Tl;dr: Perpetuals futures are financial instruments that have become increasingly popular in the crypto space. Coinbase demonstrates a hypothetical simple delta neutral strategy which takes advantage of positively skewed funding rates in the perpetual futures market to achieve a high return on investment.
By The Coinbase Data Science Quantitative Research Team
Systematic Trading Strategy
A systematic trading strategy is a mechanical way of trading that is aimed at exploiting certain aspects of market inefficiencies to achieve investment goals. These strategies employ disciplined, rule-based trading that can be easily backtested with historical market data. Rule-based trading follows strict, predefined trading methodologies that are not impacted by market conditions.
Systematic trading is a fully grown area of investing that spans a wide range of strategies and asset classes. With the ever-growing crypto market, in which thousands of tokens are being traded and derivatives offerings are being expanded, systematic trading will play an important role in goal-based investing with efficient capital allocation and rigorous risk management. In this piece, we explore a delta neutral strategy to demonstrate the basic building blocks of systematic trading.
Spot Trading: Buying or selling assets that results in its immediate transfer of ownership. For crypto spot trading, one can directly buy or sell crypto assets via centralized exchange, retail broker, or decentralized exchanges. (For example: Coinbase Prime, Coinbase Exchange)
Derivatives Trading: Derivatives are financial contracts whose values are dependent on underlying assets. These contracts are set between two parties and can trade over a centralized/decentralized exchange or over-the-counter (OTC). A futures contract, one of the most popular derivatives, obligates parties to transact an underlying asset at a future date at a predetermined price. Derivatives, such as futures, are highly regulated financial instruments. For example in the United States, the CFTC regulated the derivatives market including commodity futures, options and swaps market as well as over-the-counter markets.
Delta and Delta Neutral: The delta measures the rate of change of the derivative contract’s price with respect to changes in the underlying asset’s price. For the underlying asset itself S, it is called delta one because the rate of change of S relative to itself is 1. Futures contracts that track closely the underlying asset,…
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