The challenges facing crypto fund managers in the current market climate show just how volatile and young the industry is as a whole.
From listening to our sources, it’s as difficult as it was for the first generation of hedge fund managers in the 1990s: operating in a market where giant price swings rule the day, with almost no infrastructure compared to the kind enjoyed by participants in traditional financial markets.
“It’s much more challenging in this space because the tools in our tool box are limited,” says Jeff Dorman, CIO at Arca, an investment management firm specialising in digital assets.“Every service provider from fund administration, custody, trade order management systems, exchanges and OTC (Over-The-Counter) providers, and data providers are brand new.”
“It’s the equivalent of trying to build Uber while the car was simultaneously being invented,” he added.
If the trajectory of the global hedge fund industry is the benchmark, with today’s measures totaling assets under management (AUM) valued at more than $3.2 trillion in traditional markets, crypto has a lot of room to grow from estimated levels of $4 billion currently.
Before that growth will be possible, infrastructure must be upgraded and improvements added to the way in which fund managers conduct their trades, especially via sophisticated software known as trade order management systems.
These programs, a.k.a “bots”, possess the ability to execute a trade in real-time with minimal slippage thereby outperforming a human trader and locking in greater profits before the order is fully processed. Crypto currently lacks the level of sophisticated software when compared to that of Wall Street.
Additionally, during times of extreme volatility, trade order management systems ensure a perfectly executed trade, despite exchange server lag, when traders are at the greatest numbers and the volume can impact settling price.
Hedge funds active in crypto markets have been susceptible to violent price swings of the coins, endured throughout 2017, with a sudden surge in capital entering into the space before flowing out again in 2018.
As a result, BTC went from bullish to bearish to bullish again, all within the space of two years, as its price dropped from almost $20,000 to close to $3,100 and now up to the $8,100 level.
With every investment brings risk and whether you’re a retail investor or a hedge fund manager from a major crypto firm, the outcome remains the same: you’re susceptible to bitcoin’s price swings and the growing pains of a new industry.
Rather than operating blind, fund managers and firms prefer to have a rich price history in front of them. This means trusted data sources for quantitative decision making and greater custody options when it comes to insuring against exchange hacks and digital wallet theft.
PwC, one of the largest global accounting firms, issued a long white paper on the subject, looking into the performance of fund managers in the space. In fact, PwC is building an entire practice around crypto, meaning that there must be something there for them in the long-term.
As PwC Hong Kong director Henri Arslanian has said:
“We expect the industry to go through a rapid period of institutionalisation and implementation of sound practices over the coming years.”
As investors, entrepreneurs and US market watchers ride the nail-biting price roller coasters of this market, one thing is certain. As Uber revolutionized the taxi market, with its million-dollar medallions now worth just pennies, while empty black cars are suddenly all full, crypto trading will upend traditional investing.
We’re just not exactly sure how, but it should be an exciting ride, hopefully, with a friendly driver behind the wheel… or are we talking driverless Uber? Maybe that’ll be the next revolution.
Disclosure: The author holds no cryptocurrency at the time of writing
Stack of coins image via Shutterstock
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