Market Outlook for Crypto Hedge Funds

Transcript

we have a great panel a few of you I think Alex and Michael Lewis were all in this panel about a year ago and I probably asked you at that time if you thought Bitcoin would be higher or lower by now is it lower yeah lower I'm not sure but we'll take that I guess maybe let's do an audience poll who here has been you know who here thought Bitcoin would have bounced back by now any chance yeah we've got a few hands all right brave well so here we are I mean it's been now more than a year of crypto winter some people like to call it I guess you know I'd love to hear

what you guys you know as investors what have been the lessons that you've learned I mean is there any way that you found to make money in this market ride it out I mean what is the strategy now for you know being in such a prolonged bear market Michael do you wanna start yeah well I think a lot of lessons learned ones that I think we were aware of but hadn't experienced yet so things like liquidity draw downs from the start of block tower we discussed you know it's not a matter of if will experience an 80% drawdown it's a function of when and how many times over the course of the next 20 years so you know I think there were some market movements that

caught everyone off guard the strategy last year was clearly arbitrage in quant if you were in that game you know you performed well more the discretionary directional trading clearly had a much more difficult path but again I think when it comes down to it particularly as you know we all stood up here primarily as hedge funds is is kind of staying true to your mandate and I think the quiddity was something I caught a lot of people off-guard and so if you were certain to to be intelligent about how you constructed that part of your book at the very least you had the ability to kind of maneuver in last year's or in this crypto winter who as I see you

jotting down some notes yeah I think I would just agree with Michael there it was just the really two goes off guard was the frequency of the drawdowns and so after we've had one peak to trough door down we would think a lot of the weekends have been cleaned out but actually no it was just going to see an oscillation around that and I think from our perspective our risk management could have been better you know getting ready for having seen the magnitude of the drawdown from 20,000 down we should have been ready for that and so it's just a frequency that really took us off quarters off guard Robert what do you think how is it going with this crypto winter well I'm an optimist so I think that we have hit a bottom it seems like there's been a lot of training range

over the last quarter and volumes at least on our platform are picking up so I'm optimistic going forward today for us and we're up I cannot label us as a high frequency ish and a trading farm so for us market direction doesn't matter as much but now with Vall having come off one thing we realized it's gonna microstructure matters a lot so what we look at isn't kind of you know macro trends by it's more kind of on the kind of individual say derivatives in a contract side look at looking at kind of funding and spreads liquidations and the how can have that effect effectively a spot

market I think one trend we've seen over the past 12 to 18 months is price discovery used to be in a spot market you know you would have bitstamp tank first and and crack it would follow and then all the in a margin platform to follow whereas these days it's it's loyal driven by derivatives you'll have a large liquidation go through and that pulls down kind of spot across the board I think that's indicative of in a more sophisticated market players coming into this space I think in 2018 clearly you know long-only strategies buy-and-hold strategies and diversification those myths kinda came to reality obviously profit-taking the ability and comfort to you even hold cash shorts and arbitrage

strategies for really the only thing that returned well I would say one thing that's and surprising sort of frustrating right now is the sustained sort of high correlations amongst all these assets which makes sort of shorting as we approach the bottom a bit more risky but yeah I definitely think that sort of a shift in mindset from these diversified strategies into sort of what the endgame will look like sort of shifting the narrative from these ico focuses and just generally the bear market is caused a lot of people to be more more critical about the space which i think is a overall net positive didn't you mentioned that you've had some success finding derivatives ways to hedge against some of these you know maybe

even shorting some of these assets can you talk a little bit about that and you know have you been able to actually make money while things are going down yeah sure so we don't tend to take kind of bigger directional views so if we're buying somewhere it's very likely we're selling elsewhere or for buying we're holding a position for a few seconds up to a few minutes I mean there there is kind of a lot of exchanges out there you know where you can trade other futures or swaps or other formal kind of you know leverage product like like kind of Alex said right one of the I think the difficulties is their attempts to not be a lot of liquidity in the altcoin space so what trades and derivatives tends to

be kind of the large capture the Bitcoin theory ins of the world but throughout last year you know if you could kind of proxy hedge I think this year going forward all the correlations will start to break down so running kind of proxy hedging strategies is increasingly kind of risky as these correlations start breaking down but kind of at the same time my view of the spaces going into kind of 2019 is we're gonna have way more crypto native derivatives come to the market which I'm super excited about so we're a liquidity provider as well as a speculator so we like having and have not only depth in the market but also a breadth of products to trade so I supposed to different forms of spot instruments and different coins what we're looking forward to is kind of

