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February 1, 2021

Market Spotlight

Exploring Crypto Institutional Adoption With Wintermute and Wave Financial


With the cryptocurrency markets starting off the year strong, institutional interest is starting to materialize as expected. Yoann Turpin, co-founder and head of business development at Wintermute, and Constantin Kogan, managing director of Wave Financial and partner at BitBull Capital, joined host Teana Baker-Taylor to discuss the crypto market landscape for institutions.

(2:00) Wintermute has closed two funding rounds over the past year, including a USD 20 million Series B with Pantera, Lightspeed and Fidelity’s investment arm FMR. Yoann boasts the chemistry of the team, as they all used to work together in a prior life, as part of the secret sauce for attracting the funding. He has built some desks in the options space, where he spent his days listening to central bankers and trading interest rates.

(2:49) “So you’ve got a reasonably qualified team at the start. And then…before the high caliber of the VCs like Lightspeed and Pantera, we already had a fairly decent roster of super-angels from our first round in 2018 who actually helped validate the proposition and really gave us the money pre-revenue essentially just to build the first layer of tech,” explained Yoann.

The dynamic in the market has shifted to where there has been traction and a revalidation of the environment. Everyone is speaking of state balance sheet inflation and the institutional interest has been shifting into cryptocurrencies. That has helped to fuel volume at Wintermute and to close nearly a USD 3 million round in early 2020 as well as the more recent Series B.

Competition and Roadmap

(5:50) The Wintermute team worked at a fairly large prop firm before and is no stranger to working with a billionaire when they start trading. Getting access to capital is almost never the problem. It’s more about building the right amount of trust with whoever is allocating the capital to them. In this space, it’s not necessarily helpful to throw your weight around, explained Yoann.

6:55 “Because we’re smaller and more nimble, we’re actually able to cover more of the longer tail. And we see this now as a strong differentiation. And it also helps us to do two things…We’re building deeper relationships with foundations, and we are also automating a lot of the OTC business that we are creating,” said Yoann.

(7:35) Now it is all about the smaller venues, ECNs, funds, lenders and wallets that want to trade with Wintermute directly. They will have access to a stream to trade directly if they wish to do so. That’s on the roadmap. The company also has a slight expansion in its sights. They will start with a team in Asia and are eyeing Singapore.

Fund of Funds

(8:40) BitBull Capital is the first fund of funds in the crypto space. They came on the scene in 2017 after trying to understand what was needed in the market. Back then, there were fewer than 120 crypto-oriented hedge funds in the world. BitBull does due diligence on funds, research and supports the ecosystem by allocating capital to other prominent hedge funds, including the likes of Pantera.

(9:31) Wave Financial is an asset manager with a wider array of interests. They have a venture arm, so it’s a VC-oriented hedge fund, and they also allocate to a number of projects, the details of which are on their website. They have a wealth management arm where they have built up the expertise to manage crypto whales’ assets. They are filling a need that until now traditional Wall Street firms like Morgan Stanley, UBS and Goldman Sachs have been unable to do.

(10:41) In addition, Wave prides itself as risk investment advisors. They’ve got a high standard of fiduciary responsibility and work only with qualified custodians including Fidelity and London’s Copper. Wave has launched several hedge funds including the Bitcoin Income Growth Fund, a cover-call options strategy. They are also behind a private equity fund in which they tokenize a Kentucky whiskey ultra-premium bourbon distillery. Wave plans to list the fund on STX in about a year as a security token offering (STO).

(12:45) There is a belief that hedge funds have a lot of money, and no one knows where it is coming from. It is coming from other institutions and individuals, and this is based on trust. You are either trusting a project or a fund manager who is allocating your capital. Many crypto hedge funds are startups and it is a really tough business. A lot of people don’t make it, said Constantin, adding that it takes a few years to prove yourself to pension funds, endowments and other institutions. In crypto, it is an even more complex situation because you need to educate the institutions about the space.

(13:46) “A lot of funds do bankrupt. And we just survived because we had really strong backers. Even in a bear market, there’s not a lot of redemptions at all. So that means we somehow built trust with our LPs, No.1. And No. 2, it’s also about returns,” said Constantin.

If you’re making a good bet on the other underlying crypto hedge funds, then you survive.

