Cointime

Download App
iOS & Android

How a Crypto Quant Firm Shook Off the Bear Market – And FTX Exposure

Validated Individual Expert

Crypto quantitative trading firm Pythagoras Investment Management LLC made it through the turmoil of 2022 in a rare position. The firm’s funds were up 8% for the year even with exposure to the implosion of crypto exchange FTX. However, the market turbulence halved the company's assets under management to less than $40 million as wary investors stepped to the sidelines.

In a chat with CoinDesk, Pythagoras founder and CEO Mitchell Dong discussed the firm’s market-topping strategies, how risk mitigation has changed post-FTX, and why there’s still hope for the future of crypto.

Market neutral fund strategy

The market neutral Pythagoras Arbitrage Fund was up a slight 0.1% in December but ended the year with a net gain of 8.8%, according to an investor letter shared with CoinDesk.

“We just look for spreads,” said Dong, who has more than 25 years experience operating hedge funds. “We look for opportunities to buy low and sell high simultaneously whenever the software detects an opportunity to do so.”

The trend-following Momentum Fund declined 0.4% in December but still ended the year with a net gain of 8.1% The fund takes both long and short positions based on what technical indicators show.

FTX exposure

The principal threat to Pythagoras’ Arbitrage Fund is counterparty risk. In order to make instant trades, the firm has to keep money on exchanges. Pythagoras diversifies its assets across at least a dozen exchanges with no more than 10% of its funds with any one brokerage, Dong said. Prior to the FTX collapse, Pythagoras did have 10% of its assets with that exchange.

Dong and team immediately requested a full withdrawal from FTX, but only 7% was recovered before the exchange suspended withdrawals. The remaining 3% loss was hedged or offset, first by shorting FTT tokens – the native token of the FTX exchange, and then by taking advantage of a temporary discount in Bitcoin and Ethereum futures on the Chicago Mercantile Exchange (CME) that were 3% to 5% lower than comparable prices on Binance.

Pythagoras has since tightened up its exposure to exchanges, now favoring those found to have the best technology and credit rating and lowest counterparty risks.

Current crypto climate

Dong has spoken to the firm’s largest investors who requested redemptions and who had wanted to step aside until the dust settles. These investors have a long history with Pythagoras and indicated plans to return to the crypto fold in the future.

“The bad news is that we had redemptions,” said Dong. “The good news is that there’s less competition, more price dislocations and trading opportunities. Previous trades which had been arbed out are back again.”

Comments

All Comments

Recommended for you

  • The Bitcoin-native stablecoin bitSmiley Alphanet V1 Surpasses $24M TVL in 24 Hours!

    In a remarkable achievement, bitSmiley's Alphanet V1 skyrocketed to over $24 million in TVL within just 24 hours of its launch with over 6 million bitUSD stablecoins minted through over-collateralization. bitSmiley stands as a pioneering initiative, introducing stablecoins by over-collateralizing Bitcoin.

  • Securitize raises $47M in funding led by BlackRock to enhance innovation and expansion in digital asset securities ecosystem

    Miami-based company Securitize, which specializes in tokenizing real-world assets, has raised $47 million in funding. The round was led by BlackRock, with participation from Hamilton Lane, ParaFi Capital, Tradeweb Markets, Aptos Labs, Circle, and Paxos. The funds will be used to enhance the company's innovation and expansion as it consolidates its position in the digital asset securities ecosystem. BlackRock's first tokenized fund, the BlackRock USD Institutional Digital Liquidity Fund, has also been launched on Ethereum and is available to investors by subscribing to the fund with Securitize.

  • Web3 game Shadow War completes $5 million financing, led by Momentum 6

    Game studio Patriots Division has raised $5 million in seed and Series A financing for its Web3 game Shadow War. The Series A funding was led by Momentum 6, with participation from iAngels, Cointelligence Fund, Xborg, Andromeda VC, Cogitent Ventures, and Cluster Capital.

  • BTC falls below $57,000

    According to market data, BTC has fallen below $57,000 and is currently trading at $56,999.99, with a daily decline of 5.48%. The market is volatile, so please be prepared for risk control.

  • CoreWeave, an AI cloud service provider, completes $1.1 billion Series C financing led by Coatue

    CoreWeave, a cloud service provider focusing on artificial intelligence, announced the completion of a $110 million Series C financing round. Coatue led this round of financing, with Magnetar (the main investor in the previous round), Altimeter Capital, Fidelity Management & Research Company, and Lykos Global Management participating.

  • Cointime MAY 1 News Express

    1.Celsius Network destroys 94% of total supply of CEL, worth over $89 million2.USDC Treasury destroyed more than 200 million USDC3.Pike was suspected of being hacked and lost 479 ETH4.Fantom launches $6.5 million development fund, betting on safer memecoins5.Yesterday, the U.S. spot Bitcoin ETF had a net outflow of $162 million6.The balance of Binance Bitcoin wallet increased by 6249.36 in the past 24 hours, and 15565.89 inflows in the past 7 days7.In April, NFT sales on the Bitcoin chain exceeded US$685 million, setting the third highest monthly record in history8.On-chain content distribution agreement Metale Protocol completes additional $2 million in seed round financing9.A whale deposited 1,140 MKR into Coinbase, losing about $1.1 million10.The Bitcoin stablecoin project, bitSmiley, goes live with its Alphanet V1, marking its debut deployment on the Bitcoin Layer 2 network, Bitlayer.

  • Barcelona-based Web3 Video Games Startup GFAL Raises $3.2M in Seed Funding to Expand Team and Accelerate Production Plans

    Barcelona-based startup GFAL has secured $3.2 million in seed funding from investors including Supercell Ltd and Mitch Lasky. The company plans to use the funds to expand its team and accelerate its game production plans, which leverage AI and Web3 technology for immersive gameplay. GFAL's Elemental Raiders mobile game soft-launched in March 2023, with plans to build on this for a 2024 launch. CEO Manel Sort expressed gratitude for the investment and excitement to work with former colleagues from Digital Chocolate.

  • BTC falls below $58,000

    Golden Finance reported that according to OKX market data, BTC briefly touched $57,700 and is now trading at $58,581.53, with a daily decline of 7.15%. The market is volatile, so please be prepared for risk management.

  • On-chain content distribution agreement Metale Protocol completes additional $2 million in seed round financing

    Metale Protocol, a content distribution protocol on the blockchain, announced the completion of an additional $2 million seed round of financing. Waterdrip Capital led the investment, with participation from Aipollo Investment and Ultiverse. As of now, the total size of its seed round financing has reached $4 million. Metale Protocol was formerly known as Read2N, a Web3 decentralized reading application. The new funds will be allocated to its content creation fund to stimulate more content creation activities and promote the construction of its protocol as a platform for issuing and distributing content assets on the blockchain.

  • DWF Ventures announces investment in blockchain game developer Overworld

    DWF Ventures announced an investment in Overworld, a chain game developer. Overworld recently announced plans to launch another NFT series, and in addition, Overworld will soon launch the main world arena.