Novogratz's Crypto Trading Desk Lost $136M in Nine Months
bloomberg.com
bloomberg.com
What does the fund do? The article suggests they do arbitrage. Those opportunities actually tend to increase when things are volatile. Also while you can lose money doing it you wouldn't expect a precipitous collapse in NAV. If you discover you're slower than everyone else you can shut down.
Volumes aren't necessarily correlated to price either, so that isn't entirely convincing.
I've also heard that plenty of arb guys are doing fine.
If he's speculating and not just running arbs, what is he doing? If he's just punting the cryptos that would seem more in line with what's happened, but it's not clear what he's up to from this.
Also, with arbitrage it's limited how much capital you need. A lot of HFTs use very little. If you're getting money like a hedge fund you have to be sure it can be put to use.
Ex HFT and fund manager.
I wonder how it works though. Most exchange APIs are terrible and it is simply not technically feasible to do anything using those APIs.
Also prices at too many exchanges move in absolute lockstep.
Must be private, privileged access to better (internal) APIs, profit sharing, rip the face of "retail" investor kind of deals.
After all the "exchanges" are not really exchanges as we know them in other markets. They're more like forex trading.
I think the crypto market would benefit from a (semi-)regulated impartial exchange where other firms can become members and act as brokers to direct retail flow.
But unless there's some sort of regulation about it it would just be a private business that could kick out any member for any reason. To much risk for the members.
The general web page of an exchange is horrible slow compared to their APIs and often breaks during high volume periods.
During times of high volumes as in the period of the last rally, the websites of many crypto exchanges break easily and even the API are not that stable.
You can also see that on reddit. Every time the price spiked, you got people complaining about exchanges breaking. There's still a long way to go for crypto exchanges.
[1] https://www.bloomberg.com/news/articles/2018-12-11/mike-novo...
There's this bit in Taleb's first book, "Fooled by Randomness". This was before he made a shit-ton of money. He pointed out that a lot of the nominally successful traders he worked around would declare a strategy, make a few bets, make a lot of money, and then act like geniuses for thinking up the strategy. However, they'd never really examine the obvious alternate hypothesis: they got lucky.
I used to work for a proprietary trading firm. We'd get new traders by taking very confident, driven people (e.g., former Olympic athletes), making them be clerks for a while, and then turning them loose in the pits. The CFO kept a very close eye on them early on because their natural confidence combined with early successes lead them to believe they were gods. It wasn't until they got really hammered by a bad bet or two that she'd begin to trust them.
It reminds me of a favorite line: "Every corpse on Mount Everest was once a highly motivated person with a can do-attitude."
Still in closed beta with a very limited set of testers - I've been working on a lot of the kinks in the data acquisition, which as you could imagine is a little tricky. If you want to get on the wait list, signup is here:
Can those projects work without a blockchain? Would it be cheaper to just handle stuff with (digital) signatures and old fashion contracts?
The cryptocurrency projects that will survive and thrive will be those that let people do things that are insane, and yet they want to do anyway. It'll be new markets where currently no economic activity is taking place, because the participants cannot trust each other (or make use of the legal system to trust each other) enough for any rational actor to consider transacting. Cryptocurrencies, of course, alter that rational calculus by letting you put trust in an anonymous network of worldwide miners to secure your transactions.
Think of some of the biggest companies created in Web 2.0. Facebook - who in their right mind would give Mark Zuckerburg all of their personal data so they could hook up with that hot girl in the dorm across campus? AirBnB - people actually invite strangers into their homes to stay with them? Even the founder and first investor call that "The worst idea that actually worked." Uber - you're going to get in a car with a complete stranger and pay them to drive you places?
(Interestingly, all of these are markets that are well-positioned to be disrupted by cryptocurrencies. The key elements of an EBay/AirBnB/Uber-type marketplace are 1.) ability to connect latent demand for a service with people who can supply that demand 2.) ability to receive payment and 3.) a reputation system to ensure that the service was performed reliably. Right now, the UI & scalability properties of crypto are not good enough to let them replace these centralized marketplaces, but all of the information involved could easily be stored on a blockchain rather than a database, and with current Ethereum transaction costs at 0.07c and most of these tech companies taking a 20% cut, at some point the economic incentives to replicate them will become huge.)
