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XBTO is proud to partner with the Pyth Network as its newest contributing data originator.
Established in 2015, XBTO was one of the first market participants to provide institutional-grade liquidity to major trading platforms. Since then, XBTO has become a recognized and leading proprietary algorithmic trader and venture capital firm.
XBTO is teaming up with Pyth Network, a next-generation, decentralized “oracle network” built on the Solana blockchain with cross-chain capabilities via Wormhole. Pyth serves as an oracle solution connecting leading exchanges and top trading firms holding real-world market data, with smart contracts on-chain. It is designed to do so anywhere across blockchains, and with sub-second speeds. Pyth, like XBTO, strives to establish stability, trust, and transparency throughout the cryptofinance industry.
The fundamental issue Pyth seeks to address is that decentralized finance often can’t get the access it needs to accurate, time-sensitive, real world data. Pyth depends upon contributions from partners, including XBTO to source the massive amount of high integrity and high-fidelity financial data necessary to help DeFi. It harnesses this data to create reliable and decentralized sources of high fidelity composite market data, and to establish a cross-chain market of verifiable data from quality providers. XBTO is proud to join the ranks of such an impressive list of nearly 40 data providers committed to the Pyth network.
With its proprietary technologies and unmatched expertise, many crypto exchanges working with XBTO have successfully reduced price volatility and offered enhanced spreads. On Pyth, prices are composed by aggregating data streams, weighing the results, and then conveying prices with an accompanying confidence rating. The confidence rating or “interval” can widen when markets are irregular and contract when they are orderly. This composite formula relies on the quality and indicative conviction of its data providers so that the oracle network can avoid sacrificing decentralization.
Pyth is currently working with several ambitious integration projects, including a trustless cross-chain bridge named Wormhole. Wormhole supports seamless communication between Solana, Ethereum, Terra and the Binance Smart Chain, with more chains to be added in the future. Teams developing projects on any of the supported blockchains can leverage Pyth and immediately begin implementing a high-fidelity oracle in their native protocol. Pyth has established itself at the center of creative development on the Solana blockchain, cultivating a loyal development community of “Pythians” and ensuring Its partnership value long into the future.
About XBTO
XBTO is a global, institutional market maker and asset manager providing cryptofinance trading and liquidity provision to the world’s most established exchanges. Its new partner, Pyth Network is a specialized oracle network with the goal of providing the infrastructure for DeFi by leveraging institutional-grade market data. As such, the oracle network has attracted some of the most prominent traders, exchanges, and financial services players who own unique, high-quality market data. These participants fuel the price discovery process. XBTO brings an expansive suite of products to this relationship, including asset management services, over-the-counter (OTC) trading, streaming markets, institutional and fund-based venture capital, ESG compliant crypto-mining operations, and strategy consultancy services for emerging projects in the digital asset space. XBTO, in concert with the other data originators, provides unwalled, high quality market data in equities, fx, crypto, precious metals and a growing number of asset classes to the Pyth Network.
About the Pyth Network
The Pyth network is a specialized oracle solution for latency-sensitive financial data that is typically kept behind the “walled gardens’’ of centralized institutions. The Pyth network is focused on finding a new and inexpensive way to bring this unique data on-chain and aggregating it securely. For more information about the Pyth network, please visit pyth.network.
About the Pyth Data Association
The Pyth Data Association was created in support of the Pyth network, a specialized oracle solution for latency-sensitive financial data that is typically kept behind the “walled gardens’’ of centralized institutions. The Pyth Data Association is overseen by a board of directors elected by members of the Pyth network.
“XBTO is fortunate to have the leading expertise, technology, and resources to distribute trusted, secure market data, and we are pleased to share these insights as a provider on the Pyth Network. With an expansive history working in global cryptofinance, we strive to establish industry-wide trust and transparency — and Pyth’s capabilities to increase broad access to market data bring us one step closer to achieving this goal, together.”
Philippe Bekhazi, XBTO CEO.
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The full breakdown
In our first article, "Navigating Crypto Volatility: The Advantages of Active Management," we explored how the high volatility and low correlation of digital assets with traditional asset classes create unique opportunities for active managers. We discussed how these characteristics enable active managers to execute tactical trading strategies, capitalizing on short-term price movements and market inefficiencies. Building on that foundation, we now turn our attention to the unique market microstructure of digital assets.
Conducive market microstructure of digital assets
The market microstructure of digital assets - a framework that defines how crypto trades are conducted, including order execution, price formation, and market interactions - sets the stage for active management to thrive. This unique ecosystem, characterized by its continuous trading hours, diverse trading venues, and substantial market liquidity, offers several advantages for active management, providing a fertile ground for sophisticated investment strategies.
