How liquid funds thrive in spot crypto markets

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We know there’s an obvious disconnect between the average retail investor and the whales with enough size to really influence markets.

Perhaps the most extreme gap is between, say, someone who holds a few thousand dollars’ worth of coins they’ve bought on an exchange, and a VC fund that holds the exact same tokens. The VC fund very likely acquired those coins for much, much cheaper. By orders of magnitude, even.

In fact, it was never possible for the retail investor to have bought the tokens at the same price, considering the VC bought them for a flat price years before they were ever listed on an exchange.

Over the past year or two, liquid funds have become increasingly common in crypto markets. These operate similarly to traditional hedge funds in that they freely buy and sell publicly-tradable tokens according to their mandate. 

In many cases, liquid funds trade via the same spot markets utilized by retail traders and market makers, although often with more sophisticated trading systems for more precise execution, with liquidity sourced via OTC desks, and so on.

“What is your mandate, Seth?” Yano asked Seth Ginns, Managing Partner and Head of Liquid Investments at CoinFund, on today’s Empire podcast episode.

“Our mandate is, as an investment firm, to find the best, fundamentally driven opportunities on the venture and liquid side. And then [on] the liquid side, we drive absolute return strategies,” Ginns said. 

“So we’re investing in secular growth opportunities where we think that the addressable market is very large, the team is fantastic, and there’s the opportunity to have a large return based on a fundamental underwrite over a multi-year period.”

Ask a retail investor what their mandate is and they’d probably tell you something similar, albeit with less jargon: find the least risky coins with the most potential to go up, and buy that.

Cosmo Jiang, General Partner and Portfolio Manager at Pantera Capital, distilled his firm’s strategy into generating outperformance — which generally means beating bitcoin’s returns by picking tokens. 

Both Jiang’s and Ginns’ funds hold between 10 and 20 or so different coins right now. 

Jiang said: “The edge of other managers is going to be around perhaps the acquisition part of the token, and others might be around the execution side — that’ll be the market-neutral guys, the market makers and things like that.

“But on the far end where I’m on, I believe the vast majority of our performance, if I were to do performance attribution, comes from token selection and less so the actual execution.”

He explained that Pantera uses a variety of options, primarily spot trading with some derivatives to access liquidity elsewhere. Pantera’s fund is domiciled in the US, which means it cannot trade on international exchanges.

As for how these funds actually pick their coins, Ginns had this to say:

“It’s an environment where if you do the work, if you have the connectivity, if you’re going to the developer conferences, if you can see where the tech is going, you can actually drive really good returns like that.”

He continued: “That was the biggest frustration over the last few years: You could do the work, but you weren’t seeing those positive fundamentals reflected in the token valuations. And there’ve been some really big changes that have happened, so it’s not just the change in [US] administration that’s been a catalyst.”

Catch the full episode (which includes insight into both portfolios) on YouTube, Spotify, Apple Podcasts and X.

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