As the market capitalization of bitcoin breaches $100 billion, and total cryptocurrency market cap near $200 billion, investors from Wall Street and Main Street are starting to take the new crypto asset class much more seriously.
The cryptocurrency markets are attracting professional traders and day traders en masse as the volatility and price action creates favorable trading conditions.
Combine this with a historic period of low volatility in traditional global markets, and it is no surprise that seasoned professionals with institutional trading backgrounds are allocating increasing amounts of time and capital to the crypto space.
Ari Paul is one of those seasoned trading professionals that recently left his career in traditional markets to concentrate his efforts in the crypto universe. Along with co-founder Matthew Goetz, Ari recently launched BlockTower Capital: “a leading cryptocurrency investment firm, bringing professional trading and portfolio management to an emerging digital asset class.”
Ari started his career as a market-maker of equity derivatives at Susquehanna International Group, one of the most successful and widely respected global derivatives trading firms. As equity options market-maker, he provided liquidity for retail and institutional investors and managed large portfolios of risk. Market-makers monitor and interact with order flow every second of the trading day, and the best ones become experts in market psychology.
After 6 years in the proprietary trading industry, Ari attended graduate school at the University of Chicago, where he earned an MBA with concentrations in economics, entrepreneurship, strategic management, and econometrics & statistics. In 2015, he became a Portfolio Manager of the University of Chicago’s $8 billion Endowment, after serving as Risk Manager.
Ari saw the tremendous potential in bitcoin and the cryptocurrency marketplace, and wanted the University of Chicago Endowment to profit from the crypto opportunity. In a recent appearance on the popular podcast, Epicenter, Ari speaks of actually writing recommendations to a few of the early crypto fund managers he met with, explaining how to pitch the U of C Endowment. While most fund managers in the nascent cryptocurrency space were tech-savvy engineers, who could dissect programming language with ease, Ari knew the language, metrics, and presentation that translated into potential investment by a large endowment.
One thing became clear: there was an immediate opportunity to create an institutional-quality fund in which the University of Chicago Endowment, and other endowments, pensions and foundations could invest. BlockTower Capital was founded shortly thereafter. As the CIO of BlockTower, Ari Paul is ready to deliver major crypto alpha, with a broad skill set that includes a deep understanding of game theory, derivatives markets, order flow analysis, market psychology, and risk management spanning a wide range of time frames.
As institutions quickly become more serious about capital allocations to the crypto space, BlockTower has positioned itself to benefit from the new flow of capital. CryptoNinjas recently asked Ari some questions about the cryptocurrency market and BlockTower Capital:
CryptoNinjas: Mainstream media seems almost obsessed with calling bitcoin/crypto a bubble. This is not new to those who have been following crypto for a while. Now that you have taken the career risk and committed your waking hours to crypto, does it feel any different or strike any different chords when you constantly hear the word bubble associated with bitcoin/crypto?
AP: I mostly feel frustration when hearing brilliant economists and investors dismiss cryptocurrency. I can empathize somewhat since I raised similar superficial objections in 2011 in private conversations with friends, but by now, I would hope that people willing to express strong opinions in public would spend at least a half dozen hours learning about cryptocurrency first. Most of the critics dismiss Bitcoin by comparing it to Visa or Paypal – they fail to address its core value propositions as the world’s best censorship resistance money and unseizable store of value. It’s a reminder of how early we still are in the adoption curve.
CryptoNinjas: Do you foresee major changes to crypto market structure when futures and options contracts are listed at large “traditional” or “legacy” exchanges such as CBOE?
AP: LedgerX and CBOE will soon be offering Bitcoin swaps and futures. Bitcoin options and prime brokerage isn’t far behind. This will dramatically increase the liquidity in Bitcoin and make it more accessible to traditional investors. It will also make market neutral trading strategies far more practical to implement.
CryptoNinjas: Most crypto funds seem to use cash as their main risk management tool. Do you think this is an accurate assessment in general? For BlockTower? Do you see this changing as more futures/options products are listed on exchanges with growing liquidity?
AP: Today, cash is really the only risk management tool since correlations across cryptocurrencies are very high in a crash. Shorting can’t be used as a hedge now since you have to collateralize the short position, there’s insufficient liquidity in the lending markets, and exchange downtime means that stop-limit orders can’t be relied upon. I expect this to change over the next few months as Bitcoin swaps, futures, and options, and cash lending facilities will soon be offered.
CryptoNinjas: What is your rough estimate/expectation of institutional/endowment/private/family office money flow into crypto funds over the next 12 months? 24 months? 5 years?
AP: It’s very hard to put concrete numbers to this. Large US endowments collectively hold about $200 billion. US family offices probably hold roughly $1 trillion, and US pensions another $4 trillion. If 0.5% of this money entered cryptocurrency over the next 5 years, that would be inflows of $25 billion into cryptocurrency solely from US investors. Globally, we’re probably looking at 4x this. We’ve already seen family offices starting to invest in cryptocurrency, next will be endowments, with pensions coming in last.
CryptoNinjas: What do you think are three of the most undervalued cryptos in the market right now?
AP: I can’t name specific cryptocurrencies, but two key themes I like are interoperability via atomic swaps, and “privacy coins.” We hold a few cryptocurrencies in each of these “buckets.”
CryptoNinjas: Does any particular US city stand out as having the most crypto “energy” or excitement right now? Any particular country?
AP: San Francisco is definitely a crypto hub, but we’re seeing tremendous energy in Manhattan and Brooklyn and smaller but meaningful communities across the country. Outside the US, Korea and Japan have burst onto the cryptocurrency scene in all regards.
To conclude the interview, Ari stated:
“We’re building BlockTower into a leading institutional quality cryptocurrency investment firm that will soon have multiple fund offerings. We’re very conscious of the scalability of our investment strategies and our assets under management will reflect the opportunities and liquidity in the market as it develops.”
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