Cryptocurrency Pair Trading

Abstract

Pair trading is a strategy which relies on betting on the relative mispricing of the spread between two securities which share a long-term relationship. These strategies have shown to perform well with equities, however not much research has been conducted in the field of cryptocurrencies, even though this asset class has shown characteristics suggesting suitability for pair trading. The Distance Methods and Cointegration Method are applied to a set of cryptocurrencies at formation and trading periods of daily and hourly data. It is shown that the frequency of the selection period does not influence the pairs selected. Cointegration-selected pairs generally outperforms Distance selected pairs. When trading frequency is analysed, intraday trading is more profitable, but not when using a stop-loss. Cointegration over-performs Distance, as the cost of the latter selection are increased by the higher number of trades.

Keywords: cryptocurrency, trading, statistical arbitrage, pair trading, cointegration

JEL Classification: C22, C32, C52, G53, G12, G14, G15