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BlockTower Capital Exec Spells Out Crypto Risk Management: ‘Outside of BTC, It’s Tough’

June 29, 2019

Ari Paul, the chief information officer at crypto portfolio management company BlockTower Capital, just dropped a thread on risk management in today’s crypto market. Paul, who has a background in derivatives trading and institutional investing, says the market’s evolution since 2017 has introduced various liquidity options.

“I wrote this thread on crypto risk management (and how it basically didn’t exist outside of holding cash) in mid-2017. Since then, a variety of low-risk hedging options have been born with decent liquidity.

CME futures provide an easy and low-risk way to establish short exposure to BTC. LedgerX provides decent liquidity for trading BTC options, and OTC desks are starting to offer tighter markets and more liquidity on the same.

Outside of BTC, it’s tough. You can borrow ‘physical’ assets from some lending desks and short them, but this entails some counterparty risk and is a minor operational hassle to execute. But a reasonable choice for smallish amounts (<$10m) for top 10 coins.

You can short on many exchanges, but lots of risks here. As Poloniex recently showed, exchange lending markets may cause unexpected losses due to liquidation mechanics. Levered shorts routinely get wiped out by ‘stop hunting.'” 

US crypto exchange Poloniex reported a sudden, severe price crash in the CLAM market on May 26. It generated roughly $13.5 million (1,800 BTC) in losses for.4% of the exchange’s customers as a number of margin loans defaulted.

Says Paul,

“And the exchanges that currently provide levered shorting are very risky in terms of counterparty risk. You can’t cold storage a short position. So for now, BTC is easily hedgable, most other things are not. The defi stack provides some options for hedging Ethereum assets.” 

Exchanges are continuing to explore new ways to offer liquidity and leverage for traders as institutional investors enter the market. On Tuesday, the US Commodity Futures Trading Commission set the stage for the first Bitcoin futures product in the US that’s settled in Bitcoin. It approved the launch of physically-backed Bitcoin futures contracts from US-regulated Bitcoin derivatives exchange and clearinghouse LedgerX.

Leading cryptocurrency exchange Binance executed its first margin liquidation on Friday, June 23rd.

You can check out Paul’s original thread here.

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