On November 11, 2018 Bluesky Capital was invited at the Block Plus Summit conference, held at the Fordham Business School in New York, to discuss the current state in the crypto investment management industry among leading experts in the space. From the discussion, the following key takeaways emerged:

  • While some institutional investors are starting to explore the crypto market, the industry is still characterized by a vast majority of retail investors
  • Most regulators are adopting a wait-and-see approach to allow the industry to grow and at the same time provide some protection to investors
  • There is a consensus that there may be a next bull wave in the crypto market when institutional players will enter the market within probably the next 2 to 5 years
  • Among the most promising strategies to potentially profit from the crypto market are systematic long/short, due to the high volatility present in the industry, and HFT market-neutral strategies, which capture spreads by providing liquidity and are not affected by price action as a consequence, but only by traded volume

Key Takeaways from the Conference

Below are the key takeaways from the conference.

1.     What is the current state of the crypto investment management landscape? When will institutional players enter the market?

The crypto market is still characterized by the presence of a majority of retail investors. Institutional investors are still shy away from investing large amount of capital in the markets for 4 main reasons:

  • Custody risk: currently there are not institutional-grade custodians and standardized procedures able to safely take cryptocurrencies in custody. There are in fact been many occasions where crypto wallets have been lost or hacked on exchange or personal wallets due to a lack of effective custody procedures or improper following and training by the company’s employees
  • Counterparty risk: most exchanges where cryptocurrencies are currently traded bring a high degree of counterparty risk due to intensifying competition and the high volatile nature of the market
  • Reputational risk: many institutions do not want invest in a product that was previously used in the black market to hide transactions or launder money and more recently by a variety of scam ICO’s
  • Regulatory risk: regulatory bodies around the world, and particularly in the US, are still developing a framework to regulate cryptocurrencies. Until proper rules will be established that assure that institutional investors are compliant it will be difficult for them to want to invest in this asset class

2.     What is the current regulatory framework in the United States regarding the crypto investment management industry?

Currently the SEC and the CFTC are using a wait-and-see approach. On one side, they see potential benefit in the application of the blockchain technology and cryptocurrencies and do not want to limit their evolution by defining them illegitimate as other countries like China did. On the other side, they also need to provide some protection to investors from scams and potential abuse inherent in this new industry by defining an initial set of rules.

3.     What might bring the next bull wave in the cryptocurrency market?

A bull market is generated when demand for a particular product exceeds its supply, causing the price to go up. The demand in the crypto market is determined currently mainly by retail investors, and possibly in the future by institutional investors and corporations adopting the technology. For the previous reason, there can be multiple factors that can potentially bring an increase in price in the crypto market:

  • New technological applications of the blockchain: there are new themes like tokenization that might increase the demand for cryptocurrencies and the blockchain industry as a whole from more investors and corporations
  • Entry of institutional players: a reduction in the risks previously discussed and the potential for portfolio diversification due to the low correlation of crypto to traditional asset classes can potentially make institutional players more confident in investing in the industry
  • Speculation: the inherent volatility in the market can give great potential for profits for professional investors like CTA’s who can benefit from a volatile market.

4.     What are your predictions for the crypto market?

We believe it is almost impossible for anybody to predict the direction of a market with a reasonable degree of accuracy and correctly time when to invest. The only way to generate consistent performance is by identifying inefficiencies in a particular market or repetitive patterns in data that can be exploited systematically through quantitative research. We think that the innovative nature of cryptocurrencies and yet to be discovered applications in blockchain can potentially increase the price of cryptocurrencies in the long term, but we do not know if and when it is going to happen. This agnostic approach is the opposite to what is currently adopted by the majority of other players in the market, who are currently long cryptocurrencies for their investing approach and continue stating that the market will go up sometime in the future to justify their losses in a bear market.

5.     What do you think are the best strategies to invest in the crypto market?

We believe there are 2 main strategies that can potentially generate superior performance in the crypto market:

  • Systematic long/short: the high volatility in the crypto asset class is the perfect environment for investors like CTA’s that can go both long/short in a fully systematic way and potentially take advantage of fast market conditions in both bull and bear markets
  • Market-neutral HFT: players who have invested heavily in low-latency technology can potentially generate returns collecting a spread, irrespective of market direction, by providing liquidity in the market or employing statistical arbitrage techniques.

6.     What’s the trend in the crypto investment management industry?

Currently many established hedge funds and prop trading companies have not entered the market yet because of reputational risk and limited capacity constraints. This provides an opportunity for more nimble players to enter this new asset class and potentially position themselves as market leaders in the sector by having the advantage of being first movers.

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