E11: Institutional Level Cryptocurrency

Shownotes:

In recent years, cryptocurrency has emerged as an increasingly popular investment option. Investors are drawn to the potential for quick and significant returns, leading to a surge of interest in diversifying portfolios with crypto investments. But with so many coins and tokens available, making informed decisions about which to invest in has become critical.

Last week, we were joined by Tom Costello, who provided insight into institutional finance and how it differs from retail investing. In this episode, we dive deeper into the world of crypto, an area that is often overlooked by the media unless there's fraudulent activity involved. However, with the current focus on inflation and interest rates, understanding the potential impact on cryptocurrency investments is more crucial than ever. Join us as we explore the exciting and rapidly evolving world of crypto investments.

Here are some topics from today’s discussion:

• How we got to this point
• Cryptocurrency is an effective inflation hedge
• Why crypto is an ongoing asset class
• The importance of proper training in the hedge fund business
• The challenge of differentiation in the highly correlated cryptocurrency industry
• What is a carry trade?
• The long-vol strategy 
• The U.S. dollar vs. Bitcoin

 

Episode Highlights:

[10:49] Why Crypto is an Ongoing Asset Class

It is believed that crypto will continue to be an ongoing asset class, and it's unlikely to drop to zero. Since the current state of crypto is closer to the bottom than the top, it's a good time to invest. Bitcoin and ether are the largest and most well-known cryptocurrencies and have already been established as an asset class globally, despite some regulatory debates in the US. Although they are not perfect and have their issues, the large and well-traded cryptocurrencies are well-established as a speculative asset class. Whether it's considered a commodity, security, or currency, it doesn't really matter for the purpose of buying or selling based on our beliefs about its value.

 

[14:41] The Importance of Proper Training in the Hedge Fund Business

Assuming that trading your own money is the same as getting into the hedge fund business is a common misconception. However, there's much more to it than just managing larger amounts of money. To be successful in the hedge fund industry, one must understand counterparty risks and risk assessment broadly, which cannot be learned on your own. It's crucial to undergo proper training and education in real risk management before venturing into this business. In fact, it's rare to come across anyone who has taught themselves effective risk management without any guidance or training.

[20:51] The Challenge of Differentiation in the Highly Correlated Cryptocurrency Industry

The cryptocurrency industry poses a unique challenge in terms of differentiation because the most liquid assets are highly correlated to one another. While statistical arbitrage is a well-established process in the equity world, it relies on the idea that not all equities behave the same way. However, in the crypto world, the high correlations make it impossible to do statistical arbitrage. There's nothing you can buy that will go up when the other goes down. Thus, the only way to differentiate oneself in the crypto industry is through other means.

Resources Mentioned:

The Front Office: A Hedge Fund Guide for Retail, Day Traders, and Aspiring Quants by Tom Costello

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