Constructing cointegrated cryptocurrency portfolios for statistical arbitrage

Purpose: This paper aims to present a methodology for constructing cointegrated portfolios consisting of different cryptocurrencies and examines the performance of a number of trading strategies for the cryptocurrency portfolios. Design/methodology/approach: The authors apply a series of statistical methods, including the Johansen test and Engle–Granger test, to derive a linear combination of cryptocurrencies that form a mean-reverting portfolio. Trading systems are designed and different trading strategies with stop-loss constraints are tested and compared according to a set of performance metrics. Findings: The paper finds cointegrated portfolios involving four cryptocurrencies: Bitcoin (BTC), Ethereum (ETH), Bitcoin Cash (BCH) and Litecoin (LTC), and the corresponding trading strategies are shown to be profitable under different configurations. Originality/value: The main contributions of the study are the use of multiple altcoins in addition to bitcoin to construct a cointegrated portfolio, and the detailed comparison of the performance of different trading strategies with and without stop-loss constraints.