How to make money with market neutral cryptocurrency trading strategy
Cryptocurrency trading is usually associated with high risks and high potential returns. However, there are also low-risk trading strategies that cryptocurrency traders can deploy.
Read on to learn about trading cryptocurrency pairs, how it works, and how to make money in a bear market using the market neutral trading strategy.
What is a cryptocurrency trading pair?
A crypto asset trading pair is a combination of two groups of crypto assets that can be traded for each other. The value of an asset is measured in terms of the other asset with which it is associated.
An example is BTC/ETH, which is one of the most popular cryptocurrency trading pairs as it enables traders to trade Bitcoin against Ethereum.
How does pair trading work?
Pairs trading is a market-neutral trading strategy that allows traders to bet on one asset against another while not being affected by the general trend of the market.
By opening a long position and a short position on two similar crypto pools with high correlation, traders can make a trading profit if the crypto assets they went to outperform the crypto assets they sold.
For example, if a trader believes that Bitcoin SV (BSV) will continue to lose value against BTC, he can enter into a long BTC and BTC trade with the same amount at risk on both positions. In this case, if the value of BSV drops more than BTC by the time the trader closes both positions, the pair will be trading “in the money”.
What are the benefits of a market neutral pair trading strategy?
The main reason why support traders, hedge funds, and other market participants allocate capital to pair trading is because it is a market neutral trading strategy.
Even if the market suddenly collapses, pair trading can make money, provided the asset bought outperforms the asset sold.
Moreover, pair trading allows traders to make a profit in any trading environment. Regardless of whether the market is rising, correcting or moving sideways, as long as the asset bought outperforms the asset sold, the pair trading will make money when it closes.
Finally, pair trading is a fairly low-risk strategy, which makes it interesting for cryptocurrency 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 pairs trades, it can be an excellent way to trade the cryptocurrency markets.
How to make money trading a currency pair during a bear market for cryptocurrencies
Trading cryptocurrency pairs might be a good strategy for active crypto traders during a bear market.
Provided you have the knowledge and experience to open a long and short position at the same time, pairs trading actually has relatively low barriers to entry. All you need is an account with a crypto exchange that allows you to sell cryptocurrencies and offers a wide range of tradable assets.
Next, you need to choose the two cryptocurrency combinations that you want to trade and do a search for which one you think will outperform the other. Also, make sure that they have a relatively high correlation, which they usually do if they are comparable assets (such as Layer 1 tokens (core protocol tokens, for example, ETH), DeFi tokens, or metaverse tokens).
Next, you need to buy crypto assets that you think will outperform and short crypto assets that you think will underperform.
For example, you can buy ETH and short avalanche (AVAX), if you believe that the value of ETH will fall below the value of AVAX during the crypto bear market. If I had placed 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 below AVAX since then.
Pro tip: watch the fees
When posting your cryptocurrency pair trading strategy, keep an eye on the fees. Fees that can affect the profitability of your trade can 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, the fees will affect your trading profits. So make sure that you are aware of the fees you will pay to open and close a pair trade on your chosen trading platform(s).
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