Understanding Crypto's Size Factor

Introduction

If you are getting into statistical arbitrage in crypto and you are not thinking about the size factor, you are going to get fisted.

There’s a simple reason for this, shitcoins systematically go to 0. This isn’t an industry secret, ask anybody that have traded crypto long-short for awhile and they will tell you exactly the same thing.

If you go long bluechips and short shitcoins, over 9 years, you will return 69% cumulative returns with a 0.5 sharpe. It’s not spectacular, but it tells you that this effect exists. Here’s the kicker and what you should be thinking about, you get a tasty -19% max drawdown. This is the far left tail effect of shitcoins going gigamoon on your shorts that you want to avoid.