newer forms of crypto derivatives as opposed to just another Bitcoin virtual swap or a futures contract things like you know stable corn futures speculating on on tether a leveraged format or I can think of like hash rate derivatives like swaps on the Bitcoin and I'm hash trade or a theorem transaction fees or maybe even let's say a CFD on the size of the bit connection short on we pretty fun to trade as well or like the spread between virgin coins and non virgin coins I can think about a lot of these things which I think can a market participants would would have an interesting because it tends to be very crypto native so I'm not so excited about like the backs or

kind of a CB or you see any kind of stuff but more so they're kind of crypto crypto derivatives yeah Alex we were talking earlier about some of the risks of shorting too can you explain a little bit about you know what you've experienced when you've tried to I guess short the market yeah I guess talking broadly on 2018 it became in 2017 - it became very clear that most of these altcoins just trade with a higher beta - Bitcoin you know when Bitcoin was going up in 2017 a lot of these alts rallied much higher we see stuff like that even even like today you know Bitcoin goes up 2% a lot of vaults rally in the bear market it was the opposite as Bitcoin was declining all the assaults were you know declining much further so is you know the big question with a lot of us now is

you know has has Bitcoin bottom and you know people are pretty torn on this issue but at a minimum it seems we're we're probably pretty close in terms of timing and price and if that's the case you know while these correlations remain elevated and before really bad events happen to all coins things like regulatory action or hacks really as we approach that bottom and Bitcoin gets closer to turning around the risk of shorting if these all coins remain higher beta is just extremely risky so you know right now the risk reward of all coins is probably down significantly in a better hedge might might be something like just cash so essentially it's just the fact that they're higher beta and remained highly correlated yeah I think I'll just add to that you

know what we the correlation and concentration effect is obviously very significant but the the thing to be aware of when we're looking at shorts is obviously the amount of free float and how much of it is actually out there for you to short and so if there's a project where there's only you say 10 20 30 percent outstanding then it's very open to manipulation and so that makes it much harder to show up because you can be short squeezed on it and so that's something we're always mindful of but from the perspective of Bletchley Park one of our big focuses is always on diversification of counterparty risk and so one of the problems we faced during the the bear market was we would only have maybe 10% of assets on any one exchange at any one time and so that would mean that the amount of exchanges

affording us short capacity just wasn't enough to meet the needs of the rest of the portfolio and so we were frequently finding ourselves having to cut the long exposure probably at the worst time has is the nature of trading just to offset the fact that we just didn't have enough capacity to offset that counterparty risk and so when I looked to where we are today I'm actually fairly excited when I see people trying to set up synthetic prime brokerage more abilities to short on new exchanges coming through and I think that's going to be a great way to stabilize the market do you guys have anything to add on this changing you said something interesting about stable coin stable coin futures it sounded mad yeah maybe talk a little bit

more about that because as far as you know isn't the point of stable coins that they're always pretty much a dollar at least if they're tied to the dollar like tethers and many of them are yeah sure something stable coins are meant to be stable but you know the price in the secondary market doesn't always reflect you know one to one exchange rate right so I think most people kind of saw the tether blow up it was a few months back when it traded almost 15 15 percent discount to the par and I think back then you know everyone and their mother was rushing to find some way to kind of bet against it I think back then there was only one way to really run a short television unless you had an OTC can a lending offer and it was to be long

on BitFenix and to be short on on opx or elsewhere in factory capturing like the tether to dollar spread but I think you know because a lot of what traits in the space is with tether the tether is still embedded as a major quote currency as opposed to a base currency on all the major exchanges meaning you see PTC against us DT ETH against us DT that so makes it kind of the largest you know stable con by an order of magnitude and so because maliki participants are forced to have this exposure you know I do think it's kind of broadly consensus in the market that no one is really that comfortable with what can a counterparty

risk of tether and said hence kind of having an avenue to to kind of trade it and speculate or hedge your tether exposure I think it's interesting Robert what are you seeing and caffeine in terms of what are people what what stable coins are people owning what are they using them for well I think one of the big trends is a shift to shading pairs across different exchanges and trying to catch her are between those two things so instead of taking directional risk in an old coin people are starting to trade the different pairs across the exchanges and so that's you know one of the things that Caspian tries to provide is a unified interface across all exchanges all pairs so you

