Novogratz's Crypto Trading Desk Lost $136M in Nine Months

https://www.bloomberg.com/news/articles/2018-11-28/novogratz-s-crypto-trading-desk-lost-136-million-in-nine-months

by shshhdhs • 8 years ago

135 130 8 years ago

bloomberg.com

jeletonskelly• 8 years ago

FYI - article is from November. He's still bullish...

matt4077• 8 years ago

His stock, however, has only fallen an additional 10% or so since then

(It’s hard to see exactly on the charts, because the stock price has fallen so fast +/- 10% is now a matter of just two or three pixels)

simias• 8 years ago

I mean, given how hard cryptocurrencies crashed this year is it really a surprise? The only way for him to make money would probably have been to short everything continuously but seeing how irrational and easily manipulated the cryptocurrency market has been in the past that seems rather foolish.

Given his pedigree you'd think he'd know better than to bet on something that's 99% pure unbridled speculation and 1% actual technology. It's like knowingly investing in a Ponzi scheme, what did you expect?

AznHisoka• 8 years ago

One of the best kept secrets in the hedge fund/financial industry is that most people really dont have a clue what they are doing. Sure they make bold predictions, appear on CNBC and use industry jargon. But at the end of the day, they arent much better than you or me at managing large amounts of money.

misiti3780• 8 years ago

to back this up, read the expose in the economist this week about family offices and how they all divesting from hedgefunds because the fees are ridiculous and they are doing no better than the S&P, usually worse when you take into account the onerous fees those mgrs are charging.

paulie_a4• 8 years ago

It's always sad when I get my upwards of 10 percent by professionals. I personally get 500-1000 percent return year over year. I'm working with small amounts of money that if I lost entirely wouldn't be the end of the world. But some years they barely beat inflation.

wpietri6• 8 years ago

An opinion shared by Warren Buffett. He bet a hedge fund guy $1m that an index fund would beat a portfolio of hedge funds. Buffett won handily: http://longbets.org/362/

mv4• 8 years ago

I am beginning to wonder, seeing the increased rate of hedge fund liquidations this quarter.

user59944612• 8 years ago

I'd say the exact opposite. One of the best kept secrets in the industry is that people know exactly what they are doing.

There are plenty of positions that are stable and low risk. Like running the exchange itself, all sort of middlemen and some form of arbitrage.

A hedge fund is mostly about funneling as much of customer money as possible to the fund manager. It's a fairly straightforward and risk insensitive business.

gammateam3• 8 years ago

"Huge gains in production from Texas, California, and Oklahoma quickly eliminated the regional shortages of 1920 and induced a downward trend in bitcoin prices over the next decade, with bitcoin prices falling 40% between 1920 and 1926. The decline in demand associated with advent of the Great Depression in 1929 magnified the price impact of phenomenal new discoveries such as the gigantic East Texas field which began production in 1930. By 1931, the price of bitcoin had dropped an additional 66% from its value in 1926."

paraphrased from https://econweb.ucsd.edu/~jhamilto/oil_history.pdf

Passive retail traders were never in commodities trading. Retail trades stocks. Retail has been trading digital assets like penny stocks. GTFO of the digital commodities market if you don't swing trade supply and demand or actually use it.

JohnJamesRambo2• 8 years ago

I keep rereading this comment, trying to understand what you are trying to say.

thesausageking2• 8 years ago

Given his pedigree...

Novogratz is a fun character and a good fundraiser, but he doesn't have a pedigree as an investor. He became famous (and a billionaire) by taking Fortress public. Under his watch, it then went from $35 to down below $2. After he was demoted, he ran a macro fund there which performed awfully and, in 2015, it was shutdown and he was forced into "retirement".

Alex39172• 8 years ago

I was in his office chatting with him a year and a half ago, on the exact day of June or whenever the market hit its bottom, and he called that that day was the bottom. He does things that don't always make a lot of sense to me, but he wouldn't be a billionaire if he wasn't getting a lot of stuff right also.

E.g. he also bought 500k worth of ETH and sold it for 250M. Paid his taxes, bought a new plane, and donated the rest to charity. His LPs might be nervous, but he's probably doing just fine.

KasianFranks• 8 years ago

More proof from HN that cryto is bad.

hassan_shaikley• 8 years ago

It has its uses. It's just not free real estate.

all2• 8 years ago

https://morningchores.com/free-land/

Even free real-estate has its drawbacks.

dkoston• 8 years ago

It amazes me that funds hold long positions in a market without safeguards and regulations and that really has yet to formalize. I'm bullish on digital currencies but there's going to be a ton of turmoil while the world figures out how to deal with this new asset class and major shake ups as regulations start to formalize or continue to formalize in some cases.

Long plays in this market are massively risky bets. They seem completely unnecessary as well. With the volatility that exists and the decent level of volume, there's tons of easy money to be made.

tim3337• 8 years ago

Normal investment funds don't pretty much. Hedge funds are less regulated and and can punt on pretty much anything.

ham_sandwich• 8 years ago

From what I read when the firm launched, I thought this operation would behave like a traditional market making desk, profiting from spreads and hedging aggressively. If anything volatility would help P&L, but I guess there just isn’t enough volume or liquid crypto derivatives to hedge effectively.

owenversteeg• 8 years ago

“Remember, bubbles happen around things that fundamentally change the way we live,” he said.

Ah yes, I remember how beanie babies changed the way we all lived. And tulips, of course. And rhodium?

Hmm.

blake8086• 8 years ago

And dot-coms! And real estate! Hmm.

bduerst• 8 years ago

Ships can't ever sink when all you look at are the ones that are still floating.

quickthrower2• 8 years ago

Real estate is as old as humanity

kolbe• 8 years ago

I don't remember any innovation around real estate that changed our lives within the past few decades (or millennia even).

ivalm• 8 years ago

Those aren't commodities (unlike tulips, beanie-babies, and crypto).

tim3337• 8 years ago

Tulips changed they way some of the Dutch live. They still have 11,000 hectares planted and grow 4.3 billion bulbs per year, 381 years after the so called bubble. I wonder if ETH and TRON will be about in 381 years.

lordnacho• 8 years ago

The article is missing some critical details.

What does the fund do? The article suggests they do arbitrage. Those opportunities actually tend to increase when things are volatile. Also while you can lose money doing it you wouldn't expect a precipitous collapse in NAV. If you discover you're slower than everyone else you can shut down.

Volumes aren't necessarily correlated to price either, so that isn't entirely convincing.

I've also heard that plenty of arb guys are doing fine.

If he's speculating and not just running arbs, what is he doing? If he's just punting the cryptos that would seem more in line with what's happened, but it's not clear what he's up to from this.

Also, with arbitrage it's limited how much capital you need. A lot of HFTs use very little. If you're getting money like a hedge fund you have to be sure it can be put to use.

Ex HFT and fund manager.

GreaterFool• 8 years ago

I also hear arb is doing fine.

I wonder how it works though. Most exchange APIs are terrible and it is simply not technically feasible to do anything using those APIs.

Also prices at too many exchanges move in absolute lockstep.

Must be private, privileged access to better (internal) APIs, profit sharing, rip the face of "retail" investor kind of deals.

After all the "exchanges" are not really exchanges as we know them in other markets. They're more like forex trading.

I think the crypto market would benefit from a (semi-)regulated impartial exchange where other firms can become members and act as brokers to direct retail flow.

