An Overview of Crypto Algo Funds – CityAM

Digital asset funds can be the easiest way to get exposure to crypto markets with a ‘set & forget’ strategy for investors while making short and long term gains. There are serious gains to be made in this new industry, and the findings of my own journey supporting digital asset clients over the past four years can help curious investors understand what to look for in a digital asset fund and what to run away from. 

My Journey into Crypto Algo Trading

I entered crypto in a roundabout way through social media. I was just a unicorn laser beam loving millennial who used to post articles about Bitcoin on social channels before the masses knew what it was. Overnight, BTC started to spike and people were chasing me down to help manage their crypto wallets. I had at least ten clients with a collective portfolio worth 500K USD of crypto. I became their tech guru, helping them to install clunky crypto wallets, installing 2FA on their phones, and helping them to buy crypto from unfriendly interfaces on newly born crypto exchanges. My clients mostly wanted to HODL as we entered the crypto winter of 2018.

The Algorithmic Trading of Cryptocurrency

During this time, I started a crypto algo fund in partnership with a team of developers with the intention of giving clients the opportunity to make better gains. To put it in terms that even my mom could understand, it is the ‘robotic’ or ‘automated’ trading of cryptocurrency. This approach allows for high frequency trading, buying and selling at speeds that are impossible to manually execute. One of the more popular algo trading methods involves ‘arbitrage’, which uses data analysis to execute trades by taking advantage of price differentiations between the same coins (BTC, ETH, etc.) on different crypto exchanges – just have a look at all the different price listings of BTC and imagine the profit possibilities of moving BTC between exchanges.

Crypto Algo Lessons Learned

As an experienced traditional quant developer pointed out, developers need at least 10+ years of experience to get hired on a traditional quant fund team. None of our developers, although brilliant and innovative, were veterans and it hurt us when the most volatile of volatile moments hit the market. The lack of experienced quant traders is still an issue across the board for our industry. 

Another issue was with the APIs of the crypto exchanges. APIs allow the trading technology to connect to the exchanges without manual interference or having to login. In those times, crypto exchanges were not prepared for automated trading and were changing the rules of their APIs on a regular basis. This caused the trading algos to fail, sometimes on a daily or hourly basis. 

We also didn’t have the funding or support to engage with third party auditing and inhouse compliance officers. I knew without the right team or funding that this would be a major hurdle to onboarding client funds at greater levels of 100K and above. This is another industrywide issue. There are still many crypto funds today that don’t use third party auditing or similar traditional fund safety measures, and they can get away with it because of the lack of regulation.

After taking a pause from trading, I embarked on a worldwide survey, calling up crypto algo funds and going to meet with founders in person, at their offices and crypto and blockchain conferences. I decided to take more of a ‘fund of funds’ approach instead of in-house algo trading, which lowered my overhead immensely and provided more flexibility and options with trading strategy. 

Due Diligence First. Before the Crazy 100%+ Gains

My team of advisors who were experienced in both cryptocurrency and traditional hedge funds (including investment bankers from big name banks like Barclays and Fidelity) helped me to do serious due diligence on some interesting crypto algo funds. Some of these funds had mind blowing gains, going above anywhere between 50 per cent -200 per cent per year. Unfortunately, most of them did not meet my due diligence requirements, as listed below. Most funds could not provide the essential NAV reports, and did not have compliance officers or third-party auditing – all requirements for traditionally regulated funds. It’s shocking to see the rampant cowboy negligence of best practices in the industry, and why I fully welcome reasonable regulation to protect investors.

These are elements that any serious investor should look for before committing funds:

  • Third-party auditing
  • Funds with at least one year of operation with verified results
  • NAV reports
  • An experienced team with veteran quant developers
  • In-house compliance officers
  • Extensive interviews with fund founders
  • A client interface where they can view asset totals at any given time
  • A detailed breakdown of trading strategy and back testing results if possible. 
  • Realtime or daily updates of account totals with a private client interface – most crypto funds don’t do this yet. 

Enter the Covid Shakedown Test…

Potential investors always ask me, “What’s the risk management in a worst-case scenario or catastrophic event?? Will I lose all my money??” I always had an explanation for this, and then came Covid. A blessing in disguise…

Covid destroyed many crypto algo funds (fund of funds included) because of strategies that could not keep pace with the extreme volatility. It was tragic, and I lost a few partnerships with other funds because of it. The silver lining is that the strong crypto algo funds survived because of their strategies and experienced teams. 

Erin Grover is a brand ambassador for Icoinic, the first Digital Asset Fund of The Netherlands that also includes algorithmic trading. Her specialty is in  algorithmic/quantitative crypto trading & best practices for crypto funds. She is also an advisor for the AKASHA Innovation Hub in Dublin which provides incubation and acceleration for blockchain projects at various stages.

Icoinic: My Algo Fund Dream Come True
I nearly lost hope on this path during Covid. I was convinced that it was time to give up, but then I forged ahead with my search and found Icoinic, a digital asset fund out of the Netherlands.  Not only did Icoinic come out on top with serious gains in this year’s volatility, but the founders run the fund as if it’s fully regulated. 

Icoinic checked all my boxes for due diligence. Its approach is a benchmark for the industry. The founders are focused on more than just sexy gains and value client security and best practices. In short, it is the only way that I can feel safe to bring in clients, especially when they are looking to come in at 100K+ investment levels. This is how algo funds will be able to grow and sustain over time, especially when EU regulation does hit the crypto world.

Find me on LinkedIn if you’d like to learn more about this niche.