can see it from a single interface who when the panel is holding or hasn't done anything with tether or do you prefer other stable coins no tether I knew any other stable coins stable coins we've looked at gemini coin out so you make it out but generally we tend to stay away from the stable coins the way we've structured ourselves is that we tend to be working with regulated exchanges so we can move dollars quite easily but obviously we prefer moving stable coins we get all the benefits of that crypto kind of transfer ability and speed of transfer so right now actually you know we're very excited by this JP Morgan coin you know ripple should be pretty scared by it you know for them it's just a testbed but we can see this becoming

possibly the stable coin so no one else on this panel owns any stable coins oh we've made early-stage investments in one or two projects in the space but nothing incremental yeah maybe talk a little bit more about that so because you invest both in tokens themselves but also have some equity positions how do you break that up I mean what kinds of opportunities do you look for yeah so at a high level it's I don't think you should really exclude any part of the opportunity set I think a lot of the industry's evolved with the risk appetite so it's gone from high demand for icos to high demand for liquidity to high demand for equity right and so as

people's risk appetite has come in you know you've kind of moved higher up the cap structure all right if you say I'm tokens or even on the cap structure and I would say technically not so a lot of the opportunities today that presented themselves at the earliest stages are some typically some hybrid or some blend of that and usually as a fund manager in this space you have the ability to help structure those early stage deals and so you can negotiate for you know for an investment to have both equity in the company warrants both public and private warrants on that specific on a specific company as well as tokens if and when there is a token issuance so you know I think you should still as a again as a hedge fund focus

on the liquidity of your portfolio because that's what your investors expect of you but you shouldn't dispute an opportunity because it's not in a liquid form but you should have to size it according to your book yeah Alex what about you guys do you do both equity and as well as tokens we we try and look at pretty much everything we have a very flexible fund mandate I would say in the equity space I think as this shift away from you know like I see owes happened the problem is there's still a lot of capital that in the space in some of these like larger VC firms and the fact that you know this capital is not allocating to icos anymore due to 20 18 s bear market regulatory risk etc it's

almost like this capital needs to be deployed I would say there's you know only so many talented people and good projects in the space so one thing that I kind of struggle with in equity space is I feel like the valuations are still massively overinflated and kind of these top projects it's because there's almost stale capital that needs to be allocated kind of bidding these valuations up I also really don't see many very favorable attractive business models I think kind of crypto is still heavily dominated purely by speculation so really most of the revenue is just coming from people that are able to insert themselves between some sort of speculation like an exchange to charge fees and also we just haven't seen too

many exits in the space so in general a lot of these equities I generally describe is just overvalued lack of good revenue model I don't see the exit and it's just not that liquid so we look at stuff but I'm probably not as excited that it's a lot of these others on equities why do you think there isn't more of a trade off I mean here you have the market itself you know the actual crypto currencies come down so much and yet then you have these companies that's a that's a major part of their business you think that you know they were giving something up on trade volumes or whatever it is but it doesn't affect their valuations at all either still looking overvalued it's just a property there's you know there's no secondary market for these to dramatically fall in value you know maybe their revenues are

suffering you know trading volumes in the spaces has definitely come down but essentially it's just this private VC market that's shielded from the rest of the crypto market so you know a lot of these investors are maybe still just marking their VC investments at the cost that they invested in and you know some of these projects have been just building for a year straight so really not much has happened so it's kind of just kind of just shielded from the rest of the market I was it something else you've seen is companies who have done icos previously are now going back out and raising equity rounds which is interesting obviously they don't want to dilute themselves but I think a lot of them are searching for a true advisor so this space has gone a bit from being a

capital provider to more of an adviser relationship even as a hedge fund manager you have a lot of dialogue with your portfolio companies and projects are invested in whether they're you know an illiquid or a liquid position that's been an interesting evolution of the business model where you have these companies that were able to raise in the thralls of 17 you know 30 million dollars in an IC o---- and have now for a year and a half sort of been in limbo trying to figure out exactly how they accrue value to the to their token holders right which I I commend them for trying to do that and they're really trying to understand exactly what the market demands to get value to accrue the token and so they're willing to give up equity in the company for that mm-hmm speaking of I SEOs I mean that was a

