Posted November 19, 2022 at 9:48 amUpdated November 19, 2022, 9:55am
After two euphoric years (2020, 2021), 2022 tastes like a detour for cryptocurrency, bitcoin and NFT traders. In the first 10 months of the year, crypto hedge funds lost nearly half of their value according to various index providers. On November 8, when the market woke up to the sinking of FTX, it lost 12% in a single day according to NilsonHedge. The fund’s performance has been so poor that half of the managers in this database have stopped providing them. Enough to wish massive fund closures this year. Some traders had bet on the market rebound by buying bitcoin and ether just before the crash.
Up until the storm triggered by the FTX bankruptcy, volatility had declined due to massive deleveraging (leverage to speculate further). With rising rates, scandals and woes in the cryptocurrency lending industry, funds and traders have lost access to such preferential liquidity terms. With less money on hand, low margin strategies that require large volumes no longer become profitable. However, the renewed volatility has not helped specialized quantitative funds much.
Volumes on crypto derivatives have become much higher than spot volumes, which have declined this year unlike the first. Every day $50 billion is traded in bitcoin derivatives alone, and funds deal with specialist firms such as FalconX. “Previously the large “global macro” hedge funds (Ed: investing in all markets) mainly focused on bitcoin and ether futures contracts. They are starting to gain exposure to the top 10 cryptocurrencies through derivatives (swaps), notes Oliver Yates, co-founder and director of Aplo, an Autorité des Marchés Financiers approved cryptocurrency broker.
Little active in trading for the moment, the big banks will perhaps take advantage of the difficulties of certain companies to acquire market shares or teams of traders. But before taking any action, they need to see more clearly the vulnerabilities and risks of chain failure in an industry known for its opacity.
High Frequency Trader
In such a fast-paced environment, high-frequency trading firms (THF), present on cryptocurrencies, might have an advantage over other traders, their speed related to their advanced technologies. However, they cannot easily and systematically implement their extremely fast trading strategies due to the structure of most platforms, market fragmentation 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 THFs also place their servers. Only a few platforms like Deribit have a data center, in this case in the UK for this player.
“Historically, the technological infrastructure of the main 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 cryptoassets are also exchanged The different blockchains also have incompressible latencies ranging from a few tens of seconds to a hundred milliseconds,” explains Guilhem Chaumont, co-founder and general manager of Flowdesk, a trading company aimed at crypto and token issuers. On small cryptocurrencies, most companies do not run the risk that trading will not be able to value these assets.In a crisis like the one of 2022, many cryptocurrencies are completely neglected and the first 100 capture all the volumes.
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