I’ve never had the 1) time, 2) energy, and 3) expertise for day trading.

Recently, as my book approaches completion, I suddenly found myself with plenty of the first two. As for the third, well, that depends on the time and energy invested. Over the past few days, I’ve invested quite a bit of both. It’s Christmas break, after all.

This post is about my first steps of developing my first automated and profitable cryptocurrency trading strategy.

Disclaimer. I am not an expert in trading. This post is not investment advice. Do not follow it blindly. My goal is to document my experiences with trading and share my ideas. Especially the bad ones, because those are the ones we learn the most from.

What’s a dream scenario for a trader? Take a look at this (totally made-up) candlestick chart.

If the price movement of any crypto asset looked like this, trading would be ridiculously simple. Open a long position at the bottom. Open a short position at the top.

The bad news: this market doesn’t exist. The good news: this doesn’t stop me from looking for one. I’m a mathematician, so I possess an incredible amount of imagination, confidence, and naivety.

How can we find something like this?

It’s a well-known phenomenon in crypto circles that almost everything moves in tandem with Bitcoin, and beyond that, many assets also correlate with each other. Check out this chart where I overlaid the ADA:USDT and SOL:USDT price movements. (Since the two coins don’t operate on the same scale, I plotted the percentage change relative to the initial time point.)

They move together quite close, don't they?

This phenomenon gave me an idea, and I'm currently working on turning it into a profitable (and automated) strategy.

The idea in a nutshell:

1. We look for two cryptocurrencies, X and Y, so the price spread X − aY is stationary for some constant a. This is called cointegration, and while it sounds complex, it essentially means that X − aY behaves like white noise — bouncing around a certain value without drifting away from it.

2. Once we find such a pair, we calculate the X − aY spread and normalize it by removing its mean and variance. This gives us the so-called z-score, a common method for scaling time series.

3. When the z-score is high, we short Y and long X. When the z-score is low, we do just the opposite. We exit the positions when the z-score goes back to zero.

This is called pairs trading, and once I discovered the term itself, lots of lightbulbs went off. You know: once you have the name, you have the power. This is especially true for research.

I found the best material on the now-defunct Quantopian's YouTube channel, which included a video and a Jupyter Notebook that I'm using as a reference. (Here's the video and the Jupyter Notebook.)

The strategy is dead simple. However, I'm incredibly lazy and have no intention of sitting in front of my screen all day, watching trading signals and executing trades manually. So, right from the start, I've aimed to automate everything.

Currently, I'm working with PineScript, TradingView's custom scripting language. I've already created my own indicator to track the normalized spread. (You can check it out live here, and the PineScript source is at the end of this post. I won't lie; I did the entire thing with ChatGPT. Did I mention that I'm lazy?)

So, I have a signal; now I just need a bot. My plan is to set up a webhook via 3Commas to receive signals sent from TradingView. It sounds complicated, but I promise you: once I figure it all out, I'll write a hell of a tutorial post on the whole process.

But that still requires some work — and a ton of learning.

As promised, you'll find the spread z-score indicator below.

//@version=5
indicator("Spread Rolling z-Score", overlay=false)

// Input for asset symbols
asset1 = input.symbol("BINANCE:ADAUSDT", title="Asset 1")
asset2 = input.symbol("BINANCE:SOLUSDT", title="Asset 2")

// Fetching prices for selected assets
asset1_close = request.security(asset1, timeframe.period, close)
asset2_close = request.security(asset2, timeframe.period, close)

// Spread Calculation
spread = asset1_close - asset2_close

// Moving Average and Standard Deviation for Z-Score
window = input.int(30, title="Moving Average Window", minval=1)
ma_spread = ta.sma(spread, window)
stdev_spread = ta.stdev(spread, window)
z_score = (spread - ma_spread) / stdev_spread

// Plot Z-Score and thresholds as an oscillator in a separate pane
plot(z_score, color=color.yellow, linewidth=2, title="Z-Score")
threshold = input.float(2, "threshold (STD)", minval=0.0)
hline(threshold, "Upper Threshold", color=color.red, linestyle=hline.style_dotted)
hline(-threshold, "Lower Threshold", color=color.green, linestyle=hline.style_dotted)
hline(0, "Zero Line", color=color.gray, linestyle=hline.style_solid)

// Background shading for extreme Z-score regions
bgcolor(z_score > threshold ? color.new(color.red, 90) : na, offset=0)
bgcolor(z_score < -threshold ? color.new(color.green, 90) : na, offset=0)

This is how you can add it to your TradingView terminal:

Most of you know me for my educational posts from the intersection of math and machine learning, but that's only one slice of who I am. I have a lot of interests — for example, I love gardening. Especially growing chili peppers. However, that's not what this new newsletter is about.

