How SW Capital Uses Quantitative Analysis and AI to Trade BTC and ETH — Set Social Trader Spotlight

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Set Labs

5 min readMar 25, 2020

Welcome to the Set Social Trader Spotlight Series. In these posts, we give you insight into exciting new traders that will be trading on the Set Social Trading platform. If you want to learn more about Set Social Trading, you can click here.

Today, we’ve got an interview with SW Capital, a new trader on the TokenSets platform who’ll be offering the BTC Long-Only Alpha Portfolio and ETH Long-Only Alpha Portfolio Sets.

SW Capital’s Set will be live on TokenSets in a few weeks — join the Set Protocol Discord to discuss more!

Hey, nice to have you today. I saw on your website that SW Capital is a crypto investment firm focused on quantitative and machine learning-driven strategies. Can you give us an overview of what SW Capital does?

Hi, sure! Thanks for having me. My name is Alexander Markl, I’m the founder and CEO of SW Capital.

At SW Capital we are doing a couple of different things related to crypto finance. Primarily, we are trading our own capital in several different strategies ranging from market making, arbitrage to directional strategies. In addition, we offer managed portfolio, strategy development and research services to our clients.

We have been in the crypto markets since 2014 and have since then created an investment approach that is quite unique in this industry: From trade generation to risk management, our investment approach is almost entirely based on machine learning methods.

We believe that artificial intelligence will offer the most consistent, long-term outperformance in all financial markets, especially in crypto. In principle, our approach works like this: Everyday our algorithms process terabytes of data, ranging from market data and social media posts to activity on the blockchain. Our algorithms find patterns and correlations in this data, which can not be observed by the human eye. Based on these patterns, our algorithms can classify the direction of the market, volatility and risk. We then take the outputs of these systems, model behaviors and develop alpha-generating strategies which are evaluated using a scientific approach.

You have been in the crypto space since the early days in 2014. Can you give us your current outlook on the crypto markets given the recent macroeconomic events?

Absolutely! Unfortunately, the current outlook is a bit grim. The coronavirus is the only macroeconomic event that counts right now and it’s affecting every asset class, including crypto. It’s a black swan event and I think most people are not yet realizing its implications on the world going forward. The problem is that it’s coming at a time when we are not only at the end of a long business cycle, but also of a debt super cycle and at the early stages of the retirement system’s unwinding.

Due to these dynamics unfolding, we are seeing a liquidity crunch in equity and credit markets with correlations through the roof, propelled by the underlying dynamics of passive investing and indexation as well as the huge amount of debt that has built in the system. Does it make sense that Apple is selling off as much as some CCC-rated, soon-to-default junk company? Of course not. But everyone is rushing to sell everything they can to have cash on their hands and crypto is no exception.

The world will be in a deep recession by the next quarter. By then, unemployment numbers will be catastrophic, especially in the United States and Europe. All in all, the base case is a bad recession with the optionality of a depression, depending on how long this pandemic lasts. There is no way that an event like this can be bullish for Bitcoin: There is less money going around, people are losing their jobs and struggling to support their families. Magic internet money is going to be the last thing they’ll care about.

I think the current narrative for Bitcoin is that it’s a hedge against inflation, similar to Gold. While governments and central banks will certainly start printing money like there is no tomorrow and flood the market with programs like QE4 or TARP, the question will certainly be “Do we get inflation?”. The current environment is highly deflationary and due to demographics, dollar strength and other dynamics I don’t see that changing in the near future. However, if we do get it, Bitcoin will flourish as it will act like Gold for the Millenium generation.

We have the halvening coming up in May which in my opinion is going to add further stress to Bitcoin. We have seen lots of enthusiasm from miners after the 2019 H1 price run up: They invested heavily into mining equipment with Bitcoin > $10k and a pre-halvening pump in their mind, almost tripling hash rate in the last 365 days. They have been betting on this huge halvening pump which is going to fail to materialize itself. As a result, a lot of small and medium-sized miners who have weaker balance sheets will have to shutdown their business, sell their mining machines and Bitcoin. That’s why price will probably suffer a bit from the halvening in the short term. In the long term, however, with natural sell pressure reduced by 50%, it’s hard not to be bullish on Bitcoin.

To sum up, in the short term Bitcoin/crypto will probably suffer from the current macroeconomic developments. Plus, there will be shakeout of weak miners around the halvening. Once the economic situation improves and the magnitude of currency debasing that occured in the crisis becomes clear, Bitcoin is going to rise to new ATHs.

Can you go into more detail on the Sets that you’re planning to release on TokenSets? What kind of algorithms will the strategies use?

Initially, we are going to launch with two Sets on TokenSets: BTC Long-Only Alpha Portfolio and ETH Long-Only Alpha Portfolio. Both strategies are the culmination of our work over the last few years, taking our best performing strategies and synthesizing them with a machine learning layer.

The main goal of the Sets is generating better risk-adjusted returns on Bitcoin/Ethereum through a long-only portfolio of our strategies based on quantitative analysis and Artificial Intelligence (AI).

Our approach looks something like this:

Analysis of various Bitcoin/Ethereum datasets, ranging from market, blockchain and sentiment to fundamental data
Development of various short and long-term, alpha-generating strategies backed by machine learning as well as proprietary quantitative models
Live test of strategies and selection of best performers through proven risk metrics
Synthesis of strategies to a balanced portfolio with an additional AI-based portfolio and risk management layer

Anything else you’d like to tell us or your potential followers?

We have recently started putting out research on crypto projects and trading strategies which you can view on our research page. For investors interested in fundamental research as well as quantitative insights on the crypto markets it might be worth a read.

Where can users find more information about SW Capital?

If you want to learn more about us check out our website. For the most recent updates, follow us on Twitter: @sw_capital

Conclusion

We hope you enjoyed reading this interview! SW Capital’s Set will be going live in the next few weeks. If you’d like to be notified of any future product updates, head here to sign up to email notifications!

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