Buzzing about bitcoin – Ellington’s Rasheed Sabar believes bitcoin offers short-term and event-driven alpha opportunities

Ellington’s head of quantitative strategies discusses the opportunity set in trading bitcoin and why its attractive as an asset class.

WHAT DO YOU MAKE OF CHINA CRACKING DOWN ON BITCOIN TRADING?

China has always had an ambivalent relationship with bitcoin. It has “cracked down” on it multiple times in the past, banning customer withdrawals from exchanges only to reverse those decisions months later. It has also telegraphed its intention to develop its own state-sponsored cryptocurrency. On the one hand, as a nation with capital controls, it will remain opposed to bitcoin. On the other hand, as a hub of bitcoin mining and to the extent bitcoin becomes a (non-dollar) global currency, it will support bitcoin.

WHY IS BITCOIN AN ATTRACTIVE AS AN ASSET?

It is valuable as a “state-less” money system. It is not tied to banking system or monetary policy of any one country. This is especially valuable for citizens in countries with bad monetary policies or corrupt banking systems.It is also an asset that exhibits reflexivity (a theory of markets developed by George Soros), in which increased prices trigger more infrastructure development which in turn triggers in­creased adoption and then increased prices. Finally, it can be conceived as “digital gold”, i.e. an asset that appreciates in times of low government trust or banking crises with low correlation to traditional asset classes. That being said, there are many cons, including that it is still a maturing technology and one that will inherently have a conflicted relationship with governments and central banks.

WHAT IS THE CURRENT OPPORTUNITY SET?

There are opportunities both in asset management and in infrastructure investments. Within asset management, there are alpha opportunities (short-term and event driven) as well as beta opportunities (risk premia products). There are also opportunities to create income streams from crypto assets through lending products.

WHY WOULDN’T AN INVESTOR SIMPLY BUY BITCOIN THEMSELVES NOW THAT IT IS MORE ACCESSIBLE, AS OPPOSED TO INVESTING IN A FUND AND PAYING THE FEES?

Investors who want to do it themselves should need to solve (a) coin selection, (b) execution, (c) security, and (d) risk management. With respect to coin selection, the space is larger than bitcoin, and new tokens come out each week. Execution is non-trivial given that bitcoin trades on 50+ exchanges, all at different prices. Security is not easy given that any funds stored on line are vulnerable to theft. Also, dynamic risk-managed strategies may suffer smaller drawdowns than passive buy and hold strategies.

IN YOUR OPINION, WHEN DID BITCOIN BECOME A CREDIBLE CURRENCY TO TRADE?

Any asset that has sufficient liquidity and volatility is “credible”. Traders make money off of volatility.

GIVEN THAT BITCOIN TRADING IS A NEW FRONTIER WITH A LACK OF TRACK RECORD AND COMPETITORS, WHERE DO YOU LOOK TO HITE FROM TO STAFF YOUR FIRM?

We look for folks at the intersection of technology and finance.

DO YOU FEEL THAT THIS CAN BECOME AN INSTITUTIONAL PRODUCT?

Something about the space feels inevitable, though the path for how we get there is unpredictable.

Rasheed is the Head of Quantitative Strategies at Ellington Management Group. He developed the core set of strategies traded by the Quantitative Strategies Group, including strategies in equities, financial futures, commodities, and volatility.

ELLINGTON MANAGEMENT GROUP
Ellington Management Group is a $6.Sbln AUM asset manager. Ellington’s founding strategies include diversified credit, mortgage, and related markets, as we// as in quantitative macro and equities strategies. Ellington has also developed diverse quantitative macro capabilities, including use of systematic strategies to invest in global equities, futures, interest rate, options, synthetic credit, and foreign  exchange markets.