How to make money with a market neutral crypto trading strategy
Crypto trading is usually associated with high risk and potentially high returns. However, there are also lower risk trading strategies that crypto traders can implement.
Read on to learn about crypto pair trading, how it works and how to make money in a bear market using the market neutral trading strategy.
What is a crypto trading pair?
A crypto-asset trading pair is a set of two crypto-assets that can be traded for each other. The value of an asset is measured in relative terms to the other asset with which it is paired.
An example would be BTC/ETH, which is one of the most popular crypto trading pairs as it allows traders to trade bitcoin against ethereum.
How does pair trading work?
Pairs trading is a market-neutral trading strategy that allows traders to place bets on one asset against another while remaining unaffected by the overall market direction.
By opening a long position and a short position on two comparable cryptoassets with a high correlation, traders can generate a trading profit if the cryptoasset they went long outperforms the cryptoasset they went short.
For example, if a trader believes that bitcoin SV (BSV) will continue to lose value against BTC, they can enter a BTC long and BSV short position with the same amount at risk on both positions. In this case, if BSV falls more in value than BTC when the trader closes both positions, the pair trade will be “in the money”.
What are the benefits of a market neutral pair trading strategy?
The primary reason prop traders, hedge funds and other market participants allocate capital to pairs trading is that it is a market neutral trading strategy.
Even if the market suddenly collapses, a pair trade can make money, provided the asset bought outperforms the asset sold.
Moreover, pair trading allows traders to generate profits in any trading environment. Regardless of whether the market rises, corrects or moves sideways, as long as the asset bought exceeds the asset sold, the pair trade will make a profit when closed.
Finally, pair trading is considered a fairly low-risk strategy, which makes it interesting for crypto market participants who are concerned about the high volatility of the crypto asset market.
Since sharp market movements do not really affect the profitability of pair trades, they can be an excellent approach to trading the crypto markets.
How to make money with pairs trading during a crypto bear market
Trading crypto pairs can be a good strategy for active crypto traders during a bear market.
Provided you have the knowledge and experience to have both a long and a short position open at the same time, pair trading has relatively low barriers to entry. All you need is an account with a crypto exchange that allows you to short crypto and offers a wide range of tradable assets.
Next, you need to choose the two cryptoassets you want to trade and research which one you think will outperform the other. Also, make sure they have a relatively high correlation, which they normally would if they are comparable assets (like layer-1 (base protocol tokens, e.g. ETH) tokens, DeFi tokens, or metaverse tokens).
Then you need to buy the crypto asset you think will outperform and short sell the crypto asset you think will underperform.
For example, you can go long ETH and short Avalanche (AVAX), if you believe that ETH will fall less in value than AVAX during the crypto bear market. If you had put that trade on when both assets hit their most recent highs in mid-November 2021, for example, it would have been in the money since ETH has fallen less in value than AVAX since then.
Pro tip: Keep an eye on fees
When implementing a strategy for trading crypto pairs, you need to keep an eye on the fees. Fees that may affect the profitability of your trade may include trading fees, withdrawal fees, blockchain fees and borrowing fees on your short position.
So even if you make the right call and the asset you bought outperforms the asset you sold, fees will put a dent in your trading profits. So make sure you are aware of the fees you will pay to open and close the pairs trade on your chosen trading platform(s).
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Learn more:
– As open interest in Ethereum options remains high, prepare for volatility before merging
– How to Use Bitcoin Vouchers to Buy Bitcoin with Cash
– What is a bear trap and how do you change it?
– Crypto Bear Market is here: How to invest now?
– How to secure your NFT collection with Ethereum derivatives
– 5 NFT Trading Strategies for JPEG Traders
– 5 Ways Inexperienced Crypto Investors Can Resist Highly Volatile Markets
– 9 Crypto Dashboards you can use to manage your digital assets
– 5 Crypto Index Tokens That Let You “Buy the Market”
– Fiat-to-crypto versus crypto-to-crypto: How should you trade?
