Oct 2024#Opinion
Today, we are joined by Kirill Vokulov, a fund manager at Wild Boar and the creator of a complex set of investment tools: oscillator. In this interview, we dive deep into the most compelling insights: the different types of investment funds, how they operate, the tools they use, and how global events are shaping financial markets. Besides, Kirill shares his expert advice on where to invest during global instability.
Catch the full video interview on our YouTube channel.
Disclaimer: This podcast was recorded on September 19, 2024.
— Hi, Kirill! If we’re headed for a crisis, do you think crypto will follow the stock market, or could it take its specific path?
— I always think back to 2022: markets were highly correlated during that season. The correlation between the crypto and stock markets often tends towards one. The only instance I remember of serious decoupling was during the Bitcoin ETF announcement. But even then, it wasn't a massive financial crisis, just a market correction. If we look at the S&P 500 now, the question isn't if a correction will happen, but when it will.
— So, you believe a crisis is coming?
— Yes, though the S&P 500 continues to grow without significant corrections so far. Growth is especially evident in the Big Tech sector, which is pulling the index upward.
— What could trigger the crypto market to decouple from the stock market?
The main factor that could spark decoupling is the U.S. elections, and Trump’s victory could be a vital factor. Currently, the market is only rising because someone buys assets at market prices. Most professional players use limit orders, which is a more calculated approach than simply buying the market aggressively. We need large players willing to buy at market prices and drive it higher for real growth.
— How would a Harris or Trump victory impact the crypto market?
— Over the past four years, it’s become clear how the Democratic administration views cryptocurrencies. The SEC chair still can’t definitively determine what crypto is considered a security and what isn’t. Gary Gensler has essentially declared war on crypto, and the Democrats have turned a blind eye, doing nothing about it. I don’t expect positive changes. It’s likely to be just a battle for voter support.
— What do you think will happen if Trump becomes president?
— Trump could make a significant leap forward. His plan to cut taxes, raise tariffs, and bring manufacturing back to the U.S. is ambitious and somewhat radical. If he decides to go through with this experiment, the economy could take an unpredictable turn. Harris, on the other hand, supports raising taxes and maintaining the status quo. Trump is more open to experimenting so with cryptocurrency.
— Do you think Elon Musk is at risk of arrest, considering what happened to Pavel Durov?
— That sounds more like a market scare tactic. Right now, the situation is so unpredictable that anything could happen. No one believed a potential U.S. president could face an assassination attempt, and it’s a miracle he survived. Musk sometimes does and says controversial things, but he clearly has access to more information than the average person. Nothing surprises me anymore, though I think the likelihood of Musk’s arrest is minimal. But we still don’t know precisely why Durov was arrested. These sudden events make the market extremely volatile.
— What’s your take on large investors?
— Sooner or later, major funds and private investors will realize that Bitcoin is the only true safe haven in the world. In a crisis, you can't carry a gold bar with you, but you can carry Bitcoin in your mind by memorizing a seed phrase.
— Let’s talk a bit about investment funds. What types are there?
— There are three main types of funds based on their investment structure: open-ended, interval, and closed-ended. In closed-ended funds, investors contribute capital but can only withdraw it at the end of the fund’s term, which is typically around five years. Interval funds allow investors to withdraw some of their funds at specific intervals. Open-ended funds let investors deposit and withdraw money at any time. However, such funds can't always sell an investor’s share without impacting other participants.
— Open-ended funds sound the most convenient. Is that true?
— Yes, open-ended funds are indeed convenient, but they’re not always practical. They can’t always liquidate an investor’s share at market value, and if they sell at a discount, it hurts the other fund participants. Still, most modern funds are open-ended.
— But there are other types of funds, right?
— Funds can also be categorized by their trading style. There are index funds that track specific sectors, like the S&P 500, and often have automatic rebalancing. There are equity funds that trade stocks and hold cash, but only on the spot market. Additionally, there are mutual funds, hedge funds, and actively managed funds that pick sectors and entry points.
— Do funds that operate only on the spot market outperform hedge funds?
— It depends on the specific fund. For example, Bridgewater has a wide range of different funds that we often reference. Beginners tend to focus only on returns, while professionals look at Sharpe and Treynor ratios.
— What is the Sharpe ratio?
— It’s a formula where we take the fund’s return, the risk-free rate is subtracted, and the result is divided by the standard deviation of the fund's return. The outcome is the efficiency ratio of the portfolio.
— And what is the standard deviation of a fund’s return?
— It's a metric that measures how much the fund’s returns fluctuate relative to its average. If the fund performs well, the return chart will skew to the right; if not, to the left.
— What’s the average market return?
— On average, the market return is about 12.3%, according to the textbook "Principles of Corporate Finance." The standard risk is 18%.
