Abstract
Pairs trading is a strategy based on exploiting mean reversion in prices of securities. Even though these strategies have been shown to perform well for equities, their performance is unknown for the field of cryptocurrencies, usually perceived as inefficient and predictable.
We apply the distance and cointegration methods to a basket of 26 liquid cryptocurrencies traded on the Binance exchange, specifically at 5-minute, 1-hour and daily frequencies. In our backtests, the strategies underperform classical benchmarks.
However, the results are quite sensitive to parameter settings and external factors such as transaction costs or execution windows. Higher-frequency trading delivers significantly better performance, and while the most common daily distance method returns -0.07% monthly, this increases to 11.61% monthly for 5-minute frequency.
Additionally, we find evidence of simple mean-reverting behavior in intraday prices that is missing in daily data, and which provides further support for the inefficiency of cryptocurrency markets.