Bitcoin Alpha: The Tantra Approach
When it comes to crypto trading and investing, there are more opinions and investment theses than there are cryptocurrencies. And there are A LOT of cryptocurrencies. In a world in which everyone claims to be an expert, the only certainty is that no one is an expert.
From the Fat Protocol Thesis to the rise of DeFi, we have seen some narratives fail outright, while others remain to be proven or disproven.
Regardless of one’s overall thesis, time has shown that certain practices and approaches work, and others do not…
Let’s briefly explore:
The “Gut-Feeling” Approach
We shouldn’t need to write about this approach, but unfortunately there are still far too many people who believe in trusting their intuition when it comes to timing the markets. “Trust your gut,” may be sound advice if you’re trying to figure out if you’re gluten-intolerant, but if you’re relying on a gut feeling to decide when to buy or sell, it’s likely you’ll fall prey to any number of the biases to which humans are susceptible. You might get lucky once or twice, but unless you have a super-gut, thus far undocumented by science, chances are you’ll get REKT eventually.
The Technical Analysis Approach
Love it or hate it, Technical Analysis is a staple of crypto trading. But even its most loyal adherents recognize that TA is merely a tool in one’s arsenal for making predictions and understanding trends. And unfortunately there are far too many charlatans and amateurs out there who are billing themselves as experts. More often than not, new traders fall prey to bad, TA-based predictions, or worse, after a minimal amount of study and practice, they believe that they can use TA like the experts who have 20+ years of trading experience. But this is not the case.
TA is not a crystal ball or a copy of tomorrow’s newspaper that you somehow got your hands on today. TA is at best, a weather forecast. Meteorologists do often get it right, but how many times have you checked the weather on TV or online, only to look outside and see that it’s raining when it’s supposed to be sunny with blue skies?
In the absence of fundamentals, technical indicators matter most. Technicals can speak to how traders and investors will react to certain prices, but while most people who post TA charts may have good assumptions, often they will fail to properly act on them. Or worse, when assumptions prove wrong, they will fail to close the trade and get out while there’s still time.
The Quantitative Approach
Quantitative Analysis makes use of complex mathematical and statistical models in order to understand the markets and the behavior of market participants. Like TA, QA is merely a tool in the arsenal. Financial markets crank out new data points every day (24 hours a day in the case of crypto markets), and this allows quants to build out highly detailed models from which to understand trends and derive predictions. But models can only go so far, and good quants understand that no model can predict the future with 100% accuracy. Quantitative models deal in probabilities, not certainties.
When individuals or companies utilize quantitative analysis to try to time the markets, this can lead to catastrophic failure and loss of funds. Tantra Labs’ quantitative analyst and researcher, Kagen Atkinson writes:
In many cases, this stems from mistakenly overfitting their analysis to a small historical window of time, such as 1–2 years. This is the biggest oversight in TA, not using enough data. Second, going after too high of sharpe ratio will not generalize to bitcoin over the long term.
Any quant worth his or her sats, also knows that fund management is a key aspect to successful trading. If your model predicts that price will go up and you go long on a position only to see the market go against you, that kind of mistake will only get you rekt if you bet the farm. The best traders in the game aren’t always right. But they are right more often than they are wrong.
The Tantra Approach
At Tantra Labs we have developed our own way of doing things that is both quantitative and systematic.
As a company, our mandate is to generate bitcoin alpha for our lenders and investors. And we have successfully done so, not by trying to time the markets, but by taking advantage of the volatility inherent in the crypto currency ecosystem.
We use technical analysis and quantitative analysis to develop trading strategies, but before deployment, these strategies are tested repeatedly using our proprietary back-testing and forward-testing engines. And when strategies prove to be successful, we use them to help generate additional alpha-seeking strategies. Test and refine. Test and refine.
It is not uncommon for our quants to mine through hundreds of ideas before landing on a thesis that can be used as the basis for our machine learning optimization systems.
Furthermore, we are acutely aware of our shortcomings as human beings. This is where AI, automation, and algorithmic trading come in, because human beings are incredibly fallible. At Tantra Labs, we take the human emotion out of the trade execution and strategy validation processes. Emotion has no place in our live trading-system, because we don’t allow for it. However, human emotion, contextual understanding, and intuition do play a large role in the strategy development processes, as they help us narrow the search of infinite possibilities in models.
Human fallibility is a real problem that we have successfully addressed, but there is also the very real possibility of risk to order execution. At Tantra Labs our quants engineer algorithms so as to account for exchange outages like the ones recently seen on Bitmex and Deribit during this latest market drop. The effects of that drop, compounded by exchange outages, led to widespread loss of funds by individuals and companies, some which have been forced to close up shop.
Our algos are prepared for these situations because they do not rely on specific prices and specific times, but rather on average prices over a longer period of time. When orders do not go through, the algos factor in the missed orders and fill them when the exchanges once again become responsive. Note that this is happening every second.
For Tantra Labs, the drop and subsequent outages proved to be a hugely successful stress test of the systems we have worked so hard on building and refining. Not only was the Tantra Labs portfolio hedged short, fulfilling our mandate as a prop desk to systematically generate more bitcoin from our bitcoin balance sheet, but our trading engine successfully traded through all the exchange outages and volatility without one single intervention from our team.
At Tantra Labs we allow the machines to tell us which strategies work and which don’t, and more importantly, we listen to what they tell us. Then, by automating our systems to generate properly risk-adjusted returns, all the while, hedging against exchange risk, Tantra Labs is able to offer some of the highest returns on lending in Bitcoin.
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Author’s opinion only. The views and opinions expressed in this article are those of the author and do not necessarily reflect the position of Tantra Labs Inc. or any other company. Examples of analysis performed within this article are only examples. They should not be utilized in real-world investment decisions as they are based only on very limited information. Assumptions made within the analysis are not reflective of the position of Tantra or any company.
Non-reliance. The information set forth herein is for information purposes only and should not be relied on or construed as investment advice, counsel, or solicitation for investment in Tantra or any other company. Interested investors should seek appropriate independent professional legal, investment, and tax advice prior to relying on any of the material contained in this article.
Forward-looking statements. Certain information set forth herein contains forward-looking statements that give a reader the opportunity to understand the author’s beliefs and opinions with respect to the future. These statements are not guarantees of future performance of Tantra or any other company and undue reliance should not be placed on them, as they necessarily involve known and unknown risks and uncertainties.
Not a securities offer. This article does not constitute an offer of securities by Tantra or any other company.
