Event arbitrage: How to trade halvings

With the next Bitcoin halving expected to happen under a month (May 12, 2020), a significant number of users believe that this will create a bullish run for BTC as halving decreases its inflation. In this article, we’ll use historical data to explore how to trade halvings from an events arbitrage perspective.

Looking at historical data

In April 2020, we experienced halvings for both Bitcoin Cash (BCH) and Bitcoin SV (BSV) on Apr 8 and Apr 10 respectively. Let’s look at their price graphs against BTC only so as to remove the noise created by market movements:

We can observe that the price peaks on the halving date. As a quantitative trader, I believe the price of assets in the short-term is driven by supply and demand. The fundamental aspect of decreased inflation that causes price increase can be ignored in the short-term. We can imagine that the price is at the highest point when the market is sentiment is high due to all the news surrounding the halving. Take a look at the Google Trend screenshots below. It shows that the search for BCH and BSV peaked right at the time of halving, meaning demand is at its highest. Therefore, in theory, we can buy the rumor and sell the news.

Backtesting the Long Short Strategy

We can see that the Google Trend usually begins to rise about 3 days before halving, peaks on the halving date, and then goes down after halving. Using the past halving data of LTC (halved on Aug 5, 2019), BCH and BSV, we can propose a simple trade to long before halving, short on the halving date, and unwind the final position 3 days after halving.

We can perform 3 trades against the BTC quote pair to remove noise from the market: Buy ~1 BTC of the halving coin 3 days prior to halving, short ~1 BTC on the halving date, then unwind 3 days after halving to net a total of 33.84% return, with an average 11.28% return on each trade.

Example:

The total return will be around 0.3384 BTC (33.84%), with an average return of 11.28%.

How to trade the upcoming BTC halving

This simple back test shows that there is alpha when you “buy rumor, sell news” for small-cap coins. However, applying this to trade BTC is different and there is no easy way to hedge the market. In the examples above, we are essentially delta flat as we are constantly buying or selling BTC against the halving coin. But for a similar BTC trade, we need to either take delta by trading it against USD or USDT with OKEx Margin Lending or USDT swap; or alternatively hedge it with ETH. It will be up to traders themselves to determine which is the best cause of action.

Conclusion

Today we looked at an event arbitrage trading strategy to long a halving coin before halving and then short it right after halving. To summarize, the theory behind is that due to the heated discussion and news on halving, the demand for that coin will increase prior to the event; but as the news die down after it halves, the buying pressure is gone and the coin price would drop. We’ve backtested the strategy on 3 coins against BTC to remain delta neutral. It is now up to traders to decide whether we apply this trading logic to the upcoming BTC halving in May.

Halving dates for different coins: