Q&A: Crypto Hedge Fund Trader

• Do you use any specific exchange or the one requested by your clients? We go where the liquidity is. Some coins are only listed on one specific exchange, while others can be traded on several exchanges, in which case we look at the flow and figure out where is the most efficient place to execute. Occasionally it makes sense to chop up orders on different exchanges.
• Do you have any trading desks taking positions just in case a client might want this coin in the near future? Very rarely does this happen, the volatility in these markets is way to high to be exposed in this manner unless you have a strong conviction with regards to directional bias
• On the more HF side, how to you decide to take your positions(can't do ER/DCF model for coin, whats your approach and process). We just look at liquidity profiles and trade flow, do not really use valuation models on specific coins since our strategy is market neutral and we don't need the coins we trade to go up or down in value necessarily.
• How do you size your positions relative to your AUM We focus on general risk management principles. Settlement risk can be tricky as every exchange and bank has their own ways of doing things, and things like counterparty exposure and concentration in any specific coin are things we look at
• thoughts on USD/BTC being comparable to USD/EUR No comparison, the volatility profiles and technical as well as fundamental drivers are completely different.
• Arbitrage trading between exchanges, any solution possible? Not 100% what you mean by 'solution' here, but assuming that you are asking how to take the arb out of the system, my answer would be that as the markets develop, arb will naturally fade away. Having said that, it is not as pronounced as you would think, its so insignificant, that this is something we don't even really look at.
• why leaving goldman after 10 years? The traditional markets (especially in the liquidity space) are very inefficient as far as the technology and the piping works. What I mean is that, in 2018, markets are still using SWIFT technology (something that has been around since the 1980s, tickets are still being sent via faxes) and generally the whole infrastructure is in dire need of an overhaul. I really wanted to be at the forefront of technological development in the financial markets, which is why it made sense for me to join like-minded people in the space. Other than that, GS is a great place to work and I would recommend it to anyone who wants to learn about the markets and to see what they can be capable of.

-Do you have a favorite blockchain project?
Not really, we don't necessarily endorse anything or have any conviction views, but I think Firelotto is a cool idea -What are your thoughts on the impact to the crypto markets of the Mt. Gox settlement selloff?
They're definitely very visible, I wanted to post a chart, but my low level of bananas won't let me do external link -Do you do any large volume OTC deals?
all day -Do you think alt season is upon us?
not necessarily, but a lot of other market participants think so, which benefits our business -Does CrypoCobain know you stole his avatar?
ah, I had no idea, I just googled 'bitcoin avatar' and this is the best one the had

1). I'm curious why you decided to get your MBA even though you were a trader at Goldman? It is my understanding that most traders don't need to go back to graduate school in order to move the ranks as moving up the ladder is based on performance.(assuming that was your reason)
I was about 5 years into GS career and needed a vacation

2). Given that you been in the business for a decade, what are your thoughts on a long-term career in S&T(sales or trading) considering desks are becoming more automated, pending recession, and VOL/prop trading is not what it used to be. * I'm going to top BB this summer for an S&T internship and really trying to grapple with what skills I will gain for the future and if I can make this a long-term career(10+ years).
I think doing an analyst stint at an S&T desk can still be very good experience, you can't really replicate an institutional trading environment otherwise. I think you can still gain a very deep understanding of how the financial markets work in the shortest amount of time possible while also picking up skills like coding, pricing, mental math as well as learning how to communicate very complex information in a very succinct and clear way while under pressure, which in my opinion is probably the most underrated skill for people who want to be professional traders.

3). This is a follow up to question #2, Are most traders or salespersons leaving banking after 5-7 years to HF? Curious to know the trend and what you've seen over the past 2-5 years in the industry.
Hard to say, trends can differ from one product to the next, HF strategies pop-up and die-down with market cycles, but those who want to go the buy side route and are interested in being PMs always figure out a way.

How do you deal with forks? Pull out the market or research in adv a lot?
We look at forks on a case by case basis, if we feel that there is a good opportunity there, we will definitely research, and if it is a major coin then we would recover the forked asset and liquidate to improve our nav, if its a smaller forked asset then weigh the added NAV value against the custodial risk Any issues with exchanges going down for a small amount of time?
It's mildly annoying, but par for the course Risk management processes if a coin goes to zero or 70% move? Exchange hack?
Difficult to say here, without revealing specific risk management processes, so no comment Do the traders know all the cross settlement issues off by heart?
After you trade something more than once, you typically remember any specific settlement issues, especially if they are problematic. Have you had to actively market the fund to institutions?
Yes, majority of our clients are institutional Any non electric trades? If so with no clearer any issues RE settlement, fill issues?
Not sure what an electric trade is, feel free to clarify and I can try to answer Rough balance sheet? >50 mio
no comment East/ West coast?
Bay Area*

Off topic- any thoughts if CC goes to shit for a while any thoughts, if this doesn't pan out on where you'd like to settle, i.e non trading role in the space or?
I am a true believer in CC for the long term, short term volatility does not bother me much, its just part of being a trader, but I have no plans to leave the space anytime soon

Hello, thank you for your informative post and for answering our questions.

