
Novogratz's Crypto Trading Desk Lost $136M in Nine Months - shshhdhs
https://www.bloomberg.com/news/articles/2018-11-28/novogratz-s-crypto-trading-desk-lost-136-million-in-nine-months
======
lordnacho
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.

~~~
bhaak
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...](https://www.bloomberg.com/news/articles/2018-12-11/mike-novogratz-
explains-why-he-s-still-all-in-on-cryptocurrency)

~~~
mortenjorck
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.

~~~
nostrademons
It was interesting to watch the crypto subreddits and see so many people make
the same mistake. I was surprised that $6K held for so long, because if $6K
really was the bottom, it would've been a pretty shallow drop from a very
steep bubble. That's only 2/3 down, and it was the point Bitcoin hit in Oct
2017. Bitcoin was < $1k at the start of 2017. Any reasonable rate of return
would put its price at under $2k if you ignore the bubble and focus only on
fundamental metrics. Plus bubble busts tend to overshoot fair market value,
where the underlying asset actually trades at a bargain because so many people
got burned buying at the top.

The ETH drop is fairly easy to explain - it was the base asset for a very
interesting double-pyramid-scheme on the way up, which meant that that
leverage works in reverse on the way down. The ICO boom worked because many of
the people investing in ICOs had bought their ETH for pennies and already
recouped their costs; throwing $40M into a shitcoin makes a lot more rational
sense when that ETH actually cost about $4K in real money, and the factor of
10,000 difference is the price appreciation of the asset you're putting in.
That led to eye-popping dollar valuations for many of these companies (even
though they were actually raising in ETH), which brought more newbies into the
Ethereum world, which pushed the price even higher, which meant later ICOs
were raising even more in dollar terms, even though the actual dollar amounts
traded were tiny.

On the way down, this cycle works in reverse. Those ICOs don't actually hold
$40M in a company bank account; they hold 33K ETH which was _worth_ $40M at
the peak. Now that ETH is down to $94, they hold more like $3M, and they're
getting scared about being able to pay salaries. So every ICO that still holds
ETH is trying to liquidate it for dollars, but they're fighting over the much-
reduced pot of money that is coming into crypto _now_ , which drives the price
down every time somebody wants to sell.

Personally I still think we're not at the bottom yet (for either ETH or BTC),
but we may be getting close. We're at the bottom when companies start going
bankrupt, Solidity engineers start getting laid off, and people start going to
jail. Assuming it's not _all_ smoke and mirrors and some useful infrastructure
was actually built, it'll be the buying opportunity of the lifetime then,
because everyone will think this whole crypto fad will be totally over and
you'll be able to buy up that infrastructure at really cheap prices.

~~~
solveit
Re: your last paragraph

But if everyone thinks that (and most people who think crypto isn't _all_ shit
do think that), the bottom will be a lot softer than what you describe (modulo
people going to jail, I think this is mostly independent of the value of
crypto).

It's the efficient market hypothesis all over again.

------
simias
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
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
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.

~~~
dragontamer
To be fair, when you have $100 Million, the goal of the game is not "growth",
but holding onto that money.

$100 million isn't much different from $108 Million (8% gains over the
year)... or even $500 Million. In both cases, its still more than enough money
to live on for the rest of your life. The S&P 500 has dropped 50% in the past
(ie: 2008), and it doesn't make sense to risk that much money on that.

You can't use bank accounts: FDIC insurance only covers $200k per bank. You'd
literally need 5000 different bank accounts to hold $100 Million safely. So
what do you put it into?

Answer: things that don't grow as quickly as an S&P500 fund. Things that are
safer: municipal bonds, international (German, Japan) bonds to hedge the
dollar, and US Bonds. Maybe some high-quality corporate debt, like Apple's
debt, and maybe a real-estate project or two.

All of which probably returns less than the stock market. But your $100
Million will still be there in the next crisis. That's not necessarily true
for an S&P500 fund.

\------------

Finally, the average volume of Vanguard Total Market ETF is only ~3-million
(at a price of ~130 or so). Which means that Vanguard Total Market ETF only
has ~$300 Million changed each day.

If you pump $100 Million into an ETF with only $300 Million worth of daily
average volume, what do you think will happen? You'll over-centralize the
price and get a bad deal. Its not easy to move $100 Million, even into a major
fund like Vanguard's Total Market ETF, without a manager.

At $100 Million+ size portfolios, you need to start thinking of Dark Pools of
Liquidity (ie: somewhat hiding the order book). So that when you execute the
buy order, the wolves of Wall Street won't own you.

$100 Million+ accounts don't work the same as a normal account. Pump that into
the market in one day, and the price will rise dramatically. Sell that in one
day, and the price will drop dramatically (losing a % of your value on both
legs of the transaction). Having an expert guide you, so that you can minimize
Bid/Ask issues, is essential.

