MIT Bitcoin Trading Simulation Yields Profit of 89% in 50 Days

Trading bitcoin profitably remains more of an art than an exact science.

On any given day, Reddit is awash with theories explaining bitcoin price movements, ranging from exotic technical indicators to the machinations of FUD (fear, uncertainty and doubt) peddlers.

That may change, however, with a new paper that claims to have devised a trading strategy that can produce an 89% return in less than two months.

The authors, Massachusetts Institute of Technology associate professor Devavrat Shah and computer science student Kang Zhang, collected data from OKCoin, the world’s largest exchange by trading volume, from February to July.

They fed the data into a predictive statistical model they have developed and used the results to conduct a simulation of CNY/BTC trades. In the simulation, the trader could only go long or short 1 BTC in each trade.

Volatility boosts profits

The trading simulation, conducted on data taken from 50 consecutive days in May and June, produced highly profitable results. The simulated trader invested 3,781 yuan and made 2,872 trades. The total cumulative profit was 3,362 yuan, or an 89% return on the amount invested.

The trading strategy produced the greatest profits when volatility was high, in the period at the end of May and the start of June, and was still profitable when the price declined steadily at the end of the simulated period.

The trading strategy also produced a Sharpe ratio of 4.1, the authors write. This expresses a portfolio’s return after adjusting for the risk-free rate of return. A high ratio shows that an investor produced returns while taking on less risk, with scores of three and over being considered excellent.

The authors’ Sharpe ratio compares favourably to benchmark mutual funds, like the Vanguard Total Stock Market Index Fund, the world’s largest such vehicle, which is worth $355bn. That fund has aone-year Sharpe ratio of 1.79 and has returned 8.32% in the last year.