Part of Alef Bit’s activity includes performing extensive market research to assist and support our group’s investment activity, and the management of its own assets.
In this quarterly newsletter, we aim to expose our readers to some of the internal work. The goal is to provide useful and interesting information which might assist you, our readers, in your own research.
Asset Diversification vs Trading Strategies Diversification
Investors don’t usually like to place all their eggs in one basket. Putting your money on an index is usually a good idea (think of the S&P 500). Take a look for example at the Amun HODL product which re-balances the Top 5 crypto assets on a monthly basis, based on market capitalization (Figure 1). The Top 5 index achieved x4 return at its peak in comparison to Bitcoin:
While asset diversification in crypto is generally a sound strategy, it does have several major drawbacks:
- During bear markets, alts tend to drop significantly lower than bitcoin. In the last bear market, it was not uncommon to see alts drop by more than 95% from their ATH.
- History may not repeat itself: As we saw in Figure 1, during the last bull market, most alts have out-performed Bitcoin. However, in the most recent rally, Bitcoin dominance is constantly on the rise (see Figure 2) while alts are getting rekt. People may be waiting for an “Alt Season” that will never come.
But what if instead of diversifying assets, you could diversify trading strategies?
Creating a Decentralized Fund
Alef Bit Technologies’ goal is to connect skilled crypto traders to funds. We believe that there is huge untapped potential in talented traders around the world, with limited or no access to capital. We envision ultimately having thousands of active traders managing portfolios for Alef Bit.
Each and every trader has their own unique point of view on the market. Each one has developed their own trading strategy, uses a different set of indicators and has a personal trading style. By combining those traders into one aggregated portfolio, the end result is a smoother equity curve and lower drawdown.
To achieve this, we established a unique program to enable those talented traders to work with Alef Bit and do what they do best.
We call it “The Funnel”, as illustrated in Figure 3:
After an initial onboarding process, new traders receive an account on Alef Bit’s proprietary demo-trading simulator, where they undergo a 3 month trial-period.
The platform simulates an actual exchange with real-time quotes. Traders can send market, limit and stop orders, and open long and short positions. Slippage and commissions and are also factored in.
At the end of the trial period, each trader’s data is analyzed.
Apart from the overall return, we look at many different parameters, including among others:
- Risk indicators such as volatility and drawdown;
- Activity, as measured by trading frequency, avg. holding period, etc.
- Trading volume per symbol pair
The performance is also compared against the other traders who started at roughly the same period and market conditions (at the time) using various benchmarks we have created.
Only the best traders will proceed to the live-trading stage.
Proof of Concept
After 6 months of paper trading and over 200 applicants, we examined the data:
In order to provide a qualitative view of the results, we took each account that finished the 3 month trial period, as well as the aggregated portfolio, and normalized the return and risk (measured by draw-down) to values between -1 and 1.
The scatter diagram is shown in Figure 4.
It’s clear that the aggregated portfolio presented lower risk with higher returns when compared to most of the single trading accounts. This happens because good traders cancel out the losses incurred by the bad traders.
While some traders showed higher gains with similar risk, if you had to pick a single trader you would likely select one with poorer results. Furthermore, any single trader might perform well at one stage, only to have a decrease in his performance at a later period.
The aggregated portfolio provided a stable and reliable performance.
The results confirmed the expectation that when combining different strategies, the aggregated portfolio will display significantly lower risk while still achieving excellent gains.
Traders who successfully complete the demo-trading trial period proceed to live-trading and real funds allocation, on a performance-based revenue-share model.
Since there is a big difference between demo and live trading, all traders start with a relatively small initial allocation in order to verify consistency with their paper trading performance. From then on, funds are allocated based on their performance. This means good traders will see their allocation increased, while poorer traders will see their allocation decreased, or will be cut off from the program.
In this way Alef Bit creates an internal loop that ensures only the truly talented star traders remain as our portfolio managers, and the aggregated portfolio is continuously optimized and improved.
Initially, traders do not have to put any of their own capital up-front and therefore they trade with zero-risk. However, once they start accumulating profits, some of their gains remain locked-up in their accounts and act as first-loss in case of future losses. In this way, as their accounts grow, they have “skin in the game” as they risk their own funds.
One other major difference in the live-trading is a higher emphasis on risk management. We require our traders to comply with our set of risk-management guidelines, such as limiting their tradable assets, limiting exposure to a single asset, setting a cut-loss, etc.
Meet Our Traders
Given approximately 35 million individuals owning a blockchain wallet and roughly 2% of them engaging in the trading activities, currently, the market can be estimated at approximately 700,000 potential contestants for Alef Bit’s program. This means that the pool of potential traders is virtually unlimited.
