A Low-Volatility Strategy based on Hedging a Quanto Perpetual Swap on BitMEX

In 2016, BitMEX introduced a novel type of crypto derivates – Perpetual Swaps, i.e., futures with an infinite term. Perpetual swaps provide a new strategic risk management tool for cryptocurrencies due to their custody-free nature, high leverage, and funding mechanism, but there has been little quantitative analysis on the their benefits. In this paper, we introduce a trading strategy that combines a Quanto Perpetual Swap with a spot position to benefit from the funding mechanism. We compare our strategy with a long-only investment in the underlying cryptocurrency and a similar strategy based on Linear Perpetual Swaps to evaluate their performances in a large-scale backtest covering the years 2021 and 2022. Our analysis shows that our strategy generates positive returns in bullish market phases of the underlying with lower volatility.