- As investors panic about volatility, proprietary trading shops thrive on it.
- Michael Safai, co-founder of crypto prop shop Dexterity Capital explains how investors can trade alt-coins in volatile markets.
- And shares his outlook behind two of the crypto’s hottest alt-coins, solana (SOL) and terra (LUNA).
For new entrants into the crypto market, the recent
volatility
can be terrifying.
In January, bitcoin (BTC) dropped 19%, while alt-coins were hit even harder. Popular tokens, such as solana (SOL) and avalanche (AVAX) fell 44% and 39% respectively, according to crypto trading firm Genesis’s January market report.
Now within the last five days, sentiment has shifted, and bitcoin is up by 6%, while avalanche is surging ahead by 11%.
For crypto trading shops, this volatility is what they thrive on.
Dexterity Capital is one of the older prop shops in the crypto scene, having launched in 2018 ahead of the likes of Radkl and Jump Trading‘s crypto division.
“We’ve seen the winters, we’ve seen the cycles, having done this for four years now, we want to be ready for anything,” Michael Safai, co-founder of Dexterity Capital, said. “And market neutral is a way to do that.”
Last year, the firm traded over $1.2 trillion of crypto assets, according to Safai. The Financial Times reported that Dexterity trades between $2 billion and $4 billion of cryptocurrency a day.
Insider spoke to Safai to get his take on how new traders can prepare for these more volatile environments, especially when trading alt-coins.
Trading alts
Since Safai’s firm doesn’t take directional risk, their focus is on how liquidations and volatility in alt-coins will impact their profit and loss.
The tricks of the trade that they use to manage the volatility of some of the smaller tokens is through having good pricing models and historical data to manage and prepare for edge cases.
“When there’s a lot of activity, we might pull back our quotes,” Safai said. “So you might be quoting 50 [basis points] across on either side of the midpoint price in normal times. When things get really hectic, we might pull back to 100 [basis points]. We call that kind of a dynamic pullback, so that’s how we cope with it.”
For directional traders, it’s harder, Safai said.
Most of the alt-coins, such as solana and those in the DeFi space, are correlated with “the blue chips”, such as bitcoin and ether.
So when those blue-chip cryptos fall, so do the alt-coins.
However, the alt-coin trading book is not as deep and liquid as those of ether and bitcoin, which can result in bigger price swings and in larger losses.
“There’s going to be more slippage when the exchange liquidates my position, and it forces the solana price down further,” Safai said. “And this cycle repeats as more and more liquidations happen in a kind of cascade.”
For Safai’s team, they are able to take advantage and do a lot of trading amid this volatility.
For directional traders, they probably want to focus on products and exchanges that offer margin capabilities in dollars because people do want margin in dollars, Safai said.
“We’ve seen more exchanges adopting that more and more,” Safai said. “And we’ve seen that in terms of the two books, you’ve got exchanges like Binance, they’ve got bitcoin margin swaps, and they’ve got dollar margin swaps and the dollar margin swaps have taken over.”
However, the liquidations aren’t a reason to avoid alt-coins completely, Safai said. He highlights investors just need to be smart about it because so many projects are doing really great work.
“On a longer or medium even horizon, I think it’s really good to be in alt-coins but you have to be ready for bumps and things are going to happen,” Safai said. ” … If you’re a short-term trader, you just have to be smart on how you hedge and make sure you’re well diversified.”
Terra (LUNA) bull case
One of the most popular alt-coins amongst traders and investors is terra (LUNA), a layer one blockchain protocol with a focus on algorithmic stablecoins.
Just last week, terra-backed assets logged their first significant inflows of $1.4 million, according to the CoinShares digital assets flow report.
Leading market technician JC Parets named terra (LUNA) as one of his top picks at the start of the year and recently reiterated this view as bitcoin surged past $41,000 in recent days.
A number of investors also highlighted terra to Insider as one of the top challengers for outperformance relative to bitcoin in 2022.
But can it really compete with the likes of the already dominant ethereum?
Safai thinks so.
“I think that all ones that make the most noise are the ones that attract the best user base and the best community,” Safai said. “And I think terra has been very aggressive about attracting a user base and community.”
But investors should be aware that terra is providing generous returns to investors who stake USD for the terra stablecoin using the anchor protocol, which likely plays a role in adoption.
Can solana (SOL) stage a comeback?
In Safai’s personal account, he keeps a diversified mix of tokens that can be held for the long-term.
“Ethereum has been fantastic,” Safai said. “… But some of these other ones are going to offer some interesting features that ethereum just hasn’t been able to deliver yet and some of them are just going to be massive.”
One blockchain many investors were betting could compete with ethereum was solana. However, it’s been been plagued with various technical issues in recent weeks, which has weighed on the price.
“While they definitely take away some of the luster in the public eye, I don’t think that changes the quality of what they’re building,” Safai said. “I think solana has a lot of great backers, Jump is obviously massive into solana and then you’ve got the FTX and Alameda connections.”
He highlights similar issues that occurred with ethereum several years ago.
“I mean, if you go back even further, ethereum had to rollback transactions, they had, of course, the ethereum classic split, these are teething problems and they’re really hard to avoid,” Safai said.
For now at least, it’s not fazing major bitcoin bull and hedge fund chief Mark Yusko, who says he’s bullish on solana despite the technical difficulties.
“There’s probably still some potential volatility in the price ahead,” Yusko said in a recent interview with Insider. “But long term, I think it’s a great protocol.”