Hybrid pair trading strategies deliver superior returns in high-frequency crypto markets

Background and Motivation

As cryptocurrency trading continues to surge in popularity, investors and fintech professionals are searching for reliable, data-driven strategies to navigate the market’s volatility. While pair trading has long been a staple in traditional finance, its effectiveness and adaptability in the fast-paced world of digital assets remain largely unexplored. This study aims to fill that gap, offering fresh insights into market inefficiencies and profit opportunities in the cryptocurrency space.

Methodology and Scope

The research examines pair trading strategies applied to the top 50 cryptocurrencies on Binance, utilizing a comprehensive dataset that spans daily, 4-hour, 1-hour, 15-minute, and 5-minute intervals during three distinct market phases: the bullish run of 2020, the stable conditions of 2021, and the bearish trends of 2022. Three statistical approaches are compared: the distance method, cointegration method, and an innovative hybrid method combining both. A robust sensitivity analysis is performed by varying entry/exit thresholds and portfolio size to assess their impact on profitability and risk-adjusted returns.

Key Findings and Contributions

The results reveal that pair trading remains highly profitable across various time frames, with the greatest success seen in high-frequency (15-min and 5-min) trading. The study finds that fixed thresholds significantly outperform dynamic thresholds, delivering higher returns and Sharpe ratios. Moreover, adjusting entry and exit parameters and portfolio composition can further boost profits. Notably, the hybrid approach enhances the accuracy of pair selection, marking an important advancement for crypto market strategies.

Why It Matters

In a market often characterised by rapid price swings and structural inefficiencies, the findings provide much-needed clarity for both institutional and retail investors. By demonstrating the sustained profitability of pair trading, especially at high frequencies, this research challenges assumptions of market efficiency and highlights actionable opportunities in digital asset trading.

Practical Applications

Cryptocurrency traders, portfolio managers, and fintech innovators can immediately benefit from these insights. By adopting refined pair trading strategies—especially the hybrid method with carefully calibrated thresholds—they can unlock new avenues for profit and liquidity. As the cryptocurrency market matures, these data-driven approaches offer a blueprint for navigating volatility and achieving consistent returns.

Discover high-quality academic insights in finance from this article published in China Finance Review International. Click the DOI below to read the full-text original!