Cryptocurrency Markets Are Down, But Hedge Funds Can Still Profit

Opinion | June 28, 2018 By:

This year has been a wake-up call for crypto asset investors. After the rush of 2017 – where the vast majority of tokens appreciated in price – the dip, volatility, and subsequent sideways trend of 2018 have shaken out many of the band-wagon investors and made securing a profit a more difficult endeavor.

When considering strategies for navigating a volatile market, there are two tried and true strategies: directional and non-directional.

Directional strategies are driven by the belief that an asset’s value will increase or decrease. The introduction of bitcoin futures in late 2017 brought with it the opportunity to bet against the seemingly unstoppable momentum the crypto asset markets were building. Shorting bitcoin futures is one way that investors have managed to hedge against the downturn and secure a profit despite a generally declining market. Some quantitative strategies, including those that use predictive data leading them to believe a crypto asset price will increase or decrease, are also be directional.

Other directional strategies include early-stage investments like pre-ICOs or trading crypto assets early in their development. Despite the global market cap being down roughly 60%, there are projects that have launched during the first half of 2018 and significantly appreciated in value. Typically, the earliest investors in these projects stand to gain the most profit, but also face the greatest level of risk. We have also seen a strong shift towards private sales over public sales, for those with access to these projects, this can be a solid way to secure a profit.

In the non-directional, or market-agnostic category, you have opportunities on the arbitrage and quantitative trading fronts.

Beyond the traditional inter-exchange arbitrage, where you buy a token on one exchange and sell it at a premium on another, there are also triangular arbitrage opportunities to be found within the various trading pairs. As an example, you might see that the fiat value of ADA is several cents lower when purchased with ETH vs BTC. You can then purchase your ADA with ETH, sell your ADA for BTC, re-purchase more ETH with your BTC and repeat this cycle until it is no longer profitable.  

Additionally, quantitative trading has grown in popularity as the markets have declined. While many retail investors do not have the expertise to build out quant models and automate trading bots to operate within the specified parameters, there is a much simpler approach that operates on a similar basis. Identifying trading patterns and setting your limit orders accordingly can be an effective way to profit from an asset’s volatility.

For instance, in looking at the price of bitcoin over the past several weeks, you identify that it has consistently traded within the $6,250 to $6,750 range. Placing buy and sell orders at the lower and upper ends of this range, respectively, employs a ‘mean reversion’ strategy that may set you up to benefit when the price swings either direction. This approach requires patience and a lack of emotion-driven decision making, but can yield a profit if executed appropriately.

Or, you can simply ‘HODL’; if you believe that we’re in a period similar to 2014, and crypto assets prices will appreciate greatly in the long-run, then you may simply continue to invest now at this relatively low buy point and let prices appreciate.

These are just a handful of ways that savvy crypto hedge funds are weathering the storm. As always, your mileage may vary – and never invest more than you can afford to lose.


This post is not to be construed as investment, financial, or other advice. Comments in this article are derived from personal experience or from BitBull Capital Research, which solely performs research and diligence.

Joe DiPasquale is CEO of BitBull Capital Research. He has been a cryptocurrency investor since 2013. Previously, he worked in investment management, investment banking, technology, and strategy consulting at Bain and McKinsey. Joe completed his BA at Harvard University and MBA at Stanford University, and lives in San Francisco.