We've actually had a couple of these killer apps for cryptocurrencies - buying drugs off the Internet, and ICOs. In both cases, any normal, rational person looking at the behavior is going to be like "What? Are you crazy?" In both cases, people do it anyway, presumably because they really really want to buy drugs without having to meet in person, and because they really really want to invest in startups but otherwise can't.
If you can service a market with databases, digital signatures, and old fashion contracts, you should service it that way. Blockchain is useless for anything that people are doing now, because if they're doing it now, there's already a way to accomplish it.
I think there may be a future in security token offerings, a more regulated less scammy version of ICOs, kind of like traditional stock listings but cheaper and less Sarbanes–Oxleyed.
[0] https://www.streetdirectory.com/travel_guide/212726/travel_a...
I’d call the latter “fundamentals”, if only because I don’t see why engagement would provide a price floor at e.g. 1000 $/BTC rather than at 10k $/BTC or 100 $/BTC?
eg 20 million BTC investors want to have $10k in BTC, 20 mil coins available => the price should be $10k
obviously some guess work in there
The ETH drop is fairly easy to explain - it was the base asset for a very interesting double-pyramid-scheme on the way up, which meant that that leverage works in reverse on the way down. The ICO boom worked because many of the people investing in ICOs had bought their ETH for pennies and already recouped their costs; throwing $40M into a shitcoin makes a lot more rational sense when that ETH actually cost about $4K in real money, and the factor of 10,000 difference is the price appreciation of the asset you're putting in. That led to eye-popping dollar valuations for many of these companies (even though they were actually raising in ETH), which brought more newbies into the Ethereum world, which pushed the price even higher, which meant later ICOs were raising even more in dollar terms, even though the actual dollar amounts traded were tiny.
On the way down, this cycle works in reverse. Those ICOs don't actually hold $40M in a company bank account; they hold 33K ETH which was worth $40M at the peak. Now that ETH is down to $94, they hold more like $3M, and they're getting scared about being able to pay salaries. So every ICO that still holds ETH is trying to liquidate it for dollars, but they're fighting over the much-reduced pot of money that is coming into crypto now, which drives the price down every time somebody wants to sell.
Personally I still think we're not at the bottom yet (for either ETH or BTC), but we may be getting close. We're at the bottom when companies start going bankrupt, Solidity engineers start getting laid off, and people start going to jail. Assuming it's not all smoke and mirrors and some useful infrastructure was actually built, it'll be the buying opportunity of the lifetime then, because everyone will think this whole crypto fad will be totally over and you'll be able to buy up that infrastructure at really cheap prices.
But if everyone thinks that (and most people who think crypto isn't all shit do think that), the bottom will be a lot softer than what you describe (modulo people going to jail, I think this is mostly independent of the value of crypto).
It's the efficient market hypothesis all over again.
So, for instance, cryptoA trades for $99 on exchange 1, but $101 on exchange 2. Quick, buy on exchange 1 and sell on exchange 2!
Congrats you made $2 on each trade x 5 cryptos. That is hardly enough volume to make it happen.
Now imagine that the volume is so thin that after you bought the first one on exchange 1, the price gap closed, and by the time you sold on exchange 2 it collapsed.
They blamed their failure on "increased competition for arbitrage opportunities." Properly, arbitrage is low risk exploitation of differences between two markets in the same thing. Cryptocurrencies used to look like they had arbitrage opportunities, with differing prices between exchanges. Mostly, that was because it was so hard to pry cash out of the underfinanced cryptocurrency exchanges. They always had some excuse for delaying paying out. Arbitrage requires the ability to move cash quickly from one exchange to another.
As that situation improved, the spreads between exchanges narrowed. Opportunities for low-risk arbitrage disappeared. These traders reacted to this by going into higher-risk forms of trading. Which is about typical for traders. It didn't end well.
My guess is that his fund got locked into a levered position on one of the exchanges like BitMex for trying to trade too much then couldn't get out for 24 hours. This kind of thing is more common than you might expect. There are also very few exchanges that allow margin trading, leverage or shorting, and all the ones that do have, uh, questionable compliance practices.