~~~
trevyn
> _You can 't use bank accounts: FDIC insurance only covers $200k per bank.
> You'd literally need 5000 different bank accounts to hold $100 Million
> safely._

Not that it’s a good idea, but there are other ways to insure cash than the
FDIC.

One example, apparently Massachusetts offers unlimited insurance for banks:
[https://en.m.wikipedia.org/wiki/Depositors_Insurance_Fund](https://en.m.wikipedia.org/wiki/Depositors_Insurance_Fund)

(Also, 100M / 200k = 500, not 5000)

~~~
thaumasiotes
Massachusetts?

> Q: Is the DIF a federal or state agency?

> A: No. The DIF is a private, industry-sponsored insurance company and is not
> backed by the federal government or the Commonwealth of Massachusetts.

------
kilo_bravo_3
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
All you have to do is look at the buy/sell curves. Crypto is 80% market
manipulation, 19% traders and maybe 1% genuine use.

~~~
JumpCrisscross
> _All you have to do is look at the buy /sell curves_

What the hell are buy/sell curves?

~~~
orbifold
How the orders are distributed in the order book.

~~~
module0000
This is incorrect. Orders and their distribution in the order book is called
_liquidity_. Alone, they have very little meaning, and are often manipulated
in the securities and commodities market(ie: you see a 5,000 bid, and place
your own 5,000 ask - suddenly the bid is gone, and your ask gets rolled by
huge buy orders). "Buy/sell curve" has no meaning, the closest term would be
"yield curve", such as US interest rates. As the rate climbs and falls, there
are inverse effects on financial instruments.

------
owenversteeg
“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
And dot-coms! And real estate! Hmm.

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

~~~
iaw
I think ~100 years ago they really got into vertical construction but other
than that (and possibly central plumbing) your point stands..

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

------
dkoston
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.

~~~
tim333
Normal investment funds don't pretty much. Hedge funds are less regulated and
and can punt on pretty much anything.

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

~~~
matt4077
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)

------
pavlov
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...](https://www.google.co.uk/amp/s/www.newyorker.com/magazine/2018/04/16/a-sidelined-
wall-street-legend-bets-on-bitcoin/amp)

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

[https://equity.guru/2018/08/01/galaxy-digital-holdings-
glxy-...](https://equity.guru/2018/08/01/galaxy-digital-holdings-glxy-v-
debuts-market-early-investors-willingly-hooped/)

------
ham_sandwich
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.

------
kennxfl
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.

------
alanmeaney
Picking up pennies in front of a steamroller

------
arisAlexis
point? alternative investments are risky?

------
wgpete
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....

------
NicoJuicy
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 :)

~~~
tim333
You can short it on the way down, in principle.

------
imron
Buy high, sell low

------
KasianFranks
More proof from HN that cryto is bad.

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

~~~
all2
> [https://morningchores.com/free-land/](https://morningchores.com/free-land/)

Even free real-estate has its drawbacks.

------
apo
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...](https://www.forbes.com/sites/billybambrough/2018/12/12/bitcoin-
bull-mike-novogratz-has-a-stark-warning-for-the-crypto-community/)

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.

~~~
village-idiot
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.

~~~
tryptophan
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.

~~~
village-idiot
I think you hit the nail on the head with regards to centralization.

I think there's a more important aspect here: there is very little demand for
transacting in a second currency worldwide, and almost 0 demand within stable
economies. As an American who does 100% of his transactions with other
Americans in USD, why in the would should I introduce exchange rate risk into
my daily transactions? The lightning network might be all the hotness, and I
doubt that, but so long as its marked in a currency that I don't get paid in
and my landlord doesn't take, I have no earthly incentive to tie up any of my
hard earned money in a second currency in some lightning channel.

And that's not even starting on the absolute trainwreck that is general crypto
UXD. Open a channel and tie up some of my money somewhere so I can eventually
make a payment in the unspecified future? No thanks.

