Tips from a Crypto Fund Manager to Manage Risk in an Uncertain Time

I vividly remember the fall of 2008, specifically, the day of the first TARP (Troubled Asset Relief Program). I watched the Dow future sell off 50 points with every no vote cast by a Congress member just to bounce 75 points for each yes vote. Five percent price swings in either direction happened in a matter of minutes and anyone who told you they understood what was going on was lying.

By then, I had been trading professionally since graduating college two years earlier. The only markets I had ever known were the tail end of the mortgage boom and the subsequent bust.

Sitting at my desk on Tuesday and Wednesday watching as bitcoin fell from $13,000 all the way down to $9,200 then sharply bouncing back to $11,000 at the end of the day gave me a feeling of complete Déjà vu.

I launched the Crypto Assets Opportunity Fund because I felt there was a rare asymmetric opportunity for outsized gains in the market

For the last 2.5 years I have watched and traded the crypto markets on the side, on average 2–3 hours a day. For the last 6 weeks since the CAOF has launched I have been watching the crypto markets full time and a I have come to a new realization, which I feel bodes just as well for the fund as the original thesis I had for launching it.

The crypto markets are wildly inefficient, and if you trade them with a plan and discipline even in a sideways or down market there are fantastic opportunities to outperform. That being said, there is considerable risk.

I speak with a number of our investors regularly who trade crypto personally. They have varying degrees of experience, capital and expertise.

The month of January has been a roller coaster. The market has seen an obvious $2 billon Ponzi scheme collapse, cryptos explode from network valuations in the hundreds of millions to billions in as little as 72 hours, the same cryptos lose 70% of their value from there and the market wide sell off on last Tuesday and Wednesday of over 20%. Bitcoin traded under $10,000 for the first time since the inception of the CAOF.

At the time of writing the CAOF is up an estimated 5% for the month which compares to declines of 22% for Bitcoin and 29% for the top 10 crypto currencies. As reported by some of our investors conditions have been even worse for others.

As I mentioned, I know of many of you who are trading personally in the space and I am sure there are others involved who I do not know.

I wanted to share some guidance with you in this post on how to stay out trouble while trying to participate in this inefficient market.

1. Do not chase strength or the next hot coin. Everyone has a brother who has a friend who works at Coinbase and says that Tron is about to be listed. This is great if you were long from three cents as it rose to 24 cents, but it is a really risky reason to buy it 18 cents. It went back down to as low as five cents and as I write it is at eight cents. Avoid FOMO!

2. Do not get caught up in the hype. Social and mainstream media are obsessed with crypto markets. While there is some good coverage the majority is uniformed. The below link is a CNBC video from a few weeks ago teaching viewers click by click how to buy Ripple.

https://www.youtube.com/watch?v=x5j3U1bhloY

At the time, Ripple was trading over $3. Today it is at 1.60 and traded as low as 70 cents earlier in the week. At the time, anyone who took this advice was down an astounding 75+%.

3. Do not be scared to take profits or take loses. You will never buy the low and you will never sell the high. Markets this volatile always move more than you will anticipate, do not get blinded by hindsight.

4. Buy on the dips and sell into strength. This may sound obvious, but the biggest losers in crypto are doing exactly the opposite. They are exiting positions in sharp downturns and getting back in later when the coast seems clear… 40% higher. Retail investors tend to buy strength and sell weakness.

5. Do not get in over your skis. The volatility in crypto is unprecedented, anything can happen and you should position size with this in mind.

6. If it sounds to good to be true, IT IS. Bit Connect an obvious Ponzi scheme promising returns of up to 40% a month was shut down by regulators, but not before amassing an amazing $2 billion in invested capital.

No matter how transformational a technology can be to society markets will always over shoot and correct.

I was discussing this week’s price action with one of the sharpest minds I know in the space. He said that in his eyes there are two risks that should be evaluated when faced with a serious decline like we saw earlier in the week.

First, has there been an existential shock? While is not generally considered good news for crypto that a few Asian governments are discussing further regulations, this hardly amounts to a shock of this magnitude. A major hack of Coinbase or of a premier public blockchain are examples of what could constitute this.

Second, has fresh money stopped coming into the market? As the mangers of funds, he and I are in a unique position to answer that question as we know our upcoming inflows. This week the answer to that question for both of us was clearly no.

This is by no means an exhaustive list or an exact science because anything can happen next. But it is thoughtful logical to remember next time we encounter a sharp downturn as you evaluate how to handle the situation.

Involvement in the crypto market can be highly lucrative, but is also exceptionally risky. If you are disciplined and thoughtful you will find yourself with a considerable edge to the average market participant.

Good luck out there!