The importance of risk management, according to the CEO of a leading crypto quant trading firm
Panic and fear gripped the crypto market this week as falling prices and market pressure caused two industry titans — hedge fund Three Arrows Capital and lending platform Celsius Network — to face potential insolvency.
While the extended crypto market downturn has caught many market participants offside, one high-frequency trading firm managed to not only survive recent conditions but concluded trading for the month of May up 3.7%.
In this episode of The Scoop, Martin Green, Co-CIO & CEO of Cambrian Asset Management, explains why proper risk management is key to his firm’s success, and why he believes there is still a bright future ahead for the crypto industry.
According to Green, Cambrian’s risk management systems are designed to take the human element out of the equation:
“Humans aren't designed to make great analytical judgments when their brains are filled with cortisol, serotonin or dopamine. They're just not. So our systems are designed to take risk off, like sell along, or buy to cover a short if the market goes against us. So if we're long, the market goes against us to some pre-programed amount… the systems will take risk off so that if the market becomes more extreme, we've protected our investors capital.”
Although nearly $500 billion dollars has been wiped from the total crypto market cap so far in June, Green believes the severity of this correction has likely been exacerbated by crypto’s reflexive nature.
While crypto’s volatility often draws the ire of critics who do not believe it to be a viable alternative to the current financial system, Green thinks it is important to remember is still a new technology:
“I think we have to remember — and we all do in the industry — but people outside the industry have to remember that [crypto] fundamentally… is an early stage technology. Early stage in an eventual possible adoption curve.”
Episode 53 of Season 4 of The Scoop was recorded remotely with The Block’s Frank Chaparro and Martin Green, Co-CIO & CEO at Cambrian Asset Management.
Listen below, and subscribe to The Scoop on Apple, Spotify, Google Podcasts, Stitcher or wherever you listen to podcasts. Email feedback and revision requests to podcast@theblockcrypto.com.
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Crypto quant hedge fund CIO explains the impact of Elon Musk's tweets on the bitcoin market
Elon Musk's trigger-happy Twitter fingers have left the bitcoin world in a tizzy in recent days.
As the Wall Street Journal noted in a recent piece, Musk has become bitcoin's "biggest influencer" — much to the dismay of many evangelists. Since he first tweeted that Tesla would stop accepting bitcoin as payment because of environmental concerns, bitcoin has fallen about 40% from its all-time highs.
More recent tweets about Musk working with North American miners on addressing environmental concerns have pushed the crypto from lows near $30,000.
On this most recent episode of The Scoop, Martin Green, who leads quant investment firm Cambrian Asset Management, explained why Musk's tweets are having such an outsized impact on the crypto market. In Green's view, it's not so much Musk's tweets that matter but the environment into which he is tweeting.
"Often the news itself, like Elon's tweet, would have a different consequence in a different situation," he said. "You can light a match in the middle of my driveway... you can take that match and drop it on the floor in an open space. Monstrous difference in the consequences. Still the same match."
Green said that the crypto market has been primed to overreact to market news thanks to the amount of leverage in the system, which creates "a cascading of selling pressure."
The lack of institutional spot buying recently has added fuel to the fire.
Still, Green said there are a number of tailwinds for the industry. He said that there are macro forces that indicate that institutions are under-allocated to the crypto market, noting specifically that Ethereum is "quite under-owned."
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This bitcoin quant trading CEO explains how to navigate events that data can't predict
This year has been unprecedented in many respects, with the coronavirus pandemic rocking markets and driving volatility in ways many couldn't predict.
Quant trading firms — or firms that base their trading strategies on statistic models — were seemingly left at a disadvantage as firms like Winton and others lacked the data for such unprecedented events.
On this week's episode of The Scoop, Martin Green, co-CIO and CEO of quant trading firm Cambrian Asset Management, broke down what it's like to run these strategies in a time when so many events were statistically unlikely.
A lot of it, said Green, comes down to the manner in which models are built to identify and respond to types of risk.
During this week's episode, Green also touched on:
Why human judgment is valuable in building models, but is better left behind once models are executing trades
How market data in crypto has changed as the quant firm built out its data stores
How the firm views risk management and why identifying types of risk in the digital asset world is key to a winning strategy
How Cambrian is getting in on the decentralized finance mania and how the firm's risk strategy interacts with the space
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