As a former derivatives trader for major Wall Street banks, Shiliang Tang discovered bitcoin in 2013 after the European debt crisis.
"Whenever you have something that's tradable, that goes up hundreds and thousands of percent, and you are a trader, it catches your attention," he recalled in an interview.
After perusing the bitcoin whitepaper and studying blockchain technology, Tang started to follow the development of the cryptocurrency. But it wasn't until the raging bitcoin bull market of 2017 that he felt like the market was "large and mainstream" enough for him to get into it full-time.
Within four years, the depth and breadth of the nascent market had expanded so much that Tang could trade many digital assets using traditional quantitative strategies such as statistical arbitrage, trend following, and options trading.
"It felt like it was the right time. Institutional capital started to flow in and derivatives were being introduced," said Tang, who joined crypto hedge fund LedgerPrime as chief investment officer in 2017.
While LedgerPrime, which manages about $150 million in assets, primarily offers quantitative strategies to institutional investors, it is also a derivatives market-maker. From that vantage point, Tang has noticed that selling a covered call has become a popular strategy among retail traders.
A covered call strategycan be executed by holding a long position in a security and then selling call options on that same security. When investorssell a covered call, they exchange further future upside on the security for short-term profits.
"A lot of early bitcoin or ethereum investors want to generate some yield on their holdings, so they can sell calls," Tang said. "We do see a fair amount of that flow coming from retail markets. So that's something that retail is already doing to a certain extent and I see that continuing to grow in this space."
3 layer-one protocols that could 'attract a lot of capital'
Bitcoin's Saturday flash crash, which played out in a classic liquidation cascade, was no strange phenomenon to a veteran crypto trader like Tang. But one thing about the recent sell-off that stood out to him and many others is how ethereum and other large-cap altcoins have outperformed against bitcoin.
The price ratio of ether against bitcoin hit a new all-time high of 0.087 as of Wednesday afternoon in New York when bitcoin and ethereum were trading at around $50,454 and $4,395, respectively.
In Tang's view, fresh capital that flew into the crypto space this year boosted many altcoins . Venture capital investors have poured $21.4 billion into blockchain and crypto companies in the first three quarters of the year, according to The New York Times, citing data provider Pitchbook.
"A lot of that capital is not necessarily entering bitcoin," he said. For example, Paradigm, which recently raised $2.5 billion for the largest-ever crypto venture capital fund, has said it will continue to invest in "the next generation of crypto companies and protocols."
Although a lot of institutional and VC money has flown into decentralized finance and Web 3.0, Tang thinks certain layer-one protocols will be worthy contenders for capital too. He pointed to Avalanche (AVAX), Fantom (FTM), and Near (NEAR) as three smart-contract platforms that will continue to attract capital.
The AVAX token has returned 2,599% in the past year but fell 26% over the past month. The FTM and NEAR tokens gained 7,146% and 777% in the past year while plunging 45% and 14% in the past month, according to CoinGecko.
2 trends to keep an eye on in the year ahead
With more layer-one protocols exploding onto the scene, Tang said one thing to watch in the year ahead is solutions that help the average user move assets cross-chain more easily and seamlessly.
"I think in the future, as you're engaging with the crypto economy, you won't necessarily know which chain you're sitting on," he said. "But right now to move between solana, ethereum, and avalanche, a fair amount of sophistication and time is required, which I think is hindering a lot of adoption in some of the newer chains."
To be sure, a couple of "bridges" have sprung up recently to try to fix this problem. For example, there are ethereum layer-two solutions Arbitrum and Optimism and the bridges that are natively associated with them. There is also Wormhole, which aims to bridge between solana and other DeFi networks.
"I think a lot of them are very early still in terms of being fully functional," he said. "But we are hopeful that as these projects get built out, they will be able to bridge assets seamlessly and more importantly, safely and quickly between the various chains."
Another theme on Tang's radar is the growth of on-chain asset management projects, which aim to bring traditional asset management strategies on-chain and pass on their yield to the end investor or user.
One project engaged in the space is ribbon finance (RBN), which creates structured products on ethereum. The firm's first product focuses on yield through automated options strategies.
"A retail user that isn't familiar with options, they can just deposit money into a vault and get that yield," Tang said. "Whereas before, they had to understand options, they had to choose the strike, expiration, and roll the strikes to manually determine the yield. From a user perspective, it's a lot better in this regard."
Like bridges, many on-chain asset management products are still in the early days of being built.
"It will be interesting to see in a few months as they mature, what kind of real strategies they will be able to create, and what kind of yield they'll be able to pass on to their end-users," he added.
