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Cryptos crash but never die, and funds of funds can profit

On July 6, the Financial Conduct Authority (FCA), licensed Crypto Facilities, the largest cryptocurrency futures exchange in Europe, as a fully recognized multilateral trading facility (MTF).

The company – which offers a venue for leveraged, cash-settled futures contracts to traders seeking exposure to Bitcoin and other crypto assets without holding or accepting delivery of the underlying – becomes the first crypto exchange to achieve such recognition.

With this new licence, it will be able to serve institutional clients who are mandated to trade only on licensed platforms and to increase its product offering.

London-based Crypto Facilities, which has pioneered cryptocurrency derivatives since 2015, was acquired in February 2019 by US-based Kraken, a leading cash and spot-trading exchange for 30 crypto and seven fiat currencies.

Jesse Powell,
Kraken

Hinting at the long slog to satisfy the FCA’s requirements, Jesse Powell, chief executive and co-founder of Kraken, says: “We undergo these licensing efforts because Kraken is about making crypto accessible for everyone.

“This particular licence means that a sophisticated class of investors, limited by their own requirements to interface with a regulated venue such as an MTF, will now have access to crypto derivatives in Europe for the first time.

“More participants means more liquidity and a better experience for everyone.”

Endorsement

It’s hard to interpret this move from the FCA as anything other than an endorsement of the validity of dealing in leveraged crypto derivatives for institutional accounts and an acknowledgement of cryptos’ enduring and increasing allure to retail investors.

At the end of June, the FCA released research estimating that 2.6 million UK consumers have bought cryptos such as Bitcoin, Ripple and Ether. That is up by 1.1 million from a similar survey one year ago.

It also found that consumers are heavily influenced by advertising and that 83% have bought crypto assets through non-UK based exchanges.

On the same day, the UK government’s Insolvency Service wound up GPay Ltd, a cryptocurrency trading platform that used phony endorsements from TV personalities to lure retail investors. Investigators discovered that 108 clients had lost $1.5 million to the scam.

Our experience from the last three years shows it is possible to profit through algorithmic strategies from the volatility in a new, growing and inefficient marketplace for crypto-assets 

 – Yuval Reisman, YRD Capital

If retail buyers are going to expose themselves to the ridiculous volatility of cryptos, at least let them do it on regulated exchanges, seems to be the message from UK regulators.

Institutional-grade infrastructure first started building around crypto currencies in late 2017, during the extraordinary climb in the price of Bitcoin from $228 in September 2015 to $6,323 at the end of October that year, when the CME announced it would launch Bitcoin futures.

The price went up to close to $20,000 in December 2017 before it crashed to $3,264 a year later. Institutions lost interest.

But by February 2020, the Bitcoin price was back to $10,368, and as global stock markets grew nervous that the new virus circulating in China might even interrupt the long bull run, promoters once again talked up crypto as a non-correlated source of alpha and a hedge against inflation.

Tracker funds emerged with full insurance and institutional-grade custody.

Then in March, the uncorrelated return thesis turned out to be bunk. Bitcoin crashed once again, this time by 45%, in line with equity markets. Some crypto funds collapsed. But Bitcoin survived.

By July 7, it had crawled back up to $9,279 and the question remains: could there possibly be a safe and sensible way to invest, or is punting on Bitcoin and other cryptos no better than backing the fifth horse in the sixth race at Ayr?

Fund of funds

While retail investors are lured in by wallet providers and so-called exchanges, high net-worth individuals, family offices and institutions seeking exposure to cryptos allocate to specialist hedge funds.

YRD Capital suggests a fund-of-funds approach, allocating to different managers applying different quant-based strategies to crypto assets.

Yuval Reisman,
YRD Capital

Yuval Reisman, co-founder and chief executive, tells Euromoney: “We don’t pretend to know whether the price of one Bitcoin should be $100 or $10,000, but our experience from the last three years shows it is possible to profit through algorithmic strategies from the volatility in a new, growing and inefficient marketplace for crypto-assets.”

This approach thrives on volatility not price direction.

YRD Capital selects quant fund managers according to certain key criteria. They must trade crypto-to-fiat and offer monthly liquidity out of properly structured funds with full independent administrator, audit and legal functions.

And they cannot be long-only: their performance should have low correlation to the price of Bitcoin.

YRD has six funds in its basket, and targets, given fund capacity constraints, from nine to 12, across a mix of long-short strategies such as arbitrage, market-making, momentum, event-driven and others.

Operating since 2017, initially with the founders subscribing much of its assets under management (and still with skin in the game, holding a percentage of assets under management worth over $10 million), YRD Capital now has a three-year track record it can show to family offices and high net worth i