huge pretty hot Buddhist a pretty hot topic here last year but you don't really hear as much about it I think maybe that's some of the regulatory issues especially in the US but I mean our CEO is dead now what do you see Robert I I tend to agree there there's a lot of a lot of ICL's going on right now but I think the kind of the next wave RS TOS I think there's a lot of firms in the u.s. that are going through sto filings and there's also a lot of filings around 80 Isis in the US which i think is going to provide a lot of opportunity for the market any examples in particular and then stos I mean just I mean I don't

have any specific examples but you know to talk about specifically sorry but that she also secured such security tokens and I think that's going to be kind of the next evolution in in the space where people are gonna get because there's more of an intrinsic value to the token I think people can get their heads around that much better yeah Louis do you agree with that yeah I think I would just loop back as well to Alex's point in that because the market has changed so much last year we if we were looking at an equity investment in an IC o---- we actually couldn't get the equity investment we just couldn't they wouldn't grant us that access whereas now people are very open to hey why don't you take some equity take some tokens as well and there's definitely a synergy there when you're looking as an

investor if you can help model that the token economics as an equity investor that lines up much better than just being a DA my co investor who can't actually impact the governance and I think one of the biggest problems of last year was there was just a complete absence of governance on most of these token projects you know other hedge funds and ourselves you know we try to enforce it but the market was so hot we couldn't actually say hey you guys need to get a chartered accountant as your CFO you don't have to hold it all in ether whereas this year we can actually begin to steer things in a much more constructive way and I think the the upshot will be the fact that we have funds with pedigree in corporate structure and can actually begin to create real value in these projects and

so some of the stos I'm now looking at are definitely equities and they may come through with a second token so the sto will see will be an equity in the project and the next round would be an IC o---- or a utility token and I think that way a much better combination of token economics can you talk about any examples of ones where you see opportunity can't tell you I would say the Sto I like the idea of the sto market it certainly gained a lot of credibility over the last year the issue is the infrastructure on the sto side there's just not there's just no liquidity there's no liquid live exchanges right now for those assets so it's really hard for you know that obviously it's it's it's a very it's a

more regulatory compliant structure which brings comfort to both the investor and and the issuer but when it comes to actual trading of those assets it's a bit more difficult if I can jump in on a comment on sto specifically um I'm kind of bearish on the whole idea I don't think it quite makes sense to fit into like a crypto fund portfolio it's essentially you know a lot of people like the idea cuz it's it's like an equity we can model at the equity cash flows so it ends up having the economics of an equity investment with some added risks of like the crypto shell you know essentially I'm investing in crypto and our LPS want exposure to crypto just putting stos in this portfolio just seems like you know getting the economics of a pure equity investment that that doesn't seem like the

appropriate place and sort of a fund that's trying to capture the you know potentially massive reward of the crypto space mm-hmm I agree I like to think I don't like the word intrinsic value because a value is never intrinsic right like value is a relational term like the right price of Bitcoin is where it's trading at now because the Singh difference point to buyers and sellers I think within the sto space as well it's quite important to differentiate the kind of the various narratives that are going on I think that the camp when people say sto I think people think about putting a real world assets on the blockchain but if universe and real estate sto you're no longer a blockchain investor you are real estate investor I think what is more interesting is tokens that are stakes in networks or that have

security like characteristics I think B & B is a pretty good example maker and make a Daoist bill example these are tokens which are not sto in nature but they have security like a component right through implied dividends or burn or buybacks I think that's where we're gonna see a lot more shift and attention going this year it's you know you know acquiring what kind of stakes encrypt on networks or with security like characteristics as opposed to putting a real-world assets on the blockchain we're just more like a improvement of the back office are you more bullish in general on some of the auth coins versus things like Bitcoin aetherium or is it still worth buying and trading you know kind of the major clients I mean I'm quite excited

about projects like maker but it's a very hard token to trade it's not listed on many exchanges and hence you have to kind of discount your activity of a kind of what you're doing by like the liquidity profile so much about which trade is still kind of Bitcoin aetherium beacon cash like coin XRP etc is it the same for the rest of you that more of the trading is still in Bitcoin Bitcoin cash aetherium yeah we're tend to be you know there are high frequency trading and arbitrage programs will still be focused around the most liquid coins but I would take the other side of the sto argument and that yes kind of making it crypto equity adds crypto risk on top of early-stage

