Cryptoverse: Funds That Make Moolah From Chaotic Markets

A representation of bitcoin is seen in an illustrative photo taken at La Maison du Bitcoin in Paris, France, June 23, 2017. REUTERS/Benoit Tessier/File Photo

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June 14 (Reuters) – The cryptocurrency market is in shambles, leaving many investors struggling to move their money. Enter the reviewers.

Bitcoin and other cryptocurrencies have been constrained in ranges or on the decline since January, leaving the buy-and-hold investor with little choice but to sell or wait for the elusive rally.

One class of seasoned investors, though, is doing better: arbitrageurs, players such as hedge funds who thrive on exploiting price differentials between different geographies and exchanges.

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“In May when the market crashed, we made a profit. We were up 40 basis points for the month,” said Anatoly Krashelov, co-founder and CEO of Nickel Digital Asset Management in London, referring to their arbitrage strategy.

“Arb trading” involves buying an asset in one cheaper place and then simultaneously selling it somewhere else as it is priced at a premium, in theory, making the difference while being neutral to the asset.

It’s certainly not for everyone, and it requires the kind of access to multiple markets and exchanges, and often algorithms, that only serious players like high-end hedge funds can secure to make it a profitable endeavor.

But for investors who meet the criteria, it has proven attractive.

Such “market-neutral” funds have become the most popular strategy among crypto hedge funds, making up nearly a third of all currently active crypto funds, according to PwC’s annual global hedge fund report published last week.

K2 Trading Partners said its algorithm-driven high-frequency cryptocurrency stabilization fund has returned about 1% this year through the end of May, even as bitcoin has fallen 31% in the same period.

Meanwhile, Stack Funds’ long/short ETF with exposure to liquid cryptocurrency saw its largest single monthly loss of around 30% in May, while its arbitrage-focused fund fell 0.2%.

Your money has been frozen

While arbitrage has long been a popular strategy in many markets, the young crypto sector lends itself to this approach as it houses several hundred exchanges around the world with inconsistent regulation, according to the participants.

Hugo Xavier, CEO of K2 Trading Partners, said that arb trading has benefited from the lack of correlation between crypto exchanges: “This is good because you have different prices and this creates arbitrage opportunities.”

For example, Bitcoin traded at $27493 on Coinbase on Monday, compared to $28,067 on Bisq. Bitcoin is down 44% this year, at its lowest level in December 2020.

However, market watchers also point out potential pitfalls, including technical snapshots on exchanges that slow or freeze transactions, potentially robbing ARB traders of their advantage. Some lightly regulated places in smaller countries, which offer many good employer opportunities, pose additional risks.

“It is normal for the exchange to end without an internet connection,” Xavier added. “Your money can be frozen for a reason.”

stress situations

Price discrepancies usually arise due to less experienced retail traders who make up the bulk of cryptocurrency trading, particularly in the derivatives market. Although arbitrage strategies are directional, they tend to perform better when bull markets attract more retail participation.

“Of course, you want to have retail traders on the same exchange you do when you arbitrage because you will have less smart money. When there is a bull market, the retail volume comes back,” Xavier said.

“If the markets are going sideways or going down, the retail traders calm down. And the chances are less because most of the people out there are market makers and they are efficient.”

There has been a shift in recent months, with arbitrage opportunities mostly popping up during “cases of market stress,” said Markus Thielen, chief investment officer at Singapore-based digital asset manager IDEG.

“So the market structure has fundamentally changed on the part of Arbab,” he said, adding that Arbab’s strategy has generated returns of 2% in the past eight weeks.

However, Katrina Hanush, director of business development at London-based crypto maker Wintermott, said ARB trading ultimately had a limited shelf life because inconsistent pricing across various exchanges was bad for investors.

“As more institutional players enter the space, opportunities for employers will be eliminated.”

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Additional reporting by Medha Singh and Lisa Matakal in Bengaluru; Editing by Vidya Ranganathan and Praveen Shar

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The opinions expressed are those of the author. They do not reflect the views of Reuters News Agency, which is committed under the principles of trust to impartiality, independence, and freedom from bias.

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