Key Takeaways
- Market-neutral DeFi return strategies aim to generate returns without being influenced by price direction.
- Building a business on a market-neutral basis is critical due to crypto’s inherent volatility.
- In the early days of DeFi, stablecoins could deliver significantly high returns.
- The unique risk-reward profile in crypto is based on hacks of software platforms, which are not correlated with traditional assets.
- Diversification in DeFi is insufficient on its own to effectively manage risk.
- DeFi risk is likened to selling a put option, earning returns until a catastrophic event occurs.
- A framework can categorize blockchain attack vectors to assess risk and diversify investments.
- DeFi’s annual default rate has dropped from double digits to 2-5%.
- Engaging with DeFi platforms requires understanding the main risk of loss from hacks.
- Despite new platforms, the DeFi market remains structurally devoid of capital.
- The supply and demand dynamics in DeFi will continue to favor allocators.
- The returns of on-chain trading strategies vary significantly depending on market conditions.
- Diversification is critical in managing risk in on-chain trading strategies.
- It is preferable to retain assets if they remain structurally sound and communication with the team is good.
- The philosophy of diversification is crucial in the uncertain DeFi landscape.
Guest intro
Evgeny Gokhberg is the founder and managing partner of Re7 Capital, a DeFi hedge fund specializing in market-neutral return strategies and on-chain risk management. He previously worked in investment management at UBS and Deutsche Bank, where he managed long/short equity portfolios, before switching to crypto at Everledger in 2018. Re7 Capital has deployed approximately $1.2 billion in DeFi liquidity since its founding in 2021.
Market-neutral DeFi strategies
- Market neutral strategies aim to achieve returns without impacting the price direction.
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Think of it as a hedge fund that collects dollars, converts them into stablecoins and generates returns
– Evegny Gokhberg
- Building a business on a market-neutral basis is essential due to the volatility of cryptocurrencies.
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It was scary to base a business on something extremely volatile
– Evegny Gokhberg
- Early DeFi days provided high stablecoin returns.
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You can earn 40% per year from stablecoins in simple ways
– Evegny Gokhberg
- The unique risk-reward profile in crypto is based on uncorrelated software platform hacks.
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Our risk is that any software platform will be hacked, without any correlation to stocks or bonds
– Evegny Gokhberg
- Diversification in DeFi is not enough to effectively manage risk.
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Diversification always sells, but it’s not enough
– Evegny Gokhberg
Risk management in DeFi
- DeFi risk is akin to selling a put option, earning returns until a catastrophic event occurs.
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It’s like selling a put option; you get paid until your counterparty goes bankrupt
– Evegny Gokhberg
- A framework can categorize blockchain attack vectors for risk assessment.
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Can we categorize all blockchain attack vectors and create a checklist?
– Evegny Gokhberg
- DeFi’s annual default rate has dropped significantly.
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The standard percentages were double digits, now maybe 2-5%
– Evegny Gokhberg
- Understanding the risk of loss from hacks is key to interacting with DeFi platforms.
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We accept that money will be lost if a DeFi platform is hacked
– Evegny Gokhberg
- The DeFi market is structurally facing a shortage of capital.
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DeFi TVL has not grown since 2021; people are starved of capital
– Evegny Gokhberg
Supply and demand in DeFi
- The supply and demand dynamics in DeFi favor allocators.
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Supply demand will favor allocators for the foreseeable future
– Evegny Gokhberg
- The cyclicality of returns in DeFi impacts performance more than capital demand.
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Cyclicity has more influence on the profit and loss account than the variance in demand
– Evegny Gokhberg
- Multiple layers of risk exist when holding crypto assets.
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We take three layers of risk: assets, platform and chain
– Evegny Gokhberg
- Convergence of CeFi, DeFi and TradFi is expected over time.
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We see a convergence of CeFi, DeFi and TradFi
– Evegny Gokhberg
Trading strategies on the chain
- The returns of on-chain trading strategies vary depending on market conditions.
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In bull markets, returns can be 25-30%; in bear markets 5-10%
– Evegny Gokhberg
- Diversification is crucial for managing risk in on-chain trading strategies.
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Sufficient diversification prevents the impact of individual events
– Evegny Gokhberg
- The philosophy of diversification is crucial in the DeFi landscape.
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DeFi is six years old; we need to diversify
– Evegny Gokhberg
- The company aims to remain stable this year despite the volatility.
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We want to at least stay flat this year, no matter what happens
– Evegny Gokhberg
Bitcoin and altcoins
- Bitcoin is seen as digital gold; other crypto are software companies.
