Crypto 2.0: The NEW Crypto VC + Hedge Fund Hybrid Model

Saw a great chat with Crypto Bobby the other day with the Coventure & Cty Block team here:

One thing that we are seeing as a similar trend is crypto venture funds also being Quant funds. To make things more complex, we are also a mining company to really be a full stack crypto investment fund. As our mining company begins to be more profitable, it will feed right back into our VC & quant hedge fund. The typical persona at a cypto fund is a Silicon Valley product manager, developer, entrepreneur, or past tech focused VC. We are seeing less private equity buy side and sell side people truly running the deep strategies of the fund but also looking at the team, tech, & market size as they do in the Valley & Alley. We are also seeing funds building out their own internal data that is proprietary to be able to trade against for building new strategies. The great thing is that we are all beginners in this state…and the reality is that there is no way that any one of us can say what will happen in either the next few months or even in the next year. Things have a possibility to completely transform by a step function but things also have a possibility to not. It’s been a best practice for many to study up on things on their own and then add their own commentary to contribute to the ecosystem.

As noted by Willy Woo in his post, modern portfolio theory tells us that rebalancing can be used to manage downside risk. Although the math might make sense at some point, the mixed portfolio baskets that these rebalanced and actively traded portfolios use don’t necessarily work the same way as the public markets do since they base things on correlations or reverse relationships of industries. For an example, the portfolio construction of a typical portfolio could be heavy in weighting on stable tech FANG companies, but having a small set of holdings in risky international securities to balance it out. The problem is that Crypto isn’t mature enough to have these types of sectors and industries to replicate that.

An interesting technique when looking at an alternative to % of holdings is the token suppply. Willy Woo quotes “To this day her existence and wealth remains a legend that is whispered between only a priveleged few insiders within the industry. She would take 1/100 of the token supply if she really liked the project, or maybe 1/1000 of tokens if it was more speculative. Of course scale this to your own means.

Venture Capitalists who work in the domain of emerging tech do exactly this, they take a percentage of the company in (hopefully) the Series A, they never sell out until their liquidity event, the IPO or acquisition. They understand the power law dynamics between the winners and losers.”

Julian Zegelman shares great list of notes here from the NY Crypto Hedge Fund Summit which was a very private event. Here’s some takeaways:

1. Statistics of total dollars invested in ICOs in late 2017 and 2018 to date show a healthy market — but it is skewed! Bigger projects — think Telegram, EOS, Basecoin and similar scale — take all of the available capital. Lately it looks more like a “winner takes all” approach. Little capital left for smaller early stage ICOs.
2. Number of ICO companies plateaus — less deals on the market but on average they are higher quality than a year before.
3. Given the state of regulations today, the ICOs begin to look more and more like traditional equity financing deals — more emphasis on legal and financial structuring.
4. Numerous crypto funds believe that STOs (security token offerings) are the future and expect an explosion in number of such STOs in 2019.
5. Influx of institutional capital into digital assets is still severely limited by lack of infrastructure — high demand for custodian solutions, insurance, scalable trading technology and banking partners. It is not a question of “why” but “how” for many large institutional players eyeing the digital assets space. Give them the tools and they will join.
6. As more players enter the crypto trading space, the amount of arbitrage and hedging opportunities decreases — becomes harder to get allocations in popular token sales, less possibilities for information asymmetry and arbitrage. More players entering — lower returns overall = more stable and mature market for digital assets.

Now on to Quant Fund Strategy, the challenge with using traditional backtesting is that crypto has only been out for the last few years. So no fund is going to sit there and tell you that you can easily just use backtested historical data! According to Crypto Quant Research

“Investors realistically only have two choices when it comes to making an investment: speculate on mean-reversion or momentum. The latter effectively speculates on a continuation of a trend, which might be directional upward or downward moving. Trend following emerged as a definite style in the investment community in the 1980s when futures trading became more available and commodity trading advisers (CTAs) developed systematic trading programs to exploit trends in commodities. Over time other asset classes like bonds, equities and currencies were added. Given that Bitcoin futures started trading this week, it is likely that investment firms will apply their systematic trend following strategies to cryptocurrencies. In this short research note we will analyse trend following strategies in the cryptocurrency space.”

“The chart below shows the performance of two trend following systems, one based on an equal-weight allocation and the other on a risk parity model. We can observe that both profiles are almost identical and show negative performance from 2014 to 2016 and then a steep upwards trend thereafter.”

“Distribution of long and short signals of the trend following models over time. The chart below shows that initially the system was 100% long, indicating that all cryptocurrencies showed positive twelve-month performance at that point in time. In 2014 and 2015 most cryptocurrencies fell in value and the trend following system increasingly entered short positions. Once cryptocurrencies started recovering in 2016 the system changed direction again and has been 100% long since mid-2017.

When it comes to risk metrics, Crypto Quant Research states that “Trend following systems aim at capturing long-term trends, either positive or negative, and minimising risk by diversifying across markets. In the cryptocurrency universe diversification is difficult as there are only 14 cryptocurrencies with market capitalisation above $1 billion, which may explain the higher drawdowns of the trend following systems.”

Crypto Quant Research also states “The risk-return ratios of the trend following models are higher than those of the market capitalisation-weighted cryptocurrency index, but not of the equal-weighted index. It is worth noting that the current risk-return ratios are unsustainably high. As a comparison, the risk-return ratio of the S&P 500 has been 0.4 since 1926.”

“Covesting is also an interesting tool that helps to produce a one-stop solution for cryptocurrency traders and investors. Since the infrastructure of COVESTING is being built by investment industry professionals — importance of timely market data has not been overlooked. We believe it is our full responsibility to provide not only cutting edge trading technology and personalized customer service, but educate the world and our community about Cryptocurrency investing. This is why we have designed the Crypto Intelligence Portal.

The Crypto Intelligence Portal is created to be a robust educational resource and knowledge base built by traders for traders, featuring latest market news, unique content created by leading crypto experts aimed at educating the community, trading ideas, and the ability to discuss latest market developments. Here you can find crypto-trading 101 which explains the essentials of Cryptocurrency investing, as well as video tutorials to help new investors. For experienced traders, advanced trading tutorials, strategies, and technical analysis from industry professionals will be included.”

We seek to share the knowledge and best practices with our community.

Under no circumstances should any material on this web site be considered as an offer to sell or a solicitation of any offer to buy an interest, token or coin in any individual company or investment fund. Any such offer or solicitation will be separately made only by means of the Confidential Private Offering Memorandum relating to the particular fund or persons who, among other requirements, meet certain qualifications under U.S. federal or other international securities laws and generally are sophisticated in financial matters, such that they are capable of evaluating the merits and risks of prospective investments

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