I became interested in crypto around 2020, during a time when we were rushing toward the collapse of crypto markets at the speed of light. It wasn’t about easy money for me (it never is), but the technology: Bitcoin shook the world to its core by building the first secure decentralized digital currency.

However, decentralization and deregulation are double-edged swords, and Bitcoin brought a digital Wild West.

I won’t lie — crypto has a bad reputation. Scammers, thieves, and celebrities willing to do anything for money block the signal. There are a hundred scams for every valuable crypto project, and cutting through all that noise was hard for me, too.

I began understanding its essence when I was invited to an NFT project.

What a bunch of bullshit, I thought.

As always, I was incredibly skeptical. Yet, curiosity drove me, and I quickly jumped down the rabbit hole.

I remember the exact moment when blockchain technology finally made sense to me. Not long after venturing into the rabbit hole, I came across the paper that introduced Bitcoin. By the time I finished that short, mere eight-page document, I understood that blockchain is a brilliant construction with limitless potential.

Bitcoin is the first secure, global currency that is controlled by its users — not the banks, not the government, but you and me, holding Bitcoin assets.

Living in a Central European country with authoritarian tendencies (an "illiberal democracy", as our "Supreme Leader" puts it), I immediately recognized the significance of this.

Think about the People’s Republic of China, where being on the wrong side of the social credit system means that you can't even buy a bus ticket with "your money."

Think about Africa, where hundreds of millions are excluded from the global economy because banks don’t find it profitable to serve them.

Think about Venezuela, where the hyper-inflating money lost 90% of its value every couple of months. (Granted, this also happens in crypto.)

Think about the United States, where 80% of wealth is concentrated in the hands of the wealthiest 20%, and a handful of Wall Street bros crash the entire global economy to shit every few years. (Granted, this also happens in crypto.)

I’m convinced that blockchain technology holds incredible potential.

I also convinced that the current digital Wild West will evolve into a digital Silicon Valley.

I started this publication to amplify the signal, not the noise. I want to talk about technology and markets, not give investment advice or promise “fantastic opportunities” to get rich quickly.

The balance of skepticism and an open mind is essential. As the name of this publication suggests, I strive to eliminate the bias.

If you aim for that balance too, welcome — I’m glad to have you here!

Here we go again, at the heights of the crypto market. Bitcoin just hit $100000, and everyone talks about crypto once more; even your grandmother has bought some.

Take a look at where we are right now. Tempting, isn’t it?

Any experienced investor knows we’ve been here before: the 2021 peak was an entry point for most. Followed by the enormous crash, they lost their investment. Their cars. Their home.

I told you that the first time is always painful.

A really experienced investor also knows that there’ll be more peaks and there’ll be more crashes. But let’s not get ahead of ourselves!

Despite that even your grandmother is executing margin trades on the market, you (probably) don’t know what a cryptocurrency is. Even though there are a staggering amount of misconceptions and scams out there, we are talking about truly revolutionary technology.

The noise of the cons and the excessive hype drown out the signal.

What are cryptocurrencies? What is their purpose? Will you get rich from them? Should you talk your grandmother down from margin trading?

Let’s get to it.

Disclaimer. This is not financial advice, and I am not qualified to give out such. I’ll mostly talk about the technology behind crypto. Always think critically, educate yourself, and base your financial decisions on sound research.

WTF is a cryptocurrency?

According to the official definition, cryptocurrencies are digital assets, operated on decentralized, blockchain-based networks. They use cryptography to secure transactions, hence the term “crypto”. If you didn’t understand a single word, that’s alright. We are here to talk about all of this.

The definition has three key parts:

• decentralized,

• blockchain-based,

• and digital asset.

I’ll explain everything in due time, but first, let’s talk about money. You know, that number shown by your favorite banking app. It increases when your salary arrives, and decreases when you order a Big Mac menu on Uber Eats.

Have you thought about what this number really is? I’ll disappoint you: your (virtual) money is nothing but a record in one of your bank’s databases. A bunch of ones and zeros. Hell, from this aspect, it’s not that different from the gold in your World of Warcraft account. Still, you can exchange your money for goods and services. This is because we, as a society, decided to trust the government, the banks, and their stability.

How can you spend your money? Well, you can just swipe your card, right? Is it that simple?

Bad news: it’s not that simple.

The money — you know, your money — is ultimately controlled not by you, but by the banks and the state. All you can do is say pretty please, and hope your bank honors the request. Which is, ultimately, decrementing the integer representing your money, and letting the other party’s bank know to increment the number representing theirs. (Or, if the transaction is done within the institution, they’ll do the incrementing themselves.)