Market Infrastructure

(15:15) Wintermute has done some integrations with exchanges but they integrate and connect directly. Over the last three years or so, the infrastructure has greatly improved. It’s day and night in terms of the number of orders, cancellations, etc. that they can support, and Wintermute can generally support a high-frequency business today through the top 20-25 exchanges.

There are and there will probably always be some struggles around busy times because of two factors. One is that there are just many more users interested in iterating with the crypto space in general.

(16:05) “And then the second big factor is that you do have…obviously better build and more efficient layer one chains coming into the space and launching their mainnets. And then you always need exchanges to have the expertise to maintain and integrate and so on. And usually, when not too much happens, you don’t see where the cracks are. And then as soon as there’s more volume, then you start to see the cracks. Some exchanges have been able to build strong engineering teams around these issues, but I don’t think it’s a problem that will go,” said Yoann.

In general, it is definitely possible to have a flourishing high-frequency business in the crypto space today.

(17:45) Wintermute trades 1 million-1.5 million times a day. It should be in the 2 million-2.5 million a day range toward the end of this year if not sooner. The company covers 15-20% market share on some tier-two exchanges but they are nowhere near those numbers for tier-one exchanges.

Crypto Market Infrastructure & Consolidation

(18:59) For VCs, consolidation is definitely needed in the crypto market infrastructure space as well as an ability to identify players that actually support a certain infrastructure, said Constantin. Wave Financial is partnering with the Cardano Foundation and creating a VC fund that will seed their underlying infrastructure projects that are built on Cardano. More projects like this are likely to emerge given that there are so many different chains and opportunities to introduce interoperability and to make systems work together, said Constantin.

A major problem is the fact that there are so many exchanges, thousands of them. There are also a lot of OTC desks and market makers. They should start working together and aligning their goals to enable users, whether institutional or retail, to have a better experience and an ability to integrate solutions and trade and send assets from one platform to another easily, said Constantin.

Institutional Adoption

Some of the biggest names in the financial industry are getting into the game, including BlackRock. We’ve also seen endowments, and pension funds allocation to hedge funds and getting exposure to projects indirectly.

(22:25) “You can only imagine what will happen when the ETF will be approved. We are going to unlock probably, immediately about USD 1 trillion of capital easily,” said Constantin.

Venture capitalists were probably the first institutional money to come into the crypto space. Now we’re seeing macro funds and even down to pension funds and insurance groups come in, which are normally hard to get across with anything that looks remotely risky, said Yoann.

Among institutions, there is a phenomenon of slower deployment cycles, such as monthly investments, and the aspect of bitcoin first. Getting a BTC allocation approved is already a big thing. Going into ETH and getting people to understand the ecosystem of building decentralized apps is a whole different ball game, Yoann noted.

The trade is a lot less crypto-to-crypto with institutions. Wintermute is very much seeing crypto to fiat moves. They deploy fiat to go and buy cryptocurrencies. And this explains some of the cryptocurrencies being withdrawn from centralized exchanges over the past few months. They buy it and handle their own custody.

For a macro or pension fund, the strategy is more actively buying and holding. There’s also enough liquidity in the top 50 coins now to have a quant market neutral strategy as well as a long/short strategy. It’s helping new institutions to enter the space, Yoann said.

Market Predictions

(32:00) Wintermute trades market neutral. But wearing his macro fund manager hat, Yoann thinks there’s a lot of liquidity coming into the space. And at a trillion-ish market cap, crypto is such a tiny space compared to many other asset classes.

(32:47) “There are reasonable single-digit positive deltas on options on Deribit for the end of this year for calls at USD 250,000, USD 300,000 for bitcoin. It’s definitely non-zero. Now if it’s above USD 100,000-150,000, it wouldn’t surprise me,” said Yoann, adding that he wouldn’t be surprised if we do 2x, 3x, 4x in the crypto space this year.

(34:52) Now that bitcoin is trading has broken a psychological barrier, Constantin expects that it will trade in the range of USD 20,000 and USD 60,000. He also has great expectations for DeFi and believes that adoption will increase and the value locked will rise to USD 50 billion this year. Finally, he expects the Ethereum community will grow and the stablecoin market cap will increase to USD 100 billion.

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Gerelyn Terzo
Gerelyn caught wind of bitcoin in mid-2017 and after learning about the peer-to-peer nature of Satoshi's creation has never looked back. Previously she covered institutional investing and fintech for several major trade publications. Gerelyn resides in Verona, N.J.

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