Bitcoin volatility has long been a feature of crypto markets, but recently, it has reached stratospheric levels as global markets baulk at the threat of inflation and rising interest rates.
Last week, liquidations in crypto markets reached $US200 million ($280 million) daily, as bitcoin and many other coins pumped and dumped over a matter of hours, reacting strongly to reports US inflation had spiked to a 40-year high.
Selloffs in crypto markets are compounded by investors who are highly leveraged, with loans collateralised across blockchains. Once a sell-off is triggered, liquidations are cascading across blockchains as investors scramble to cover their positions, prompting prices to yo-yo widely as money rushes in and out.
Bitcoin is up 1039 per cent since March 2020 and ether has risen 2940 per cent, though the rallies in both cryptocurrencies have been interrupted by several sharp sell-offs.
Bitcoin has tumbled from a peak of nearly $US69,000 in November to less than $US40,000 in the early days of 2022.
Zerocap believes this volatility offers an opportunity because sophisticated investors, whether they be family offices or funds, are looking for ways to get overarching exposure to bitcoin, but without the daily fluctuations.
According to a recent Goldman Sachs report, 15 per cent of family offices already have exposure to crypto.
The Smorgon family has backed Zerocap since last year, when a scion of Victor Smorgon, Peter Edwards, took a strategic shareholding in the business among a sweep of crypto-based investments, including in Melbourne’s Apollo Capital and San Francisco-based Polychain Capital.
Investment firms around the world have been toying with structured products. The Chicago Mercantile Exchange was one of the first to offer futures contracts settled in bitcoin, ether, or US dollars.
Wealth managers have struggled with how to offer crypto-exposure to their wealthier clients, who are clamouring for information on how to position themselves.
Zerocap, which has large positions in Solana and Fantom, both scalable blockchain platforms for DeFi and crypto applications, has secured a derivatives trading licence and plans to roll out a suite of structured products for growing numbers of sophisticated investors and family offices wanting to manage that volatility.
“Volatility isn’t bad if you have ways to earn yield on top of it and harness its downside,” Jonathan de Wet, chief investment officer at Zerocap, said.
The Smart Beta fund will re-weight its assets each week to map 14 per cent volatility exposure, and is being launched now just as mainstream investment banks and firms move to include crypto-based strategies.
As it stands, many crypto investment firms are buying and selling “directionally”, which means they buy when the market is going up and sell when it’s going down.
“That’s the opportunity for us, people can make better risk-return trade-offs when they use derivative instruments rather than the spot price,” Mr Chapple said.