© Reuters. FILE PHOTO: A representation of Bitcoin is seen in an illustrative photo taken at La Maison du Bitcoin in Paris, France on June 23, 2017. Photo: Benoit Tessier/Reuters
Written by Lisa Pauline Matakal and Medha Singh
(Reuters) – The cryptocurrency market is in chaos and many investors are struggling to make money. Enter the reviewers.
Other cryptocurrencies are either range-bound or down since January, leaving the buy-and-hold investor with little choice but to sell or wait for the elusive rally.
However, one class of seasoned investors does better: arbitrageurs, and players love hedge funds that take advantage of exploiting price differences between different regions and exchanges.
“In May, when the market crashed, we made money. We went up 40 basis points this month,” said Anatoly Krashelov, co-founder and CEO of Nickel Digital Asset Management in London, referring to their arbitrage strategy.
Arb-Trading involves buying an asset at a cheaper price in one place and simultaneously selling it in another where it is listed at a premium, theoretically making the difference while looking at the asset neutrally.
It is certainly not for everyone and requires access to multiple markets, exchanges and often algorithms that only serious players like high-end hedge funds can secure to make it a profitable venture.
But for investors who meet the criteria, it has proven attractive.
Such “market-neutral” funds have become the most popular strategy among crypto hedge funds, accounting for nearly a third of all currently active crypto funds, according to a global crypto hedge fund report released by PwC last week.
K2 Trading Partners said its algorithm-driven high-frequency trading fund has returned about 1% this year through the end of May, despite Bitcoin dropping 31% over the same period.
Meanwhile, Stack Funds’ long/short ETF, which is exposed to liquid cryptocurrency, posted its biggest monthly loss of around 30% in May, while its arbitrage-focused fund lost 0.2%.
Your money has been frozen
While arbitrage has long been a popular strategy in many markets, the nascent crypto sector lends itself to this approach as it houses several hundred exchanges around the world with inconsistent regulation, according to the participants.
Hugo Xavier, CEO of K2 Trading Partners, said that arb trading has benefited from the lack of correlation between cryptocurrency exchanges: “This is good because you have different prices and this creates arbitrage opportunities.”
For example, Bitcoin traded at $27,493 on Coinbase (NASDAQ 🙂 on Monday for $28,067 on Bisq. Bitcoin is down 44% this year and is down from its lows in December 2020.
However, market watchers also point out potential pitfalls, including technical glitches in exchanges that slow or freeze transactions and deprive arbitrage traders of their advantage. Some lightly regulated places in smaller countries that offer many good employer opportunities pose additional risks.
“It is normal that the exchange process stops being connected to the Internet,” Xavier added. Your funds may be frozen for any reason.
Price differences have usually occurred due to less experienced retail traders who make up the bulk of cryptocurrency trading, particularly in the derivatives market. And although arbitrage strategies are directional, they tend to perform better when bull markets attract more retail participation.
“Obviously you want retail traders on the same exchange as you if you are arbitrage because you have less smart money. When there is a bull market, the retail volume comes back,” Xavier said.
“When the markets move sideways or go down, retailers calm down. The chances are less because most people out there are market makers and they are efficient.”
There has been a shift in recent months, with arbitrage opportunities emerging primarily in “market stress” situations, said Markus Thielen, chief investment officer at IDEG Digital Asset Manager in Singapore.
“So the market structure has fundamentally changed on the part of Arb,” he said, adding that the Arb strategy has generated returns of 2% over the past eight weeks.
But Katrina Hanush, director of business development at London-based crypto maker Wintermott, said Arb trading ultimately has a limited shelf life, as inconsistent prices across exchanges are detrimental to investors.
“As more institutional actors enter the space, the opportunities for Arb are being eliminated.”