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Bitcoin stands alone as digital gold; others are software companies
– Evegny Gokhberg
- Altcoins are undergoing a cleansing process and most are expected to lose value.
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99.9% of altcoins should be worth zero
– Evegny Gokhberg
- The crypto market resembles early Silicon Valley startups.
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Imagine if every Silicon Valley startup were to list on the stock exchange on day one
– Evegny Gokhberg
- In crypto, a dual approach of top-down and bottom-up analysis is needed.
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We start top-down and merge it bottom-up
– Evegny Gokhberg
Investment strategies in crypto
- Investing in crypto requires a balance between established companies and speculative bets.
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Balance concentrated risk with measurable, understandable assets
– Evegny Gokhberg
- In an unforgiving market, patience is better than frequent trading.
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In this market it is better to be patient and trade infrequently
– Evegny Gokhberg
- It is preferable to retain assets if they remain structurally sound.
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We will continue to hold if the assets are structurally sound and communication is strong
– Evegny Gokhberg
- The latter part of the market cycle is crucial for altcoins’ profits.
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You need the last part of the cycle to get going
– Evegny Gokhberg
Market dynamics and liquidity
- Investors should approach trading with a clear understanding of the risks.
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Be clear about your expected risk and avoid overtrading
– Evegny Gokhberg
- Compounding profits in crypto is more effective by holding assets.
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The way to increase profits is to do nothing
– Evegny Gokhberg
- FOMO is a major destroyer of returns in the market.
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FOMO is one of the biggest destroyers of returns
– Evegny Gokhberg
- The current market volatility may be related to liquidity issues.
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I think it’s liquidity related, but who knows?
– Evegny Gokhberg
Market forecasts and opportunities
- There is hope for a positive market move if critical levels are maintained.
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As long as we maintain these levels, there is hope for positive movement
– Evegny Gokhberg
- The market shows stability and outperformance of altcoins compared to Bitcoin.
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Alts don’t break against BTC; there is stability
– Evegny Gokhberg
- Today’s market looks like small caps versus large stocks.
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It’s like small caps versus majors in traditional markets
– Evegny Gokhberg
- Investors should not panic about selling during market downturns.
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Don’t panic, sell; it’s probably the opposite
– Evegny Gokhberg
Untie the connection between fundamentals and price
- There is a significant gap between DeFi fundamentals and price performance.
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There is a gap between fundamentals and price in DeFi
– Evegny Gokhberg
- Liquidity is a dominant factor influencing market narratives.
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Liquidity influences market narratives and price movements
– Evegny Gokhberg
- Lack of liquidity causes underperformance in software and crypto assets.
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There is not enough money available to maintain performance
– Evegny Gokhberg
- The rise of gold is drawing attention away from fringe assets like SaaS stocks and Bitcoin.
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The rise of gold attracts capital, which impacts marginal assets
– Evegny Gokhberg
Banking system and leverage
- The banking system can create significant leverage through regulatory changes.
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Regulatory changes could lead to significant bank leverage
– Evegny Gokhberg
- Redeploying debt into the banking system will increase liquidity and impact the business cycle.
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Re-leveraging banks will recycle capital through the system
– Evegny Gokhberg
- Current market conditions indicate a lack of sufficient liquidity.
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The market shows insufficient liquidity, which affects performance
– Evegny Gokhberg
- Gold spikes often precede Bitcoin performance, signaling potential market shifts.
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Gold Peaks, Then Bitcoin Performs; signals are close
– Evegny Gokhberg
Risk tolerance and investment decisions
- Risk tolerance is crucial for investment decisions, especially in volatile markets.
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Risk tolerance starts with understanding the disadvantages
– Evegny Gokhberg
- Investors should consider a benchmark like this $ETH to manage risks.
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Use a benchmark such as $ETH to manage risks effectively
– Evegny Gokhberg
- Higher beta assets experience larger withdrawals compared to major cryptocurrencies.
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Higher beta assets have larger drawdowns than major cryptocurrencies
– Evegny Gokhberg
- Investors must be realistic about their risk tolerance and potential losses.
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Ask yourself if you are willing to bear potential losses
– Evegny Gokhberg
Market corrections and opportunities
- The current market correction does not indicate that the entire crypto market is broken.
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The market is looking like a sharp correction within a bull market
– Evegny Gokhberg
- The market may change quickly, but a long-term downturn is not imminent.
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A long-term recession does not appear imminent at the moment
– Evegny Gokhberg
- Current market conditions should be seen as an opportunity, not a signal to give up.
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This is an opportunity, not a sign to leave the sector
– Evegny Gokhberg
- The market noise will ultimately be just that: noise.
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The noise in the markets will be just that: noise
– Evegny Gokhberg