I exited all of my PA crypto positions over the last week so I thought it might be interesting to look back over the last three months, what worked, what didn't, and what surprised me.
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I had a few constraints - I wanted to make reasonably consistent profits, I didn't want big drawdowns (2-3% max) and I didn't want to spend more than 10-15 minutes a day trading. The obvious thing was to do cash/futures arbitrage.
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There are tons of tweets about it, but briefly the idea is to go long physical BTC and short futures against it, to capture the premium of futures over spot without taking delta exposure. I was late to it, but when I started in Apr the basis was ~30%/year and it hit 40%+ at peak.pic.twitter.com/lrmLHPM8fV
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Registering for exchanges was easy. Transferring in fiat took a couple more days but was also pretty simple. First lesson was that the default "buy crypto" link on a lot of exchanges rips you off on both exchange rate and commission. Go to the order book instead!
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Next problem is getting into a hedged position. You need to buy spot/short futures, but you need spot crypto to collateralise your futures account before you can start trading futures, so legging risk is unavoidable. I entered a tiny position first, and then bootstrapped it.
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Once you have a position on it's much easier to add to it, because you can do a near simultaneous spot/futures trade and temporarily run a leveraged futures position (e.g. 50% collateralized) while you wait for your spot to transfer to your futures wallet.
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I was paranoid about exchanges being hacked, so I had positions across six exchanges. The basis varies considerably across exchanges so I would have larger positions where the yield was higher. Generally Binance, FTX, Bybit, Huobi and FTX had the highest yields.
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I also had some short perpetual positions vs long spot. The yield is unpredictable, but it can get really high (like 0.5%/day) and it is very low volatility because there is ~0 duration risk (compared to a hedged futures position which can have ~0.5%/day volatility)
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Something that should have been clear to me in advance is that this trade is structurally short BTC. The basis goes up (=> losses) when BTC rallies and down (=> gains) when BTC sells off. The sell off from 15-22 Apr was really good for this strategy!
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So how did I do? I had targeted a 25%/year return and I made about 10% in three months, so I more than hit the target, though I ended up exiting the positions much earlier than I liked. Cumulative return below (based on snapping my account equity at 5pm each day)pic.twitter.com/t5KmsNfwzc
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Some stats -- daily volatility was about 0.3%, Sharpe ratio was 4.7 and maximum drawdown was ~1.2%, which occured in the first two weeks as the basis rallied very shortly after I entered the trade.
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If you're sharp-eyed you might notice that I said I made ~10% but the chart above only shows a ~7% gain. The other ~3% came from a stupid mistake.
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Around the first week of May I decided to "reach for yield". Doge was rallying and I noticed that I could sell DOGE/USD perpetuals and earn ~3x the yield that I could on a BTC/USD perpetual, so I allocated a small portion of the portfolio to thathttps://twitter.com/macrocephalopod/status/1391137796979560450?s=20 …
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A bit more than a week later was May 19, a huge crypto sell off. My DOGE/USD future was auto-deleveraged to close out a levered long, leaving me naked long DOGE in a falling market. Not good!
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I was in a meeting when I was notified and it was half an hour before I could trade out of the spot position. I was incredibly lucky - my futures buy nearly bottom ticked the market at ~0.2 and I closed out the spot at ~0.31 for a +50% profit (about +3% of my total equity)pic.twitter.com/GYF1b4gkez
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I removed that the pnl from that trade from the chart above - here's what it looks like if I leave it in. Taking a ~6% basis position in a memecoin where I knew there was high risk of auto-deleveraging was a bit stupid, and I was lucky it worked outpic.twitter.com/XbzXkQ9dkV
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I made a bunch of other dumb mistakes too, like sizing the spot/futures legs incorrectly to begin with, occasionally trading the wrong contract and needing to trade out, and messing up a currency conversion once. Fortunately none of them cost me more than a few bps.
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By far the most time consuming thing was doing my pnl each day, so I'd definitely look for a way to automate that in the future. I also bought a subscription to Skew Analytics which was helpful, though probably not strictly necessary.
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Some other helpful resources - FTX Premiums https://ftxpremiums.com/ for tracking basis across multiple coins on FTX
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Binance Premiums https://binancepremiums.com/ (by
@robertmartin88, you should follow him) which was useful for tracking the same thing on Binance.Show this thread -
Was also v helpful to discuss ideas and implementations with
@therobotjames@choffstein and @drewg__Show this thread -
I've closed out all the positions now because basis came down to ~5% on most exchanges and I have better ways to use the cash - but nice to know that if the basis comes back again, I'm ready to get back into the Bitcoin free money tradehttps://twitter.com/thestalwart/status/1407410049874595840 …
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Here’s
@LumberTrading explaining how to do this for even fatter margins in an illiquid as shit market https://twitter.com/LumberTrading/status/1410655494746697729 …This Tweet is unavailable.Show this thread
End of conversation
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