A Cryptocurrency Hedge Fund Manager’s Perspective On The Effects Of “Crypto Time”

It is 4:30 AM, I’ve been up since about midnight. I couldn’t sleep so I came into the office to catch up on some things and play around with some “fun” projects like coding up a new backtesting engine and building out some additional strategies for the hedge fund. If you know me, you know that I am no stranger to sleepless nights.  It’s just a thing with me, it always has been. Fortunately, I’m not one of those toss-and-turn kinds of people.  When I wake up, I’m up, my mind is already thinking about some puzzle or some new project I want to start. “Start” being the operative word there, as my wife will surely explain, I’m excellent at starting new things, finishing them to completion, well, that’s another story. Speaking of which, now where was I? Ahh yes, the cryptocurrency time warp. I just watched bitcoin stretch its wings and touch a new all-time high of $19,915 at 3:10 am Pacific Time.  A pretty impressive occasion, and certainly one worthy of celebration, however, over the subsequent 20 minutes, it dropped almost $1,000 and traded at $19,002.     

It is a volatile asset, so this should come as no surprise, in fact, just the other day during the Thanksgiving holiday, it did almost this exact same thing see the chart below.

So, what then does that have to do with a time warp? Well, it’s all connected, me not sleeping, cryptocurrency volatility, bitcoin hitting new all-time highs, exciting new projects, backtesting hedge fund trading strategies in crypto, and this tweet I saw from one of my Twitter buddies, @zackG1982 that got me thinking.

You see, when we built out our equity strategies that were the foundation for the Reality Shares Exchange Traded Funds and Indexes, we were using about twenty years of data, in some cases, 50 years of data to build something robust enough to feel comfortable that the signal is real and not just a fluke.  However, when it comes to cryptocurrencies, one year of data is more akin to five years of stock market data. Cryptocurrency markets are open 24 hours/day, 7 days/week.  Compared to 6.5 hours/day and 5 days/week in the traditional equity markets.  Bitcoin doesn’t stop trading for Thanksgiving, and it certainly doesn’t take a half-day for the day after Thanksgiving. Bitcoin global, it is open all day every day. You don’t need to call your banker and wait for the branch to open up to send a wire, or execute a trade, you just send it wherever, whenever.  

As if the additional trading and market hours weren’t enough, these markets are unregulated, they are raw, organic, and messy. Significant leverage is available and traders use it. These markets are not for the faint of heart.  It is like cage fighting vs boxing or to use a less violent and apt analogy, it’s like cooking from scratch vs. using a Betty Crocker cake mix. The cryptocurrency markets are the breeding ground for a new type of investor. An investor who learns how to take care of themselves. How to watch out for scams, how to make their own decisions, and how to apply a healthy degree of skepticism to everything they read or hear. This new investor doesn’t need to be coddled with over-regulation and bureaucracy.

Certainly, mistakes will be made, many investors will touch the proverbial “hot stove” but because this market is so volatile and littered with warning signs, at every turn, they are more apt to tread lightly at first. Ironically, the lack of regulations and safety blankets creates a heightened sense of responsibility on the investor/speculator. They are more inclined to think twice about diving in head first before if they first test the water level, and because cryptocurrencies are so volatile, they don’t have to risk a great deal of capital to be in a position to see significant potential rewards. They can risk smaller allocations of capital, and learn five times faster than their equity investor brethren. 

As I pointed out above, a “cryptocurrency year” is like five years in the traditional stock market, so 3-5 years of cryptocurrency investing, is the equivalent of 15-25 years of stock market wisdom, that’s almost a lifetime of lessons. Look back at the last five years of the stock market, and compare that to the last five years of cryptocurrency markets, think of all the learning moments, market shocks, extreme bull and bear cycles, scams, hacks, new technologies, deprecated technologies, upgrade cycles, economic theories, copycat competitors, changing narratives, meme wars, proselytizers, get-rich-quick scammers, YouTube experts, you name it; it is all far more explosive, much more frequent, and in my opinion, significantly more engaging than the traditional markets where asset managers and investors struggle to eke out enough basis points to justify the effort, some succeed, but most fail. 

Entering the cryptocurrency time warp is like hitting the 5x speed button on a podcast or audiobook. So much to learn, so much opportunity, and at the same time, so much uncertainty and the realization that it will be impossible to comprehend everything. Sound like a nightmare? No way, what an incredible time to be alive. I love this asset class and you will too if you give it a chance. Consider how daunting a busy seven lane interstate freeway would feel to a brand new driver. It all starts with an on-ramp, then the slow lane, then over time, a lane change and before long, you are navigating in and out of traffic like a pro. Cryptocurrencies are no different. It all starts with that first incremental step.