— What does 18% risk mean for my $100 investment?
— It means if you invest $100, you can expect a return of $12.30 per year. In 64% of cases, your return will fall between 12% and 30%. This is a range within one standard deviation.
— So when discussing risk, we’re referring to one standard deviation?
— Yes, when we mention risk, we talk about standard deviation. Market risk is a bit more complex, though. Essentially, it’s the variation in portfolio returns based on market fluctuations. The portfolio’s beta measures how sensitive it is to market changes.
— What’s the best benchmark for the altcoin market?
— Many people use Total 3, but that’s not accurate. It doesn’t account for market cap dilution. When the price drops, but Total 3 doesn’t because the token supply increases, the project still loses value.
— Can you give examples of good ratios for funds?
— It's hard to pinpoint exact figures for crypto funds, but there are too few, especially in the secondary market. In traditional funds, people usually refer to S&P, where the average figure is around 0.11%.
— What’s the optimal historical period to evaluate a fund?
— Great question. Mathematical statistics don’t always apply here, so we rely on the law of large numbers. The more results you have, the more they tend to follow standard deviations. I recommend evaluating a fund’s performance over 4 years, focusing on monthly returns, or at least quarterly.
— What instruments do funds use, and why haven’t they become widespread?
— For example, forwards are a bit outdated. The key difference between a forward contract and a futures contract is that forwards involve physical asset delivery, while futures do not. Forwards are rarely traded and are gradually disappearing. What's left now are mostly delivery-based and cash-settled futures. Options exist too, but they’re a bit more complex.
— What’s the difference between futures and forwards?
— Futures bind both parties: the buyer must buy, and the seller must deliver the asset when the contract expires. In crypto markets, we use what are called “perpetual futures.” Binance markets these as perpetual, but they aren't indeed it. These contracts are automatically renewed every 8 hours, creating the illusion of a perpetual contract, but actually replacing the old one with a new one.
— So if I hold a long position in futures throughout the entire bull run, and I have an unrealized profit of $1 million, could Binance close my position, preventing me from realizing that profit?
— It depends on the trade volume and liquidity. If the market moves smoothly and predictably, market makers and Binance will adjust. Ultimately, the first to exit wins.
— What can you tell me about options?
— With futures, you have obligations, but with options, you have the right to buy. There are two types of options: Call and Put. A Call gives you the right to buy the asset at a predetermined price, called the Strike price. When the option expires, you can either buy the asset or opt-out.
— How do platforms verify counterparty reliability?
— For instance, on Binance, only market makers sell options, and you can only buy them. On Deribit, they use a margin system, where you need a certain balance in your account to initiate a trade. If your balance drops below that, your position can be liquidated, just like with futures.
— Can you give an example of an options strategy?
— Sure, take an arbitrage strategy. If the premium for an option deviates significantly from the calculated value, you can buy the option and simultaneously purchase the underlying asset on the market. This allows you to hedge completely against price fluctuations.
— Tell me about your funds.
— Currently, we have three index funds and two actively managed funds. The index funds operate on a principle of market capitalization weighting, where the top 10 assets are rebalanced at the end of each month. This is an ideal tool for those who may not understand cryptocurrencies but want to invest beyond just Bitcoin without purchasing the assets individually.
— What about the two actively managed funds?
— These funds operate based on oscillators.
— What is an oscillator?
— An oscillator is a mechanism built on a group of indicators for market analysis. One of the most well-known is the Fear & Greed Index, which we use alongside the RSI (Relative Strength Index). We’ve tested numerous indicators against historical data and only retained those that demonstrated stable returns. Currently, we utilize 19 indicators.
— Which indicator turned out to be the best?
— Recently, we discovered an interesting indicator — the IFP (Inter-Exchange Flow Momentum). It tracks transfers between exchanges and generates two scales: real-time and a 90-day moving average. It indicates moments when it's time to buy or sell.
— How does this indicator work?
— When the number of transfers sharply increases, something significant is happening in the market, such as a rise in purchases. It captures these transfers and analyzes both exchange and inter-exchange flows. When the actual volumes cross the 90-day moving average, that’s a buy signal.
— How accurate are its signals?
— In our case, it adds 2.3% to quarterly returns. Indicators rarely allow for beating the market, but collectively, each contributes its part.
— How is your fund doing at the moment?
— In May, we secured our first major client. We work with investors with capital starting at $100,000. Since May, we have launched marketing alongside the platform and focused on attracting clients.
— Thank you for the interview, Kirill!
Conclusion
The interview with Kirill provides valuable insights into the influence of geopolitics and macroeconomics on the cryptocurrency sector. We explored the prospects of cryptocurrencies decoupling from traditional markets and shared our predictions for the future, including potential scenarios following the U.S. elections.
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