Moving Forward with the Sharpe Fund: Developing High-Frequency Trading Strategies for Cryptocurrency Markets

Over the past couple of months, the Sharpe team have been working round-the-clock to develop and test a platform for high-frequency trading on cryptocurrency markets. It has been noted by some Centuri users, this has been accompanied by relative quietness on Telegram from the team. As described on our roadmap, it was always our intention to deploy algorithmic statistical trading from July, and we are pleased to have met that target.

Reflecting on Strategy

Over the past six months, Sharpe has developed a proven track-record in generating alpha amidst turbulent and somewhat bearish market conditions. A quick look at the Digital Asset Arrays on ICONOMI does not paint the brightest of pictures, with even the best indices down almost 60% from six month’s ago. Sharpe’s total capitalisation, conversely, lies at approximately $2.1m, around 30% below NAV at inception six months ago (inclusive of service fees).

Much of this capital reduction is attributable not to sub-optimal investment decisions, but rather to the looming liquidity crisis that is sure to drive cryptocurrency markets into further decline as it dawns on the key players. Namely, much of the perceived value held in cryptocurrencies simply does not exist. The order-books for the majority of assets are so thin that a mere 0.2% of circulating supply can wipe 10% off of the asset’s market cap. The future looks bleak for funds that have large positions in relatively low market cap assets, to gain a true understanding of their AUM, you can reduce the quoted value by 25% or more. To make matters worse, although we have seen significant growth in BTC/USD recently, this has not translated, as it has in the past, to a concordant growth in the ‘alt’ market. Once the market at large realises that the value they see in their Blockfolio does not remotely resemble the value that can be achieved by liquidation, we expect further and significant declines.

While we believe that taking long-term positions in blockchain markets can yield significant returns, our experience over the past six months has taught us that short-term speculation is somewhat self-defeating. One cannot generate returns in cryptocurrency markets by simply trading tokens in these conditions; frankly, ‘generating alpha’ in this market essentially translates to ‘losing less money than everyone else’.

The exception to this rule is participating in private sales through seed-stage venture capital. However, we are presented with a related challenge here — a distinct lack of high-quality startups seeking funding in this sector, and a preponderance of lacklustre projects offering tokens with no viable use cases at ludicrously inflated valuations. It is not difficult to understand why this bear market persists, built on a foundation of mindless hype and little else. Despite the dearth of high-quality projects, the returns generated from seed-stage investments significantly out-performed the market as a whole. It is worth noting, however, that several recent high-profile ICOs have performed abysmally on secondary markets.

Much of the ‘value’ that has been created with recent ICOs can be attributed to wash-trading. We simply do not believe the volume figures quoted by exchanges for some of these new projects, with hundreds of thousands to millions of dollars of daily volume on relatively obscure trading platforms. This is evidenced, to an extent, by the existence of so-called ‘market makers’ charging six figures each month to increase volumes. Sharpe operates its own market-making algorithm on Qryptos, which can be clearly seen by looking at the beautifully linear depth in the order-book. This, however, does not translate into large volume because the majority of SHP is held and utilised for its intended purpose.

The Move to High-Frequency Trading

HFT in equity markets is the preserve of extremely wealthy funds, an ultra-competitive space requiring hundreds of million dollars of infrastructure and expensive data feeds from exchanges, in order to take advantage of very small inefficiencies within the market. HFT plays a valuable role in price-discovery and in reducing those inefficiencies, and its practitioners quietly amass fortunes with negligible risk — a Sharpe Ratio of 10 is not unreasonable for a typical HFT strategy.

Cryptocurrency markets are far less efficient than equities, and have the added advantage that all order-book data is freely available. Accordingly, generating returns requires several orders of magnitude less capital compared to equity markets.

Several months ago, we began developing statistical models based on our experience from manual trading, in an attempt to understand price action in cryptocurrency futures markets, alongside some more exotic Machine Learning methodologies. Supporting this, we have developed extensive infrastructure for automated trading in cryptocurrency markets.

We are pleased to be able to announce that we successfully completed the backtesting phase of development, in which we apply our models to the market historically over the past three years. These indicated that a return of 5% per day is not an unreasonable goal. Naturally, one should always be skeptical of backtests — they tend to assume a somewhat idealised environment, and we all know that past-performance does not predict future performance. Therefore, we began live-testing our HFT strategy a couple of days ago. At the time of writing, the algorithm has made 500 trades, and realised 2% ROI on both days, yielding approximately 0.004% profit on a per-trade basis.

Next Steps for the Sharpe Fund

Naturally the shift in strategy described in this update will require some modification to how the sharpe.fund page currently operates. Listing each position does not make sense with non-speculative HFT activity, therefore we will simply chart our total AUM since inception and list our portfolio of seed-stage investments.

In addition to the development of our algorithmic trading strategies and supporting infrastructure, we are in the midst of a re-branding effort led by our marketing manager, Brittany. We’ll have more information to share in relation to this in a couple of weeks. Our business activities are essentially being streamlined into Sharpe Capital, Ventures and Analytics. Sharpe Capital relates to HFT and equity trading, Sharpe Ventures to seed-stage venture capital/private equity funding, and Sharpe Analytics toward the monetisation of our market sentiment ‘alternative data’ product.

Talk to the Team

The best place to reach out to the Sharpe team is through Telegram, at t.me/sharpecapital. Alternatively, please feel free to email us at hello@sharpe.capital.

How Can I Buy SHP?

We recommend purchasing SHP using the Bancor Protocol, requiring just 5 clicks! SHP is also available through IDEX and ForkDelta. SHP is also listed on QRYPTOS.