It’s one of the best-known—albeit diminishing—discrepancies exploited by the likes of Alameda Research, a crypto trading firm filled with former traders from high-frequency shops. A famous example is the kimchi premium, the tendency for Bitcoin to trade higher in South Korea thanks to strong demand and the difficulty of moving money around to profit from the gap.
With no one-stop prime broker to centralize trading books and offer clients leverage across venues, traders like Treinkman face plenty of challenges in their bid to arbitrage price gaps, but say the rewards are commensurate.
And the opportunities pop up everywhere. For instance, when longer-dated futures in pretty much any asset class trade higher than the spot price—known as contango—the former almost always converges to the latter as the contracts mature.
That’s popularized the crypto basis trade, where an investor goes long the spot rate and shorts the futures.
When Bitcoin last peaked in mid-April, the December contracts were nearly 4% higher than August which were in turn about 2% higher than the spot reference rate, as speculators unleashed bets on rising prices. By contrast, the December oil contracts were trading beneath August’s on the same day, according to the data compiled by Bloomberg.
“The crypto market is still dominated by retail investors who use excessive leverage and bid the premiums for futures,” said Nikita Fadeev, a fund manager at $60 million crypto unit at quant firm Fasanara Capital.
Fasanara Digital also trades short-term momentum and a form of statistical arbitrage, which bets on gaps between various tokens eventually closing like when Ethereum is surging but Bitcoin isn’t.
As assets grew, the fund recently appointed Laurent Marquis, the former co-head of derivatives at Citadel Securities, as chief risk officer, and Steve Mobbs, co-founder of quant fund Oxford Asset Management, as senior adviser.
Over in Zug, Switzerland, St. Gotthard Fund Management has transformed from an old-school family office writing options on Swiss shares to a digital evangelist in its income strategy aiming to yield 8% a year. Just like in stocks, the investing style sells derivatives to take advantage of big demand to hedge price swings—which causes the volatility priced into options to be higher than what’s likely to come to pass.
For option writers like St. Gotthard, that means the premiums are much juicier, though they also come with a higher risk of having to actually pay out, like an insurer during an earthquake.
“The major difference at the end of the day is how much premium retail investors are willing to pay,” says chief investment officer Daniel Egger. “On the other hand of course we’ve written calls we wished we hadn’t in those moves up.”
In fact, going long crypto over the past year has proved the easiest and most profitable way to tap into the boom. And for those choosing the systematic route, competition is rising.
For example, in order to get an edge in its market-making strategy, BKCoin has recently installed servers at Asian crypto exchanges, a move known as co-location in the high-frequency world of stocks. It’s a sign the industry is growing up fast.
“In any emerging market we’ve seen these inefficiencies decrease over time,” said George Zarya, founder of Bequant, a crypto prime brokerage that caters to systematic traders. “There are more professional players that come in.”
This article was provided by Bloomberg News.