How to make money with a market neutral crypto trading strategy

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Crypto trading typically comes with high risks and potentially high returns. However, there are also lower risk trading strategies that crypto traders can employ.

Read on to learn more about trading crypto pairs, how it works, and how to make money in a bear market using the market neutral trading strategy.

What is a crypto trading pair?

A crypto asset trading pair is a set of two crypto assets that can be traded against each other. The value of an asset is measured relative to the other asset it is paired with.

An example would be BTC/ETH, one of the most popular crypto trading pairs as it allows traders to trade Bitcoin against Ethereum.

How does pair trading work?

Pairs trading is a market-neutral trading strategy that allows traders to bet one asset against another while remaining unaffected by the general market direction.

By opening a long and short position on two comparable cryptocurrencies with a high correlation, traders can make a trading profit if the cryptocurrency they went long on outperforms the cryptocurrency they went short on.

For example, if a trader believes that Bitcoin SV (BSV) will continue to fall against BTC, they can enter a long BTC and a short BSV position with equal risk on both positions. In this case, if the value of BSV falls more than BTC when the trader closes both positions, the pair trade is “in the money”.

What are the benefits of a market neutral pair trading strategy?

The main reason prop traders, hedge funds and other market participants invest capital in the pair trading space is that it is a market neutral trading strategy.

Even if the market suddenly collapses, there can be money to be made from a pair trade, provided the asset bought exceeds the asset sold.

In addition, pair trading allows traders to make money in any trading environment. Whether the market is recovering, correcting or moving sideways, as long as the asset bought outperforms the one sold, the pair trade will make money when it closes.

Finally, pair trading is considered a relatively low-risk strategy, which makes it interesting for crypto market participants who are concerned about the high volatility of the crypto market.

Since strong market movements do not really affect the profitability of pair trades, they can be an excellent approach to trading the crypto markets.

How to make currency pairs for trading during a bear market

Trading crypto pairs can be a good strategy for active crypto traders during a bear market.

In fact, provided you have the knowledge and experience to hold a long and short position at the same time, pair trading has relatively low barriers to entry. All you need is an account with a crypto exchange that allows you to short sell cryptocurrencies and offers a wide range of tradable assets.

Next, choose the two cryptocurrencies you want to trade and do some research on which one you think will perform better than the other. Also, make sure they have a relatively high correlation, which is usually the case when you’re dealing with comparable assets (eg Layer 1 tokens (core protocol tokens, eg ETH), DeFi tokens or metaverse tokens).

Next, buy the crypto that you think will perform better and short the crypto that you think will perform worse.

For example, you can buy ETH and sell Avalanche (AVAX) if you think ETH will fall less than AVAX during the crypto bear market. For example, if you had taken that trade when both assets hit their most recent record highs in mid-November 2021, it would have been in the money, as ETH has lost less value than AVAX since then.

Pro tip: keep an eye on the fees

When using a crypto trading pair strategy, remember fees. Fees that can affect the profitability of your trade include trading fees, withdrawal fees, blockchain fees and borrowing fees on your short position.

Even if you make the right decision and the asset you buy outperforms the one you sell, the fees will eat into your trading profits. So make sure you are aware of the fees you have to pay to open and close your pairs trade on your chosen trading platform(s).

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