Home Business Insights & Advice Taming Crypto’s volatility: Could these products help?

Taming Crypto’s volatility: Could these products help?

by John Saunders
19th Jan 22 3:10 pm

With advisors having a range of ways of accessing cryptocurrency, as well as other assets, on behalf of clients, asset managers are coming up with new ways to provide different access to cryptocurrency.

This is the case with recently launched crypto products that don’t just offer access to the price movements inside the form of a U.S.-domiciled product wrapper and also claim to have an integrated risk reduction. Two of these products – one of CBOE Vest, the other from THOR Financial Technologies in collaboration with Separately Managed Account (SMA) supplier Eaglebrook Advisors -use technical signals to make trades with or out of cryptocurrency futures or cryptocurrencies for their customers.

“Thus far the biggest story has been just accessing this space, but one of the challenges, especially for professionals committing assets to the space, has been extreme volatility,” stated Karan Sood, CBOE Vest’s CEO. “Bitcoin’s long-term average volatility is just short of 100%.”

Mutual funds are a solution

The fund was launched in October. CBOE Vest launched the Bitcoin Strategy Managed Volatility Fund (ticker: BCTVX), the mutual fund which is invested in Bitcoin futures and eliminates the requirement to have an actual bitcoin-related wallet.

CBOE Vest’s plan claims to provide some bitcoin-linked returns and control the fluctuations by allocating funds to an asset that has a cash-like yield in drawdowns.

“Our strategy, at its simplest, will seek to vary the exposure to bitcoin futures in response to the volatility experienced by bitcoin futures,” Sood said. “If the volatility is high, the fund will reduce its risk of exposure to futures contracts for bitcoin. If the volatility is lower and the fund is able to increase its exposure. It’s an allocation that is dynamic to bitcoin futures that are adjusted daily.”

CBOE Vest has several products that offer similar risk-adjusted exposure across different wrappers of products and different asset classes

An SMA solution

The partnership between THOR and Eaglebrook integrates its trade algorithm into SMAs providing advisors with direct access to bitcoin as well as other digital assets that are stored offline within cold storage in Gemini Trust. The algorithms of THOR control volatility and the technology it uses allows for efficient client onboarding, execution of trades as well as portfolio rebalancing as well as tax report.

The plan, which was launched in November 2021, shifted from bitcoin’s $62,000 price to a 100percent cash position, which spared its investors a lot of the decline in the price of the cryptocurrency according to Brad Roth, founder of THOR Financial Technologies.

“We use our technology just like we do in equities, as of right now when we get a volatility signal we’ll convert to a cash-like position,” Roth said. “Right now, our client is doing exactly what it was designed to do. In the last drawdown, we were sitting on the floor.”

THOR was launched in the year 2000 and has since grown to more than 1 billion dollars in assets under management (AUA) over its portfolios of model portfolios.

As CBOE Vest builds products targeted at financial professionals, Sood has stated that, to date, the most interest in plain vanilla bitcoin futures has come from self-directed investors.

Financial professionals have a higher need – and appreciation – for investments that are regulated such as ETFs, exchange-traded funds (ETF), and mutual funds, according to Sood, as they tend to be more suited to the highest-interest requirements to which they’re usually tied.

“There are other challenges for intermediaries because they are managing these assets in a multi-asset portfolio, and nothing comes close to delivering the kind of volatility – or, historically, the kind of returns – that bitcoin has delivered,” said Sood. “You would think that most want to offer clients enough access to bitcoin to have the returns move the needle as a portfolio, but that often will result in accepting a certain amount of volatility as well.” Investors are using financial software to track their multi-asset portfolios. Prillionaires App is the most user-friendly and sophisticated wealth management platform available online. With its great user interface and net worth calculator, you can monitor your assets and liabilities across borders perfectly and accurately.

But scepticism abounds

Some experts in the crypto-for-advisors industry are sceptical of risk mitigation strategies like this.

“I wouldn’t say they’re a bad idea,” said Dan Eyre, the CEO of BITRIA, the company that provides advisors with access to cryptocurrency for their customers. (BITRIA was rebranded as BlockChange at the end of last year.) “The way most investors are looking at digital assets are as an investment they can make that offers a very strong upside, but also a lot of volatility risk.”

“If you look at any two years since the digital asset ecosystem emerged, there’s no period where if you held the investment you would have lost money on it,” the analyst stated. “Most actively traded risk-management strategies don’t necessarily outperform simply keeping an investment. We do see some fluctuations, but that’s fine since most of it is up-side volatility. If you attempt to identify bottoms and tops by using algorithms, you might be missing out on certain items while also generating a substantial tax cost.”

Sarson Funds, a crypto asset manager and education service that caters to advisors announced its own risk reduction products.

John Sarson, the firm’s CEO, has criticised the risk mitigation trading strategies for being too complicated.

“Wall Street wouldn’t be Wall Street if it didn’t take a straightforward investment and attempt to wrap it in many different packages ‘to meet investor needs,'” said Sarson. “While some of these options are logical, some are more beneficial to the issuer than the investment they end in making for the customer. These investment programs that are derived from algorithms may be effective at times, but in other instances, they will probably disappoint their customers. Here at Sarson Funds, we believe that using call writing software that is geared towards investors who are averse to volatility in bitcoin makes sense.”

Sarson’s call-writing program which is featured prominently as part of its Crypto & Income strategy utilises the volatility of crypto to generate monthly income by using covered calls. The income stream is used to buffer against the risk of market downs or swings.

Eyre also supports an analysis of the fundamentals on digital investments for investors looking to find more alpha.

“There’s a good chance that fundamental analysis will perform technical active trading in most cases, but if you do want to do active trading, there are hedge funds you can go to that do that better than anyone else,” the analyst said. “If you really wanted to reduce risks associated with volatility when the client is extremely concerned, then perhaps digital assets aren’t the best option for them. There’s nothing wrong with that.”

While Sarson prefers a covered-call strategy, he admitted that there’s room for a variety of various risk-management strategies in the field.

“For investors that otherwise view cryptocurrency as ‘too risky,’ these products add great value by managing risk and bringing a client into this emerging asset class,” said Sarson.

 

The above information does not constitute any form of advice or recommendation by London Loves Business and is not intended to be relied upon by users in making (or refraining from making) any investment decisions. Appropriate independent advice should be obtained before making any such decision. London Loves Business bears no responsibility for any gains or losses.

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