Risk Management in the Crypto Markets - Dina Tsarapkina

foreign [Music] thank you foreign right now [Music] thank you hi everyone um nice to see you all my name is Dina tarapina I'm the co-founder and co-chief investment officer of syncretic Capital so we're a cyclical multi-strategy crypto hedge fund um I used to work at Bridgewater I worked on The Unofficial crypto team there working on educating Ray dalio on his views on crypto worked for one of the other cios so I've been in the tribe space for a little while now and mostly I wanted to go through the really boring topic of risk management so none of you actually want none of you none of you want to hear this but unfortunately I think some of you may have to so um the funny thing about the crypto space is by the law of large numbers a lot of people made some very concentrated bets in the space and then some people got very lucky in doing so and so ended up with a lot of assets but unfortunately applying these very concentrated bed approaches towards Asset Management puts you in the position of being more likely to lose all your Investments rather than actually being able to preserve your wealth so I'm basically here today to talk to you about some basic guidelines on how you may want to change your current holding strategy in order to increase your chances of preserving your bags so volatility is um in crypto a really really big factor and the way that it works in this space is very different from how it works in tradpy so generally with volatility um there's a lot of I guess nuances that end up being approximations when you're working with low volatility environments but when you're dealing with really volatile assets there's some things that you may want to keep in mind so um as Caroline Ellison said you know you can only lose a hundred percent of your assets but you can gain Infinity unfortunately this has some uh some nuances that we uh we should probably think about more explicitly so basically um I think one thing people fail to realize when dealing with volatility and investing in highly volatile assets is that if you lose 50 of your assets you actually have to make up a hundred percent in order to uh regain your initial base and so uh I think that people in crypto kind of don't really appreciate this asymmetry and when you're dealing with things that aren't particularly volatile this Nuance doesn't really matter and it ends up being a rounding error and so you know traditional Finance principles don't really emphasize on the uh asymmetry of geometric returns but I think it is something that's worthwhile considering as your oh sorry yeah it is something that's worth considering just as part of you know when you're making very very concentrated moonshot bets um so diversification um yeah so everyone's heard about the mythical like 60 40 portfolio how it's been broken all this boring stuff but um in reality if you're dealing with several different assets having them being uncorrelated adds a lot of value to your ability to preserve wealth because the various um the various return streams if they are in fact uncorrelated will reduce your losses and how we I mentioned in the prior slide is um if you basically are in the position of experiencing an extreme donut and you have to have much higher performance in order to get out of the hole and so diversification allows you to have different uncorrelated cash flow streams that have similar return streams which you know doesn't really change your expected performance from a purely expected returns perspective but it does increase your overall sharp ratio by reducing your volatility so being able to allocate your portfolio and placing your assets into uncorrelated cash flow streams will go a long way in terms of wealth preservation just because things have the same expected value doesn't mean you're actually going to realize those returns and so decreasing your volatility increases your odds of actually being able to realize those expected returns so to the extent that you can diversify your Holdings uh please try to find uncorrelated assets and so sources of diversification are quite hard in crypto because everything is really really really correlated but uh with a little bit of creativity you can try to diversify your assets a little bit so um one really simple way to think of it is like in token allocation you know you may want to invest across various uh different chains or different themes whether it's game fine what not but unfortunately most of these things are going to end up being really really a correlated regardless and so to the extent that most of your assets are actually in token exposure you are going to experience a lot of correlation like most of these things are 70 or 80 correlated so that's uh not going to be too good for your diversification but uh if you look at some more creative sources within you know the crypto space like obviously yield farming is one aspect of that there's some synthetic instruments that give you exposure to gold for instance packages like pretty diversifying and inflation protected exposure to Gold this space is still developing but to the extent that you can find kind of things that aren't really organically driven uh by the same factors as as generic crypto tokens um that that will be pretty valuable in terms of Outsourcing potential sources of diversification another thing that's worth touching on is option vaults so people think that this is like a really good source of diversification and it can be but a lot of the time you actually can't take both sides of the Vault and so you should really think about like who is the counterparty that you're betting against in the space why would you trade a market where you can't take both sides of the bed these things are really designed in order to you know trick retail investors potentially into putting their Assets in you know into these things that has a negative expected value so so while um while they might be diversifying they are sometimes negative expected value and so just just be careful playing with any kind of markets where you do have a place where you can't take this both sides of the bed so hedging instruments um most people think derivatives are designed in order to take concentrated bets in crypto so you see a lot of people trading like levered perks and options and all these things to get convexity but uh crypto people would be surprised that they're actually designed for risk management so um I'm going to walk you through a couple of different ways that these instruments can be helpful with downside risk mitigation the couple disclaimers that are worth noting though is that um volatility in crypto is very very large which means that hedging your risk is expensive and you do want to be thoughtful around when you're actually spending the money in order to hedge your portfolio because otherwise this can get very expensive and the funny thing with options is that um whenever you need the most they're actually the cheapest because when is the crypto Market the most fragile it's at the top of the bull market when is the market most likely to collapse at the top of the bull market and people are mostly using options to make concentrated bets on the upside rather than trying to hedge their portfolio so to the extent that uh UC volatility is really cheap ask yourself like why is this because the market is overheating that might be a