venture equity but at the same time it does liberate venture capital equity markets to the retail investor which is transformational which is something we haven't seen and so I'm very excited about that and I think we could see in my mind over the course of this year we'll have to see exchanges evolved to host these stos first but I think we'll see a series of very small cap FinTech equities that tokenizing may not necessarily be actually doing anything on the blockchain but they will be crypto assets as an irregular as a regular equity investor that's really exciting because we can begin to apply it standard metrics for evaluating these things and find spectacular growth rates in very early-stage companies which would be the equivalent of a round be round see that you typically would never

have access to especially if you were in America as a qualified or accredited investor you just wouldn't be able to get hold of them whereas now this kind of liberalisation I think is going to be very exciting and it's going to take a little bit time but I think in the first 12 months we'll see some small market caps and hopefully from here we'll see some unicorns emerge out of the tokenized equity space and that to me is very exciting so between between stos in the small cap venture space and Softbank at the large cap no companies will go public in the foreseeable future great while we're talking a little bit uh you know predictions for the future you were talking before about you know you think bitcoins near a bottom do you guys agree with that I mean who here thinks you know Bitcoin it's you know in the market

in general is close to bottoming out or has it already the one thing the one thing that I say a lot to to our LPS and to people that I speak with broadly is absolute price bottom may have set in it may not I think the psychological bottom is in whatever that you know whatever that's worth I don't think we have if I'm looking at this it from a risk/reward perspective it's an extremely attractive time right now to be investing what about you guys do you agree I agree I think you know like I think the bottom if it's not behind us it's it's gonna be this year I think also like a Bitcoin it's a long-term game right so buying a 3,000 or 4,000 or

even 10,000 view plays out it doesn't really matter anyways Robert I mean III like I said at the beginning I think we have hit the bottom we're definitely starting to see a lot more interest a lot more trading activity than we have you know after November crash so thanks for picking up my issues there's sort of just still a lot of negativity left in the space that I really wish would wash out and one dramatic final wick that you know some buyer ended up buying you know there's still a lot of like fake metrics in the space there's still a lot of you know illegal offerings that the SEC is probably going to come down on so you know in my view it'd be a lot more

obvious that we'd hit the bottom if we got one final dramatic capitulation wick followed by a lot of you know buying volume essentially once all the negativity was washed out of the space all we'd have to go left is up and I guess to your point about you know where do you allocate in the next bull market I guess it a lot of it comes down to how you sort of see the actual asset class you know playing out in the long term if you sort of take a view of like what I've been describing recently is like security maximalism like if blockchain security is correlated to price and you know one eventually you know takes off by far in a way then sort of all wealth and all valuable applications should be secured by this sort of one leading

chain if you believe that view then sort of and you still believe that which I do that sort of these all coins will probably trade at a higher beta to Bitcoin in the next bull market what you end up doing is kind of you know following which one you think will be the eventual security and value leader and kind of viewing everything else as a trade and really trying to you know take those short-term profits and you know that interesting trades would probably be in my book you know ignoring everything that didn't I see oh that's out of a lot of this space and then looking at really anything that has like a unique characteristic to enter the leader which is Bitcoin right now which is maybe things like you know privacy transactions or sort of alternative security models but on yeah it's sort of

how you see the end game truly if it converges on to most of the value and security on to one asset or if you believe in more of a like multi coin type of universe yeah I think I'm just thinking about it and I I don't think the bottom of the markets in yet at all I think the market is becoming saturated with new exchanges opening and I also think the regulator's have yet to really take down any exchange of significance and I think from experience of trying to determine when a market bottomed is in what you have to do is really wait for bad news to impact and then see how the market reacts right so right now if there was some bad news about maybe a top-20 exchange being shut down by the SEC this market would drop 50% they were just crater right and so

until we can get to a stage where the market can comfortably stomach bad news the bottom is probably not in I think one last thing just to note where it was a hedge fund panel and I know the price of Bitcoin is important to everyone because we're all somewhat levered to it but one thing to note is 2018 it was hard to make money 2017 it was hard to lose money it didn't matter if you were the smartest active manager in the world I think the forward for hedge funds is actually very right because active management really matters now we're starting to see price dispersion below the Bitcoin level bitcoins been fairly consistent at 3,800 in that range and now we're starting to see a lot of dispersion amongst the altcoin space and so as hedge fund managers we should be managing towards active alpha and so I

think with the development of the markets development of things like high spin and and and the OTC providers in the derivative space we'll be able to tap into that alpha in a much more significant way yeah well that's all we have time for thank you guys so much for being here great discussion