Posted Nov 19, 2022 9:48 AMUpdated on Nov. 19, 2022, 11:30 a.m.
After two euphoric years, 2022 has a flavor of rout for crypto, bitcoin and NFT traders. Over the first 10 months of the year, crypto hedge funds have lost almost half of their value according to the various index providers. On November 8, when the market woke up to the sinking of FTX, they lost 12% in a single day according to NilsonHedge. Fund performance has been so poor that half of the managers in this database have stopped delivering them. Enough to augur massive closures of funds this year. Some traders had bet on the market rebound by buying bitcoins and ethers just before the plunge.
Until the storm triggered by the bankruptcy of FTX, volatility had fallen due to the massive reduction in leverage (leveraging to speculate further). With rising rates, scandals, and the woes of the crypto lending industry, funds and traders have lost access to such preferential liquidity terms. With less money at their disposal, low margin strategies that require large volumes no longer become profitable. However, the renewed volatility did little to benefit specialized quantitative funds.
Volumes on crypto derivatives have become much higher than spot volumes, which have fallen this year unlike the former. Every day $50 billion is traded in bitcoin derivatives alone and the funds deal with specialist companies like FalconX. “Previously the large “global macro” hedge funds (Editor’s note: which invest in all markets) were mainly focused on futures contracts on bitcoin and ether. They are starting to gain exposure to the top 10 cryptos through derivatives (swaps), notes Oliver Yates, co-founder and director of Aplo, a crypto broker approved by the Autorité des Marchés Financiers.
For the moment not very active in trading, the big banks will perhaps take advantage of the difficulties of certain firms to acquire market shares or teams of traders. But before any initiative, they must see more clearly about the vulnerabilities and risks of chain failure in a sector renowned for its opacity.
High frequency trader
In such a hectic environment, high frequency trading firms (THF), present on cryptos, could have an advantage over other traders, their speed linked to their advanced technologies. However, they cannot simply and systematically implement their extreme speed trading strategies due to the structure of most platforms, the fragmentation of the market and the very nature of the blockchain. Their servers are hosted on the “cloud” (internet) unlike traditional exchanges which are hosted in data centers where the THFs also place their own servers. Only a few platforms like Deribit have a data center, in this case in the United Kingdom for this actor.
“Historically, the technological infrastructure of the major platforms is located in Japan, which creates, for example, a latency (Editor’s note: transmission delay in computer communications) of the order of 300 milliseconds with Europe, where there are also traded cryptoassets. The different blockchains also have incompressible latencies which vary from a few tens of seconds to a hundred milliseconds”, explains Guilhem Chaumont, co-founder and general manager of Flowdesk, a trading company intended for issuers of cryptos and tokens. On small cryptos, the majority of firms do not take the risk of trading being unable to value these assets. In crises like that of 2022, many cryptos are completely neglected and the first 100 capture all the volumes.
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