- In less than four months, crypto hedge fund BKCoin Capital has doubled its assets to $130 million.
- Founders Carlos Betancourt and Kevin Kang told Insider about the firm’s 5 trading strategies.
- They also shared an altcoin whose recent upgrade has unlocked tremendous demand and upside.
In just over three years, Carlos Betancourt and Kevin Kang — a pair of former Wall Street traders — have grown their crypto hedge fund to an 11-person operation overseeing $130 million in assets under management.
But the journey hasn’t always been easy, the founders of BKCoin Capital told Insider in an interview at the Chicago Trading Show.
For starters, it took them more than a year to prepare for the fund launch, which turned out to be an arduous process due to the lack of crypto custodians that were ready to service active hedge fund managers back then.
“They had cold storage and it would take 24 hours for you to get your asset so you can trade,” Betancourt recalled. “That doesn’t work for an active manager that sees an arbitrage opportunity and needs to act quickly.”
Like many crypto traders, Kang and Betancourt were drawn into crypto after stumbling upon tremendous arbitrage opportunities, which typically refer to buying crypto on one exchange and selling it for a higher price on another exchange.
“In the traditional world, if you have a low-teens or high single-digit return a year, that’s a pretty good year,” Kang said. “Whereas in crypto, we are looking at 10% to 50% return per trade, so compounded over the course of the year, we are seeing just too good of an opportunity to pass.”
Kang didn’t miss the other side of the coin either. When he first started trading crypto in 2016 and 2017, it seemed like he could do no wrong even with a simple buy-and-hold approach. However, when the
descended on crypto in 2018, many investors were wiped out due to the sudden drawdowns and liquidations of leveraged trades.
5 flavors of systematic crypto trading strategies
As a result, they decided to launch with a market-neutral strategy to give institutional investors exposure to the still-nascent asset class but with much less volatility. The systematic strategy utilizes an in-house proprietary algorithm to identify and exploit arbitrage opportunities.
As the crypto market matures, arbitrage opportunities are few and far between, but Kang still finds them in the derivatives market and offshore exchanges. The trick, he said, is to always stay on top of new launches, whether it’d be new tokens or altcoins, new investment instruments or products, and look for market dislocation there.
“Obviously, there’s going to be no strategy where we are the only ones that know about it. There are smarter people out there who can figure it out,” Kang said. “But in terms of alpha decay, we got to make sure we are one of the first to find out about the opportunity and execute on it before that arbitrage goes away.”
As the flagship strategy takes off, the firm also launched smart beta strategies for bitcoin and ethereum. These two strategies make arbitrage, mean-reversion, momentum, and trend following trades but denominate their returns in bitcoin or ethereum so that investors can accumulate more crypto assets instead of dollars.
“Those two strategies have been super popular among family offices and miners who are just sitting on bitcoin because they could accumulate more,” Kang said.
Over the last two and a half years, the fund has also started building out its market-making capabilities. Today, it provides
across major exchanges by quoting two-way prices across 60 currency pairs and collects the bid-ask spread as the returns.
Kang said BKCoin plans to continue growing the market-making desk because there are more opportunities in making the spread in smaller-cap tokens or altcoins.
Most recently, the firm launched a decentralized finance strategy that will invest 25% of the book in 10 to 15 undervalued DeFi tokens and deploy the rest of the 75% in DeFi yield farming. Betancourt adds that the team will conduct fundamental and risk analysis of both the tokens and vulnerabilities in some of the DeFi protocols.
“As we move forward, we are putting a lot of emphasis on exactly what’s behind the protocol, what the code looks like, and to what extent do they make that public,” he said.
An undervalued altcoin with ‘tremendous’ demand and upside
Kang and Betancourt are always brainstorming for arbitrage opportunities and undervalued assets. The duo is finding hidden gems in non-fungible tokens, DeFi tokens, and particularly tokens of blockchain-based play-to-earn games.
In picking tokens to invest in, they try to focus on those with “tremendous demand.”
One of the tokens that have caught their eyes recently is that of Terra (LUNA), a layer-one blockchain developed by South Korean firm Terraform Labs. The decentralized financial payment network itself powers a basket of fiat currency-pegged stablecoins for cross-border transactions. The LUNA token, which is used for governance and staking, has surged 11,576.7% in the past year, according to CoinGecko.
Kang adds that Terra’s most recent upgrade, Columbus-5, has allowed it to burn $2 billion worth of tokens in just one week.
“By burning so much, there’s a limited supply, but there’s still a huge demand for their tokens,” he said. “So their token has been rallying tremendously this year.”
Overall, he believes that investors looking for asymmetric upside in crypto now will have to look at small-cap tokens.
“You are not going to see bitcoin returning 6,000% in a year anymore, because the more an asset class matures, the less volatile it will be and the less return there will be,” he said. “So if you are looking for those kinds of returns, you got to trickle down to smaller caps. I think that’s where a lot of smart people are placing their bets.”
However, making early investments in small altcoins can be extremely risky, so investors can start by allocating 1% of their portfolios to a basket of DeFi tokens to dial down the risk, he added.