Optimal market-neutral currency trading on the cryptocurrency platform

TL;DR

This paper introduces the Optimal Trading Technique (OTT), a novel arbitrage method for market-neutral currency trading on cryptocurrency platforms, balancing profitability and risk through convex optimization.

Contribution

The paper presents a new bi-objective convex optimization approach for multivariate pair trading in cryptocurrencies, incorporating risk management and demonstrating robustness across market conditions.

Findings

Achieved 15.49% annualized profit in crypto markets from 2020 to 2022.

Validated OTT's effectiveness across different cryptocurrencies and market phases.

Proposed a risk-aware arbitrage strategy without external shorting or holding during trades.

Abstract

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.