good indicator that it might be worth putting on a hedge and of course the same thing is true with perpetuals right like when Perpetual uh borrowing rates are really overheated that's also probably a friction that you may want to think about and it's you know Perpetual yields are high when things are overvalued when things are stretched and so that's a natural gravitation Force for maybe what goes up is going to come back down soon um so hedging defy exposures a lot of people don't actually think about this but to the extent that you're allocated into a liquidity pool you can often hedge some of those exposures by going to the perpetuals market so you do have to think about the cost of hedging the Baseline hedging rates on perps are about 10 a year maybe you're in like a stable um stable volatile LP but you can usually hedge at least one of one leg of the trade in order to get protection from the downside so this way you can potentially experience the gains from a yield Farm without necessarily having the volatile exposure of um of you know having the actual underlying exposure and so that's another potential source of diversification because a lot of the benefits of yield farming are that you're getting a yielding instrument and um you know being able to remove some of the volatility does reduce your correlation and kind of create something that looks like a bond so leverage liquidations and capital efficiency um so when you're hedging D5 instruments there is a factor of dilution of yield that happens so to the extent that you're spending capital on both deploying it into the farm and also having to put some Capital aside for hedging that's going to basically dilute the total amount of yield that you're getting on your deployed Capital because you're having to hold collateral against some of the Perpetual instruments that you're deploying and so you do have to think about what you're actually earning is going to become less than what's coded in the yield Farm you're going to experience impermanent losses you're going to dilute your Capital by having to hedge and uh you know managing those positions potentially you can put on a leverage Perpetual position and hedge that way but then you're more at risk of blowouts so these are all things that do require very very active management as far as um you know items not just sooner before tomorrow's ceremonies and come on down to Palestine uh anyway uh Capital efficiency and hedging does uh impact your total returns so that's one more Factor that's worth thinking about so why why liquidity matters um a lot of people and uh I mean for the most part in retail investing it doesn't matter too much because you're usually not a huge male that's going to you know move a liquidity pool by pulling your Capital out but in case there are any people with really really begs here that like to take concentrated LP positions uh it might be worth thinking about what happens if you try to really quickly exit everything you have in a single go so often you want exit liquidity are going to exist and so um think about what share you are of any liquidity pool you're participating in think about this the overall liquidity of the market you're trading in think about what happens in the event you want a stop loss to be working because a lot of the time the time when you think you want these things to matter is when you're going to basically get rugged and the Market's going to fall out from under you so again just just useful things to think about as part of your day-to-day process of uh putting on what you think is potentially a hedge or potentially responding to bad market conditions and how to uh you know do these things in a responsible way um so beta this is not I don't know if generally do you guys know what beta is Market beta I don't know no we don't know what Market beta is some do okay um so uh beta is basically a function of correlation and volatility so how related is the market that you're dealing with to other markets So within the crypto space like your betas are going to be generally quite High when you're dealing with coins you're going to have both really high correlations and high correlate volatilities so effectively when you're trying to trade um when you're holding coins you're just basically getting like 90 really levered Bitcoin or ethereum then there's beta with Trad fire markets so traffic markets actually also have parameters that influence the crypto market and there's times that that matters and there's times that doesn't matter and so um really understanding what factors are driving the market whether it's you know risk on risk off Dynamics coming from equities whether it's bond yields understanding how these pressures are impacting crypto at any given point in time allows you to have some potential power over how you can actually use some hedging Tools in order to reduce the risk in your portfolio so you know the calculation of beta anyone can Google it's really easy but basically um the important thing is here is understanding when risk events are happening in the crypto space and basically considering hedging either using options or perpetuals at a time when those things are actually at high risk and potentially you might not want to liquidate your whole portfolio ahead of a risky event but that's really what you know tools like perpetuals or options might come in handy as far as hedging goes and that uh brings us to the topic of hedging event risk so for instance like if you know j-pow is giving a speech of some capacity and the market is really nervous about that you're going to experience volatility within the equity market and because crypto is way more volatile than equities there's potentially um going to be a big shock to the crypto markets that flows through that and if it really is a pivotal fed announcement it could really change the direction of the crypto cycle so if stocks are going to tank there's a chance that crypto will get even more hurt by something that um Jay Powell says and so you know potentially hedging for your portfolio and understanding how much you want to head to your portfolio by knowing your portfolios beta ahead of these announcements basically prepares you uh to experience some of that volatility in a less you know painful way through the event and so that's another place kind of where you might want to think about understanding the composition of your portfolio understanding the volatility and just being well prepared for deploying uh some hedging instruments against periods that might really injure you and leveraging data so in order to do all these various uh things that I described um you probably are going to need some data so here I'm going to insert a small Shield towards some of our counterparties that we like to use um so there's Arkham intelligence if you want to monitor on flows things crypto Quant or glass node just in terms of um various kind of on-chain aggregations Delphi digital for some research Amber data for General market data we found quite useful and the tie in Missouri we find useful resources for kind of general like Bloomberg style insights into the space and that's mostly um all I have for you today um if you thought any of this is confusing uh you should just hand your bags over to me and I will manage them for you so uh that's uh that's mostly it thanks a lot for for taking the time to listen to my talk [Music] thank you