But unless there's some sort of regulation about it it would just be a private business that could kick out any member for any reason. To much risk for the members.

polkapolka2• 8 years ago

You bypass the API completely and fill orders "manually".

module00005• 8 years ago

Forget the 3rd party exchanges with their homegrown APIs. If you are dealing with size(1k+), you go straight to the CME and trade crypto futures contracts. Dealing with the CME also adds the regulation necessary(ie CFTC) for your investors.

bhaak3• 8 years ago

This interview[1] sounds like they called bottom at 6k and then the floor fell out: "We thought it was a bear market. I went into it thinking in the long run crypto is going to be a real structural shift in the world and I can just hedge my portfolio. And to be fair, we did a really great job not losing money the first 60 percent down. What you forget is that a market like Bitcoin that’s down 84 percent has dropped 60 percent—and then another 60 percent. That’s where the pain happens. You start buying Ether again, because it’s only $400 after being at $1,300. But then it drops to $100, and you’ve lost 75 percent of your money. We haven’t done horribly in that context, but we’re still down. [...] I did think Bitcoin was going to hold at $6,200. It stayed there for four months. It felt like the selling was finished."

[1] https://www.bloomberg.com/news/articles/2018-12-11/mike-novo...

wpietri6• 8 years ago

"Felt like". That's beautiful. The dude had a feel and lost the equivalent of 2300 years of labor (at the US median income).

There's this bit in Taleb's first book, "Fooled by Randomness". This was before he made a shit-ton of money. He pointed out that a lot of the nominally successful traders he worked around would declare a strategy, make a few bets, make a lot of money, and then act like geniuses for thinking up the strategy. However, they'd never really examine the obvious alternate hypothesis: they got lucky.

I used to work for a proprietary trading firm. We'd get new traders by taking very confident, driven people (e.g., former Olympic athletes), making them be clerks for a while, and then turning them loose in the pits. The CFO kept a very close eye on them early on because their natural confidence combined with early successes lead them to believe they were gods. It wasn't until they got really hammered by a bad bet or two that she'd begin to trust them.

It reminds me of a favorite line: "Every corpse on Mount Everest was once a highly motivated person with a can do-attitude."

mortenjorck• 8 years ago

I was pretty sure $6-7k was the floor for BTC, and it’s interesting to see a high-profile fund manager made effectively the same, expensive mistake. The biggest surprise for me, though, was ETH, which given its better fundamentals, I had thought would be where the market went after Bitcoin popped – and yet, it was not only dragged down, but crushed even harder than BTC.

JohnJamesRambo2• 8 years ago

6k was the bottom and then a black swan event happened, at the worst possible time, when Bitcoin Cash forked again and the owners of the two forks had to childishly sell tons of bitcoin to fund their hashpower war. I don't think that was a predictable event.

startupdiscuss• 8 years ago

You need volume for liquidity which you need to execute the arb.

So, for instance, cryptoA trades for $99 on exchange 1, but $101 on exchange 2. Quick, buy on exchange 1 and sell on exchange 2!

Congrats you made $2 on each trade x 5 cryptos. That is hardly enough volume to make it happen.

Now imagine that the volume is so thin that after you bought the first one on exchange 1, the price gap closed, and by the time you sold on exchange 2 it collapsed.

koolba• 8 years ago

Don't forget to throw in significant counter party risk in dealing with fly by night exchanges. There's a non-zero chance that your entire balance held at an exchange disappears overnight.

lend000• 8 years ago

Any arb strategy requires holding reserves, so while the amount of the asset you can afford may increase by 4% per month, it's not a great business to be in if you're measuring from the start of a bear market. Same goes for a lot of stat-arb funds in the space, which are currently measuring their performance against the market, but which are significantly down YTD.

Animats• 8 years ago

The article suggests they do arbitrage.

They blamed their failure on "increased competition for arbitrage opportunities." Properly, arbitrage is low risk exploitation of differences between two markets in the same thing. Cryptocurrencies used to look like they had arbitrage opportunities, with differing prices between exchanges. Mostly, that was because it was so hard to pry cash out of the underfinanced cryptocurrency exchanges. They always had some excuse for delaying paying out. Arbitrage requires the ability to move cash quickly from one exchange to another.

