How Statistical Arbitrage Can Lead to Impressive Gains

2/9/2023, 8:43:09 AM - Henry Chikwem
How Statistical Arbitrage Can Lead to Impressive Gains

The term “arbitrage” is typically used as a trading term in the stock market. Arbitrage can also be used in virtually all fields of trading. In crypto trading, there is a term similar to the one used in the stock markets and it is “Crypto Arbitrage.”

To know more about crypto arbitrage, check this post.

In this article, the point of discussion will be centered on statistical arbitrage, which is a subset of crypto arbitrage.

Key Takeaways

• Statistical Arbitrage has to do with having crypto pairs, that is, cryptocurrencies that share some similarities.

• The use of mathematical models, statistical models, and bots is essential to accurately applying statistical arbitrage strategy to the crypto market.

• Statistical Arbitrage consists of other factors such as Cross Asset Arbitrage and ETF Arbitrage.

• Market opportunities appear in terms of crypto prices gains, which if not exploited on time, can be gone in a flash.

SEE ALSO: How To Arbitrage Between Crypto Exchanges For Gains

SEE ALSO: How To Make Low-Risk Gains With Crypto Arbitrage

What is “Crypto Arbitrage?”

Crypto arbitrage is a technique that is implemented to exploit crypto price differences to make a profit. You buy a crypto coin on an exchange for a given price and then sell it at a higher price on another exchange.

While this may seem easy, knowing when to do it and being fast enough to see it through are two major determinants for making profits in the process due to how fast prices change in minutes, sometimes even in seconds, on different crypto exchanges.

Moving on, there are different types of crypto arbitrage, of which statistical arbitrage is one of them, which I will be discussing in detail now.

So, follow me as I explain to you what statistical arbitrage is all about and how it can lead to impressive gains.

Statistical Arbitrage

How Statistical Arbitrage Can Lead to Impressive Gains

Statistical arbitrage is a technique that is focused on trading quantitative hedge funds. This technique came into existence in the 1980s, mostly utilized in traditional financial institutions, but has gone on to be applied to the crypto market as well.

Statistical arbitrage is used typically by most financial investors in making financial decisions or for arriving at one, and not necessarily as a tool for investment.

Nonetheless, it has started to be used as a tool for making profits in the crypto market and now entails the use of mathematical models, bots, and complex equations towards making a profit from crypto pairs.

Conditions for Statistical Arbitrage

The major way this technique is used in the crypto space is by trading or having crypto pairs.

For example, Ethereum and Ethereum Classic have to have a high level of co-integration between them. By co-integration, I mean a statistical relationship between both cryptocurrencies.

I used Ethereum and Ethereum Classic here because Ethereum Classic is a fork of Ethereum, which means they share similar properties.

EOS and Tron are other examples as well. Both are direct competitors. Both have a considerable market cap and they both released their main-nets and created their own blockchains at about the same time.

Finally, there’s Monero and Zcash, which share a similar target audience (investors looking to conduct anonymous crypto transactions), and both provide high-quality private features.

When selecting a crypto pair, it is always very important that you select two cryptocurrencies that are similar in some way.

You could do some research on them to see if they have many similarities. If they do, then it means they would make an excellent pair for statistical arbitrage.

How to Use the Crypto Pair to Make Gains

Now that you have gotten your crypto pair, the next thing to do is to watch and see how they perform. When one crypto begins to perform better while the other performs poorly, you buy the crypto that performed poorly and sell the one that performed better.

This is usually done to maximize profit potential while minimizing as much risk as possible, with the idea that the crypto that did poorly will rise in value and catch up with the better crypto, thereby making a profit.

I will be using an example to give a clearer illustration of this concept:

For instance, if you have a crypto pair, say Monero and Zcash, the next thing to do is to test them to see which does better.

If Monero increases in value and Zcash fall in value, you buy Zcash and sell Monero with the hope that it will regain value, preferably by as much as that of Zcash for you to make a profit.

Note that statistical arbitrage is way more complicated than this as a lot of models and equations are utilized, bots included, to conclude.

The explanation given in this article is to make it as simple as possible so that you don’t get lost trying to understand what it is all about.

Frequently Asked Questions (FAQs)

Is statistical arbitrage risk-free?

No, statistical arbitrage comes with its risks as it is centered around crypto market prices to arrive at a decision or profit, which is enough risk on its own.

Is statistical arbitrage illegal?

No, statistical arbitrage is not illegal. It is simply a market technique that is utilized to ensure market efficiency or arrive at a profit, be it in the crypto or stock market.

Are arbitrage bots profitable?

Yes, they are, as using bots makes it possible to achieve profits within seconds through arbitrage trading. This is something that a regular trader may be unable to do because such opportunities to profit may only exist for a few seconds and then vanish. 

Final Thoughts

Using statistical arbitrage trading is one method among several other methods that can be used to capitalize on presented opportunities concerning crypto prices in the crypto market.

This technique, though technical and complicated, can be very efficient when utilized correctly.

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