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The Cryptoverse: The Hedge Funds that Profit from Unpredictable Markets

Image: Reuters Berita 24 English -  The cryptocurrency market is a shambles, with many investors failing to make a profit. The arbitrageurs...

Image: Reuters

Berita 24 English - The cryptocurrency market is a shambles, with many investors failing to make a profit. The arbitrageurs have arrived.

Since January, Bitcoin and other cryptocurrencies have been stuck in ranges or on the decrease, leaving the average buy-and-hold investor with little choice but to sell or wait for the illusive rally.

However, one group of seasoned investors is doing better: arbitrageurs, or players like hedge funds who profit from pricing disparities across different countries and exchanges.

"We gained money when the market crashed in May. For the month, we've gained 40 basis points "The arbitrage technique, according to Anatoly Crachilov, co-founder and CEO of Nickel Digital Asset Management in London.

Arb trading entails purchasing an item at a lower price and simultaneously selling it at a higher price, with the goal of pocketing the difference while remaining neutral on the asset.

It's not for everyone, and it necessitates the kind of access to many markets and exchanges, as well as complex algorithms, that only serious participants like sophisticated hedge funds can secure.

It is, nonetheless, appealing to investors who fit the criteria.

According to PwC's annual global crypto hedge fund report released last week, "market neutral" funds have become the most popular strategy among crypto hedge funds, accounting for over a third of all currently active crypto funds.

K2 Trading Partners claimed its algorithmically driven high-frequency trading crypto arbitrage fund has returned roughly 1% this year through the end of May, despite bitcoin falling 31% in the same period.

Meanwhile, Stack Funds' long/short trading fund with exposure to liquid cryptocurrencies lost roughly 30% in May, while its arbitrage-focused fund lost 0.2 percent.


While arbitrage has long been a popular technique in many markets, the new crypto sector, according to participants, lends itself to the strategy because it includes several hundred exchanges spread over a world with inconsistent regulation.

Arb trading profited from a lack of interconnectedness among crypto exchanges, according to Hugo Xavier, CEO of K2 Trading Partners: "That's excellent because you have different pricing and that generates arbitrage opportunities."

On Monday, for example, bitcoin was trading at $27,493 on Coinbase versus $28,067 on Bisq. Bitcoin has dropped 44% this year and is already trading at December 2020 lows.

However, market observers warn of potential hazards, such as technical difficulties on exchanges slowing or blocking transactions, potentially stripping arb traders of their advantage. Some sites with little regulation in smaller countries, which provide a lot of fantastic arb chances, come with additional hazards.

"It's natural for an exchange to go down," Xavier explained. "It's possible that your funds will be frozen for whatever reason."


Price disparities have often occurred as a result of less experienced retail traders, who account for the majority of crypto trading, notably in the derivatives market. While arbitrage methods are direction-neutral, they tend to outperform in positive markets when retail participation is higher.

"Of course, when performing arbitration, you want to have retail traders on the same exchange as you are because there will be less smart money. When the market is bullish, retail volume returns "Xavier explained.

"Retail traders take a break when the markets are heading sideways or down. Because the majority of the people there are market makers and efficient, there are less opportunities."

According to Markus Thielen, chief investment officer of Singapore-based digital asset manager IDEG, there has been a shift in recent months, with arbitrage chances showing more frequently amid "market stress conditions."

"The market structure on the arb side has fundamentally changed," he said, adding that their arb approach earned returns of 2% in the last eight weeks.

However, Katryna Hanush, head of business development at London-based crypto market maker Wintermute, believes arb trading will eventually be phased out due to inconsistency in price between exchanges, which is terrible for investors.

"As more institutional participants enter the market, arb chances will dwindle."

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