Bitcoin [BTC] has had an eventful start to 2021. The UK’s Financial Conduct Authority (FCA) has banned the sale of crypto-derivatives to retail investors, calling them “ill-suited” and warning of a “high risk of suffering losses” if they invest in digital currencies.
There are also fears over a price bubble after bitcoin surged to a record high of $41,998.75 on 8 January 2021 — it had already quadrupled in price in 2020 — before dropping to $31,670.58 on 11 January. [Coindesk.com data showed it had dropped even lower by 27 January, before staging something of an unstable recovery].
However, Anatoly Crachilov, co-founder and chief executive of crypto-focused investment firm Nickel Digital Asset Management, remains bullish, declaring that there is long-term growth in the sector buoyed by support from institutional investors.
Crachilov founded Nickel Digital Asset Management in 2019 alongside Michael Hall and Alek Kloda. Together, they have 60 years of experience in traditional finance.
Hall is a portfolio manager with experience trading macro, commodity and fixed income portfolios at several hedge funds and investment banks, while
Kloda is a macroeconomist and algorithmic trader with research expertise in arbitrage in high volatility markets.
Crachilov brings 25 years of experience in investment management and private equity, most recently with JP Morgan and Goldman Sachs.
“My crypto journey started in 2017 when clients came to me with a question. It was ‘Am I missing something with crypto currencies? Do we have to be there?’” he states. “From that point, I started to immerse myself in crypto and I got fascinated by the beautiful underlying mathematics of it. My father was a mathematician, so it was very close to my heart!”
Nickel Digital Asset Management is an FCA-regulated, full-service asset-management house, specifically designed to bridge traditional finance with the digital asset world.
“We believe in the exploitable nature of cryptocurrency price movements,” says Crachilov. “We deploy low-latency algorithmic trading and pursue a range of arbitrage strategies in both spot and derivative markets, as well as directional buy-and-hold solutions. We saw a gap in the market to attract institutional investors who were concerned about security, transparency and liquidity in digital assets. We developed an independent third-party custody solution where the manager has no transfer right over the funds.”
“We saw a gap in the market to attract institutional investors who were concerned about security, transparency and liquidity in digital assets. We developed an independent third-party custody solution where the manager has no transfer right over the funds”
Its first product came in June 2019, with the market-neutral Digital Asset Arbitrage Fund.
“It required payment rails and application programming interface connections to multiple global trading venues — in our case 17 cryptocurrency exchanges,” he explains. “This strategy is based on cross-venue arbitrage. The manager exploits market inefficiencies and price dislocations, harnessing the extreme swings of volatility. It is low-latency, fully systematic trading with decision making and execution timeframes measured in milliseconds. It has had all-positive months returns.”
Its second is the Digital Gold Institutional Fund, which tracks bitcoin and has returned 200% net since its launch last May. It uses sophisticated execution algorithms to minimise unwanted execution price impact, especially critical for large trading volumes. Investors buy at a fair market price without a bid/ask spread and with a daily liquidity profile.
The digital factor
Nickel Digital Asset Management has also recently launched the Nickel Digital Factors Fund — a multi-strategy fund using high-frequency trading, market making, trend following, relative value and statistical arbitrage. An example is a strategy which analyses market signals to predict where prices will go, and bets on that. Another might be focused on the relative value between two assets, betting they will converge or diverge.
“We are also seeing a rising investor demand to create a more diversified fund looking at other crypto coins, beyond pure-bitcoin implementation,” Crachilov explains.
The funds held up to the spring market meltdown.
“The implosion of liquidity in the market was a great test. Equities, fixed income and gold went down and crypto was also dragged into this black hole,” recalls Crachilov. “We reduced the risk across the board and March essentially became a capital preservation month. With arbitrage, we took our self-imposed limit of 20% of AUM per exchange to 3% to eliminate counterparty risk as much as we could.”
“The implosion of liquidity in the market was a great test. Equities, fixed income and gold went down and crypto was also dragged into this black hole”
Meanwhile, Bitcoin has also been described as a risky product.
“Bitcoin often exhibits large upside swings that tend to be followed by corrections,” Crachilov contends. “This is a normal behaviour for a new technology in the early stage of its adoption curve. This market is poised for a fundamental expansion cycle.”
One driver is its inelastic immutable monetary policy. The supply of bitcoin is capped at 21 million and its issuance schedule is hard coded and completely uncorrelated. Crachilov argues that changing demand makes it a powerful hedge against currency debasement and inflation. It has an inbuilt scarcity similar to gold.
“It is important to view bitcoins as a crypto asset and avoid possible confusion by the name of cryptocurrency. The main investment thesis behind bitcoin is its store-of-value function,” he says.
“It is important to view bitcoins as a crypto asset and avoid possible confusion by the name of cryptocurrency. The main investment thesis behind bitcoin is its store-of-value function”
Another supportive factor, he adds, is that large payment platforms are getting more engaged, including PayPal [PYPL], Square [SQ] and Visa [V]. Established financial institutions such as Fidelity are also beginning to offer bitcoin custody services.
“Bitcoin is increasingly owned by longer-term investors, weighted towards Europe and North America, looking to buy and hold within multi-asset portfolios. It becomes sticky money. They won’t sell just because it goes down 20%,” Crachilov says.
“2020 was the year that bitcoin went institutional. We have over 25 global investors. With the arbitrage fund, we found that it attracted family office groups and high-net-worth individuals who were willing to explore crypto without taking a full directionality bet. They can move faster when making allocation decisions than heavier institutional clients.”
“2020 was the year that bitcoin went institutional. We have over 25 global investors. With the arbitrage fund, we found that it attracted family office groups and high-net-worth individuals who were willing to explore crypto without taking a full directionality bet. They can move faster when making allocation decisions than heavier institutional clients”
However, in the last three months, the asset has seen traditional asset managers and insurance companies exploring allocation. Investors like Bill Miller and Stanley Druckenmiller have come out in open support of bitcoin and ownership of it.
“The low-interest rate environment has caused asset-liability mismatch, incentivising them to look for new options to generate income streams,” Crachilov says. “Interest from pension funds is only emerging, but when the first one allocates, we may see a ‘fear of missing out’ unfolding in instructional space.”
He contends that retail investors in the market will benefit from the inflow of institutional money.
“The recent FCA ruling wasn’t banning crypto, it was around restricting retail clients accessing crypto derivatives. This is fair enough as they are complex instruments. But buying bitcoin itself is perfectly legitimate. I expect retail demand to go up, but my advice to retail investors is be conservative in your allocation. Do not overexpose yourself, albeit with great potential, as it remains a highly volatile asset.”
“I expect retail demand to go up, but my advice to retail investors is be conservative in your allocation. Do not overexpose yourself, albeit with great potential, as it remains a highly volatile asset”
Indeed, he advises investors to only put 1%, 2% and, at a stretch, 3% of their portfolio in it. That way they are in the “perfect spot” to benefit from the upside without damaging their risk profile.
Nickel research has shown that between 31 December 2012 and 31 December 2020, a portfolio of 60% equities, 40% treasuries would have delivered a 124% total return. Adding just 1% of bitcoin to that portfolio would have delivered a return of 146%.
“The reason we are called Nickel is that if you add a little of it to steel you get a higher-grade. It is impact-resistant, temperature-resistant and stainless steel,” Crachilov says. “Similarly, adding single digits of crypto to an institutional portfolio strengthens it as well."
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