It’s time for a one-month update about my BTC trading method, which I have been running myself personally since early November 2022. I had only had a single losing day this year when BTC surged but otherwise this method is like pulling money out of an ATM. Hardly any work involved, just entering the trade in the morning if I my indicator tells me to, checking it a few times during the day, and then closing the positions in the afternoon.
But then what if BTC is strong and I am caught short? This is unlikely because then there would be divergence, but in the other direction (funds accumulating BTC instead of selling). As discussed earlier, I don’t trade everyday, only when shortly before the market opens I detect weakness/divergence between BTC and index futures, indicative of a large fund(s) liquidating BTC. Otherwise, I sit the day out.
You can see how BTC is at the mercy of hedge funds after the stock market opens. This is due to funds liquidating Bitcoin, while Bitcoin still being highly correlated with the stock market otherwise, especially to the downside. This creates a strong negative drift, making a long-SPY/QQQ short-BTC pair trade very lucrative.
Above we have Bitcoin (in black) and QQQ (in blue) over the past 4 days, from Monday Jan. 23rd to Thursday Jan 26th. [The discontinuities in the chart is because BTC trades 24-7 but QQQ only trades during market hours.] During market hours, one can observe that Bitcoin tends to be weaker. I was able to avoid that large Bitcoin spike a few days ago because I had already closed the position.
Zooming into Thursday, Jan 26th, on a 1-minute chart the divergence is more evident. I profited this day too. (Here, blue denotes QQQ; black denotes BITO, an ETF which tracks Bitcoin):
And again on Friday, January 27th:
Another profitable day. Bitcoin looked like it was going to pull ahead, but fell hard by the final hour of the day. I kept the position open an hour after the close because there was so much weakness, pocketing a couple more thousand dollars from the short BTC position.
You are not trying to predict market direction per say, but rather hitching a ride on a current. The divergence tells you if a fund is selling, and then you simply go along for the ride. By making a long/short pair trade out of two highly correlated assets, you minimize directional risk while profiting from this divergence. I call it the ‘window method’:
1. Find at least two assets which are highly correlated, like Ford vs. GM.
2. Determine a so-called ‘trading window’, in which a certain pattern tends to recur (this can be tested to be made statistically robust). For the Bitcoin method, this is during market hours between 6:30 AM and 1 PM PST. The window can be any duration.
3. At the beginning of the window, determine is there is divergence, and if so, short the weaker of the two assets, while going long the stronger one.
4. Close the positions at the end of the window. The divergence is your profit.
The third step is like front-running. The divergence is indicative of a fund selling, but by shorting at the beginning of the window, allows one to step ahead of the liquidating fund and then ride it down, while being long the stronger of the two assets provides overall market directional neutrality. This can explain how Ren Tech and other funds do well during all market conditions. Because hedge funds tend to liquidate assets in a predictable way , likely on a timetable and gradually throughout the day to minimize market impact and to get a better price, it means that such a window can be determined by observing such a cyclicality or periodicity.
Renaissance Technologies has attracted a lot attention, but nothing has turned up any leads, although it’s reasonable to assume there are smaller hedge funds that employ similar strategies that may fly under the radar. From what is publicly known based on books, discussions, and articles, Renaissance employs various pair trading and correlation methods, so this seems at least superficially similar to what I have described above. What exactly those correlation methods are, for understandable reasons, is kept close to the vest.
Overall, if I had to guess how Renaissance makes its money, it would be something like I have described, only they do it better than competing funds and have it fully automated, for windows of all sizes and many assets. And performed at massive scale. Unlike the front-running that has gotten negative media attention, there is nothing illegal about this, because it does not not involve conflicts of interest between the broker and the client. There is nothing illegal about extracting order flow from publicly available data and then jumping ahead of it.
Edit: This method has actually gotten better over the past few days, which is the opposite of what one would expect to happen when something this profitable is disclosed. This is nuts..you got a malfunctioning ATM spitting out hundreds and no one is even talking about this. Over the past few days I have expanded my Bitcoin trading method to overnight too, allowing me to increase my daily earnings by 50-100%. February 2nd was extremely profitable in the overnight session, as stock futures surged higher on Meta earnings but Bitcoin fell.
Here are some of the past few days (QQQ in blue, bitcoin in black):
Wednesday (no profit because no divergence):
Thursday, 2/2/2023, the divergence so far today is crazy wide (this is just for the first 90 minutes of the session):
Overall, one would assume some random individual without any connections or insider info doesn’t stand a chance in the cutthroat world of trading, dominated by multi-billion dollar hedge funds that collectively employ thousands of quants with the most prestigious of degrees crunching data 24-7 in the search for any sort of ‘edge’ to beat the market, but, still, stuff gets through. This isn’t quite on the same level as The Big Short or r/wallstreetbets destroying Melvin Capital, but it shows there is still hope for underdogs.
I’m a buy and hold kind of guy but am intrigued with your BITO/QQQ gambit. I don’t quite understand where you see a divergence in the Jan 27 graph. They both start out pretty even and continue until late in the day.
I tracked them today (Jan 30) and it was even more incoherent. BITO at 10am had moved to 0.68% and QQQ to 0.50%. So, there was no divergence if I understand you correctly, and therefore you wouldn’t want to short BITO. Yet, BITO ended -2.13% to QQQ’s -0.85.
What am I missing here? If large funds dumped BITO in the afternoon I wouldn’t have had any ability to detect that at all in the morning.
Any clarification much appreciated.