As that situation improved, the spreads between exchanges narrowed. Opportunities for low-risk arbitrage disappeared. These traders reacted to this by going into higher-risk forms of trading. Which is about typical for traders. It didn't end well.

revel• 8 years ago

I think you're completely right that his fund isn't just performing straight up arb. In fact, I don't think it can generating most of its P&L from arb since (from what I remember at least), Galaxy Digital simply has too much capital to put it to use with an arb strategy alone.

My guess is that his fund got locked into a levered position on one of the exchanges like BitMex for trying to trade too much then couldn't get out for 24 hours. This kind of thing is more common than you might expect. There are also very few exchanges that allow margin trading, leverage or shorting, and all the ones that do have, uh, questionable compliance practices.

kilo_bravo_3• 8 years ago

I like how cryptocurrencies were launched as an alternative to central banking, wresting control of money away from the government and big banks. An open and level playing field that would democratize how people transact financially with each other.

And then the first thing the early adopters did was recreate the flawed financial institutions that surround "real" money so that they could pretend to be Gordon Gekko and throw around words like "arbitraaaaage".

Is there data on what percentage of cryptocurrency transactions are "Real, actual, humans buying and selling real, actual, things or compensating each other for their ideas and thoughts" and what percentage consists of "traders shouting at each other in the echo chamber"?

Filligree• 8 years ago

All you have to do is look at the buy/sell curves. Crypto is 80% market manipulation, 19% traders and maybe 1% genuine use.

JumpCrisscross3• 8 years ago

All you have to do is look at the buy/sell curves

What the hell are buy/sell curves?

apo5• 8 years ago

Assuming you mean order book (=buy/sell curve), how do you arrive at 80% market manipulation numerically?

goalieca• 8 years ago

and 100% a threat towards worsening global warming.

mancerayder• 8 years ago

This isn't Reddit, do you have something to back any of that up with?

Manipulation can be 100% or 10%, who the hell knows?

nostrademons6• 8 years ago

Haven't run the analysis myself (yet - it's awfully tempting), but it seems like you could get rough numbers of this by computing the volume of on-chain transactions (excluding transactions to known exchange wallets) vs. the volume on all exchanges. The idea is that if you're just trading crypto for price increases, it's much more convenient to do this on an exchange where you receive either another cryptocurrency or fiat, while if you're exchanging it for goods & services, there's really no way to do that other than a wallet app. On-chain transactions would also capture the OTC market (where traders make direct arrangements to transact with each other), but you could perhaps avoid that by filtering out large transactions.

Actually, it's pretty easy to run these numbers for a rough ballpark. About $2.1B of Ethereum (22.7M ETH @ $94) was traded across all exchanges in the last 24h. 3 ETH is mined every 10sec or so, so that's about 26K from mining, probably not a large contributor. I don't have good numbers for how much ETH is traded per day, but it's 5.7 TPS, so about 490K on-chain transactions per day. A quick glance at recent transactions shows maybe an average of 0.2-0.3 ETH per transactions (heavily skewed - the vast majority are for 0.01 ETH, and then maybe 1 out of 50 will be a 10 ETH transaction), so that's about 100K ETH/day. The figure of roughly 99% unbridled speculation and 1% actual technology sounds about right.

village-idiot5• 8 years ago

Turns out those middlemen served a legitimate purpose, and most of the people advocating for their removal had absolutely no idea what they were talking about.

apo5• 8 years ago

Exchanges use off-chain transactions. When you see a transaction on the block chain, it's very unlikely to be a settlement between two exchange customers because it's far more efficient for the exchange to settle on its own private ledger.

On-chain Bitcoin transactions incur fees. Aside from a group launching an attack on Bitcoin, there's little return for the cost of spamming the block chain.

module00005• 8 years ago

The CME started trading futures contracts for BTC in December of last year. Since then, it's been a downward spiral in terms of price. With the CME involved, it means banks(let that sink in) are trading against you. Their pain threshold exceeds yours(and all of ours), and you will lose every time betting against them.

dharma1• 8 years ago

I don't think CME is the reason prices have plummeted... My hypothesis is that there was no particular reason for the crash except simply lack of new buyers (everyone and their dog already heard about crypto), and lots of people selling. The drop looks steep but so did the rally before it. People can't agree on the value, it's all driven by sentiment and new blood (or lack of it).