Yes, you have read it correctly: your money is not entirely your own, because it is still controlled by the bank and the state. (Everyone whose account has been frozen knows this.) This is a centralized system, governed by the banks in between the people. Who, in turn, are governed by the Big Brother state, overseeing it all.

If you live in the People’s Republic of China, and the social credit system is not your friend, they might even deny you the purchase of a train ticket.

Of course, the world is not black and white. Everyone saying so is lying to you. (Or want to sell you something.) Centralization has several advantages. Say, if your credit card data gets stolen, your bank freezing all outgoing transactions is not such a bad thing. Or, if your bank flops like the Jaguar rebrand, the government might pay out your losses. (In the USA, this is guaranteed up to $250000 by the FDIC insurance.)

There is no such insurance for your crypto assets. (Yet.)

Back to crypto. The biggest innovation of Bitcoin (BTC), the first cryptocurrency, is to create a financial infrastructure without any middlemen like banks. In other words, it is decentralized. Your Bitcoin — and all of your other cryptocurrencies — are yours for real, and no one can take it from you. (If you secure it properly.)

If you want to spend your BTC, you are free to do so at any time.

Imagine agreeing with your friends that from now on, you’ll trade with each other using Shiba Inu portraits printed on toilet paper. (Shiba Inu is a dog breed, and the symbol of the DOGE coin. My choice was not accidental; neither is the toilet paper you print it on.) One sheet is worth a lunch, ten sheets are worth a ride to work, and so on.

What stops you from hijacking the office Xerox and making a wagon of this, practically living free until eternity?

Digital currencies have the same problem. Bitcoin, similarly to the virtual money in your bank account, is a bunch of zeros and ones. Can’t you just create fake transactions, or worse, fake Bitcoins? This is not a problem in our traditional finance system. Banks might control your transactions, but they secure them, too. You just need to trust them. (See, I told you that centralized systems are not the devil.)

This is where the second part the cryptocurrency definition enters the scene: the blockchain, where the bulk of Bitcoin’s innovation lies. Essentially, a blockchain — where Bitcoin transactions are recorded — is a public database, secured via a brilliant use of cryptography.

You read that right: all. Transactions. Are. Public.

See it for yourself: here’s a Bitcoin address containing precisely 42256.48233006 BTCs, worth north of four billion USD when I write this.

Performing a transaction is as simple as making a record in the shared database called the Bitcoin blockchain. In the original construction, the integrity of the database is granted by the so-called validator nodes. If you make an invalid record — say, transfer nonexisting money BTC — it will be rejected. If the transaction is valid, everyone is happy. Especially the validator nodes, which you know as the (in)famous Bitcoin miners.

To sum it up, all transactions are public and secure, and most importantly, you can launch one at any time. Again, one of the biggest advantages of our vanilla financial system is that your balance and transaction history are hidden from your family, your neighbors, colleagues, and sworn enemies.

You can read about the details in the original publication. If you are a technical person, I highly recommend you read this. For now, let’s stay on track and talk about what all the hype is about.

Why is Bitcoin valuable?

Instead of talking about Bitcoin, let's detour into the past once more and talk about gold. Why is gold valuable? Apart from a couple of minor applications — making conductive materials for circuit boards, jewelry for wives and lovers, toilet bowls for oligarchs — let me tell you, gold is of no actual use.

Gold, as a metal, is weak, soft, and too heavy for any sensible construction. Yet, its market capitalization is $17.880 trillion (that is, billion times billion), and all the important people start to sweat really hard when bad guys try to steal the nation's gold reserve in action movies. (Just for comparison, the total capitalization of the European stock market is $12.295 trillion, while the American stock market is $62.748. I found the data here.)

So, why is gold important? Because it is rare, and we humans agree it's worth a lot. (There are other examples from history. For instance, in parts of Africa, salt blocks had the same role.)

The same is true for Bitcoin, which is called the crypto gold for a reason. You can't really pay with BTC yet (and a gold bar would not be accepted at Walmart either), but it's rare, and thus it stores value. Shifting a crypto portfolio towards Bitcoin is the same as turning a vanilla portfolio into gold.

So, Bitcoin is the digital gold. What are the other cryptos?

Good question. Some of them are scams, others are jokes, but trust me, a significant portion of them solve real problems in finance.

Say, there’s Ethereum, which is the second largest crypto according to market capitalization. The Ethereum blockchain is the pioneer of so-called smart contracts. If we can put financial transactions on the blockchain, why can’t we do the same with contracts? Say, how would you like your monthly salary to be automatically and irrevocably transferred to you by your employer instead of relying on their mood? Contractual breaches are a serious problem.

