The recent failure of the third-largest crypto exchange, FTX, a hack at the largest crypto derivatives exchange, Deribit, and Binance’s announcement that it intends to acquire FTX have shaken up the cryptocurrency investment market.
Josh Peck, founder of TrueCode Capital, responded quickly, telling investors, “First and foremost, our investors’ funds are safe. We are executing our trading algorithm as normal, and we were not exposed to either the Deribit hack or the FTX failure. We exited the market in an orderly fashion according to our standing trading rules. It’s business as usual at TrueCode Capital.
“Our layered approach to risk has informed our decision that we do not use leverage or derivatives, which protected us from the Deribit hack,” Peck continued. “Similarly, we only work with US-based SOC 2-compliant exchanges, so we have not been affected by the failure of FTX.”
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So, what happened?
Peck explained: “First, the crypto exchange FTX suspended withdrawals on November 8, which sent ripples through the market as investors were reasonably concerned about whether the third-largest crypto exchange was going to survive the day. Their corporate token, FTT, which investors use for trading on the FTX exchange to receive lower fees, dropped by 75% as investors sought to move their money off the platform and the small fee discount for trading using FTT was outweighed by the declining value of the token and the increased likelihood of total loss by continuing to hold it. Much like the Terra/LUNA tokens earlier this year, it is possible for FTT to become valueless in days.
“Second, the crypto derivatives exchange, Deribit, also suspended withdrawals after they fell victim to a hack of their crypto bridge. The bridge is a workaround some firms use in an attempt at interoperability between tokens in different markets, but this bridge is not as secure as the actual blockchains. Virtually all crypto derivatives, many DeFi projects and a large percentage of Web3 projects are exposed to this crypto bridge problem, so there is little reason to expect these attacks to cease. They are too profitable for cybercriminals to ignore.”
Peck says he has lived through several of these bear markets over the past decade and has seen numerous firms fail (including Mt. Gox).
“We see firms emerge during boom times, but few are able to survive the down times,” he said. “While we may seem overly pedantic about managing the exogenous crypto risks for our Fund, this focus is borne of experience. To prosper in the crypto markets, you have to survive them.”
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TrueCode Capital’s defensive approach protected its Fund from total loss in a number of ways, Peck explained, including:
– No derivatives, no leverage: So TrueCode Capital did not have money on the Deribit derivatives exchange
– US-based, SOC 2-compliant exchanges: So the Fund did not have exposure to Deribit or FTX
– US-based exchanges only: No exposure to FTX (Bahamas) or Deribit (Panama)
– Once-daily trading: Enabled exit at a higher price than the intra-day low
– Manual trading: Prevented losses due to price distortions across exchanges
– US-based: Fund is US-based and protected from low-quality derivatives platforms
“You’ll notice that none of these protections have to do with our trading model, they are mostly features of our robust fund design,” Peck added. “Deribit and FTX account for a substantial portion of total crypto derivatives trading, so there are many market-neutral crypto funds that will fail because they failed to properly assess the risks of their platforms. Many of these Funds are based offshore so they could take advantage of the low-quality overseas derivatives markets, which they improperly believed was a risk-free return instead of a risk premium.”
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