Crypto Trading has gone from being a niche market to being a mainstream activity and maybe to being much more of a niche trading activity again. The days when you could be long everything because the number went up, are likely gone and this will likely have a profound shift on trading strategies.
Our Crypto Index, one of the more aggressive directional Crypto indices is in a sizeable drawdown. Several important undercurrents are happening in the markets. The number of purely directional managers dwindled in the first part of the drawdown, and there is little sign of those traders coming back en masse.
For any of the prior drawdowns, we noted hardly any reduction in the willingness of directional traders to continue to take risks. This time around, starting at the beginning of the year, we have seen a rapid reduction during the Luna/3AC debacle. Despite a somewhat higher index level and “stable” drawdown, directional traders are not moving back into trading.
While the reduction of directional traders is still taking place, the pace is much subdued compared to the wave that occurred during May/June. However, we have lost approximately 45% of the number of traders that were engaging in Directional Strategies (that we have daily transparency for). And the trend is downward.
So, a not too dramatic forecast, is that if you are engaging in market-neutral/arbitrage strategies, your counterparties have like changed, from a directional, small traders (we are hesitant to call them retail traders, but many of them had similar behavior and size) to a more professional outfit. This may change the behavior of the space.
As an example of a relationship that broke down in 2021, is the Friday/Saturday anomaly. It was more profitable to hold Crypto Coins on Fridays and Saturdays than on any other day in the week. The gains on those days are still outpacing but both time series are drifting down.
The upside is that there is a lot of dry powder. The managers that we track have approximately 25% of their allocation to Stable Coins (USDT, USDC). When (and if) the sentiment changes, redeployment of this could fuel a rapid move.