Events-driven trading is a technique usually utilized by the big boys at hedge funds and institutions. But with the accessibility and 24/7 nature of the crypto market, these characteristics also open up the opportunity for the little guy to trade events and get in on the action.
In this article, the event-driven approach is explained, along with some examples and tips on how to execute such a strategy so you can gain an edge over other traders and start being more efficient with how you play the markets.
Unveiling the Event-Driven Strategy
Event-driven strategies take advantage of the fact that investors tend to overreact to new information hitting the market. Any piece of new information which can impact the market can be defined as an ‘event’.
Popular in the world of traditional finance, a stock may be mispriced when there’s a significant event, such as an earnings call, where lower than anticipated earnings could precipitate a sell off. Also, leading up to the event, there is usually heightened volatility as traders place their bets on how this news will impact the price.
An event-driven strategy involves assessing the likely outcomes and waiting for the news to be released, positioning either ahead of time or as the new information is released, during which time the price fluctuates and opens up opportunities for a trader to make money.
This strategy can be carried over to the cryptocurrency market too. For example, the bullish price action in ETH ahead of the Merge and Shapella upgrades. However, there are two unknowns that are encountered with events-driven trading.
-
Not all events are known ahead of time: Two recent examples are the SEC suing Binance, and the labeling of ADA, MATIC and SOL as securities. As soon as these news items hit the market, they pushed the market lower. But no one (or very few) people knew these events were going to happen ahead of time, so you had to be quick if you wanted to capitalize off of this.
-
The market impact can be uncertain: While for some events like blockchain upgrades are bullish and known by most market participants ahead of time, there’s some ambiguity with others until they actually occur. A good example is the Fed’s interest rate decisions. Although the date and time at which they occur are known in advance, how price will react and whether the announcement results in a bullish or bearish trend is not known until it actually occurs.
As illustrated by the two points above, the ability to make fast decisions and go with the flow of the market following events is one characteristic of a successful trader. Preparation is also important, as this strategy requires an analysis of different potential outcomes, which can be fed into your trading plan.
Another point is that psychology tells us that humans tend to place higher emphasis on the impact of breaking news that’s negative. So in this case where something that’s perceived as negative hits the newswire, traders should look for opportunities to go long in response to an overly bearish, knee jerk reaction (and vice versa).
Advantages of Event-Driven Strategies in Crypto Trading
Event-driven trading strategies offer several benefits for cryptocurrency traders. The ability to make quick decisions based on market events can often lead to profitable trading opportunities. Here are some advantages of using event-driven strategies in cryptocurrency trading:
-
Only make plays in the markets when it’s lively: With event-driven strategies, traders can make quick decisions based on real-time market events, ensuring they are only trading when the market is making moves and exhibiting volatility. With less time spent on charting and in the market, you can be more efficient and reduce your risk of taking large losses. This style also helps with avoiding ‘forced trades’ in boring or ranging markets, since you should only be active around the time of significant events.
-
Gain an edge over other traders: Traders who successfully use event-driven strategies can gain an edge over those who do not utilize these proactive strategies. Although trading algorithms can react faster to news headlines and are more efficient over very short time horizons, human traders tend to do better at forecasting the long-term implications of events, since there’s always more context or other factors to consider.
-
Lots of academic literature on this topic: events-driven investing has been thoroughly researched by academics and there’s large scope for implementing these findings into actionable trading strategies.
Get more creative: trading the news or important catalysts gives traders the opportunity to be more creative in their analyses, rather than following a set of rules or setups based on technical analysis. Also, this style is more versatile and performs well across different market regimes, whereas technical strategies may only perform better when there’s a bull market.
How to Implement Event-Driven Strategies
To implement an event-driven strategy in the crypto market, you can follow these steps:
-
Monitor narratives and news, make a list of upcoming events.
-
Analyze known events in advance and feed this into your trading plans.
-
Utilize limit orders as part of your trading plan.
-
Alternatively, if you don’t want to take a particular direction, you can position long on volatility through arbitrage.
Monitor Narratives/News
-
Follow accounts like tier10k and activate notifications on Twitter.
-
Join Telegram channels such as GAINS Crypto News, One Crypto Feed, and unfolded to stay on top of the latest news and developments.
-
Stay up to date on narratives with crypto-focused newsletters like An Ape’s Prologue and Crypto Narratives.
-
Make use of our DeFi Intel Twitter list!
Analyze Known Events and Feed this into Your Trading Plan
Preparation is key for known events: you should know how the market has behaved in the past to get an indication of how it may behave in the future. For example, we know that with macro events like the Fed’s interest rate decision and press conference, the price of major cryptos like Bitcoin and Ethereum trend in one direction leading up to the event, experience an impulsive move in one direction, and then reverses to continue in the initial direction.
The 15-minute chart for ETH-USD shown below illustrates why some people often caution against trading events, as it’s easy to get chopped up or FOMO in. On June 14th, ETH displayed large movements in both directions ahead of the Fed’s interest rate announcement, but ultimately the price of ETH fell sharply in response to the new information presented to the market during the press conference.
