The Bot Traders Cometh for Your Bitcoins

Techies and suburban housewives beware, the high speed world of algorithmic trading is coming for your Bitcoins and it won’t be pretty—unless of course you have a program trading system and implement it early enough for it to succeed.

Massachusetts Institute of Technology associate professor Devavrat Shah and computer science student Kang Zhang, used data gathered from Beijing-based OKCoin, the world’s largest exchange by trading volume, fed the data into an algorithmic trading model they developed and used the results to conduct a simulation of CNY/BTC trades (Chinese Yuan vs Bitcoin).

The result?  A strategy that can produce an 89% return in less than two months.

In this trading simulation, the trader could only go long or short 1 BTC in each trade. The system trader invested 3,781 yuan and made 2,872 trades. The total cumulative profit was 3,362 yuan, or an 89% ROI.

The data used was taken from 50 consecutive days in May and June, or just under two months for a nearly 100% return on investment (I can almost hear Wall Street and Chicago salivating now).

The trading strategy supposedly produced a Sharpe ratio of 4.1. This ratio is popular in the hedge fund world whereas it allows investors to evaluate a fund’s portfolio returns. It reveals whether the fund manager’s performance is due to smart investment decisions or a result of excess risk.

The greater a portfolio’s Sharpe ratio, the better its risk-adjusted return is. A negative Sharpe ratio indicates that a risk-less asset would perform better than the security being analyzed. Any ratio number above 1 is ideal, and above 3 is excellent.

The result also supports the idea that the same technical indicators used in traditional capital markets trading to help predict price action could be used in Bitcoin trading. Similar patterns were found in the Bitcoin price charts which led to the system’s success.

As with any system or trading methodology, they all work until they don’t. This increases exponentially when you have a market full of speculators trading on similar systems and methodologies, so don’t expect this window of opportunity to last.

In other words, the early bird catches the worm.

Happy trading!

H/T: CoinDesk