Strategy description

Past performance is not indicative of future results.

This is a statistical arbitrage strategy.

The strategy uses the normalized ratio of BTC price divided by ETH price. The fundamental assumption is that ETH price follows BTC price (high correlation), and thus when the normalized ratio value is far from equilibrium (zero), the ratio will revert to equilibrium.

• The strategy only takes long positions in ETH, as ETH has been observed to have more volatility and thus will be the asset to have higher price action in times where ratio is far from equilibrium.
• Short positions have been excluded in this version of the strategy as negative price actions happen quicker. This makes prediction of negative trends more difficult with the rolling ratio based model.
• The strategy calculates rolling Z-score with long term and short term moving averages, as well as rolling standard deviation of BTC/ETH price ratio
• Enters a long ETH position when rolling Z-score is in acceptable boundaries
• Exits positions when the profit threshold or a stop loss limit is reached

The strategy enables

• Capturing gains in bull markets (like July 2021 - December 2022, and October 2023 - February 2024)
• Capturing gains in neutral markets (like January 2023 - July 2023)
• Reducing max drawdowns in bear markets compared to pure buy&hold strategies with ETH or BTC

Furthermore

• The strategy deposits excess cash to Aave V3 USDC pool to gain interest on cash

Assets and trading venues

• The strategy trades only spot market
• Trade only single asset: ETH
• The strategy keeps reserves in USDC stablecoin
• Trading takes place on Uniswap on Polygon blockchain
• The strategy decision cycle is one day

Backtesting

The strategy parameters (length for calculating rolling Z-score, and take profit and stop loss limits) have been optimized using Binance data from 1 January 2021 to 31 March 2024. Backtests have been carried out for subsets of this timeframe.

Profit

The backtested historical results indicate 104.5% estimated yearly profit (CAGR).

This is above the historical profit you would have gotten by buying and holding BTC or ETH.

Risk

This strategy has produced a maximum -22.8% backtested drawdown. This is much less severe compared to buy and hold, making the strategy less risky than buy and hold historically.

For further understanding the key aspects of risks

• The strategy does not use any leverage
• The strategy trades only the established, highly liquid, trading pair ETH-USDC which is unlikely to go zero based on historical data