Capital is not the only pre-requisite for trading and investment. The market requires strong strategy, a tight hold on the trading and investing policies and the ability to stomach volatility. It is important to understand that risk will always follow an investor. A panel discussion at Beyond Block Summit Tokyo did just that, acquaint attendees with the insights and the Do’s and Don’ts of the crypto trading world.
Beyond Block Summit Tokyo was held from 4th to 5th April, 2018 in Westin, Tokyo. It was a major success with over 10,000 attendees and 25 marquee speakers. One of the most interesting panel discussions was on “The Art Of Trading And Investing.” The panel discussed market making, trading strategies, and a host of other topics affecting crypto trading.
The Panel included the following luminaries:
- John Burbank is the CIO and the founder of Passport Capital, a global investment firm based out of San Francisco.
- Phil A. Woods is the founder of Abele International Pte Ltd and presently the managing partner and the business development officer of Abele Group. He also has senior sales experience at Citibank and UBS.
- Darius Sit is the managing partner of QCP Capital, a crypto-focused hedge fund. The firm also facilitates trading in crypto assets, provides trading/structuring advice, and helps out with treasury and balance sheet management.
- Masa Kakiya is the CEO of Smart Contracts Japan. It is a major liquidity provider in the crypto world. The company also deals in consulting and promotion services.
- Nithin G. Eapen is the CIO of Arcadia Crypto Ventures, a consulting and investment company that invests its own private capital into crypto assets. He is also the creator of the cryptocurrency index (Bloomberg ticker: CRYPTO).
Market Making and Manipulation
The concept of market making is important for investors and traders to understand. It basically refers to providing liquidity in a financial market in the area where it lacks. The task of a market maker involves ensuring that there is enough trading activity and liquidity in the market. With respect to crypto, the definition of market making becomes much broader.
Due to the knowledge of the trade intentions of a client, this information and position of trust can be misused, as well. Market manipulation is a problem in the current crypto market and a lot of pump-and-dump operators are also currently active. This makes it critical that long-term market participants bring more transparency to the system so that players of all hues – institutional, HNIs, and retail are able to trust the market and its fairness.
Talking of the current state of the market, Kakiya shared that his company is working on a project to create dark pool liquidity. The current trading is 70% OTC and 30% via the exchange. They are developing a system where there is not only enhanced liquidity but also transparency for all players. He also shared the innovation in Japan where companies can be incorporated with in-kind contribution in ETH or BTC, a major first in the crypto market. Sit believes that there is a knowledge gap that leads to confusion between market making and manipulation. It is important to educate the larger ecosystem so that the difference can be appreciated and there is stronger liquidity in the markets in the future.
Woods added that regulation is an important aspect to be considered. Regulation will be forced upon the community if it does not ensure transparency and fairness in the system. Eapen believes that market manipulators who pump or dump would only be successful once or twice before getting caught. The crypto ecosystem is very sophisticated and such players will be abolished from the market, sooner than later.
Burbank shared that the US Stock market operated in a similar manner for the first 50-60 years. The regulation was weak with market manipulation common. The current crypto system is evolving at an unbelievable pace, and this is a market opportunity to bring world-class technology to solve the issues of liquidity and transparency in the system. Even if the structural problem exists, reputation is critical for dealing in the crypto world. Once your image is tarnished, you would find that liquidity will move on, never to return.
Strategies for Trading and Investing
Trading and investing is an unpredictable and complex process. The panel discussed a few trading strategies and latest developments:
Burbank believes that arbitrage is currently the most interesting and riskless strategy. It is important to strategize how to take advantage of liquidity and gain profit out of it. Also, he analyzed why arbitrage exists at such a scale in the crypto market. Normal capital markets would see such huge arbitrage opportunities traded away but crypto has a unique ecosystem where there are multiple exchanges dealing with the same underlying currencies. Coupled with high volatility and regulatory and geographical issues, arbitrage opportunities continue to exist on a massive scale.
The panel also discusses how bots would become important for automated trading within multiple geographies and why, due to structural issues, arbitrage would remain the number one alpha generating investment thesis for the current foreseeable period.
Sit is focused on both quant and arbitrage strategy and believes that arbitrage in some form would always remain in the market. He also shared his view that arbitrage is more geographical as compared to a classical capital arbitraage market, which is focused on spot to future mispricing. Arbitrage spreads might decline in the future but would still remain an important part of the market.
Eapen discussed that he does not execute arbitrage regularly due to the size of his investment scale and the time taken for shifting of coins from one exchange to another. He is concentrating on betting on the overall market and capturing the larger market movement rather than focusing on few percentage points available on arbitrage. For him, the important thing is to believe in the crypto market and its long-term potential.
Burbank shared that the issue with price is that it is a function of liquidity. As institutional players are currently not present in the crypto space, there is not much depth in the market. Arbitrage gives you an opportunity to be active in the market without taking on major risk. The panel also discussed the importance of project and utility for the long-term growth of its price. So more mature projects would see better funding and better token rates in the future. Another important issue is that businesses should only tokenize when it adds value to the ecosystem of the business. Looking to take advantage of the crypto market by unnecessary tokenization would end badly for all stakeholders involved.
The panel also discussed stablecoins, especially Tether. Eapen shared that he won’t buy a stablecoin as an investor. He is not into the business of investing in stability; his focus is squarely on capital growth. There is no investment reason for buying a stablecoin, he said. Sit agreed with Eapen that pegs for diluting volatility don’t work fundamentally in the markets. Woods also agreed that stablecoins are a dumb idea. Kakiya took a contrary view. His organization is pro Tether. The cryptocurrency has utility, especially in settlements as stability is of prime importance.
The panel also discussed the current bear market in the crypto world and what lies ahead for the industry. Kakiya shared that miners have been selling off their stash to ensure they meet their break-en points. Burbank believes the price went up too much, the bubble generated regulatory backlash, and sellers realized that there is no liquidity in the market. This led to a crash. But the panel believes that a Warren Buffet-type of value investor would buy in such a market as there is blood on the streets, and this is an amazing time to buy for the long term.
Blockchain use cases are massive and have the ability to revolutionize industries. Adoption of blockchain by businesses will force institutional investors to realize that they need to be in crypto for diversification and alpha generation. The panel’s final notes were on how institutional players are necessary for liquidity and why investors need to play a long-term game to win in the crypto market.
Written by Stephanie Vaughan.