Shalini Nagarajan

<div id="highlights-block_62ea686a3f249" class="highlights">
 <ul>
 <li>Trading volumes for the quant trading firm have dwindled since Terra’s crash</li>
 <li>But Safai said cryptoasset price declines in itself didn’t have a negative effect on the firm</li>
 </ul>
 
</div>



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&#8217;t think these lenders were going to go down the way they did. We didn&#8217;t think Three Arrows Capital (3AC) was going to implode the way they did,” he said, referring to the <a href="https://cms.blockworks.co/whats-wrong-with-centralized-crypto-lending/" target="_blank" rel="noreferrer noopener">collapse of high-profile crypto lenders</a> driven by their exposure to the highly-leveraged <a href="https://cms.blockworks.co/3ac-files-for-bankruptcy-as-co-founders-location-unknown/" target="_blank" rel="noreferrer noopener">hedge fund 3AC</a>.



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 <a href="https://cms.blockworks.co/tag/terrausd/" target="_blank" rel="noreferrer noopener">TerraUSD</a> (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&#8217;t know if they&#8217;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&#8217;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.”



<h3 class="wp-block-heading">Practical short-term expectations</h3>



Dexterity, which traded cryptocurrencies between <a href="https://www.ft.com/content/b2ef8b06-bfeb-4f02-ac6d-a17676d01839" target="_blank" rel="noreferrer noopener">$2 billion and 4 billion</a> 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.



<blockquote class="wp-block-quote">“The good news about us is that since we&#8217;re market-neutral, we aren&#8217;t exposed to the price of cryptocurrency assets. So the decline in prices itself has not been bad for us,” he added.</blockquote>



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.&nbsp;



“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&#8217;re better than they were in 2019. They&#8217;re better than what they were, probably, in early 2020. So we&#8217;re doing well,” he said without specifying numbers.&nbsp;



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&#8217;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 <a href="https://cms.blockworks.co/gone-crypto-dexterity-capital-co-founder-michael-safai/" target="_blank" rel="noreferrer noopener">double its headcount</a>, but it’s now altered that ambition. The firm, which currently counts 17 employees, plans to hire slowly.&nbsp;



“We’re hardcore either engineers or quantitative traders. So while we&#8217;re still growing, we&#8217;re not planning on doubling this year,” he said.



<h3 class="wp-block-heading">Linking TradFi to crypto could make for a good bet</h3>



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.&nbsp;



“If I&#8217;m an investor right now, and I see a good team that&#8217;s building something in infrastructure or that connects TradFi to the crypto world, I think that&#8217;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&#8217;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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Don’t Expect 2021-style Crypto Returns Anytime Soon, Says Dexterity Capital

Casey Wagner

<div id="highlights-block_62671db880729" class="highlights">
 <ul>
 <li>Hack VC and Dexterity Capital led the round</li>
 <li>The protocol hopes to be the first on the Terra blockchain to operate an on-chain orderbook with the automated market maker framework</li>
 </ul>
 
</div>



Vertex Protocol, a decentralized FX protocol for multi-currency spot and derivatives trading, has closed an $8.5 million seed funding round ahead of its planned launch this summer.



<a href="https://www.crunchbase.com/organization/hack-vc" target="_blank" rel="noreferrer noopener">Hack VC</a>, the $200 million crypto seed fund headed up by Alex Pack and Ed Roman, and Dexterity Capital led the round. Other investors include Jane Street, Hudson River Trading, GSR and Huobi. 



“We are excited to partner with some of the top trading firms in the space alongside VC partners with deep knowledge in scaling new protocols,” Alwin Peng, co-founder of Vertex, said. “The capital and expertise provided will help propel our team forward and put Vertex at the forefront of [multi-currency] DeFi innovation.”



Currently, more than 99% of DeFi (decentralized finance) liquidity lies in US dollar-tied stablecoins, a spokesperson from Vertex said. While non-USD stablecoins exist, no viable protocol allows for trade between various fiat-linked tokens, which has hindered adoption and utility, the spokesperson added.



International traders looking to hedge currency risk between USD-denominated DeFi investments and their local currencies currently have few options for liquidity, and the Vertex team is hoping to change that.&nbsp;



“As one of the largest liquidity providers in crypto, we recognize the potential of this protocol to contribute towards a vibrant market for investors worldwide,” Michael Safai, managing partner at Dexterity Capital, said. “We believe these products have a place in many DeFi portfolios, which is why we’re taking an approach to investment that will help ensure liquidity and growth for Vertex far beyond launch.”



Vertex plans to be the first decentralized trading protocol on the Terra blockchain to operate an on-chain orderbook with the automated market maker (AMM) framework. The protocol, once launched, hopes to provide traders with perpetual swap offerings and a borrowing and lending facility with flexible collateral options.



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Soon-to-launch FX Trading Platform Secures $8.5M in Seed Funding

<div id="highlights-block_619bbb83194fc" class="highlights">
 <ul>
 <li>Michael Safai believes changes happen at the startup level</li>
 <li>Dexterity Capital is looking to change the game when it comes to solving market inefficiencies </li>
 </ul>
 
</div>



Partner and co-founder of Dexterity Capital Michael Safai is no stranger to the startup world.&nbsp;



“I am very much a West Coast startup person,” Safai said during an in-person interview in London, where the co-founder now resides. “We think that startups offer the best way to build, it’s so different from traditional finance.”&nbsp;



With a bachelor&#8217;s degree in astrophysics and economics and a Juris Doctor degree, both earned at California Universities, he has experience across a range of industries.&nbsp;



After working as a startup attorney and consultant, Safai decided to join the community full time. He worked at LiveRamp, a california-based data connectivity platform, for three years, first as the chief of staff and then the head of international. 



LiveRamp focused on looking at data and market inefficiencies, and it inspired Safai to start thinking about how inefficiencies in digital asset trading could be solved. He left LiveRamp in 2016 and co-founded Dexterity in 2018.&nbsp;



“When we started this in 2017/2018, I think some of my old colleagues were unsure of what we were doing,” Safai said. “Now, that sentiment has definitely changed as crypto has grown.”&nbsp;



Dexterity Capital, an algorithmic high-frequency trading firm focused on cryptocurrencies, is looking to solve some of the biggest challenges in finance, Safai said.&nbsp;



Despite having only a 13-person team, although Dexterity is hoping to double in the next year, the company makes between $2 billion and $4 billion in trades a day.&nbsp;



When asked if he fears a potential bear market in the coming months, Safai was unphased. The team specializes in market neutral strategies, he said, making the trades immune to bear or bull patterns.&nbsp;



In terms of regulation, a topic every leader in the digital asset space seems to want to weigh in on these days, Safai said it will be a long waiting game. Different nations and regulatory bodies are approaching the issue of cryptocurrency oversight in different ways and at different speeds, he said.&nbsp;



“I think that we are going to have to work with patchwork legislation for a while,” Safai said. “I don’t know what’s going to happen in terms of regulation, it’s hard to see how exchanges and companies in this space will interact with regulators.”



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