Navigating Volatility With Certainty: Best Practices For Crypto Winter
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(Texas, United States) — BTC is down 49% YTD, ETH is down 54% YTD — we are currently in a market which is generally referred to as a “crypto winter” within the digital assets space. Many players in the crypto lending industry are going through a liquidity crisis, struggling to cope with surging withdrawal and redemption requests. It feels like every day there is another firm that busts in crypto headlines.
What are some of the best strategies to survive the crypto winter and what does the future hold for the industry? As an active market participant since 2017, JKL Group offers their perspective on the current market environment.
“Having gone through the crypto winter of 2018–2020, it is clear to us that similar patterns are unfolding this time round. Same as in the previous market cycle, risk-averse mentality and sound liquidity management processes are key in ensuring the perseverance of business in the long run,” says JKL Group Chairman Jingyuan Ye.
JKL Capital — the financial arm of JKL Group — offers two quantitative asset management strategies, both of which offer low correlations with the underlying crypto market. Their positioning as volatility trading strategies makes the asset manager agnostic to recent market moves. In addition, due to liquidity concerns, JKL Capital has always held back from any DeFi exposure. “We feel the liquidity is not yet mature in DeFi. Proper infrastructure has to be built around the space and proper risk management processes have to be put in place to improve the liquidity,” adds Jingyuan.
Lin Cheung, CEO of JKL Group, addresses some of the best practices to deploy during (and even better before) the crypto winter: “Always be mindful of risk and leverage, regardless of the markets in which players operate. High returns always mean high risks and whenever investment managers or products offer high returns, be aware that risks are involved — explicitly or implicitly. JKL Capital runs arbitrage strategies on an unlevered basis, and since the end of 2021 we haven’t seen arbitrage opportunities delivering more than 10–15% p.a. So when more and more so-called ‘market-neutral’ products started popping up across DeFi with an APY of 20%+, it was a clear signal to us that either some unexplained risks were embedded or excessive leverage was employed in those DeFi strategies.”
Another pain point to address in this market are the altcoins. Due to lower number of investors and thin liquidity, low-cap crypto projects took the biggest hit in the last few months. All the way until the end of this year and heading into 2023, we will begin to see a lot of token unlocks for projects launched during last year’s bull. This busy unlock schedule will put even more selling pressure on altcoins. Therefore, focusing on major crypto pairs and working with major exchanges is a good idea to mitigate idiosyncratic risks and liquidity risks exhibited in altcoins.
However, by far the largest risk events by magnitude and by impact have been connected to insolvency concerns of some of the biggest crypto firms. “Diversification is the most effective way to manage counterparty risks. From a diversification standpoint, we have multiple providers, and we can quickly shift our exposure when necessary — in particular shift our exposure away from risky counterparties,” commented Lin. “On the other hand, we always engage with all the major participants in the market. Through our resources and through constant qualitative and quantitative monitoring of counterparties we are able to identify and take immediate action if necessary to mitigate our counterparty risks.”
All these practices are important measures which would ensure business continuity and sustainable growth over the long run. After all, crypto winters are not forever, and the next Bitcoin halving event is set for 2024. Crypto winters are generally a great time for innovation and franchise building.
“As a group, we have a broad diversification across business lines: OTC, Asset Management, Lending and Mining. All of the core business lines generate strong cash flows, allowing us to reinvest into future expansion of our business despite the crypto winter,” said Jingyuan.
In the spirit of taking the market share while the market is turbulent, JKL Mining has recently announced the launch of a 35MW mining farm. The first facility in Texas will host over 10,000 machines or 35MW and is scheduled to go live in July 2022. Targeting a total investment over USD 60 million, the company plans to rapidly build out to 85MW of capacity by the end of 2022 and scale to over 250MW in 2023.
“I would like to specifically highlight our expansion into mining: right now is a perfect moment for us to build out our mining operations. Launching the farm in July will enhance our financial position and help us to expand further,” summed up JKL Group Chairman.
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Investor Relations Team
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