[lordnacho]

The article is missing some critical details.

What does the fund do? The article suggests they do arbitrage. Those opportunities actually tend to increase when things are volatile. Also while you can lose money doing it you wouldn't expect a precipitous collapse in NAV. If you discover you're slower than everyone else you can shut down.

Volumes aren't necessarily correlated to price either, so that isn't entirely convincing.

I've also heard that plenty of arb guys are doing fine.

If he's speculating and not just running arbs, what is he doing? If he's just punting the cryptos that would seem more in line with what's happened, but it's not clear what he's up to from this.

Also, with arbitrage it's limited how much capital you need. A lot of HFTs use very little. If you're getting money like a hedge fund you have to be sure it can be put to use.

Ex HFT and fund manager.

[bhaak]

This interview[1] sounds like they called bottom at 6k and then the floor fell out: "We thought it was a bear market. I went into it thinking in the long run crypto is going to be a real structural shift in the world and I can just hedge my portfolio. And to be fair, we did a really great job not losing money the first 60 percent down. What you forget is that a market like Bitcoin that’s down 84 percent has dropped 60 percent—and then another 60 percent. That’s where the pain happens. You start buying Ether again, because it’s only $400 after being at $1,300. But then it drops to $100, and you’ve lost 75 percent of your money. We haven’t done horribly in that context, but we’re still down. [...] I did think Bitcoin was going to hold at $6,200. It stayed there for four months. It felt like the selling was finished."

[1] https://www.bloomberg.com/news/articles/2018-12-11/mike-novo...

[wpietri]

"Felt like". That's beautiful. The dude had a feel and lost the equivalent of 2300 years of labor (at the US median income).

There's this bit in Taleb's first book, "Fooled by Randomness". This was before he made a shit-ton of money. He pointed out that a lot of the nominally successful traders he worked around would declare a strategy, make a few bets, make a lot of money, and then act like geniuses for thinking up the strategy. However, they'd never really examine the obvious alternate hypothesis: they got lucky.

I used to work for a proprietary trading firm. We'd get new traders by taking very confident, driven people (e.g., former Olympic athletes), making them be clerks for a while, and then turning them loose in the pits. The CFO kept a very close eye on them early on because their natural confidence combined with early successes lead them to believe they were gods. It wasn't until they got really hammered by a bad bet or two that she'd begin to trust them.

It reminds me of a favorite line: "Every corpse on Mount Everest was once a highly motivated person with a can do-attitude."

[_hardwaregeek]

Honestly the schadenfreude is real. What part of the crypto graph made him believe he could make assumptions about, well, anything?

[oblib]

I hate to admit I agree, but I have to be honest too. That is spot on.

[mortenjorck]

I was pretty sure $6-7k was the floor for BTC, and it’s interesting to see a high-profile fund manager made effectively the same, expensive mistake. The biggest surprise for me, though, was ETH, which given its better fundamentals, I had thought would be where the market went after Bitcoin popped – and yet, it was not only dragged down, but crushed even harder than BTC.

[nostrademons]

It was interesting to watch the crypto subreddits and see so many people make the same mistake. I was surprised that $6K held for so long, because if $6K really was the bottom, it would've been a pretty shallow drop from a very steep bubble. That's only 2/3 down, and it was the point Bitcoin hit in Oct 2017. Bitcoin was < $1k at the start of 2017. Any reasonable rate of return would put its price at under $2k if you ignore the bubble and focus only on fundamental metrics. Plus bubble busts tend to overshoot fair market value, where the underlying asset actually trades at a bargain because so many people got burned buying at the top.

The ETH drop is fairly easy to explain - it was the base asset for a very interesting double-pyramid-scheme on the way up, which meant that that leverage works in reverse on the way down. The ICO boom worked because many of the people investing in ICOs had bought their ETH for pennies and already recouped their costs; throwing $40M into a shitcoin makes a lot more rational sense when that ETH actually cost about $4K in real money, and the factor of 10,000 difference is the price appreciation of the asset you're putting in. That led to eye-popping dollar valuations for many of these companies (even though they were actually raising in ETH), which brought more newbies into the Ethereum world, which pushed the price even higher, which meant later ICOs were raising even more in dollar terms, even though the actual dollar amounts traded were tiny.

On the way down, this cycle works in reverse. Those ICOs don't actually hold $40M in a company bank account; they hold 33K ETH which was worth $40M at the peak. Now that ETH is down to $94, they hold more like $3M, and they're getting scared about being able to pay salaries. So every ICO that still holds ETH is trying to liquidate it for dollars, but they're fighting over the much-reduced pot of money that is coming into crypto now, which drives the price down every time somebody wants to sell.

Personally I still think we're not at the bottom yet (for either ETH or BTC), but we may be getting close. We're at the bottom when companies start going bankrupt, Solidity engineers start getting laid off, and people start going to jail. Assuming it's not all smoke and mirrors and some useful infrastructure was actually built, it'll be the buying opportunity of the lifetime then, because everyone will think this whole crypto fad will be totally over and you'll be able to buy up that infrastructure at really cheap prices.

[solveit]

Re: your last paragraph

But if everyone thinks that (and most people who think crypto isn't all shit do think that), the bottom will be a lot softer than what you describe (modulo people going to jail, I think this is mostly independent of the value of crypto).

It's the efficient market hypothesis all over again.

[elhudy]

What "fundamentals" exist for Eth that allow it to be valued at a specific price point? Eth has no earnings, no assets, and no liabilities. Its intrinsic value is close to 0. It could be totally wiped off the planet tommorow and almost nobody besides crypto traders would care. Crypto trading should be based on technical analysis not "fundamentals".

