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Ari Paul | How the Top Crypto Funds Are Trading and Investing in Cryptocurrency

Hidden Forces

February 12, 2018

66 minutes

In Episode 32 of Hidden Forces, Demetri Kofinas speaks with Ari Paul about the inner workings of hedge funds focused exclusively on the cryptocurrency space.

Over the course of the last year, cryptocurrency has dominated our society. The price of the most popular digital currencies surged, increasing in value by well over 1000% in a matter of weeks. We saw similar rises in initial coin offerings, with the number of token offerings increasing from just seven a month in January 2017 to more than forty a month by the end of the year.

This crypto euphoria fueled the formation of several cryptocurrency hedge funds which, according to their various founders, aim to bring the professional trading and portfolio management of Wall Street to the emerging class of digital asset. Although this work promises to open the crypto space to an entirely new class of traders, there are many questions regarding how these funds work and how reliable they are. For example, how are crypto fund managers managing risk? What sorts of benchmarks are crypto funds using in order to measure performance? And how does a cryptocurrency investor seek alpha in an already uncorrelated market? To answer these questions, and help shed some light on the emerging world of crypto hedge funds, we turned to Ari Paul.

As a portfolio manager who oversaw risk at the University of Chicago’s endowment investment office and the Chief Investment Officer at BlockTower Capital- a leading crypto hedge fund that raised over $140 Million in 2017 - Ari Paul is uniquely qualified to discuss the most interesting and creative investment opportunities for making money in cryptocurrencies. His positioning also means that he is intimately familiar with many of the risk factors that populate this new and fledgling market.

Over the course of the discussion, Ari Paul speaks with host Demetri Kofinas about the skepticism surrounding market values, how we can protect ourselves from counterparty and exchange risk, and how hedge funds like BlockTower Capital are making it easier for someone who may not be intimately familiar with blockchain technologies or the inner working of specific cryptocurrencies, participate in this new digital economy.

Demetri also asks Ari what the benchmarks for crypto funds like Blocktower are and how they measure performance. The challenge in the cryptocurrency space, according to Paul, Is that there are really three benchmarks: bitcoin, cryptocurrencies in general, as well as the broader equity markets. Seeking Alpha in an already uncorrelated asset class, therefore, presents a slew of new risk factors that aren’t present for traditional hedge fund managers. Ari Paul also gives his opinion on how the flood of institutional capital might alter these correlations, what a consolidation in cryptocurrencies might look like, and if we are verging near a collapse in valuations.

The two also take a look at cash-settled futures markets, consider the use of put and call options, and explore ways in which investors can better protect themselves from counterparty and exchange risk. Finally, they examine some of the most interesting and creative investment opportunities for making money in cryptocurrencies and what the average investor can do in order to take advantage of them.

Producer & Host: Demetri Kofinas

Editor & Engineer: Stylianos Nicolaou

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