Don’t get me wrong, I am very proud of the ETFs and the Indexes we built at Reality Shares. In a world where most money managers can’t beat the S&P 500, the LEAD Dividend Growth ETF handily outperformed the S&P since inception as well as most of the peers in the dividend growth category. The BLCN ETF significantly outperformed since inception, and DFND which is long and short, meaningfully outperformed the HFR Equity Hedge Fund Index since inception.  In fact, DFND even had a go at outperforming the S&P 500 which says a lot considering it only has about 50% net exposure. However, even with all of that, it wasn’t really satisfying. Unfortunately, the work we were doing was appreciated by only a small handful of the ETF investing public. The average ETF buyer didn’t appreciate the effort, they would happily buy an ETF that underperformed by 2-3%/year after fees long as they could tell their clients the fees on their chosen fund were lower. Let me repeat that, “NET of FEES”, utterly perverse logic, and when you add in all of the regulations, the intermediaries and service providers, we felt like our whole existence was just keeping the service providers and law firms in business.

Cryptocurrencies and digital assets, on the other hand, show great promise for asset managers, financial advisors, and individual investors to add value, to be compensated for it, and to feel good knowing that the value they added was worth more than the compensation they received. Ahhhh, it just feels so nice writing that.   

Please don’t mistake my meaning, adding value in equity selection is and will always be a noble pursuit, and we will continue to manage and service the ETFs and other ETF issuers through our equity indexes, but if I’m perfectly honest, that is not what gets me out of bed at midnight. The world doesn’t need another equity ETF to diversify their 1,500 other equity ETFs. Nope, what the world needs is access and on-ramps to this new and novel asset class. Now that I can get behind, opening the doors, building the bridges, paving the on-ramps so the “crypto-curious” don’t get left behind. With OnrampInvest.com we aim to open the doors for financial advisors, with Blockforce Capital, we are opening doors for institutions and accredited investors. Unlike the saturated traditional hedge fund market, we believe there is a huge need for risk-managed quantitative investment funds like the Blockforce Capital Multi-Strategy Hedge Fund or other funds offered by Pantera, and Blocktower, they are out there, but the space could use a lot more competition.

For the individual investors, unfortunately, we are unable to accept individual “non-accredited” investors in those funds, but rest assured, wherever possible, we are also going to open-source our intelligence for individual investors so they can accelerate their own investment journey.  We hope this wisdom we share along with our various algorithms and models will help individual investors avoid some of the common pitfalls that early investors are prone to. On this note, we are proud to partner with Emberfund.io.  We developed  “The Quant” BTC trading strategy for Ember customers to invest as little as $250 into quantitative trading strategies developed by our team as well as other great asset managers. Their solution takes full advantage of the blockchain, offering a non-custodial solution eliminating the need for a third party intermediary or custodian in the middle. In addition to Ember, I will do what I can to build and offer additional strategies on other investor platforms, but the next initiative will be building out the Onramp and Blockforce Capital Cryptocurrency Research portal for investors and advisors to get the education that is sorely lacking in this space.

Okay, I think it’s time for me to get back to work. 

Well, would you look at that, It’s 7:00 AM now and BTC has rallied all the way back to $19,400.  Never a dull moment.

Ideas on how to get started

A word of advice for those of you looking to invest for the first time in this asset class.  It doesn’t matter if you are investing $100 or $1 million dollars, stick with the basics first, don’t try to pick the next bitcoin or eth. I see too many people plowing into XRP and other “penny” assets because they think they can “buy more”. If an asset doubles, it doubles, it doesn’t matter if you have 0.01 units of something valued at $20,000/unit (investment value $200) or 1 million units of something valued at $.0002/unit (investment value $200). They are both worth $200 the cheaper per unit price does not make the project or token “cheaper”. Please hear me out on this. Please.

You don’t have to buy a whole bitcoin, bitcoin is divisible into 100,000,000 “Satoshis”.  If you insist on telling your friends you own a bunch of something, strive to buy 10,000,000 Satoshis. (About $2,000 USD) at ~ $20,000/BTC. 

1 Satoshi = 0.00000001 BTC

100,000 Satoshi = 0.00100000 BTC

1,000,000 Satoshi = 0.01000000 BTC

10,000,000 Satoshi = 0.10000000 BTC

100,000,000 Satoshi = 1.00000000 BTC

A simple rule of three: keep your initial investment relatively small compared to your investment net worth. Don’t make what I refer to as, “stomach acid” investments.  If you think it is too much, then it probably is. I like the idea of “the rule of three”. 

  1. Invest 3% of your investment portfolio today or over the next few months,
  2. Dollar cost average with 3% of your discretionary income as you earn it, and
  3. Commit to no less than a 3-year time horizon on any of it.  Once you have this in place, send me an email, we can discuss some rational next steps for securing it, rebalancing, diversifying, etc.

BTW, if the rule of three is too much stomach acid, try the rule of “one”, or even the rule of “0.5” just dip your toes in the water.  These are still very early days, there is no need to rush in blindly.  Just get started. Happy investing!