BTC/ETH Ratio Arbitrage

## BTC/ETH Ratio Arbitrage — Full Methodology

### Ratio Calculation

1. **BTC/ETH ratio:** BTC price / ETH price (e.g., if BTC = $60,000 and ETH = $3,000, ratio = 20)

2. **Rolling statistics:** Calculate the 90-day mean and standard deviation of the ratio

3. **Z-score:** (Current ratio − 90-day mean) / 90-day standard deviation

### Entry Criteria

1. **Long ETH / Short BTC:** When Z-score > +2.0 (BTC is extremely overvalued vs ETH → expect reversion)

2. **Long BTC / Short ETH:** When Z-score < −2.0 (ETH is extremely overvalued vs BTC → expect reversion)

3. Execute as a paired trade: equal dollar amounts on each leg

4. Rebalance positions weekly on Sunday at 00:00 UTC

### Exit Rules

- **Mean reversion target:** Exit when Z-score returns to ±0.5 (ratio has normalized)

- **Stop loss:** Exit if Z-score reaches ±3.0 (ratio diverging further — thesis broken)

- **Time stop:** Close after 8 weeks regardless of Z-score

- **Partial exit:** Take 50% off at Z-score ±1.0

### Position Sizing

- Allocate 5–10% of crypto portfolio to each leg (10–20% total)

- Pairs trade is market-neutral — not exposed to overall crypto direction

- Margin requirements vary by exchange

### Best Market Conditions

Works best in range-bound crypto markets where BTC and ETH rotate leadership without a clear trend. During strong BTC dominance surges or "altcoin seasons," the ratio can trend beyond historical norms. The 90-day lookback window adapts to regime changes.

### Backtest Notes

Tested on BTC/ETH ratio daily data from Jan 2020 to Dec 2024. Weekly rebalancing with 0.1% slippage per leg. The strategy is dollar-neutral — overall crypto market direction doesn't affect returns.