Using algorithmic trading to analyze short term profitability of Bitcoin

Abstract

Cryptocurrencies such as Bitcoin (BTC) have seen a surge in value in the recent past and appeared as a useful investment opportunity for traders. However, their short term profitability using algorithmic trading strategies remains unanswered. In this work, we focus on the short term profitability of BTC against the euro and the yen for an eight-year period using seven trading algorithms over trading periods of length 15 and 30 days. We use the classical buy and hold (BH) as a benchmark strategy. Rather surprisingly, we found that on average, the yen is more profitable than BTC and the euro; however the answer also depends on the choice of algorithm. Reservation price algorithms result in 7.5% and 10% of average returns over 15 and 30 days respectively which is the highest for all the algorithms for the three assets. For BTC, all algorithms outperform the BH strategy. We also analyze the effect of transaction fee on the profitability of algorithms for BTC and observe that for trading period of length 15 no trading strategy is profitable for BTC. For trading period of length 30, only two strategies are profitable.

Keywords

• Algorithmic trading
• Bitcoin
• Cryptocurrencies