Espresso 2.0 : Migration Patterns and Alpha

by Ben Lilly

The Alpha in Migration Patterns

More and more often now it shows up where we least expect it.

This last week it happened during a side conversation before a meeting.

Benjamin and I (me being Ben… Yes, there are two Bens among us) were convinced 2017/2018 whales weren’t trading as much. Their game was different.

It resembled migratory patterns more than anything.

They grazed in such a manner that minimized effort. They were getting lazy. On the other hand, retail acted the same, they are anything but efficient.

Now it was during the discussion on current trends among whale wallets when it happened... Alpha appeared. alpha is what we call a signal, indicator or event that we can reliably trade from.

This most recent alpha is being run through Jarvis as we speak. Once the artificial intelligence machine understands the data and can act off it, then we can start running test bots off it to determine if its good enough to be added to our main trading software.

The alpha being explored hints at whales becoming more thoughtful in their approach and more risk averse. Instead of hanging in one part of the market, they were now migrating in ways that resembled trading in leveraged markets, to altcoin spot markets, earning yield in money markets, and then maybe to other areas.

It's as if the moment a feeding hole started to become barren the pods would exit via a slow migration at first, and then as a group.

Now, simply knowing this migration happens doesn’t do much for you as a trader. The key to this alpha is in knowing when the first whales were heading to new waters. Which is what I’ll show you today.

Its About Tradeoffs

In 2017 and 2018 leveraged trading was the game. Whales would move frequently in their pursuits of liquidity on Bitmex. If shorts started to pile up whales would go in and liquidate with determination. The same applied if longs piled up.

Part of this time period was known as Bart season. Candlestick charts would resemble Bart Simpson’s haircut. These series of barts were whales doing their job.

Fast forward to today and the game is not necessarily more complex. There’s just more arenas for the game to be played in.

DeFi is one such arena. And with it, crypto’s money markets got a facelift through protocols like Aave, Compound and dYdX.

These protocols allow users to lend crypto and stablecoins to other users who are wanting to borrow. These lending protocols are now becoming the backbone of rates and stablecoin demand.

If a whale wanted to earn easy money they could look to harness the money market to find 10% yield on their capital.

This created an easy way to generate profit on large sums of money with relatively low risk compared to the markets. If you’ve ever needed to move several million dollars of crypto into a trade position you might understand what I’m saying when I talk about the low risk nature of lending capital for 10%+ being too much to pass up on.

This is the behavior we saw. Its risk averse profit. For every $1 million, whales were scooping up over $800 a month for every 1% of interest. Or $10,000 per month for every 12%. That’s real cash flow.

But with everything else in life, nothing last forever. And that’s the secret to these whales…

Migratory Events

Whales start to leave their risk averse yield opportunities in search of riskier waters as yields drop.

It happened this weekend.

Early last week yields on Compound, Aave and dYdX were nearly 8%. On dYdX it was over 10%.

Later into the week yields started to drop. By Friday/Saturday yields were 3.5%. And by the time the markets woke up on Sunday, yields were about 2.7%.

source: DeFiPrime.com

The drop in yields made the risk in the markets worth it again.

Funding rates in the market were no longer excessive in one way or the other. Meaning entering a long or short wasn’t as expensive as earlier this week. And yields on stablecoins were dropping low enough to where the easy cash flow no longer was significant.

These conditions resulted in a migration back to the trading markets. Which is what we witnessed yesterday.

More importantly, the money markets gave us a hint to another source of alpha. As yields dropped, money started to move. And as a few other conditions like funding rates, exchange flows and on-chain metrics reset or turned bullish, the entry into a long position surface.

You may have noticed the post in our Telegram chat of the 80%+ gain. That was alpha from what I mentioned regarding funding rates, exchange flows and on-chain metrics. Not money market yields.

New sources of alpha take time to make its way into our main trading software. No longer are the days where we can upload data, plug in real-time feeds and let Jarvis loose on the markets.

Each potential source of alpha gets back tested, then tested in real-time via small bots, and then maybe added into the main software if it makes the cut.

The alpha from money markets is one we expect to use for our upcoming ChainPulse fund. Its an on-chain fund that does swing trading.

We’re happy to say the system that will be used for the fund opening up in Q1 is ready. It now gets updated as new alpha is discovered.

In the next week or two we look forward to finally putting it to the test in Enzyme Protocol as soon as they release v2 on testnet. We’ll keep you updated on our progress.

In tomorrow’s Espresso we expect to return to a market brief. There’s a chance Mnuchin decides to chum up some FUD in crypto this week.

Your Pulse on Crypto,

B. Lilly

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