Where to Hide in the Bear Market, Dexterity Capital

• Dexterity Capital is a prop trading shop that trades billions of dollars in crypto daily.
• Co-founder Michael Safai examines the impact of last week’s crash on retail and institutional traders.
• He also shares an area of the market that could become a safe haven for investors and developers.

When crypto tumbles, it’s natural to assume that traders will feel the most pain.

But for players like Dexterity Capital, a proprietary crypto trading shop that employs market-neutral strategies, it’s good for business. Dexterity trades between $2-4 billion of cryptocurrency a day, according to the Financial Times.

“For Dexterity, being market-neutral,

volatility

is what really we live for,” Michael Safai, co-founder of Dexterity Capital, said. “So there was a lot of volatility around the LUNA implosion. That was good for market-neutral strategies for the most part. If you were playing market making or stat arb strategies, they went pretty well.”

For retail traders, it’s a different story.

“A lot of retail got burned,” Safai said. “And our data is showing that there’s probably less retail activity than pre-crash. What that means is that much of the volume you’re seeing, or a larger proportion of the volume you’re seeing, is now institutional traders, like us, like Jump or Jane Street, or any of the big traders you’re used to hearing about.”

The crypto crash was sparked initially by the

Federal Reserve

hiking interest rates and then accelerated by the collapse of the terra ecosystem, which had a market cap of $33 billion only a month ago.

“All year long, we’ve seen a skew as institutional volume gets bigger and bigger,” Safai said.

Retail flow is all about catalysts, Safai said. There’s two types of players in retail, “the hodlers” who are investing for the long term and the active traders, he added.

Terra’s implosion is just one more negative factor on top of an already uncertain environment for retail investors from geopolitical tensions, to surging inflation, slowing growth and higher interest rates.

“Given what happened last week, probably some people feel very burned, and are worried to engage again right now,” Safai said.

The environment is so uncertain right now, it’s hard to say what the catalyst could be to re-engage retail, Safai said. At the moment, he’s monitoring what the Federal Reserve does.

If the central bank decides to tolerate inflation for a sustained period of time, then the narrative of crypto as a hedge against inflation could “resuscitate” retail interest, Safai said.

One of his biggest fears after the events of last week is the loss of trust in the ecosystem and in the “ethereum killers”, such as solana (SOL) and avalanche (AVAX). He expects to see a shift back toward the known quantities that are ether (ETH) and bitcoin (BTC).

“People are thinking, ‘hmm, that old ethereum thing that we thought was old-fashioned is actually pretty solid and reliable and maybe we should be looking back at that instead of these ethereum killers, [which] might have flaws or defects similar to what we saw in terra’,” Safai said.

Many developers moved to other alternative blockchains, known as “ethereum killers”, because ethereum has had difficulty scaling, which had resulted in high gas fees and slow transaction speeds.

“You now have to weigh that against the risk of what we saw happening at terra last week,” Safai said. “So my expectation is that some people who were building projects, whether it was on terra, or some other layer one last week, are now thinking, ‘hmm, should we go back to  ethereum and give up those bells and whistles for safety?'”

Ethereum is expected to transition from the

proof-of-work

to

proof-of-stake

consensus mechanism this year, which could be another catalyst for the market. ConsenSys’s Simon Morris says this switch will introduce the preconditions for scalability on the network.

“Now assuming it does happen this year, I got to think it’s going to be a good thing because it does change the game,” Safai said. “And it’s something new to get excited about. And there’ll be new puzzles to figure out around how these new mechanisms work.”

For now, however, retail is in a tough spot, Safai said. Institutional players are also facing challenges after the stablecoin tether’s limited depeg.

“Even a small depeg, even if it’s just 10 pips, that’s not great for shops that are doing a lot of high-frequency trading, because many of these perpetual swaps are margined in tether,” Safai said. “And a 10 pip difference actually matters a lot to us. So that’s not been great.”

“But that aside, redemptions are working,” he added.

In the current range bound scenario, market making does well for institutions. They are implementing approaches like volatility strategies with options and overlay strategies, Safai said.