Optimal market-neutral currency trading on the cryptocurrency platform

Abstract

This research proposes a novel arbitrage approach with respect to multivariate pair trading called Optimal Trading Technique (OTT). We introduce the method to selectively form a "bucket" of fiat currencies anchored to cryptocurrency for simultaneously monitoring and exploiting trading opportunities. To handle the quantitative conflicts that arise when receiving multiple trading signals, a bi-objective convex optimization process is designed to cater to the investor's preference between profitability and risk tolerance. This process includes tunable parameters such as volatility punishment, action thresholds. During our experiments in the cryptocurrency market from 2020 to 2022 when the market was experiencing a vigorous bull-run immediately followed by a bear-run, the OTT realized an annualized profit of 15.49%. We further carried out the experiments in bull, bear, and full-cycle market conditions separately, and found that OTT is capable of achieving stable profit under various market conditions. Apart from the profitability side of the OTT, the arbitrage operation provides a new perspective of trading, which requires no external shorting and never hold intermediate cryptocurrency during the arbitrage period.