Given his pedigree you'd think he'd know better than to bet on something that's 99% pure unbridled speculation and 1% actual technology. It's like knowingly investing in a Ponzi scheme, what did you expect?
$100 million isn't much different from $108 Million (8% gains over the year)... or even $500 Million. In both cases, its still more than enough money to live on for the rest of your life. The S&P 500 has dropped 50% in the past (ie: 2008), and it doesn't make sense to risk that much money on that.
You can't use bank accounts: FDIC insurance only covers $200k per bank. You'd literally need 5000 different bank accounts to hold $100 Million safely. So what do you put it into?
Answer: things that don't grow as quickly as an S&P500 fund. Things that are safer: municipal bonds, international (German, Japan) bonds to hedge the dollar, and US Bonds. Maybe some high-quality corporate debt, like Apple's debt, and maybe a real-estate project or two.
All of which probably returns less than the stock market. But your $100 Million will still be there in the next crisis. That's not necessarily true for an S&P500 fund.
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Finally, the average volume of Vanguard Total Market ETF is only ~3-million (at a price of ~130 or so). Which means that Vanguard Total Market ETF only has ~$300 Million changed each day.
If you pump $100 Million into an ETF with only $300 Million worth of daily average volume, what do you think will happen? You'll over-centralize the price and get a bad deal. Its not easy to move $100 Million, even into a major fund like Vanguard's Total Market ETF, without a manager.
At $100 Million+ size portfolios, you need to start thinking of Dark Pools of Liquidity (ie: somewhat hiding the order book). So that when you execute the buy order, the wolves of Wall Street won't own you.
$100 Million+ accounts don't work the same as a normal account. Pump that into the market in one day, and the price will rise dramatically. Sell that in one day, and the price will drop dramatically (losing a % of your value on both legs of the transaction). Having an expert guide you, so that you can minimize Bid/Ask issues, is essential.
What's your evidence for that? Sure, they don't want to lose, but nobody does. And if anybody likes to get richer, it is pretty clearly rich people. Even the charity-focused ones want to keep increasing their resources, as that lets them have more impact.
The worldwide bond / debt market exceeds $100 Trillion. While the worldwide stock market is only $69 Trillion (sum of top 60 exchanges)
https://www.visualcapitalist.com/all-of-the-worlds-stock-exc...
It is clear that Bonds are more popular than Stocks, by a factor of ~50% or so. The rich are buying up debt in far greater numbers than stocks. And EVERYONE knows that Bonds make less money.
I know some of it is cultural. My Chinese friends tend to own real-estate. But it seems like around the world, all major investors favor the lower-risks of Bond investing compared to Stocks.
Not that it’s a good idea, but there are other ways to insure cash than the FDIC.
One example, apparently Massachusetts offers unlimited insurance for banks: https://en.m.wikipedia.org/wiki/Depositors_Insurance_Fund
(Also, 100M / 200k = 500, not 5000)
> Q: Is the DIF a federal or state agency?
> A: No. The DIF is a private, industry-sponsored insurance company and is not backed by the federal government or the Commonwealth of Massachusetts.
Where you're right, of course, is that 100M justifies considerably greater attention to the money management. But the biggest focus is tax efficiency, not the micro details of the market.
Interestingly, there is a way to easily do that. The first project of my career (back in 2002, and still active!) was at a FinTech startup (https://www.promnetwork.com/solutions/depositors) with a product (https://www.cdars.com/) that does this transparently by opening up all the bank accounts and doing the map-reduce for you! Single statement, fully FDIC insured.
...and there are always t-bills
Numbers like this are always quite funny to me. What does year over year mean in this context? 5 years? 10?
If you would start with $1000 then in 10 years you would be at approx. 976 million with only lower part of your profits (500%).
As I understand it, a hedge fund is supposed to be, well, a hedge. It's not supposed to make more money than the market when the market's doing well. It's supposed to be uncorrelated from the rest of the market, with the hope that it can maintains or even gain value in the event that the rest of the market tanks. An asset class that could reasonably be expected to substantially outperform both a bull market and a bear market isn't a hedge against anything, it's just a strictly superior asset class and we're pretty good at arbitraging those out of existence in relatively short order.
