Crypto Pair Trading: How to Make Money with a Market Neutral Crypto Trading Strategy
Crypto trading is generally associated with high risks and potentially high returns. However, there are also lower risk trading strategies that crypto traders can deploy.
Read on to learn more about trading crypto pairs, 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 pair is a set of two crypto-assets that can be traded against each other. The value of an asset is measured in relative terms against the other asset with which it is associated.
An example would be BTC/ETH, which is one of the most popular crypto trading pairs as it allows traders to trade bitcoins for ethereum.
How does pair trading work?
Pairs trading is a market neutral trading strategy that allows traders to place bets on one asset versus another without being affected by the general direction of the market.
By opening a long position and a short position in two comparable crypto-assets with a high correlation, traders can generate a trading profit if the crypto-asset they bought outperforms the crypto-assets they bought.
For example, if a trader believes that bitcoin SV (BSV) will continue to lose value against BTC, they could enter a long BTC position and a short BSV position with the same amount at risk on both positions. In this case, if BSV loses more value than BTC by the time the trader closes both positions, the pair 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 pair trading is that it is a market-neutral trading strategy.
Even if the market suddenly crashes, a pair trade can make money, provided the asset being bought outperforms the asset being sold.
Additionally, pair trading allows traders to generate profit in any trading environment. Whether the market is rallying, correcting, or moving sideways, as long as the asset bought outperforms the asset sold, the trade in the pair will make money when it closes.
Finally, pair trading is considered a rather low-risk strategy, which makes it attractive for crypto market participants who are concerned about high volatility in the crypto-asset market.
Since sharp market moves don’t really affect the profitability of pair trades, they can be a great approach for trading the crypto markets.
How to Make Money Trading Pairs 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 actually 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 crypto-assets 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 were comparable assets (such as Layer 1 tokens (baseline protocol tokens, e.g. ETH), DeFi tokens or metaverse tokens).
Then you need to buy the crypto-asset that you think will perform better and short the crypto-asset that you think will perform worse.
For example, you can go for ETH long and avalanche short (AVAX), if you think the value of ETH will fall less than AVAX during the crypto bear market. If you had put this trade when both assets reached their recent all-time highs in mid-November 2021, for example, it would have been in the money because ETH has fallen less in value than AVAX since then.
Pro Tip: Keep an eye on fees
When deploying a crypto trading strategy, keep an eye on the fees. Fees that could 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 choice and the asset you bought outperforms the asset you sold, the fees will reduce your trading profit. So make sure you are aware of the fees you will pay to open and close your pair on your chosen trading platform(s).
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