motivates the mirrored position. A rollback step is described for cases where only one leg opens, and the combined position is closed at portfolio-level profit or loss thresholds.

The reported backtest covers roughly three months and shows a modest gain despite more losing than winning trades. The author notes that fees, slippage, infrequent entries, and extreme correlated moves can weaken the result. The method’s hedge ratio also combines a price ratio and return beta, so its economic interpretation and stability need scrutiny; the document does not establish robustness across markets or periods. The backtest challenges claims of reliably multiplying capital, but is not enough to establish live profitability.

Key ideas

• Equal contract counts do not ensure a balanced hedge when asset prices and contract values differ.
• The proposed hedge ratio combines the average price ratio with a return-based beta estimate.
• Contract face values and integer sizing affect the hedge actually placed on an exchange.
• The strategy enters on relative-strength conditions and evaluates profit or loss across both legs.
• The reported backtest is modest, and fees, slippage, and extreme market moves remain material risks.

Tags

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