Optimal market-neutral currency trading on the cryptocurrency platform
Hongshen Yang, Avinash Malik
TL;DR
The paper addresses profitability from market-neutral arbitrage in the cryptocurrency domain by proposing OTT, a multivariate, basin-anchored pair-trading framework that operates across fiat currencies anchored to crypto. It combines spread-based trading signals with a bi-objective convex optimization that maximizes expected profit while penalizing risk through a covariance term, parameterized by a risk-aversion factor $\lambda$ and tunable thresholds. Empirical results across 2020–2022 demonstrate OTT achieving annualized returns up to about $15.5\%$ (notably at 5-minute resolution with $tc=0.1\%$) and robustness across bull, bear, and full-cycle regimes, with validation extended to BTC and SOL in post-COVID analysis. The approach emphasizes market neutrality, no external shorting, and applicability beyond ETH, while acknowledging cryptocurrency volatility and data-period limitations; potential extensions include Ornstein–Uhlenbeck modeling and broader asset universes.
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.