But if you know what you’re up against and how the price tends to behave during certain catalysts, then these patterns can help to inform your trading plan.
For instance, the movements made ahead of the Fed’s interest rate decision are usually reversed once the announcement happens. Also note how the sharp downward move in ETH continued until just after the close of the American trading session (around 20:45 UTC). Looking at patterns across more examples and becoming familiar with how the market usually responds, you can then start to draw up some ideas and rules about how to trade this particular event in the future.
Setting Limit Orders
Let the market come to you.
After drawing up a trading plan and analyzing how the market has behaved in the past, you can begin to generate some ideas and set up limit orders in advance to automate your trading as much as possible. You’re more likely to make mistakes in the heat of the moment, so setting limit orders can help to remove the emotional aspect from trading.
Hot Tub Arbitrage Vaults
As a passive option for those who don’t want to deal with the pressure of making quick decisions or acting fast enough when news drops, the Hot Tub vaults can be viewed as an events-driven arbitrage strategy.
As more volatile events occur, more arbitrage opportunities arise and as a result, the vault makes higher profits. For example, if you deposited into the vault when volatility was low and held ETH in the vault through the Merge and the Shapella upgrade, some of the profits you earn will have come from these volatile events.
You can also go long on volatility using options strategies such as a strangle, but this is a bit more complicated and may cost more due to the premiums paid for the option contracts.
Some Upcoming Catalysts for Crypto Markets
To give you some ideas on how to trade events, here are some upcoming catalysts that will impact the assets that Perp has arbitrage vaults for: BTC, ETH and OP. The Hot Tub vaults are the simplest way to passively earn returns by capturing the volatility that occurs from these events. Alternatively, directional bets can be taken via spot or perpetual futures markets.
-
There are 4 Fed meetings remaining in 2023: These meetings reveal the latest interest rate decision and the press conferences that follow give the market more insights into the future path of monetary policy. Both typically lead to volatile conditions for the entire crypto sector.
-
Another important macro event is the US monthly CPI reading: Along with the Fed’s interest rate decisions and monetary policy statements, the Consumer Price Index (CPI) is a key gauge of the US economy that is used to inform their decisions, so these events also tend to have a high impact on the market.
-
There are 4 Fed meetings remaining in 2023: These meetings reveal the latest interest rate decision and the press conferences that follow give the market more insights into the future path of monetary policy. Both typically lead to volatile conditions for the entire crypto sector.
-
Another important macro event is the US monthly CPI reading: Along with the Fed’s interest rate decisions and monetary policy statements, the Consumer Price Index (CPI) is a key gauge of the US economy that is used to inform their decisions, so these events also tend to have a high impact on the market.
-
BASE launch on the OP Mainnet: expected sometime in August, the price of OP will likely see greater volatility leading up to and during this launch (as well as potentially acting as catalyst for bullish price action in the following days or weeks).
-
Activation of EIP-4844: The DenCun upgrade for Etehreum is expected in October/November of this year, which will likely have a positive impact on ETH as well as Layer 2 tokens such as ARB and OP.
-
Potential Bitcoin ETF Approval: the image below from Bloomberg terminal shows the timelines for the various Bitcoin ETF submissions that are currently under review. The ‘next deadline’ column shows the date for the SEC’s to make a decision. For example, the ARK 21Shares Bitcoin ETF’s next deadline is August 13th. One of three things can happen on this date: the ETF application gets approved, rejected or the SEC delays their decision. The furthest they can delay this particular ETF is December 27th.
As shown below, between August 2023 and March 2024, the SEC will have to make a decision on these ETF applications, so you should be prepared for any eventuality. News of a rejection could be bearish for BTC, while an approval will be bullish.
Challenges of Event-Driven Strategies
Events-driven trading is not suited to everyone and is generally not recommended for novice traders, since there are some drawbacks to this style.
-
Correctly predicting the impact on the market is something that’s difficult to do, so it’s important to always have a plan in place and manage risk by knowing in advance where you’ll cut the position.
-
You’ll also need to either analyze the impact well ahead of time or be able to think on your feet and identify good points to buy or sell when unexpected news drops. Experienced traders with a deep understanding of the cryptocurrency market are best placed to profit from event-driven strategies.
Final Thoughts on Events-Driven Trading
While more suited to sophisticated traders, events-driven strategies can help to provide you with an edge, better structure your trading activities and reduce the amount of time you spend in front of the charts or in the market.
The difficulties lie in being disciplined enough to follow through with your plan, being able to react quickly or think on your feet and conducting analysis ahead of time, which could take time and relies on having good knowledge of the market you’re interested in.
But luckily for those less experienced (or lazier) crypto holders, our Hot Tub arbitrage vaults can take the hard work out of events-driven trading by automating a delta neutral strategy (learn more about how it works in this article). The arbitrage strategy underlying these vaults contribute to compounding your earnings across different catalysts or events as time passes.. Just deposit and forget about trading, where the longer you stay in the Hot Tub, the greater the arbitrage profits you can earn as more opportunities arise during volatile periods.