B.itcoin [BTC] The UK’s Financial Conduct Authority (FCA) has banned the sale of crypto derivatives to retail investors, labeled them “unsuitable” and warned of a “high risk of loss” if they invest in digital currencies.

There are also fears of a price bubble after Bitcoin rose to a record high of $ 41,998.75 on Jan. 8, 2021 – the price had quadrupled in 2020 – before falling to $ 31,670.58 on Jan. 11. [Coindesk.com data showed it had dropped even lower by 27 January, before staging something of an unstable recovery].

However, Anatoly Crachilov, co-founder and managing director of the crypto-focused investment firm Nickel Digital Asset Management, remains optimistic and explains that with the support of institutional investors, the sector will grow over the long term.

Crachilov founded Nickel Digital Asset Management in 2019 together with Michael Hall and Alek Kloda. Together they have over 60 years of experience in traditional finance.

Hall is a portfolio manager experienced in trading macro, commodity and fixed income portfolios with several hedge funds and investment banks

Kloda is a macroeconomist and algorithmic trader with research expertise in arbitrage in high volatility markets.

Crachilov brings 25 years of experience in investment management and private equity, most recently at JP Morgan and Goldman Sachs.

Crachilov’s journey

“My crypto journey started in 2017 when customers came to me with a question. It was’ Am I missing something about cryptocurrencies? Do we have to be there? ‘”, He says. “From that point on, I started delving into crypto and I was intrigued by the beautiful underlying math. My father was a mathematician, that was very important to me! “

Nickel Digital Asset Management is an FCA regulated full-service asset management house that has been specifically designed to combine traditional financing with the world of digital assets.

“We believe in the exploitation of price movements in cryptocurrencies,” says Crachilov. “We employ low-latency algorithmic trading and pursue a range of arbitrage strategies in both spot and derivatives markets and directional buy-and-hold solutions. We saw a niche in the market to attract institutional investors who were concerned about the safety, transparency and liquidity of digital assets. We have developed an independent custody solution for third parties where the manager has no right to transfer the funds. “

“We saw a niche in the market to attract institutional investors who are concerned about the security, transparency and liquidity of digital assets. We have developed an independent custody solution for third parties where the manager has no right to transfer the funds. “

The first product came in June 2019 with the market-neutral Digital Asset Arbitrage Fund.

“It required payment rails and connections to the application programming interface to multiple global trading venues – in our case 17 cryptocurrency exchanges,” he explains. “This strategy is based on cross-location arbitrage. The manager exploits market inefficiencies and price distortions and takes advantage of the extreme fluctuations in volatility. It is a fully systematic, low-latency trade with decision-making and execution times measured in milliseconds. It has made all of the positive monthly returns. “

The second is the Digital Gold Institutional Fund, which tracks Bitcoin and has posted a net return of 200% since it was launched last May. It uses sophisticated execution algorithms to minimize unwanted effects on the execution price, especially with large trading volumes. Investors buy at a fair market price without a bid / ask spread and with a daily liquidity profile.

The digital factor

Nickel Digital Asset Management recently launched the Nickel Digital Factors Fund – a multi-strategy fund that leverages high frequency trading, market making, trend following, relative value and statistical arbitrage. One example is a strategy that analyzes market signals to predict where prices will go and bets on them. Another might focus on the relative value between two assets and bet that they will converge or diverge.

“We are also seeing increasing investor demand for a diversified fund that deals with other crypto coins beyond just implementing Bitcoin,” explains Crachilov.

The funds lasted until the spring market collapsed.

“The liquidity implosion in the market was a great test. Stocks, fixed income, and gold all went down, and crypto was dragged into this black hole, ”recalls Crachilov. “We’ve reduced risk across the board and March essentially became a month of capital preservation. With arbitrage, we have increased our self-imposed limit from 20% of the AUM per exchange to 3% in order to exclude the counterparty risk as much as possible. “

“The liquidity implosion in the market was a great test. Stocks, fixed income, and gold all went down, and crypto was drawn into this black hole as well. “

Bitcoin has now also been described as a risky product.

“Bitcoin often has large upward fluctuations, which tend to be followed by corrections,” claims Crachilov. “This is normal behavior for a new technology in the early stages of its adoption curve. This market is facing a fundamental cycle of expansion. “

One driver is the inelastic immutable monetary policy. The supply of Bitcoin is capped at 21 million, and the issuance schedule is hard-coded and completely uncorrelated. Crachilov argues that changing demand provides a strong hedge against currency depreciation and inflation. It has a built-in scarcity similar to gold.

“It is important to view bitcoins as a crypto asset and avoid possible confusion with the name cryptocurrency. The main investment thesis behind Bitcoin is the value storage function, ”he says.

“It is important to view bitcoins as a crypto asset and avoid possible confusion with the name cryptocurrency. The most important investment thesis behind Bitcoin is the value storage function. “

Become institutional

Another supporting factor, he adds, is that major payment platforms, including PayPal, are getting more involved [PYPL], Place [SQ] and visas [V]. Established financial institutions like Fidelity also offer Bitcoin custody services.

“Bitcoin is increasingly owned by longer-term investors who are weighted towards Europe and North America and who want to buy and hold in multi-asset portfolios. It’s going to be sticky money. They won’t sell just because it drops 20%, ”says Crachilov.

“2020 was the year Bitcoin became institutional. We have over 25 global investors. With the arbitrage fund, we found it was attracting family office groups and high net worth individuals willing to explore crypto without placing a full directional bet. They can move faster than heavier institutional clients when making allocation decisions. “

“2020 was the year Bitcoin became institutional. We have over 25 global investors. With the arbitrage fund, we found it was attracting family office groups and high net worth individuals willing to explore crypto without placing a full directional bet. They can move faster than heavier institutional clients when making allocation decisions. “

For the past three months, traditional asset managers and insurance companies have been researching the allocation. Investors like Bill Miller and Stanley Druckermiller have spoken openly about Bitcoin and its ownership.

“The low interest rate environment has created an asset-to-liability mismatch and has led them to look for new options to generate income streams,” says Crachilov. “Pension fund interest is just beginning to emerge, but when the first allocation is made there can be a ‘fear of missing out’ in the classroom.”

He claims that retail investors in the market will benefit from the inflow of institutional funds.

“The latest FCA ruling did not ban crypto, but restricted private customers’ access to crypto derivatives. This is fair enough as the instruments involved are complex. However, buying Bitcoin itself is completely legitimate. I expect retail demand will increase, but my advice to retail investors is conservative with your allocation. Don’t overexpose yourself, albeit with great potential, as it remains a very volatile asset. “

“I expect retail demand will increase, but my advice to retail investors is conservative with your allocation. Don’t overexpose yourself, albeit with great potential, as it remains a very volatile asset. “

In fact, he advises investors to only place 1%, 2% and, in the end, 3% of their portfolio in it. That way, they are in the “perfect spot” to benefit from the upside without hurting their risk profile.

Nickel research has shown that between December 31, 2012 and December 31, 2020, a portfolio of 60% stocks and 40% government bonds would have produced a total return of 124%. Adding just 1% Bitcoin to this portfolio would have delivered a return of 146%.

“The reason we’re called nickel is because if you add a little bit of it to steel, you get better quality. It’s impact-resistant, temperature-resistant and made of stainless steel, ”says Crachilov. “Similarly, adding single-digit crypto numbers to an institutional portfolio also strengthens it.”

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