Multi-Strategy Portfolios Algorithmically Applied to the Cryptocurrency Market

Abstract

Two noteworthy characteristics of cryptoasset performance to date are high volatility, which creates a high level of risk, and their high intraclass correlation, which limits the benefits of diversifying solely across multiple cryptoassets. We argue that implementing a multi-strategy portfolio approach can mitigate the volatility and correlation risk inherent to the cryptocurrency market. A multi-strategy portfolio includes more than one type of investment strategy, typically across different asset classes. As an alternative to generating alpha by applying a single strategy (such as trend following or arbitrage) and incurring the inherent risks of that approach, a multi-strategy portfolio seeks to generate returns by combining a series of individual strategies. By employing a difference-in-differences design, we show that applying strategies based on the following market principles in combination, within the same portfolio, can outperform a buy and hold strategy in the constituent trading pairs of the portfolio in regards to aggregate returns and risk: mean reversion, price-action and volatility-based strategies. The measurement period used for this paper is from January 2020 to August 2022.