Cryptoverse: Funds moolah in messy markets

A representation of bitcoin is seen in an illustrative photo taken at the Maison du Bitcoin in Paris, France, June 23, 2017. REUTERS/Benoit Tessier/File Photo

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June 14 (Reuters) – The crypto market is a hot mess, leaving many investors struggling to make money. Enter arbitrageurs.

Bitcoin and other cryptocurrencies have been rangebound or declining since January, leaving your usual long investor with little choice but to sell or wait for the elusive rally.

However, one class of seasoned investors fare better: arbitrageurs, players such as hedge funds that thrive on exploiting price differences between different geographies and exchanges.

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“In May, when the market crashed, we made money. We gained 40 basis points on the month,” said Anatoly Crachilov, co-founder and CEO of Nickel Digital Asset Management in London, referring to their arbitrage strategy.

“Arb trading” involves buying an asset in a cheaper location and simultaneously selling it elsewhere where it is quoted at a premium, in theory pocketing the difference while being neutral on the asset.

It’s certainly not for everyone and requires the kind of access to multiple markets and exchanges, and often algorithms, that only serious players like sophisticated hedge funds can secure to make it a profitable venture.

Still, for investors who respond to the bar, it proves attractive.

These “market neutral” funds have become the most common strategy among crypto hedge funds, accounting for nearly a third of all currently active crypto funds, according to PwC’s annual Global Crypto Hedge Fund Report released last week. .

K2 Trading Partners said its high-frequency crypto arbitrage fund, which is algorithm-driven, had returned around 1% this year through the end of May, even as bitcoin fell 31% over the same period.

Meanwhile, Stack Funds’ long/short trading fund with liquid cryptocurrency exposure posted its biggest monthly loss of around 30% in May, while its arbitrage-focused fund lost 0. 2%.


While arbitrage has long been a popular strategy in many markets, the young crypto industry lends itself to this approach as it has several hundred exchanges around the world with inconsistent regulation, according to participants.

Hugo Xavier, CEO of K2 Trading Partners, said that arb trading benefits from a lack of interconnectivity between crypto exchanges: “It’s good because you have different prices and that creates arbitrage opportunities.”

For example, bitcoin was trading at $27,493 on Coinbase on Monday, compared to $28,067 on Bisq. Bitcoin is down 44% this year and at its December 2020 low.

Yet market watchers also point to possible pitfalls, including technical glitches on exchanges slowing down or freezing trades, potentially robbing arb traders of their edge. Some loosely regulated rooms in smaller countries, which offer plenty of good arb opportunities, come with additional risks.

“It’s normal for a trade to disconnect,” Xavier added. “Your funds may be frozen for any reason.”


Price discrepancies are usually due to less experienced retail traders who make up the bulk of crypto trading, especially in the derivatives market. And, although arbitrage strategies are neutral in terms of direction, they tend to perform better when bull markets attract more retailer participation.

“Of course you want to have retail traders on the same exchange you are on when arbitrage because you will have less smart money. When there is a bull market, retail volume comes back,” Xavier said.

“If the markets are moving sideways or falling, retail traders calm down. There are fewer opportunities because most people are market makers and they are efficient.”

Markus Thielen, chief investment officer at Singapore-based digital asset manager IDEG, said there has been a shift in recent months, with arbitrage opportunities appearing mostly during “stressed market situations”.

“So the structure of the market has fundamentally changed on the arb side,” he said, adding that their arb strategy had generated returns of 2% over the past eight weeks.

Still, Katryna Hanush, director of business development at London-based crypto market maker Wintermute, said arb trading ultimately has a limited lifespan because inconsistent pricing on different exchanges is bad for investors.

“As more and more institutional players enter the space, opportunities for arb will be eliminated.”

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Reporting by Medha Singh and Lisa Mattackal in Bengaluru; Editing by Vidya Ranganathan and Pravin Char

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