With Bitcoin, we’ve created a secure and decentralized system for finance. With Ethereum, we did the same for contracts. Here’s the twist: Ether (ETH), the native currency of the Ethereum blockchain, is the currency you pay with to execute smart contracts.

So, if BTC is gold, ETH is the petrol running the smart contract infrastructure. Petrol runs the physical world, and ETH (and several others) runs the digital one.

Should you buy crypto or not?

You shouldn’t if you don’t know what you are doing. I mentioned in the beginning that the crypto market is cyclical, and we are marching towards the peak. You don’t need to fear missing out; there’ll be plenty of entry points. The current state is not one. (In my opinion.) At least you can learn the market in the time, giving you a chance to exit as a winner. Instead of losing your house, like many others who bought at the peak.

Is crypto dangerous?

There are two typical concerns: the carbon footprint of mining and the deregulation due to decentralization.

Let’s start with the carbon footprint of the validator servers. Although this is a serious issue with Bitcoin, later projects (like Ethereum) have solved this problem. With Bitcoin, the verification of the transactions is done by solving an algorithmically difficult problem, which makes the processors (CPU and GPU alike) sweat. So, you need energy for real. This is called the proof-of-work consensus mechanism. Opposed to this, ETH and other major projects use proof-of-stake, which replaces heavy computations with a majority vote.

The true problem lies in the deregularization. I’ve heard from many that crypto funds terrorism due to its anonymity. If you have paid attention so far, you know that all transactions on the blockchain are not private but public to the whole wide world. So, money movements are easily traceable and not that anonymous.

Thus, accicentally funding an illegal organization is not a serious threat to you.

What’s serious are the scams praying on human naivety and layman ignorance. Trust me, if the Hawk Tuah girl tells you to buy her new crypto coin, you are already too late to join. All you can get for your money is the priceless experience of having the rug pulled out from under you.

You shouldn’t blame the technology for the scams, but the human nature. Think of all the fraud in the vanilla financial ecosystem. Ponzi schemes. MLM products. (Fake gurus. Yes, I know that it hurts. If you’ve been scammed, learn from it.)

Does the importance of money, as a civilizational milestone, dwindle because your favorite CEO occasionally embezzles a couple of million dollars? No.

We are dumb and easily manipulated by wolves in sheep’s clothing, no matter the setting. Educate yourself and always think critically. (And watch a lot of Coffeezilla, if you want to know how scams work.)

Who am I and what gives me the right to talk about crypto?

Does it matter who I am? Let me tell you a secret: the truth of a statement doesn't depend on its source. You should look at what someone is saying, instead of who is saying it. Even a sworn crypto evangelist can say some unbelievably stupid shit — as they usually do — but on the other hand, even a sixteen-year-old high schooler can have an understanding of the market you can only respect.

It's also irrelevant how much money I've made with crypto. My claims should be validated by facts, not by money. Trust me, there are plenty of people who have the intelligence of a brick, but purchased a handful of Bitcoins around 2010, getting lucky with them. However, you cannot substitute knowledge with money.

Let me tell you a story directly from Robert Cialdini's Influence. (A book that everyone should read.) There was an average American soap opera and an actor named Robert Young playing a doctor. The dude became the face of a coffee producer named Sanka, and even though he had zero medical knowledge, consumers got the illusion that physicians recommended the Sanka decaffeinated coffee. In reality, it was not.

So, if you constantly follow the loudest voices like a sheep, you will end up in a bad place. Not just in crypto.

Why should you believe me, then?

You shouldn't. Critical thinking is one of the most important life skills. Research everything I say, and if I'm talking some stupid shit, call me out. Just make sure to keep it civil. I enjoy being challenged to an intellectual duel. Not to a bar fight.

Alright, but who should you believe?

No one. Well, except yourself. Whenever you consume crypto-related content, you must think real hard about what they're trying to sell you.

I don't mean to disappoint you, but most influencers make their living by getting you to sign up for a crypto exchange through their affiliate link (or, worse, a crypto casino), earning a hefty commission from the money you spend.

It's even worse when someone charges for their analyses or 'trading tips.' Think about it: if a trader is beating the market like Titanic did the Oscars in 1997, do they really need your measly two hundred bucks? They don't, and you know it.

If I ever ask for money for anything in the future, that should make you suspicious, too. Feel free to ask tough questions to anyone, and if you're not absolutely certain about the value being offered, don't take the deal.

Speaking of trust: it's truly an honor that you've read this far. I chose a written format because if you've made it here, it likely means you're interested in the topic, enjoy thinking critically, and maybe I can learn something from you, too. So, I'm looking forward to reading your comments!