What are your thoughts on an aspiring trader going into the cryptocurrency world straight out of undergrad as opposed to starting at S&T or a prop trading firm?

Assuming the individual is fairly certain (88.69420%) he wants to get into the industry early on during the growth phase. Also note the individual has had previous trading and market-making/fintech internships. As well he has taken part in implementing an ICO ($100+ MM raised).

He has made roughly the same amount trading cryptocurrencies than he would as a FT analyst (hugely due to pure luck during summer boom). To him, it seems like a trade-off of interest in an volatile, developing industry vs. experience/social connections/prestige in a structured environment. With that said, this individual doesn't give a shit about prestige.

However, would choosing to go into cryptocurrency trading/business development/financial services pigeon-hole him and limit future opportunities in other industries if he does happen to want to transition?

if you can find a position where you can learn to trade crypto, then go for it. Just keep in mind, the most important thing is that you can work for someone who you can directly learn from. Unfortunately the only big crypto trading desks (Circle, Cumberland, etc) typically hire experienced traders who understand dynamics of institutional trading, and I am not sure exactly what their outlook is on taking on junior traders. Perhaps S&T or established prop would be a good way to go, because the two most important things you can learn to be a successful crypto trader is buy/sell dynamics in an institutional environment and how all of the post-trade back-office stuff works (i.e. operations, accounting, risk, etc.) among some of the things I listed earlier in the thread.

other than that, your experience would definitely give you a leg up, (particularly realizing that most of your success is luck, you would be surprised how many young traders think they are "geniuses" because of their 4Q 2017 success)

I wouldn't worry about pigeon-holing too much, this early in your career. A good trader can trade most anything anyway.

I have never been a true prop trader, but in my opinion a prop trader is a prop trader, no matter what the product that he/she focuses on. You could definitely design an FX or Crypto trading program with almost identical Risk/Reward profiles. I think, the more important question that you need to ask yourself is "why crypto", "do I want to learn the tech" etc.

As far as being pingeonholed goes, I wouldn't quite look at it like that. I will try to draw parallels between the FX and crypto markets as an example. What both asset classes have in common is that the fundamental analysis around them is very macro-focused, while the way they trade and the supply/demand economics around them (more FX than Crypto) are, instead, very technical.

What I am saying is that as someone who understands, geopolitics and other macro themes through trading these products, you will never be truly pigeon holed as those skills will lead to a wide variety of jobs in finance or in certain other industries. The technical skillset will allow you to trade most anything in the future as well.

Those are my 2 cents on the topic, hope its somewhat helpful.

billbo:

Hey would love to get an update on how the fund is going? Have you managed to find good trading opportunities over the last couple of months as the market continues to evolve and become more efficient?
Fund is going well, crypto is in quite a prolonged bear market, but the beauty of being market neutral is that any volatility (even on the downside) still can be a good source of alpha. Regarding market efficiency, I would say that you definitely see a lot less wash trading and fake volume on exchanges than you did in back in May

What is your view on the ICO market, do you think it is now completely dead? Are there still any good deals that can be found early stage?
I don't think its dead, more that it is evolving, with the downturn in the markets, a lot of projects that raised a lot of money and do not have a usable product, are going to be washed away with the tide, which is a good thing for any market, while the strong projects will weather the storm. Also, with the recent SEC action on Airfox and Paragon (google it if you are not familiar), any new raising of capital will be much more structured and more carefully planned by any new project. Finally, I think that the ICO will go the way of the STO (security token offering) as regulators all over the world are communicating that capital raising activities will need to be regulated in the same manner that they have been in the traditional markets.

Given the vastly declining trading volumes, do you think Bitcoin (and/or other cryptocurrencies) will become an actual asset class? They has been a lot of talk about the institutionalisation/financialization of the space with news about Bakkt, Endowment funds investing in space, ETF discussions etc...
Hard to say, if you think about it, the entire market cap of all the cryptos put together is smaller than Apple. But the tech is truly remarkable in my opinion and there are a lot of projects and institutional players (like the ones you mention) that are dead set on building this infrastructure. Should be interesting to watch what happens to crypto once the traditional markets start crashing down to earth over the next year or two.

Lastly, do you regret your decision making crypto your full time job?
No I do not. I don't look at it in the way that I left traditional finance to go to crypto, but more that I left a big bank to go work at a start-up fund. The things I've learned this last year from a business building perspective is something that I don't think I could have learned anywhere else. I could do a completely new AMA on what its like to be a founding partner of a hedge fund and everything that goes into building it into a viable profitable business. At a big bank you sometimes take for granted what your army of support staff does for you as you only focus on your specific job. At a small business, you are responsible for absolutely everything and it is an incredibly steep learning curve.