When bitcoin meets conservative, relatively speaking

Singapore

AS bitcoin prices whipsawed just after cracking the US$10,000 level in recent days, the idea of a steady return is not what one would typically expect from investing in it.

Yet, a unique bitcoin-focused fund that quietly opened an office in Singapore a little under a year ago aims to offer just that, with its purportedly conservative strategy now in increasing demand from family offices in Asia.

The hedge fund - said to be the first in the world with its investing strategy - is run by a firm known as BitSpread, which operates effectively as a market maker for bitcoin investments. Like traditional market makers, BitSpread enters the market to buy and sell the asset quickly to match orders, and makes money from the price differential, multiplied by the volume transacted.

The fund is gaining interest by the week. Its assets were estimated at just under US$40 million as at end-November 2017. This is expected to double to US$80 million by the end of this year, and to approach US$200 million in another six months, said its CEO and founder Cedric Jeanson, who has relocated to Singapore to tap the rising demand from Asian investors.

"We bring liquidity to the ecosystem. We're not being punters, calling whether the bitcoin is going to go up or down," Mr Jeanson told The Business Times. The fund deems itself "market-neutral", distancing itself from several cryptocurrency funds that are betting on the one-way direction of cryptocurrencies - up.

"Traditional institutions such as family offices don't like directional bets," he said, noting that wealthy clients desire some exposure to this commodity but with a less risky approach. Anecdotally, potential clients may be willing to put up just 2 per cent of their portfolio to get some exposure to bitcoin or ethereum - the two dominant forms of cryptocurrencies that are in actual use today - given that they have, for now, no known correlation to other investable assets, said Mr Jeanson.

Family offices are approaching BitSpread directly because of the unique strategy, and because global private banks remain wary of offering cryptocurrency exposure to clients. Demand from family offices, in turn, "puts pressure on the distribution network" of private banks, said Mr Jeanson.

"There is a message: that BitSpread is a bridge between the traditional form of finance, and this new blockchain world," added Mr Jeanson, who was formerly the chief operating officer of Nomura and has some 15 years of experience in the securitised derivatives business at various global banks.

Mr Jeanson noted that banks have a narrow view of bitcoin and ethereum, seeing them just as payment modes. But he noted that bitcoin and ethereum are paid to miners who secure the public blockchain, which makes them a part of the blockchain technology.

The fund employs its market-maker strategy on mainly bitcoin and ethereum traded on 14 cryptocurrency exchanges in places such as Korea, Japan, the US and Europe.

The aim for market makers is to match deals efficiently while avoiding the risk of holding an asset that may be rapidly decreasing in value before it is sold to a buyer. BitSpread's effective inventory limit is 10 bitcoins which, as at end-November, translates very roughly to a limit of about US$100,000 in value.

The fund is also trying to expand its operations to enable it to provide market-making services round the clock. BitSpread currently has offices in Singapore, Paris, London, and New York.

BT understands that since May 9 this year, the fund has returned more than 40 per cent without any drawdowns. Investors pay a 2 per cent management fee, and a 30 per cent performance fee. Typical hedge funds charge on a 2/20 structure.

Compared to the performance of bitcoin, the fund has been relatively conservative. Bitcoin has risen in value by roughly 10 times since the start of the year. It was worth about US$1,000 in January.

To be sure, bitcoin is a wildly speculative bet for most retail investors. It also remains unclear if bitcoin would go mainstream, given that authorities want control over money supply. But Mr Jeanson noted that usage of bitcoins is gaining momentum; Japan, for instance, has legalised bitcoins for payments. In Singapore, some 20,000 consumers have reserved the Monaco Visa card - a prepaid Visa card that allows users to spend cryptocurrencies by having them converted into fiat.

There are also other ways that the use of a public blockchain can help consumers travelling around the world. "Say you've travelled to New York, and hit your head on the pavement. How would you show them your medical records? You can if they are stored on a blockchain, which can be much more secure," said Mr Jeanson, pointing to the dangers of hacks on large institutions.

Mr Jeanson is clear that there should be caution about initial coin offerings (ICO), noting that these are effectively forms of equity raising. "It's been a bit hazardous, to say the least," he said.

"The white paper is as good as this," he added, picking up a white napkin on the table, and referring to ICO's commonly thin adaptation of a prospectus. "Very few of these people would pass the first round of Shark Tank because the investors would ask: where is your product?"