However, as we have seen so far, passing our demo-trading trial period is no easy feat. We like to call it “Proof-of-Work”:
The trader has to exhibit discipline, low time preference, will-power and most importantly talent, in order to proceed. Many complain up-front about the terms or give up in the middle.
By accompanying our traders throughout the process, we can really get to know their characteristics. Even though our traders come from all over the world with different experience and background, we can honestly say that all of them have that star quality, or talent, to become exceptional traders. It is our role to help them fulfill that potential.
So How Does It Actually Work?
Alef Bit has institutional accounts on the major crypto exchanges. Each of our live traders receive a sub-account on one of those exchanges, see Figure 5. They have permission to trade-only, they cannot withdraw (or deposit) funds into their account.
Each account is connected via an API to a control system which continuously monitors our entire portfolio.
We developed our own proprietary set of dashboards which display all the information required, as well as perform real-time calculations.
As mentioned above, risk analysis is a priority. Each time a trader violates the guidelines, or the system identifies some high risk factor, it generates an automatic alert. In addition, our control room is manned 24/7 so the operator on shift can respond to each alert as instructed, and perform periodic checkups in order to make sure there are no unforeseeable events happening.
The crypto market’s high volatility can be a double-edged sword: On the one hand, large price swings offer enormous potential gains for talented traders. On the other hand, investors may be deterred to allocate funds due to the high risk.
At Alef Bit, we believe we’ve created the perfect engine to match between traders with limited access to funds and investors who can provide those same funds.
We offer a unique value proposition of: Talented traders filtering mechanism; performance-based funds allocation; and money management & optimization, all combined together to out-perform a high-gains but high-risk market.
We launched our demo trading-simulator in November 2018, and initiated our live-trading in February 2019. So far, the results have exceeded all expectations.
So, whether you are a talented trader eager to prove your skill, or an investor looking to get exposure to crypto but have not found the right vehicle to do so, Alef Bit may be the answer for you!
For more details, contact us:
This communication is provided for informational purposes only and does not constitute, and should not be construed as, financial, legal, investment, tax or any other advice. Alef Bit Technologies Ltd. or its affiliates and/or subsidiaries (collectively, ”Alef Bit”) normally hold as principal bitcoin, Ethereum, blockchain tokens and other cryptocurrencies or asset classes that may be discussed in this communication.
This communication has been prepared based upon information, including market prices, data and other information, from sources believed to be reliable, but Alef Bit does not warrant its completeness or accuracy except with respect to any disclosures relative to Alef Bit and/or its affiliates. Any opinions and estimates constitute our opinion as of the date of this material and are subject to change without notice. Alef Bit may have relied upon certain quantitative and qualitative assumptions when preparing the analyses herein which may not be articulated as part of such analyses. The realization of the assumptions on which such analyses were based is subject to significant uncertainties, variabilities and contingencies and may change materially in response to small changes in the elements that comprise the assumptions, including the interaction of such elements. Furthermore, the assumptions on which the analyses were based may be necessarily arbitrary, may be made as of the date of the analyses, do not necessarily reflect historical experience with respect to blockchain tokens, cryptocurrencies or other asset classes similar to those that may be contained in the analyses, and do not constitute a precise prediction as to future events. Past performance is not indicative of future results.
Alef Bit does not assume responsibility for investment decisions. This communication is not intended as investment advice or an offer or solicitation for the purchase or sale of any blockchain token, cryptocurrency, security, financial instrument or other asset class. Alef Bit provides this newsletter for research and discussion purposes only and does not provide general or individually tailored investment advice of any kind. Any opinions and recommendations contained herein do not take into account individual readers’ circumstances, objectives, or needs and are not intended as recommendations of particular cryptocurrencies, other assets or strategies to particular persons. You must make your own independent decisions regarding any cryptocurrencies, blockchain tokens, asset classes, financial instruments or strategies mentioned or related to the information herein. Readers should consult with their own advisors before making any investment or other financial decision. You ultimately must rely upon your own examination and that of your professional advisors, including legal counsel, financial advisors and accountants as to the legal, economic, tax, regulatory, or accounting treatment, suitability, and other aspects of the analyses contained herein. Alef Bit shall not be liable for either (i) any errors or omissions made in the data or analyses contained herein or (ii) damages (incidental, consequential or otherwise) which may arise from your or any other party’s use of the data or analyses contained herein.
This communication may not be redistributed or retransmitted, in whole or in part, or in any form or manner, without the express written consent of Alef Bit. Any unauthorized use or disclosure is prohibited. Receipt and review of this information constitutes your agreement not to redistribute or retransmit the contents and information contained in this communication without first obtaining express permission from an authorized officer of Alef Bit..