With that in mind, doesn't this basically devolve to a bet that at least a whole decade's worth of economic growth was going to be consumed entirely by a massive recession? That's not wholly unprecedented, admittedly, but it is a lot rarer than I'd be comfortable putting any money on at flat odds.
What am I missing?
But, yeah, it was likely a sucker's bet.
Honestly I have no idea what Protege was thinking.
If you're saying the hedge fund managers themselves make money, sure. That's Buffett's exact point: they pocket money, but that money isn't going to the customers, which is why the hedge fund portfolio's rate of return ends up lower than the index fund.
There are plenty of positions that are stable and low risk. Like running the exchange itself, all sort of middlemen and some form of arbitrage.
A hedge fund is mostly about funneling as much of customer money as possible to the fund manager. It's a fairly straightforward and risk insensitive business.
There's a massive saliency bias in that the strategies people are most likely to hear about are ones with some excitement behind them – that gives people a massively distorted view of hedge funds.
paraphrased from https://econweb.ucsd.edu/~jhamilto/oil_history.pdf
Passive retail traders were never in commodities trading. Retail trades stocks. Retail has been trading digital assets like penny stocks. GTFO of the digital commodities market if you don't swing trade supply and demand or actually use it.
Bitcoin is a commodity steered by the same level of supply and demand pressures but held to a higher fictional standard by people that trade and evaluate it like a different asset class (equities)
Most commodities have seasonal patterns. Bitcoin trades like those.
It isnt controversial when a conmodity plunges and surges. Its actually better for different parts of the population at different times.
Novogratz is a fun character and a good fundraiser, but he doesn't have a pedigree as an investor. He became famous (and a billionaire) by taking Fortress public. Under his watch, it then went from $35 to down below $2. After he was demoted, he ran a macro fund there which performed awfully and, in 2015, it was shutdown and he was forced into "retirement".
E.g. he also bought 500k worth of ETH and sold it for 250M. Paid his taxes, bought a new plane, and donated the rest to charity. His LPs might be nervous, but he's probably doing just fine.
But even if you're right and he did make a great trade, that doesn't make him a genius. He's a gambler and sometimes gets a great hand.
He was super bullish on EOS before it tanked. He very publicly called a bottom[1] for BTC on Sept 13th when it was $6,300 and it's down by ~50% since.
[1] https://twitter.com/novogratz/status/1040288811643809798
https://coinmarketcap.com/currencies/ethereum/historical-dat...
And then the first thing the early adopters did was recreate the flawed financial institutions that surround "real" money so that they could pretend to be Gordon Gekko and throw around words like "arbitraaaaage".
Is there data on what percentage of cryptocurrency transactions are "Real, actual, humans buying and selling real, actual, things or compensating each other for their ideas and thoughts" and what percentage consists of "traders shouting at each other in the echo chamber"?
What the hell are buy/sell curves?
Manipulation can be 100% or 10%, who the hell knows?
Actually, it's pretty easy to run these numbers for a rough ballpark. About $2.1B of Ethereum (22.7M ETH @ $94) was traded across all exchanges in the last 24h. 3 ETH is mined every 10sec or so, so that's about 26K from mining, probably not a large contributor. I don't have good numbers for how much ETH is traded per day, but it's 5.7 TPS, so about 490K on-chain transactions per day. A quick glance at recent transactions shows maybe an average of 0.2-0.3 ETH per transactions (heavily skewed - the vast majority are for 0.01 ETH, and then maybe 1 out of 50 will be a 10 ETH transaction), so that's about 100K ETH/day. The figure of roughly 99% unbridled speculation and 1% actual technology sounds about right.
Exchanges use off-chain transactions. When you see a transaction on the block chain, it's very unlikely to be a settlement between two exchange customers because it's far more efficient for the exchange to settle on its own private ledger.
On-chain Bitcoin transactions incur fees. Aside from a group launching an attack on Bitcoin, there's little return for the cost of spamming the block chain.
