abnormal return

What Is Abnormal Return?

An abnormal return refers to the additional profit generated relative to a “benchmark” or “expected return.” In simple terms, it is the difference between actual returns and a chosen reference return. The benchmark could be a broad market index, the performance of similar assets, or a risk model.

Many people equate abnormal return with “excess return” or “alpha.” These terms are often used interchangeably in everyday conversation, all referring to returns that exceed the norm. In the crypto market, benchmarks are commonly the price movements of major cryptocurrencies or your own historical strategy performance.

Why Are Abnormal Returns More Common in Web3?

Abnormal returns are more prevalent in Web3 because the market is still early-stage, information is more fragmented, rules change rapidly, and participants are more diverse. Less mature markets are more likely to experience short-term pricing inefficiencies.

Key reasons include:

• Frequent launches of new tokens and protocols lead to information asymmetry, allowing early participants to potentially gain extra returns.
• Mechanism-driven incentives, such as airdrops and liquidity mining, specifically allocate additional rewards to certain behaviors.
• Greater volatility in derivatives funding rates and cross-market price spreads, creating more frequent arbitrage windows.

How Do Abnormal Returns Work?

The core principle is to first define a “benchmark,” then calculate the difference. The benchmark represents the return you would likely achieve without any active intervention—for example, using the average return of a major index or Bitcoin as your reference point and comparing it to your own strategy.

Expected return can be estimated using historical averages, risk models, or the performance of similar assets. Abnormal return = actual return − benchmark return. If you factor in risk, many investors look at “risk-adjusted” abnormal returns, such as using the Sharpe ratio (returns divided by volatility) to compare strategy quality.

How Are Abnormal Returns Achieved in Trading?

In trading, abnormal returns typically arise from event-driven or structural opportunities. The three most common types are:

1. Price discrepancies during new token launches or significant events. For example, before and after announcements, upgrades, or macroeconomic data releases, prices may temporarily deviate from the norm, offering potential for extra profit regardless of trading direction.
2. Derivatives funding rates. Funding rates are periodic payments between long and short positions in perpetual futures contracts designed to keep futures prices close to spot prices. By holding positions in the right direction, you can either “collect” or “pay” this rate, resulting in extra returns or costs.
3. Cross-market or intra-asset price differences. When the same asset temporarily trades at different prices across markets, programmatic or manual arbitrage can capture these spreads.

What Are the Main Sources of Abnormal Returns in DeFi?

In DeFi, abnormal returns typically come from incentives and mechanisms:

• Airdrops: Projects distribute tokens to early adopters or users who perform specific actions. Airdrops function as “participation rewards”—additional allocations determined by project rules.
• Liquidity mining: Providing funds to trading pairs in exchange for token rewards based on your contribution. These rewards constitute extra returns but are subject to token price changes and impermanent loss.
• Staking and lending: Locking assets to earn interest or lending them out for yield. While basic interest may not qualify as abnormal return, during incentive periods or when interest rates are imbalanced, returns can exceed typical ranges.
• Funding rate arbitrage: Hedging positions between derivatives and spot markets to capture net funding rate differences.
• MEV-related: MEV (Miner/Maximal Extractable Value) refers to profits block producers or searchers can earn by reordering transactions. While direct participation is difficult for regular users, some products share these returns with participants—always assess smart contract risks carefully.

As of 2024, major on-chain stablecoin lending yields generally range from about 2%–8% annualized (subject to interest rate environments); certain incentive-driven liquidity mining or airdrop campaigns may offer significantly higher short-term returns but are usually unsustainable and come with greater price and strategy risks.

What Is the Relationship Between Abnormal Returns and Risk?

Abnormal returns often come with higher uncertainty. The “extra profit” you earn may result from taking on risks that are not fully priced in by the market or from temporary incentive mechanisms.

Main risks include: price drawdown, insufficient liquidity causing slippage, smart contract vulnerabilities, drops in incentive token prices, leverage and liquidation risk, as well as regulatory uncertainty. Any financial operation may incur losses—set stop-losses and position limits ahead of time.

How Can You Pursue Abnormal Returns on Gate?

You can reduce trial-and-error costs by following clear steps; here are examples of two common scenarios:

Step 1: Monitor funding rates.

• On Gate’s futures trading page, check funding rates and settlement cycles for each asset; understand what positive and negative funding rates mean.
• If considering “hedging for funding rate gains,” hold offsetting positions in spot and futures markets to reduce price risk—watch out for trading fees and liquidation prices.

Step 2: Participate in new tokens and events.

• Follow new listings and announcements in Gate’s news sections to identify potential incentive mechanisms or short-term price discrepancies.
• Test with small positions and set stop-losses to avoid “buying highs and selling lows” during volatile periods.