You can't call the bottom on something you can't value, Novogratz thought it was at 6000 but made the wrong bet (for now, let's see what happens on a 1-2 year timeline). He's been doing the roadshow this year saying institutional money is coming in (I had a brief chat with him in London) but I don't see any pension funds touching something this volatile with a barge pole. Not until real value is starting to emerge

tim3337• 8 years ago

It depends how you view things - is buying ICO tokens compensating the founders for their ideas and thoughts?

Apparently Silk Road had sales of $1.2bn which gives you an idea of the amount of drugs traded and the turnover of Bitcoin on exchanges was about $2000 bn over the last year. So sales of goods as a percent of speculative transactions are probably <1%. Not that that means that much - FX speculation is larger than real trade for fiat also.

Scoundreller• 8 years ago

I found this article pretty good about the whole IPO “experience”:

https://equity.guru/2018/08/01/galaxy-digital-holdings-glxy-...

pavlov• 8 years ago

Here’s a deep New Yorker profile of the man and his crypto ambitions from the more halcyon era of April 2018:

https://www.google.co.uk/amp/s/www.newyorker.com/magazine/20...

kennxfl• 8 years ago

I actually thought given the size of the position, he was part of the group manipulating transactions in order to liquidate at the top. Holding those positions long term doesn't seem smart.

NicoJuicy• 8 years ago

You can't win in a losing market ( market capitalisation). I explained it to a friend of mine and he didn't want to hear it.

Now we're one year further and he says it will go up again... Some people just don't understand :)

tim3337• 8 years ago

You can short it on the way down, in principle.

apo5• 8 years ago

This article was published November 28 of this year. From mid-November to now, cryptocurrency exchange rates have fallen by about 50% across the board, with some much higher.

This move took many speculators, including Novogratz, by surprise:

"I did think Bitcoin was going to hold at $6,200," said Novogratz. "It stayed there for four months. It felt like the selling was finished. But then Bitcoin Cash decided to fork again."

https://www.forbes.com/sites/billybambrough/2018/12/12/bitco...

I suspect many of these speculators are betting on a quick recovery. Should that not pan out, Novogratz and many others are headed for a world of pain.

Meanwhile, Bitcoin the technology continues chugging on. The most noteworthy development is the rapid build-out of the Lightning Network scaling solution, but there's a bunch of stuff beyond that which gets almost no attention.

JumpCrisscross3• 8 years ago

Novogratz and many others are headed for a world of pain

Management fees make for good medicine.

village-idiot5• 8 years ago

Lightning is never going to happen. They have absolutely no idea how to scale that network or handle the routing problem. The entire system is just rife with potentials for monopolies and abuse. No consumer in their right mind would ever commit their money to it.

apo5• 8 years ago

Lightning is never going to happen.

It's happening right now:

https://bitcoinmagazine.com/articles/progress-report-lightni...

tryptophan• 8 years ago

Even if it does happen, I don't see the point of it. Why use centralized bitcoin based transactions vs centralized USD based transactions?

Isn't the whole point of bitcoin that you get rid of centralization? But apparently people want to bring it right back with lightning.

wgpete• 8 years ago

This guy showed up on bloomberg businessweek wearing a blazer and track pants. usually a recipe for losing that sum of money as a boomer....

alanmeaney• 8 years ago

Picking up pennies in front of a steamroller

granaldo• 8 years ago

With bitcoin down nearly 80% since all time high and the others down 90% (https://www.coingecko.com/en?view=all_time_high)

Not surprise anyone who came in and trade may be catching knives. Plus all the uncertainties in market participants

imron• 8 years ago

Buy high, sell low

arisAlexis• 8 years ago

point? alternative investments are risky?

Novogratz's Crypto Trading Desk Lost $136M in Nine Months

Related Stories