Darius is an early pioneer in the Singapore crypto-trading scene. Fresh out of the National University of Singapore Darius joined Dymon Asia Capital, Asia's largest macro hedge fund. There he learned intricacies of macro trading and was exposed to the entire spectrum of financial derivatives including financial options.

Darius' foray into crypto-trading started off in 2016 with simple arbitrage opportunities, arbitraging Bitcoin prices between different countries. What started off as a hobby, quickly became a serious business opportunity when he saw the potential of crypto-assets.

Darius Sit: Such worries, or complaints by those that reject crypto assets are simply excuses for resisting the change. Many banks and individuals have been robbed, since the creation of fiat currency, but you don’t see people complaining about the dangers of holding money in their wallets thus rejecting fiat. While I’ll admit that it is an over-simplification, my point is that with sufficient profit motive, the market will find the solutions, and they have.

The increased adoption of crypto currencies globally has driven up its value, making many early adopters very wealthy. This wealth creation and the increased market cap of crypto assets has translated into demand for services to keep crypto assets safe. Judging by the increase in institutional offering and the overall improvement of quality of these offerings, I believe the cyber- security in both custodians and exchanges have been greatly strengthened since those days where people’s coins could be stolen, or held at ransom by hackers.

Unfortunately many late adopters still remember many of those stories about coins being hacked, not realising the technology has improved significantly over the last five years. That said, any cyber-security expert will tell you that the weakest link in cyber security are humans, so as people start to hold more digital assets, they will likely become more savvy in terms of good cyber- security hygiene. I’m optimistic that these concerns will fade away quickly, if not already.

Darius Sit: Such volatility is indeed a big risk, but it also presents great opportunities. This is precisely why investors should opt for an alpha strategy as opposed to the passive strategy. Bitcoin’s price action as you described above presents a lot of alpha opportunities, the key is a robust risk management framework. I believe astute institutional investors can invest in hedge funds that deal exclusively in crypto assets. Much of the talent pool that has crossed over to the asset management side of crypto trading have come from either financial institutions, or hedge funds. These individuals happened to also be early adopters of the asset. They saw the opportunities in this asset class, figured out a way to monetize it, and never looked back. Essentially, this is our story, and it isn’t a unique one.

Like any other asset, there are idiosyncrasies and nuances within the crypto space, early adopters still have a significant edge. This edge comes from being part of the crypto ecosystem early on. It is a tight knit community where folks trade market insights and deals very selectively. It is a bond forged through surviving the “crypto-winter”. All the early adopters had to suffer through the period after Bitcoin crashed from $20,000 to $4,000.

In our case, we focused on what we knew, which is market structure. We were one of the earliest players in the crypto derivatives market and continue to be a significant player in the space. Early on we focused on capitalizing on the inefficiencies in the space and continue to do so. Since the crypto markets have deepened significantly over the last 15 months, we now feel that the time is right to also take on third party capital. Previously, we weren’t comfortable.

I don’t believe crypto currencies will never replace fiat. I believe over time the two will co-exist. In my mind, I see crypto currencies co-existing with fiat, as a check on ill-disciplined central banks. For us, we don’t just trade crypto-currencies in isolation, but also look at all the macro themes globally and see how it may potentially impact crypto assets. Not too different from macro investing, which is why it isn’t too surprising that someone like Paul Tudor Jones would come out to speak about it.

Darius Sit: For us it’s really about coins that have specific market structures – a volatility curve and basically an options market and a rates market. Right now, the only coins that have this market structure are bitcoin and Ethereum. To some extent, bitcoin cash. The rest of the coins don’t really have options or rates markets yet. But that’s our view of what could represent institutional grade coins. If you look at market cap of some of these alternative coins, you could argue that there are a lot of “blue chip” coins as well – coins that have either been around for a long time or coins that have in the recent times had a lot of attention and a growing market cap making them blue chip, especially some within the DeFi space.

Darius Sit: We have actually spoken to some of these guys on your list as they have been exploring trading in crypto; I actually think this would be interesting. From the conversations that we’ve had, they are able to enter the crypto market but only certain segments. For example, they would be able to trade CME futures or they would be able to trade on regulated markets like Coinbase, or regulated exchanges. But there are many parts of the crypto market that they will not be able to have access to, such as non-regulated exchanges. I think this would be difficult for them given compliance. This has been part of the discussion, how do they tap these markets when a lot of the liquidity pools are not regulated. If they default on you, you have no recourse and you don’t know who to sue because in most cases there’s no domicile and no jurisdiction behind them. Therefore, it becomes difficult for these big institutional funds to participate.

But irrespective of that, if more professional investors such as hedge funds come in and participate in certain segments of the market, I think it would actually create additional dislocation simply because we would witness this heavy participation in certain segments from institutional players but less so in other segments. We actually see this already in the current market already, right? The forward curve on the CME futures and the forward curve on the non-regulated exchange futures are very different and very arbitrage-able because one has the participation of the institutions and one does not. This for me shows a potential for added dislocation.

Darius Sit: You are right, counterparty risk needs to be analyzed when a fund trades on non-regulated exchanges. Some of those are involved in practices that would be very frowned upon in institutional markets, so there is not just counterpart risk, but also trading risk on these exchanges. We have also seen exchanges come and go either from hacking risk or fraud. Within the spectrum of non-regulated markets, there are good exchanges and bad exchanges as well.

So, as you suggest, it is a good idea when you look at a fund that’s trading cryptocurrencies to look through which venue and market are traded and what the risks are, because having the right counterparties and having the right relationships with counterparties is very important.

You know, as you can see every other week some form of exploitation of a DeFi protocol becomes public, and so I would recommend caution. By definition, there is no intermediary in DeFi protocols, and so if anything happens, there is no recourse. What does this now mean? Well, if you are going to use a DeFi solution you should look at the code. You need to know that code and you also need to know the team members of the protocols which are often anonymous. As you can imagine, DeFi in the end comes with big question marks, not just for many investors but for regulators as well who, at least at this stage, don’t know how to regulate DeFi and as everyone else are not sure of what the risks are.

New DeFi protocols are coming up every day, and so how do you separate the good from the bad? How do you identify which are safe and which are not? I think this is a very tricky question given that DeFi is such a new space even within crypto. I would say the approach would probably be to err on the safe side by sticking with the blue-chip ones, meaning the DeFi protocols that have been around for a long time and more well-known.