A Cheat Code for Crypto?

The best trading edges are often found in places most people don’t think to look. It’s why being a bit of a pirate – zigging when others zag and finding opportunities in the market’s blind spots – is such an effective approach.

Today, I want to share something that has me genuinely excited. It’s a little like finding a cheat code in a video game that gives you special powers the other players don’t know about.

Key points:

1. Retail flow is a gold mine of predictive power in crypto – when retail traders pile in one direction, the market often moves the opposite way
2. Enhanced carry factors that look beyond a single exchange’s funding rates can significantly boost performance
3. Factors that crushed it in equities in the 90s are working beautifully in crypto now

Read on if you want to peek behind the curtain at what’s possible when you combine good data with systematic trading approaches.

A Brief Introduction to Unravel

I’ve recently been exploring the work of a company called Unravel, which is essentially building the MSCI of crypto – but with better tech and a focus on alternative data sources that are nearly impossible for solo traders to construct.

What caught my attention is how they’re aggregating data from hundreds of sources and making it available through an easy-to-use API. For those of us who value our sleep and sanity, this is huge.

One of their founders put it perfectly:

“The same factors that worked really well in the 90s on US equities markets are working really well in crypto still. The big players are still not there, the alpha is still there, especially in the cross-section.”

This is the crucial point.

Back in the 90s and early 2000s, quant factor trading absolutely crushed it in equities. Then, it basically stopped working as more money piled in. The returns went flat for years.

But in crypto, that opportunity is still wide open. The typical crypto market participant isn’t a sophisticated quant shop. There simply isn’t enough institutional money chasing these factors to squeeze out the alpha.

The Retail Flow Factor

When I first started analysing Unravel’s retail flow factor, I literally had to double and triple-check that I hadn’t made a mistake in my code. The results seemed too good.

This factor examines order book data to distinguish between retail and institutional trading activity. The idea is simple but powerful: heavy retail flow tends to be a contrarian indicator.

What I found was stunning:

• Nearly linear relationship between factor values and next-day returns
• Strong predictive power even after accounting for trading costs
• Works BETTER on high market cap coins than on the broader market

How it works: When retail participation is high, the market tends to move in the opposite direction. It’s the classic case of the “dumb money” getting caught on the wrong side.

Enhanced Carry: Beyond Single-Exchange Funding

Another fascinating discovery involves carry factors. The easiest way to construct a carry factor is to use data from a liquid exchange like Binance.

But here’s the interesting part – according to Unravel’s analysis:

“Carry returns come more from a pricing inefficiency rather than actually collecting the funding rate.”

Since Binance is the most efficient exchange (highest volume, most market maker activity), it may not be the best place to source this signal. The inefficiencies are more pronounced on less liquid exchanges.

When I tested an enhanced carry factor that aggregates signals across multiple exchanges:

• It showed strong predictive power for next-day returns
• Demonstrated a fascinating “reversal” effect at days 2-3 (potential mean-reversion opportunity)
• Remained profitable even with conservative cost assumptions

Simple Improvements Anyone Can Make

Not all improvements require fancy data sources. One thing I’ve been testing is simple enhancements to basic carry factors.

For example, instead of just using yesterday’s funding rate, try:

• Smoothing it out: Using a short rolling window (3-5 days) improves performance by capturing the “stickiness” of carry
• Include the tendency of carry to revert from extremes in your model
• Ensemble approach: Combining multiple lookback periods creates a more robust signal
• Looking at perp premium to spot rather than just the funding rate: This examines the actual mechanism that creates funding

What This Means For You As A Trader

The crypto market continues to offer unique opportunities for quant traders that simply don’t exist in more mature markets. If you’re willing to put in the work to build systems around these inefficiencies, the potential rewards are substantial.

Inside our Robot Wealth Pro membership, we’ve been working with these concepts to enhance our systematic crypto strategies. The results have been remarkable, pushing Sharpe ratios from already solid levels to genuinely exceptional performance.

It’s a reminder that sometimes the best edges aren’t found by being more complicated, but by finding the right data and applying systematic approaches to it.

Is This Too Good To Be True?

Whenever I see backtests with exceptional performance, my scepticism kicks in – as it should. But I’ve found a few reasons to believe these factors have staying power:

1. Behavioral foundations: These factors are based on persistent human tendencies that don’t disappear easily
2. Limited institutional presence: Unlike equities, there aren’t hundreds of quant funds competing to harvest these inefficiencies
3. Structural features: The crypto market’s unique structure (24/7 trading, funding rates, retail dominance) creates persistent anomalies

That said, no edge lasts forever. The window of opportunity for these strategies will eventually narrow as more sophisticated players enter the space. The time to implement them is now, while the alpha is still rich.

Want to Learn More?

If you’re intrigued by these concepts and want to go deeper, here are some next steps:

1. Check out Unravel’s factors: They’ve built an impressive platform that saves you months of development time
2. Consider simple improvements to your existing strategies – sometimes a small tweak like smoothing can make a big difference
3. Join our Robot Wealth Pro membership if you want to see how we’re implementing these concepts in our systematic strategies. The path to RW Pro starts with Bootcamp.

I’m genuinely excited about these developments. The crypto market continues to offer unique opportunities for quantitative traders who are willing to put in the work.