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.
Highlights
Cryptocurrencies have seen a surge in the recent past
We present our results from various perspectives such as the geometric average trading period returns, the number of buy/sell signals generated and the impact of the transaction fee
Comparing the performance of reservation price algorithms (RP, Reservation price algorithm (RP)∗, KT ), and moving average based strategies (VLMA, Fixed Length Moving Average (FLMA)) with buy and hold (BH), we found that for BTC, the returns of all algorithms are superior than corresponding BH strategies
Summary
Cryptocurrencies have seen a surge in the recent past. Researchers and investors alike have focused on the growth and evolution of cryptocurrencies like Bitcoin (BTC), Etherum, and Litecoin etc. Moore (2013) attributed three main factors that contributed towards the rise and adaptation of bitcoins. Higher profit margins, maintained by credit card agencies for using their platforms has resulted in dis-satisfied customers. The customers are lured to use BTC, which promises extremely low transaction fee. The anonymity that is offered by the bitcoins. Bitcoins offer the possibility of conducting transactions using pseudonyms and omitting the need of using real names. BTC has become one of the choice currencies for online payment and beside others is accepted by tech-giants like Amazon, Apple, Microsoft, and Paypal etc. The introduction of cryptocurrencies provided a new
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