Inside the Mind of a
Digital Asset Trader

We caught up with Gerry Ifill, Head of HashKey XPert, who shares how he approaches trading in the digital asset markets. An industry veteran, Gerry has a wealth of experience in developing structured financial products for institutional investors. Having identified the investment potential of digital assets, he is on a mission to show his peers how they can effectively incorporate digital assets into their investment strategy for maximum returns.

What are three things investors need to consider when they start investing in digital assets?
The first thing to understand about digital assets is that they are an emerging asset class. New opportunities and profitable trading strategies are constantly emerging. Market conditions are constantly evolving, and innovations are entering the space every day – this means that you have to constantly analyse the market and fine-tune your trading strategies.

What’s exciting is that there is growing recognition of the potential of digital assets from an investment perspective. Over the past 12 months we have seen significant increases in interest from institutional and professional investors, who want to know how they can add digital assets to their portfolio.

The second is volatility. Digital assets are significantly more volatile than traditional asset classes. Between early October 2020 and mid-May 2021, there was a sustained bull run across a whole range of digital assets. For example, the price of Bitcoin rose from around US$11,000 to over $60,000 at its peak, and that was then followed by a major market correction, and lately it has been trading in a relatively narrow band of between US$33,000 to $38,000 since then. Obviously, compared to traditional asset classes, 10-20 percent swings are still significant, but the volatility has eased compared to previous periods.

What’s worth pointing out about volatility is that it creates a variety of short-term opportunities to capture excess value from the market. One of the drivers of the volatility is the high level of retail investor participation, which means that the market tends to be highly sentiment-driven – you get major price moves every time Elon Musk tweets about Bitcoin. This can lead to significant profit and loss swings, but it also creates opportunities to exploit relative value and arbitrage strategies. A lot of what we do is designing trading strategies that take advantage of this volatility and limit losses via hedging techniques.

My last point is the long-run potential of digital assets. One of the biggest advantages of investing in digital assets is that it can significantly improve portfolio diversification. At the fundamental level, digital assets have different value drivers when compared to other asset classes. Take equities as an example – its fundamental value drivers are cash flows, the risk-free rate of return, and the equity risk premium. For digital assets, these are the network and the impact of network effects, the monetary policies (how new coins or tokens are issued), and the token economics or “tokenomics” (how a token’s value is generated and distributed).

As previously mentioned, the digital asset ecosystem is constantly evolving, and new products and services are being developed and launched on a day-to-day basis. If you zoom out and look at what’s happened in the industry over the last 2-3 years, its development has been incredible. It’s impossible to know what the market or the broader ecosystem will look like in 12-18 months, let alone 5 years. However, the underlying technologies are so much more efficient and flexible than the legacy financial technology that it seems almost inevitable that more financial and investment products will be recreated in the digital realm. For example, you can essentially tokenise anything with real-world value – we have seen it with art, but you can apply the same principles to say, real estate. This not only has the potential to massively disrupt the financial industry, but also to create opportunities for those that see the changes coming and can position themselves effectively. For professional investors or institutions that are interested but have yet “taken the plunge”, now is the time to learn and build up institutional knowledge and capabilities around digital assets. That is one of the goals of HashKey XPert –to help investors identify opportunities, and take advantage of the long-term potential of digital assets.

What’s your view on the market valuation of digital assets in light of the recent market correction?
There are a lot of people who are extremely bullish over the long-term and there are certainly solid arguments that support that view, although it depends on which digital asset we are talking about, and how they are designed. If we just take Bitcoin and compare it to an asset like gold, there are a number of similarities in the sense that it is a store-of-value with a finite supply, and so you get scarcity. A number of people use models such as Stock-to-Flow, which are used to calculate the “fair value” of precious metals, and these suggest that, with respect to its current price of around US$35,000, Bitcoin is significantly below its fair value. Essentially, the idea is that as more people join the Bitcoin network and demand increases, Bitcoin’s value increases because value is linked to scarcity.

From a trader’s perspective, the market is highly liquid and volatile, so if you can employ sophisticated strategies that can effectively manage risk, then there is a massive potential to generate short-term market-neutral or asymmetric returns that don’t rely on taking a long-term view on the price of any particular digital asset.

Can you give us some examples of the common trading strategies unique to the digital asset space?
As market conditions are constantly evolving, a strategy that worked two months ago might not generate the same level of return today. A good example of this is spot-futures arbitrage. During the recent bull run, expectations of futures price rises led to quarterly futures contracts trading at a significant premium relative to spot. At some points the gap was hovering around 10 to 12 percent, which translates to an annualised return of 40-50 percent at that time. This strategy is relatively straightforward – a trader may simultaneously buy digital assets at spot and sell futures contracts for delivery at the end of the quarter, capturing the premium as profit. And by owning the underlying asset, the trader may effectively eliminate market risk. However, since mid-May and the rise in bearish sentiment, the futures premium has narrowed significantly, making the aforementioned strategy less profitable. If market sentiment improves, we may see that opportunity present itself again.

There are strategies like exploiting cross-platform price differences or other arbitrage strategies, as well as opportunities that are unique to the digital asset markets such as staking. Staking is a type of consensus mechanism used by Proof-of-Stake blockchains to operate the network and validate transactions. Staked coins are locked up on the blockchain network for a set period of time to earn a return. There are also opportunities to generate asymmetric returns through investments in low-cost altcoins and tokens.

Do you have any other advice for investors who want to learn more about digital assets?
Investors in digital assets should make use of different opportunities to communicate with other market participants and share their insights with each other. As a leader in FinTech and digital asset management, HashKey Group combines deep expertise in the digital asset market and an insider’s understanding of institutional investors to help those keen on starting their digital asset journey develop bespoke products and strategies that deliver on their risk and return requirements, as well as uncover exclusive opportunities across the entire investment cycle.