After a December to remember, crypto took a rough ride in the paddy wagon called the markets. The volatility was glorious, but for many, the gyrations negatively impacted their PNL. Bloodied traders, hedge funds, and ICO issuers litter the information highway. The El Dorado of uncorrelated returns still entices many to continue their journey in this new and exciting industry.
2, But No 20
Every day my LinkedIn inbox was filled with at least one new person announcing they were opening a crypto hedge fund. Various media outlets reported that by the end of Q1, a few hundred registered crypto hedge funds existed.
The vast majority of these funds are long only. Meaning these fund managers are overpaid beta chasers. Nothing wrong with the beta, but when you fool yourself into thinking you produce alpha, disastrous results ensue.
The investors who gladly handed over thousands and sometimes millions of USD, now stare at scarlet numbers that would make Hester Prynne proud. As I check in with some of my hedge fund manager friends, the fundraising process is going slower than expected.
The second class of slightly more sophisticated fund managers expected to arbitrage their way into Steven Cohen’s league. These managers proved more successful; however, some learned that your risk management in the crypto markets better be airtight or you will get REKT. All manner of bad luck greeted their lackluster returns. The inability to manage margin requirements on spread trades is one sure way to destroy a spread trade.
All in all, many newly minted John Paulson wannabe’s learned that it wasn’t so easy to trade crypto. The markets were volatile, seemingly random, and did not “behave” as they should or had.
ICO, A Dream Deferred
Every tech team now needs an ICO strategy. If the un-washed public will hand you hundreds of thousands of Ether on nothing more than a slick website and a plausible whitepaper you have to take their un-dilutive money. The flood of ICOs continues unabated, most of the 2017 vintage deals now trade below their ICO price.
I firmly believe that the ICO is a revolutionary way to fund technology projects. And the ICO should allow anyone with an internet connection and a few Satoshi or Ether to participate in the success of a project. However, the ICO has morphed into a private-placement orgy.
The ICO deals have gotten bigger, which necessitated the creation of the Sale of Future Tokens (SAFT) monstrosity. Teams bypass the small individual investors who used to participate in public ICO issuances for private deals conducted through SAFTs. Telegram has raised over $2 billion via SAFTs issued to professional investors. Good on them, but we should not consider that a real ICO.
Traditional VC investors love the SAFT because it closely resembles the traditional Series Alphabet soup. The SAFT achieves the liquidity event very quickly, meaning they can dump their paper on retail investors in the secondary market. However, there is just too much token toilet paper for the market to absorb. The ICO market slumped and took its god Ether with it.
Many newly minted token investors will find that without the support of retail, they are just passing a hot potato along Sand Hill Rd. Unfortunately for their bonuses, these hot potatoes are marked to market almost immediately and could end up costing them percentage points of returns.
This is not an “ICOs are dead” market call, but rather for ICOs to regain their former glory, they need to go back to basics. The teams that can say no to SAFT, and actually launch a fair and widely distributed public token sale, will revive the market. There are still projects that will do extremely well, but most of these tokens are and always will be dog turd.
Trading All Markets
The financial media loves crypto; there’s pathos and a cast of very interesting characters (I’m loving Brock Pierce’s hats). Readers searching for the next get rich quick investment devour any and all crypto coverage. PSA: if you need to read Bloomberg to figure out what happened in crypto, don’t quit your non-crypto day job.
There are any number of reasons why the market plunged from $20k to $6k in Q1. US tax-related selling, regulatory FUD, the ICO slump, weak hands capitulating, are all plausible reasons. These combined with the simple fact that an asset that goes up 20x in one year is certainly due for a meaningful correction.
No financial reporter will accept the simple reason that nothing goes up or down in a straight line. There must always be a reason, and they print all manners of gobbledygook if it sounds plausible to their editor.
The best crypto traders can trade both bull and bear, and furthermore both trending and choppy markets. However, I have encountered very few of these specimens. Most successful traders learn their style and if the current market structure doesn’t fit, they take a break.
The market is in chop mode. After $10,000 thunderously fell, the market traded in a $6k to $10k range. The beauty of Bitcoin is that the range is very large, and moves sudden. For disciplined traders, this chop is a gold mine.
For those who thought merely sitting in a Telegram chat room, or reading /r/bitcoinmarkets was sufficient to generate mad gains, SFYL. What keeps traders coming back to the market is that hard work is actually rewarded. This is truly the only real free asset market globally. That should excite any student of the markets, and student one must be if you want to drive a Lambo and order trains of Dom P.
P.S. If you don’t know what a train is, order one at the club, and watch your heart skip a beat when presented with the bill.
Onward to The Elysian Fields
Before one departs for the Hamptons, French Riviera, or Bali, another quarter awaits. Q1 was the carnage, Q2 will be the consolidation.
The regulators spooked us, the drops nuked us; but after all of that $5,000 was not breached. Bitcoin is still here, the markets are still volatile, and more people than ever before know what a cryptocurrency, digital token, and or ICO is. That is a net positive.
Many exchanges now have more registered users than the stock exchange in their domicile. The demand to trade these markets surpasses the capacity of exchanges. Crypto is not going anywhere, and those who are completely comfortable in the digital arena will continue to prefer crypto investments to equities and fixed income.
I don’t know where the price will be in the next three months, but my spidey sense tells me a sentiment shift is occurring. The next test will be $10,000. Can we hold, and for how long? Then the journey back to $20,000 can continue.