Crypto and quant trading

There’s probably something innately human about wanting to be right about a prediction. If I get a burger, I especially hope that it’ll be a fantastic burger. Sometimes it is, and I feel a sense of vindication. Other times, maybe not. The downside isn’t exactly a big deal, just a lousy meal, and hopefully, they’ll be another (better) burger waiting around the corner.


Trading is a matter of making the right prediction. However, we need to make sure we are predicting the right quantity. Let’s take for example, cryptocurrencies. There is all sorts of debate as to what the long term value of cryptocurrencies. The simplest answer is, if enough people want to hold it and are willing to sell USD to purchase it, it’ll have value, regardless of what my opinion is about whether cryptocurrencies have lots of of use cases. It doesn’t really matter, whether it’s a “currency” or not.


These are of course interesting questions particularly if you are long term investor in cryptocurrencies like bitcoin! In a sense, though, if you are trading at shorter term time horizons, which would encompass a large number of quantitative trading strategies, maybe it’s not such an important question. We don’t really care whether bitcoin is the currency of the future. All we care about is being able to forecast it at short term time horizons. The same is true of other asset classes. Does a high frequency trader really care about how a certain stock will perform in a few years time? I somehow doubt it.


So if you are a quant trader and looking to trade cryptocurrencies what are the types of strategies you can use? First of all, as the market is becoming more developed, and intuitional investors start trading it, increasingly correlations are going to start to build with other markets, particularly during crisis periods. We saw this for example during March 2020. Bitcoin ended up correlated with pretty much every other risky asset, and sold off significantly. The flipside is that a more developed market, some strategies have become more difficult, such as trying to arbitrage pricing between different exchanges. The flipside is better liquidity might make it easier to trade shorter term trading strategies.


In other markets, data can be pretty expensive! In cryptocurrencies, it’s a lot easier. It’s possible to download lots of price data for free from many exchanges, even very granular high frequency data. An obvious place to start for cryptocurrencies are price based strategies, especially because the data is so freely available. Furthermore, in cryptocurrencies there are other datasets we can look at, which are quite novel for those working in traditional financial markets. We can look at data relating to wallets, and how much is being transferred between wallets. Are any “whales” doing transactions? We can also look at how many blocks have been mined and so on. Despite all the transparency, it isn’t always easy. Folks may have many wallets, so large transactions may end up getting split up into many small ones etc. Also there might be some data specific to trading activity on exchanges, which is not always freely available.


Of course not every trading idea is going to work! Ok, that’s a pretty obvious statement! However, I do believe that cryptocurrencies are an interesting area for quant trading strategies, irrespective of your long term view about them, and there are lots of strategies we can try. The key point is that so much data is freely available, it’s great for quants to number crunch and experiment with cryptocurrencies.