24/7/365 market access
One of the defining characteristics of digital asset markets is their continuous, round-the-clock operation.
Unlike traditional financial markets that operate within specific hours, cryptocurrency markets are open 24 hours a day, seven days a week, all year round. This continuous trading capability is particularly advantageous for active managers for several reasons:
- Immediate response to market events: Unlike traditional markets that close after regular trading hours, digital asset markets allow managers to react immediately to breaking news or events that could impact asset prices. For instance, if a significant economic policy change occurs over the weekend, managers can adjust their positions in real-time without waiting for markets to open.
- Managing volatility: Continuous trading provides more opportunities to capitalize on price movements and volatility. Active managers can take advantage of this by implementing strategies such as short-term trading or hedging to mitigate risks and lock in gains whenever market conditions change. For instance, if there’s a sudden drop in the price of Bitcoin, managers can quickly sell their holdings to minimize losses or buy in to capitalize on the lower prices.
Variety of trading venues
The proliferation and variety of trading venues is another crucial element of the digital asset market structure. The extensive landscape of over 200 centralized exchanges (CEX) and more than 500 decentralized exchanges (DEX) offers a wide array of platforms for cryptocurrency trading. This diversity is beneficial for active managers in several ways:
- Risk management and diversification: By spreading trades across various exchanges, active managers can mitigate counterparty risk associated with any single platform. Additionally, the ability to trade on both CEX and DEX platforms allows managers to diversify their strategies, incorporating different levels of decentralization, regulatory environments, and security features.
- Arbitrage opportunities: Different venues often exhibit price discrepancies, presenting arbitrage opportunities. For example, managers can buy an asset on one exchange at a lower price and sell it on another where the price is higher, thus generating risk-free profits.
- Access to diverse liquidity pools: Multiple trading venues provide access to diverse liquidity pools, ensuring that managers can execute large trades without significantly impacting the market price.
Spot and derivatives markets (Variety of instruments)
The seamless integration of spot and derivatives markets within the digital asset space presents a considerable advantage for active managers. With substantial liquidity in both markets, they can implement sophisticated trading strategies and manage risk more effectively.
For instance, as of August 8 2024, Bitcoin (BTC) boasts a daily spot trading volume of $40.44 billion and an open interest in futures of $27.75 billion. Additionally, derivatives such as futures, options, and perpetual contracts enable managers to hedge positions, leverage trades, and employ complex strategies that can amplify returns.
Overall, the benefits for active managers include:
- Hedging and risk management: Derivatives offer a powerful tool for hedging against unfavorable price movements, enabling more efficient risk management. For instance, a manager holding a substantial amount of Bitcoin in the spot market can use Bitcoin futures contracts to safeguard against potential price drops, thereby enhancing risk control.
- Access to leverage: Managers can use derivatives to leverage their positions, amplifying potential returns while maintaining control over risk exposure. For instance, by employing options, a manager can gain exposure to an underlying asset with only a fraction of the capital needed for a direct spot purchase, thereby enabling more capital-efficient investment strategies.
- Strategic flexibility: By integrating spot and derivatives markets, managers can implement sophisticated strategies designed to capitalize on diverse market conditions. For instance, they may engage in volatility selling, where options are sold to generate income from market volatility, regardless of price direction. Additionally, managers can leverage favorable funding rates in perpetual futures markets to enhance yield generation. Basis trading, another strategy, involves taking offsetting positions in spot and futures markets to profit from price differentials, enabling returns that are independent of market movements.
Exploiting market inefficiencies
Digital asset markets, being relatively nascent, are less efficient compared to traditional financial markets. These inefficiencies arise from various factors, including regulatory differences, market segmentation, and varying levels of market maturity. For example:
- Pricing anomalies: Phenomena like the "Kimchi premium," where cryptocurrency prices in South Korea trade at a premium compared to other markets, create arbitrage opportunities. Managers can exploit these by buying assets in one market and selling them in another at a higher price.
- Exploiting mispricings: Active managers can identify and capitalize on mispricings caused by market inefficiencies, using strategies such as statistical arbitrage and mean reversion.
The unique aspects of the digital asset market structure create an exceptionally conducive environment for active management. Continuous trading hours and diverse venues provide the flexibility to react quickly to market changes, ensuring timely execution of trades. The availability of both spot and derivatives markets supports a wide range of sophisticated trading strategies, from hedging to leveraging positions. Market inefficiencies and pricing anomalies offer numerous opportunities for generating alpha, making active management particularly effective in the digital asset space. Furthermore, the ability to hedge and manage risk through derivatives, along with exploiting uncorrelated performance, enhances portfolio resilience and stability.
In our next article, we'll delve into the various techniques active managers employ in the digital asset markets, showcasing real-world use cases.
