Crypto as a trend in the systematic trading industry
The beginning of 2021 has been all about a crypto in the financial media worldwide. We have witnessed a market frenzy with Bitcoin acting as the driving force reaching its ATH price of $58,000 in mid February. Sitting on the verge of mass adoption, many hedge funds and asset managers are starting to include crypto assets into their portfolios and trading strategies. Also, we are seeing a growing tendency of Institutional Investors and Financial Institutions purchasing cryptocurrencies as a hedging mechanism within their treasury management activities. Examples of publicly traded companies that own crypto related assets include MicroStrategy and more recently Tesla.
Crypto being a nascent asset class, is the hottest trend where the trading community is setting its eyes. It is considered to have huge opportunities to generate alpha due to the highly volatile environment, 24/7 activity, existence of inefficiencies and market fragmentation. Volumes are increasing but it still represents a very small size compared to traditional financial markets.
As a purely digital asset, the programmable capabilities of cryptocurrencies are highly appealing for systematic traders. There is a growing number of hedge funds targeting profit opportunities in this niche market.
The systematic approach to trading crypto assets is particularly well suited for automation. Trading automation offers significant competitive advantages while removing the human element from the equation. The crypto market has huge presence of automated strategies known as bots. Bots usage gives traders access to emotionless mechanisms to execute a certain strategy. Other opportunities have arisen following statistical arbitrage mechanisms for buying and selling assets in different markets with price discrepancies. To take advantage of such discrepancies, we have seen high-frequency traders to be expanding towards the crypto market. Also, there are strong teams developing market making strategies to provide liquidity within different exchanges to profit from the difference between the bid/ask spread.
Despite the current hype on the market and the positive aspects that crypto can offer to systematic traders, this asset class poses certain challenges for participants. This fairly nascent environment takes me to the first point that quantitative trading teams need to be aware when entering the crypto market. The datasets for training and backtesting the models are still quite small. as the trading history of most crypto assets can be counted in months.
The second challenge to consider is related to the difficulties to build a proper infrastructure to get involved. The market is highly tech oriented and always moving, with new areas constantly emerging, like smart contracts, decentralised finance, flash loans, automated market makers, perpetual swaps to name a few, so teams need to be constantly updated and building up their tech stack to remain competitive.
The crypto market is still very young and will be fascinating to see how it evolves as innovation continues to flourish. Let’s stay tuned for what it is coming!
