Don’t Expect 2021-style Crypto Returns Anytime Soon, Says Dexterity Capital

“Last year was such a great year for everybody. Our expectations are kind of unreasonable now,” Dexterity’s managing partner Michael Safai said


Dexterity Capital Co-Founder Michael Safai


key takeaways

  • Trading volumes for the quant trading firm have dwindled since Terra’s crash
  • But Safai said cryptoasset price declines in itself didn’t have a negative effect on the firm

Dexterity Capital’s Michael Safai believes any market-neutral cryptocurrency firm will shake off the effects of potential shakeups within the industry.

In an interview with Blockworks, he said the US-based proprietary trading firm has faced the impact of liquidity being sucked out of the market and its business has had to adapt.

“It’s been hectic. A lot of things broke that we never thought would break, and we didn’t think these lenders were going to go down the way they did. We didn’t think Three Arrows Capital (3AC) was going to implode the way they did,” he said, referring to the collapse of high-profile crypto lenders driven by their exposure to the highly-leveraged hedge fund 3AC.

3AC, which was invested in a number of troubled crypto projects, defaulted on multimillion-dollar loans to lenders as cryptoasset prices plunged following the collapse of TerraUSD (UST) on May 9. When the firm failed to meet loan repayments, lenders were forced to freeze withdrawals on their networks, causing widespread anxiety over the inter-connectedness of the industry.

“When May happened, everyone thought the sky was falling and didn’t know if they’d be around for another quarter. People were acting scared,” Safai said. But he thinks that’s slowly changing as investors gradually price in factors that were up in the air till now.

“The Ukraine war is going on, sadly, but it’s a known quantity now. The macro environment is a much more unknown quantity, seeing as much inflation as we have and still surviving it. So people are starting to get comfortable again with reinvesting in crypto.”

Practical short-term expectations

Dexterity, which traded cryptocurrencies between $2 billion and 4 billion at the start of the year, performed well until Terra’s crash. Things have become quiet since.

“We run algorithmic-marketing strategies, which means we do a lot of volume. We traded over a trillion [dollars] last year. We feed off of volume, and so volumes being down is not good news for us,” Safai, who described the market downturn as the “third really big bear market,” said.

Also, the collapse of crypto lenders didn’t just hurt investor sentiment, but affected trading volumes on major crypto exchanges.

“The good news about us is that since we’re market-neutral, we aren’t exposed to the price of cryptocurrency assets. So the decline in prices itself has not been bad for us,” he added.

A market-neutral trading strategy implements the execution of both long and short positions. Such trades make the most of diversification used to hedge against market declines.

Safai thinks holding high expectations for trade volumes and enjoying the enthusiasm of the 2021 bull run isn’t reasonable. 

“Last year was such a great year for everybody. Our expectations are kind of unreasonable now. But in terms of what our returns are, they’re better than they were in 2019. They’re better than what they were, probably, in early 2020. So we’re doing well,” he said without specifying numbers. 

According to him, Dexterity managed to be in that position by executing solid trades rooted in real alpha, as opposed to being stuck with levered long positions.

“Anyone just going long, or making a basket of coins isn’t going to kill it right now. Guys like us who are market-neutral, or have some real alpha will do okay,” he said.

Dexterity told Blockworks last year that it was looking to double its headcount, but it’s now altered that ambition. The firm, which currently counts 17 employees, plans to hire slowly. 

“We’re hardcore either engineers or quantitative traders. So while we’re still growing, we’re not planning on doubling this year,” he said.

Linking TradFi to crypto could make for a good bet

Builders could have a real opportunity in the current crypto market environment. Specifically, infrastructure builders make for a good venture capital investment, according to Safai. That’s because these businesses are likely to get picked up once market enthusiasm for crypto returns.

“With the kind of failures that happened over the past few months, people are thinking regulation is going to come in more strongly, which means TradFi players who already have all the licenses are well positioned if they have the technology,” he said. 

“If I’m an investor right now, and I see a good team that’s building something in infrastructure or that connects TradFi to the crypto world, I think that’s a good bet.”

Going forward, Safai expects crypto lenders to rethink how they manage risk and be more concerned about whom they lend to because the space wasn’t as developed as it should’ve been.

“They’re going to be much more shy to do anything undercollateralized or extended credit. And they just have to get smarter.”

He suspects the market will be slow for a while and won’t change anytime soon.

This article was updated on August 10 at 11:12 am ET.

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