Hedge fund betting on bitcoin spread unfazed by record price

BitSpread gained 80 per cent this year through September, boosted by market making on exchanges in Japan and Korea.
BitSpread gained 80 per cent this year through September, boosted by market making on exchanges in Japan and Korea.PHOTO: AFP

LONDON (Bloomberg) - Bitcoin-focused hedge fund BitSpread isn't interested in the price of the cryptocurrency, even as it soared close to the US$6,000 mark this week.

Instead, the firm is looking at something else: the price disparity between the exchanges that sell bitcoin.

"We're not interested in the price of bitcoin - high or low," said Cedric Jeanson, the former JPMorgan Chase & Co trader who started BitSpread, which manages more than US$25 million.

"We'll buy bitcoin versus the yen if the price is high, while simultaneously selling bitcoin versus the US dollar if the price is low."

What the firm is really interested in is the price differences between the big exchanges that have sprung up, such as Gemini and itBit. BitSpread gained 80 per cent this year through September, boosted by market making on exchanges in Japan and Korea, which have experienced a "surge of interest in digital currencies" after the countries legalised bitcoin use, Jeanson said in an interview.

"There is incredible momentum around the world now to access blockchain networks, either as an investment or value transfer."

That surge of interest has produced more flow for the fund, which continuously buys and sells bitcoin among exchanges without taking a position on the digital currency.

"It's not just across exchanges, but intra-exchanges," Jeanson said. "We can buy from one and sell it back to the same one."

BitSpread's gain this year compares with returns of 33 per cent in 2016, 19 per cent in 2015 and 11 per cent from June through December 2014.

Yet its approach has advantages and disadvantages.

While betting on the price differences between exchanges may mean the fund is less exposed to bubbles, it may also mean smaller gains when bitcoin is surging.

Cryptocurrency hedge funds on average jumped 535 per cent in the first nine months of this year, according to Eurekahedge, beating the almost 500 per cent rise in the price of bitcoin. 

This follows returns of 106 per cent last year for these funds, 69 per cent in 2015 and a 52 per cent plummet in 2014, according to the Singapore-based data provider. Hedge funds on average have risen 5.6 per cent this year.

Eurekahedge's index includes pools that employ a variety of trading strategies to profit off price movements in the underlying digital currencies, including arbitrage, event-driven, momentum and shorting on a limited scale given liquidity constraints.

Funds like BitSpread earn money on price differentials, rather than the price of the asset itself, which creates less exposure to market movements, such as a potential plunge if there's a bubble. 

Bitcoin has risen more than fivefold since trading at US$1,000 as recently as March, and was at about US$5,600 on Tuesday - close to its record high after being spurred by greater acceptance of the blockchain technology that underpins it.

In September, bitcoin plunged 30 per cent in two weeks as buyers weighed the impact of a Chinese ban on initial coin offerings and domestic trading in virtual currencies.

The digital currency's rise this year has left people divided, with some questioning the market's viability.

While some of his colleagues have been more accepting of bitcoin, JPMorgan Chase & Co chief executive officer Jamie Dimon, who has called the cryptocurrency "a fraud," said last week that anyone who buys it is "stupid".

Hedge-fund manager Kyle Bass recently said a "whole bunch of people are going to lose a lot of money" in the crypto "mania".

Others like Goldman Sachs Group are exploring ways to help clients trade cryptocurrencies like bitcoin.

One of the largest of a growing group of investors looking to access bitcoin is former Fortress Investment Group trader Mike Novogratz, who is said to be starting a US$500 million hedge fund to invest in cryptocurrencies, initial coin offerings and related companies. There are at least 75 funds investing in the space, according to Autonomous Research.

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