[nostrademons]

Adoption and projects using it. Like any currency, ETH becomes more valuable when you can spend it on more things. It's the base currency for a whole infrastructure of distributed trust & settlement; if useful economic activity occurs on top of that infrastructure, ETH gains in value proportionally.

[elhudy]

Ok, but the whole idea behind fundamental analysis is that you generate a specific value of worth based on your analysis. So what formula are you using to calculate a price point for Eth based on "adoption and projects using it"? Are you tracking all projects using it, and assigning it a dollar value based on a per project usage and cross-checking that against the number of ways you can use it? Or are you just guessing? Because if you're just guessing, that's not a fundamental analysis.

[nostrademons]

I actually am, to most of those points. I'm indexing every forum & blog on the web, then cross-referencing it with a big long list of crypto projects, then using that to infer which projects have an active, involved, growing community and which are scams or dead. Sentiment, activity, and viral mentions aren't a perfect proxy for adoption, but it's pretty close, and a lot more robust data source than technical analysis or previous prices, which by their nature will always be a lagging indicator.

Still in closed beta with a very limited set of testers - I've been working on a lot of the kinks in the data acquisition, which as you could imagine is a little tricky. If you want to get on the wait list, signup is here:

http://www.cryptolazza.com/

[JohnJamesRambo]

6k was the bottom and then a black swan event happened, at the worst possible time, when Bitcoin Cash forked again and the owners of the two forks had to childishly sell tons of bitcoin to fund their hashpower war. I don't think that was a predictable event.

[airstrike]

And which event is really predictable in the world of speculating?

[Animats]

The article suggests they do arbitrage.

They blamed their failure on "increased competition for arbitrage opportunities." Properly, arbitrage is low risk exploitation of differences between two markets in the same thing. Cryptocurrencies used to look like they had arbitrage opportunities, with differing prices between exchanges. Mostly, that was because it was so hard to pry cash out of the underfinanced cryptocurrency exchanges. They always had some excuse for delaying paying out. Arbitrage requires the ability to move cash quickly from one exchange to another.

As that situation improved, the spreads between exchanges narrowed. Opportunities for low-risk arbitrage disappeared. These traders reacted to this by going into higher-risk forms of trading. Which is about typical for traders. It didn't end well.

[startupdiscuss]

You need volume for liquidity which you need to execute the arb.

So, for instance, cryptoA trades for $99 on exchange 1, but $101 on exchange 2. Quick, buy on exchange 1 and sell on exchange 2!

Congrats you made $2 on each trade x 5 cryptos. That is hardly enough volume to make it happen.

Now imagine that the volume is so thin that after you bought the first one on exchange 1, the price gap closed, and by the time you sold on exchange 2 it collapsed.

[koolba]

Don't forget to throw in significant counter party risk in dealing with fly by night exchanges. There's a non-zero chance that your entire balance held at an exchange disappears overnight.

[GreaterFool]

I also hear arb is doing fine.

I wonder how it works though. Most exchange APIs are terrible and it is simply not technically feasible to do anything using those APIs.

Also prices at too many exchanges move in absolute lockstep.

Must be private, privileged access to better (internal) APIs, profit sharing, rip the face of "retail" investor kind of deals.

After all the "exchanges" are not really exchanges as we know them in other markets. They're more like forex trading.

I think the crypto market would benefit from a (semi-)regulated impartial exchange where other firms can become members and act as brokers to direct retail flow.

But unless there's some sort of regulation about it it would just be a private business that could kick out any member for any reason. To much risk for the members.

[module0000]

Forget the 3rd party exchanges with their homegrown APIs. If you are dealing with size(1k+), you go straight to the CME and trade crypto futures contracts. Dealing with the CME also adds the regulation necessary(ie CFTC) for your investors.

[polkapolka]

You bypass the API completely and fill orders "manually".

[bhaak]

What do you mean by "manually"?

The general web page of an exchange is horrible slow compared to their APIs and often breaks during high volume periods.

[polkapolka]

Did you run into latency problems doing arbitrage this way? Or do you rely on API's?

[bhaak]

I didn't do arbitrage but running bots for statistical data via API. I think latency is not even the big problem, although of course you have to account for it when doing arbitrage. The latency can be quite high even during calm periods (also don't forget that exchanges can be on different sides of the globe, that already adds quite a bit of latency).

During times of high volumes as in the period of the last rally, the websites of many crypto exchanges break easily and even the API are not that stable.

You can also see that on reddit. Every time the price spiked, you got people complaining about exchanges breaking. There's still a long way to go for crypto exchanges.

[lend000]

Any arb strategy requires holding reserves, so while the amount of the asset you can afford may increase by 4% per month, it's not a great business to be in if you're measuring from the start of a bear market. Same goes for a lot of stat-arb funds in the space, which are currently measuring their performance against the market, but which are significantly down YTD.

[revel]

I think you're completely right that his fund isn't just performing straight up arb. In fact, I don't think it can generating most of its P&L from arb since (from what I remember at least), Galaxy Digital simply has too much capital to put it to use with an arb strategy alone.

My guess is that his fund got locked into a levered position on one of the exchanges like BitMex for trying to trade too much then couldn't get out for 24 hours. This kind of thing is more common than you might expect. There are also very few exchanges that allow margin trading, leverage or shorting, and all the ones that do have, uh, questionable compliance practices.