Step 3: Screen investment and staking products.

• On Gate’s finance or staking pages, review annualized yields and rules; distinguish between baseline interest and promotional incentives, noting lock-up periods and redemption conditions.
• Diversify allocations; avoid concentrating funds in a single incentive product.

Risk Reminder: Any strategy may incur losses. Always consider trading fees, slippage, funding rate fluctuations, contract terms, implement robust risk controls, and keep emergency funds on hand.

Common Misconceptions About Abnormal Returns

Misconception 1: Mistaking one-time luck for a stable strategy. Abnormal returns may be driven by short-term events—they should not be annualized and treated as long-term performance.

Misconception 2: Ignoring costs. Fees, slippage, borrowing interest, and funding rate changes can erode profit margins; net returns may fall short of expectations.

Misconception 3: High returns mean low risk. Extra profits often involve additional risks—especially with leverage or complex derivative products.

Misconception 4: Not tracking results or reviewing strategies. Without data records, you cannot accurately assess whether you achieved abnormal returns.

How Should You Handle Abnormal Returns for Compliance and Tax Purposes?

Tax treatment of crypto returns varies by jurisdiction, but the general approach is to keep detailed records and report earnings as required by law. Abnormal returns from trading spreads, interest, incentives, or airdrops may be classified as capital gains, income, or other categories depending on their nature.

It is advisable to keep records of: transaction dates, asset quantities and prices, fees paid, types of income sources, addresses, and transaction hashes. Consult local professionals when necessary to avoid compliance risks.

How Can You Evaluate Abnormal Returns Using Data?

Assessment requires comparing both your benchmark and strategy performance. The process is as follows:

Step 1: Select a benchmark.

• For example, use daily returns from Bitcoin or a major index relevant to your trading.

Step 2: Calculate the difference.

• Subtract benchmark returns from your strategy’s actual returns to obtain daily or per-trade abnormal returns.

Step 3: Adjust for risk.

• Measure volatility or drawdowns to see if abnormal returns occur under reasonable risk exposure.

Step 4: Review and iterate.

• Summarize which events or mechanisms most often lead to abnormal returns; optimize position sizing and entry/exit rules accordingly.

As of 2024, many investors use simple interval statistics (such as trailing 90 days) to assess strategy stability under various market conditions rather than relying solely on annualized figures from single time points.

Key Takeaways on Abnormal Return

Abnormal return is the “extra profit” relative to a benchmark—more common in Web3 due to incentives, information asymmetries, and mechanism-driven price differences. To capture it effectively: clarify your benchmarks, keep thorough records, pilot strategies with small positions on platforms like Gate, manage costs and risks. Abnormal returns are usually not sustainable; risk management and regulatory compliance are equally important. A prudent approach is to treat abnormal returns as occasional bonuses—not as permanent guarantees.

FAQ

Abnormal return sounds complicated—where should beginners start?

Beginners should start by understanding basic yield mechanisms: get familiar with standard market interest rates and trading fees. Then gradually learn about common abnormal return strategies such as liquidity mining and arbitrage through small-scale experiments. It’s best to begin with low-risk environments (such as stablecoin LPs) rather than diving straight into high-risk projects.

My abnormal return suddenly dropped—is this normal?

A drop in abnormal return is common. Main causes include reward programs ending, increased participation diluting profits, or shifts in market liquidity. This highlights the cyclical nature of abnormal returns—early participants tend to earn more while later joiners see lower returns. Regularly assess project fundamentals and adjust your strategies or seek new opportunities as needed.

Can abnormal return opportunities be linked to scams or rug pulls?

Yes—this is a real risk. Some projects attract users with high yields only to disappear with investor funds (rug pulls). To identify risks: check if project code is open-source, if the team has verifiable backgrounds, and whether contracts have been audited. Using regulated platforms like Gate helps reduce risks but learning how to vet projects yourself is essential.

Do abnormal return opportunities vary greatly across blockchains?

Yes—the differences can be significant. Major blockchains (Ethereum, Arbitrum, etc.) are highly competitive with more stable but lower yields; newer chains tend to offer higher returns but also greater risks. When choosing chains, consider ecosystem maturity, liquidity depth, and project quality. Beginners are advised to start on Ethereum or Arbitrum before exploring other options with more experience.

How much capital should I allocate toward pursuing abnormal returns?

This depends on your risk tolerance and total asset base. Generally, it’s recommended not to allocate more than 20–30% of your total portfolio for abnormal return strategies—keep the rest in stable assets. Remember that abnormal return opportunities carry high risk; never use borrowed funds or your entire savings so that you can withstand losses if profits reverse.