You can't call the bottom on something you can't value, Novogratz thought it was at 6000 but made the wrong bet (for now, let's see what happens on a 1-2 year timeline). He's been doing the roadshow this year saying institutional money is coming in (I had a brief chat with him in London) but I don't see any pension funds touching something this volatile with a barge pole. Not until real value is starting to emerge
Apparently Silk Road had sales of $1.2bn which gives you an idea of the amount of drugs traded and the turnover of Bitcoin on exchanges was about $2000 bn over the last year. So sales of goods as a percent of speculative transactions are probably <1%. Not that that means that much - FX speculation is larger than real trade for fiat also.
Ah yes, I remember how beanie babies changed the way we all lived. And tulips, of course. And rhodium?
Hmm.
The idea of a private citizen owning land was not generally accepted in the medieval age of kings. Only lords and other nobility could own land back then. Technically, the king owned the land, and the Lords were simply stewards of the King... probably indirectly (King -> Count -> Lords)
Eventually, real estate could be owned by the common peasants and merchants, but that starts to get into modern capitalist style society.
For some details, see this article: https://en.wikipedia.org/wiki/Quia_Emptores
This varies from culture to culture. Romans owned their land. Egyptians did not.
they literally turn bad debt good
Not surprise anyone who came in and trade may be catching knives. Plus all the uncertainties in market participants
Long plays in this market are massively risky bets. They seem completely unnecessary as well. With the volatility that exists and the decent level of volume, there's tons of easy money to be made.
(It’s hard to see exactly on the charts, because the stock price has fallen so fast +/- 10% is now a matter of just two or three pixels)
https://www.google.co.uk/amp/s/www.newyorker.com/magazine/20...
https://equity.guru/2018/08/01/galaxy-digital-holdings-glxy-...
Now we're one year further and he says it will go up again... Some people just don't understand :)
Even free real-estate has its drawbacks.
This move took many speculators, including Novogratz, by surprise:
"I did think Bitcoin was going to hold at $6,200," said Novogratz. "It stayed there for four months. It felt like the selling was finished. But then Bitcoin Cash decided to fork again."
https://www.forbes.com/sites/billybambrough/2018/12/12/bitco...
I suspect many of these speculators are betting on a quick recovery. Should that not pan out, Novogratz and many others are headed for a world of pain.
Meanwhile, Bitcoin the technology continues chugging on. The most noteworthy development is the rapid build-out of the Lightning Network scaling solution, but there's a bunch of stuff beyond that which gets almost no attention.
Management fees make for good medicine.
It's happening right now:
https://bitcoinmagazine.com/articles/progress-report-lightni...
Edit: supposedly there is $62 billion worth of BTC sloshing around out there. If you take that number at face value, then close to .0016% of BTC has been committed to the lightning network. This is not “happening” by any stretch of the imagination.
However, you made the provably false statement that Lightning "wasn't happening." That train has left the station, leaving a surprisingly large crowd on the platform yelling at passersby that it will never happen.
You're asserting that it can be turned on and it contains money. You're correct that indeed, there are some nodes containing some money.
I am asserting that the network will never be a functional way for large chunks of the population to move money around, because it is a bad design built on top of a bad currency. Under my definition, the fact that a few people interested in it have moved an infinitesimal amount of money around is mildly fascinating, but not of particular note one way or another.
"Lightning" is not simply code that does indeed run at this minute - it is also the idea that Bitcoin will transcend into a pragmatic currency with the widespread usage of this 2nd-layer interface that can handle more than 7 transactions per second. That's the part that's not happening.
Isn't the whole point of bitcoin that you get rid of centralization? But apparently people want to bring it right back with lightning.
I think there's a more important aspect here: there is very little demand for transacting in a second currency worldwide, and almost 0 demand within stable economies. As an American who does 100% of his transactions with other Americans in USD, why in the would should I introduce exchange rate risk into my daily transactions? The lightning network might be all the hotness, and I doubt that, but so long as its marked in a currency that I don't get paid in and my landlord doesn't take, I have no earthly incentive to tie up any of my hard earned money in a second currency in some lightning channel.
And that's not even starting on the absolute trainwreck that is general crypto UXD. Open a channel and tie up some of my money somewhere so I can eventually make a payment in the unspecified future? No thanks.