Artificial intelligence data science and other new technologies have been making a deep impact within the cryptospace.
So much so that these days, quants have shifted their focus from traditional markets and technologies and have shifted their sights to cryptocurrencies and their underlying technologies.
E-Crypto News reached out to Louis Benassy, COO of Dfi Labs to make sense of this. Here is what he had to say.
Louis Benassy, COO Dfi Labs
- How did you guys get involved with cryptocurrencies and their underlying technologies?
When blockchain technology first hit the investment scene in 2017, we recognised the tremendous promise offered by digital assets early on.
With this in mind, we took a structured approach to understanding this disruption. We set out to bring the best practices of traditional asset management to the world of digital assets, while embracing cutting-edge data science.
Since then, the firm has grown to eight full-time professionals and stands firmly behind its commitment to meet the growing need for institutional-grade investment alternatives.
2. What are your views on the massive capital inflows into DeFi?
The recent $1.5 billion purchase of Bitcoin by Tesla had quite an effect on the crypto industry. Besides driving up the BTC price by 20% per cent virtually overnight, it brought Bitcoin fresh global media exposure.
As Bitcoin attracts greater coverage, potential buyers are more inclined to look into the DeFi space. Investors want to use their Bitcoin to get additional attention for other avenues within the crypto space, be it DeFi tokens or other platforms such as Solana, NEAR or Polkadot.
That said, not every DeFi project is set to be a smash hit. Paying heed to team reps, partners, deals with other companies, and understanding the purpose as well as the direction the project is headed still forms the basis for a successful approach to investing in this space.
3. What exactly do you guys do?
Today, digital assets have achieved a level of maturity where institutional-grade products can begin to flourish. At Dfi Labs, we offer fully systematic investment management services, dedicated to digital assets.
No human intervention is required during the investment process. We help qualified investors and financial institutions achieve their investment objectives by allocating capital to our various strategies.
Far from taking a simple buy-and-hold approach, we combine best practices learned from top hedge funds with our expertise in predictive analytics and data science to turn volatility in the investor’s favour.
4. Please, how do your products and services work?
Our investment products are designed around several key processes. To deliver the right exposure to the client, a few sequential steps need to be successfully followed.
We collect data from structured and unstructured data sources, clean and reformat it for analysis using machine learning algorithms.
We leave no stone unturned to find meaning underlying market trends and movements, exploring a number of candidate explanatory variables in the process.
Based on our findings, we construct a model according to a set of constraints, incorporate a risk management strategy and send it out for execution, making sure that all our signals are converted into a market order of the appropriate type and size.
5. Do you think there is a mathematically and scientifically proven way to mitigate risk?
At Dfi Labs, we are not lulled into a sense of security by complex mathematical formulas, regardless of whether they were derived by top researchers.
There is no magical formula for risk management, with risk control techniques constantly evolving and new approaches being invented.
This means that we must constantly challenge assumptions, look for new approaches to measuring risk and keep abreast of the latest research.
6. How does this work in the actual world?
Improving the predictive power of our models, adjusting positions according to the level of conviction behind our predictions and implementing clever dynamic stop-losses are all ways of optimally managing downside risk.
7. How does the interplay of data science and artificial intelligence affect optimal decisions when it comes to market entry and exit?
AI and machine learning systems leverage Big Data and visualisation to identify market entry and exit signals.
Artificial intelligence (AI) provides the latest approach to market timing by incorporating computational problem-solving techniques that emulate the way humans make decisions or engage in thought processes.
Neural network mimics the structure and function of the human brain. The combination of Big Data with powerful AI algorithms allows us to spot subtle patterns in the market and predict future market movements based on these data patterns.
Just like the brain, neural networks can learn and adjust as additional data and findings emerge.
8. What are your plans for 2021? Do you have any secrets that you want to spill?
In 2021, we intend to continue working on perfecting existing strategies and developing new ones for the digital asset class.
To this end, we will hire two PhD students in machine learning as part of the development of a research unit. We will also continue to develop new investment formats to meet the expectations of our investors, including a Luxembourg fund and a listed fund.
In addition, our goal is to establish ourselves as a key influencer as we continue to share our market insights with the broader community. With all these elements in place, we are confident that we can become one of the European market leaders in our field.
9. Your organization is a recipient of $500,000 funding. How did that go?
We have successfully completed a capital raising from a number of business angels. With this funding secured, we can now implement all our expansion plans.
10. How can anyone use your products and services? What steps do they need to take to use them?
Our products are primarily aimed at qualified investors and financial institutions. We work with investors who are aware of the risk they are taking when they invest in this new asset class.
That said, our service offering is fairly straightforward: We work with the investor to better define their exposure requirements, devise a set of strategies that meet those requirements, and then handle the onboarding process.
That last part takes place with considerable ease and efficiency. At the moment, we only offer managed accounts, that is, we link to the client’s existing exchange account or a newly created account.
Managed accounts have the advantage of being extremely flexible, and we don’t charge management fees to keep interests as aligned as possible. Clients will soon be able to invest directly in our products through exchange-traded funds and traditional funds.
11. What are your thoughts on the exponential rise in cryptocurrency prices?
The price of cryptocurrencies, just like any other asset, obeys market cycles. Part of what makes the 2020–2021 cryptocurrency rally so different from 2017 is that institutional investors are now embracing bitcoin, giving it a newfound legitimacy and helping to eradicate the reputational risk of investing in cryptocurrencies.
Clearly, 2017 has been an exciting time for what could be summed up as crypto-native and retail-driven trading in the market. Nevertheless, it shone a spotlight on this space, which has proven beneficial in the long run.
Today, we see insurance companies, asset managers, hedge funds and corporates jumping into the market.
As much as 95% of Bitcoin’s market cap is held in wallets that hold at least BTC 1, suggesting that the majority of holders are wealthier investors, as opposed to smaller retail speculators.
Acceptance is crucial as this asset class does not enjoy government backing. Its value comes from the network effect, which in turn is based on people’s perceptions.
12. How has the rise of the digital asset space led to improved access to liquid markets?
Over the last 5 years, prices in the crypto space have remained markedly inefficient, but things are looking up.
Cryptocurrency volumes are seeing exceptional pace of improvement, and becoming less volatile.
The majority of those who hold cryptocurrencies are investing and trading coins to capitalise on the price appreciation, rather than using them as a medium of exchange. Infrastructure is also a big factor, as a higher number of cryptocurrency exchanges generates more trading activity.
There are currently over 200 cryptocurrency exchanges, 21 decentralised exchanges and a handful of peer-to-peer (P2P) platforms.
There are many more exchanges currently in the works and set to launch in the near future, not to mention prime brokers such as SheeldMarket or Tagomi, also making inroads, increasing liquidity across exchanges and providing access to dark pools, among other features.
Finally, acceptance has played a significant role in boosting liquidity. To date, there are more than 370,000 merchants in 182 different countries accepting payments in cryptocurrencies, including giants such as Amazon, IBM, Microsoft, Apple’s App Store, PayPal and eBay.
13. How have your solutions, products, and services led to improved access to digital assets?
Timing crypto market moves is a hot topic, and for good reason. Many investors believe that crypto bull markets will run forever, right up until the price drops 50%, as it did last March. Not all market timing is created equal, though.
Avoiding sharp price drops and using smaller moves to your advantage requires powerful prediction and execution algorithms. Systematic market timing strategies hold potential to improve risk-adjusted portfolio performance.
The advantage lies mainly on the risk side – reduced drawdowns and lower volatility of returns. Our offering empowers wary institutional investors to get a foot in the door without the fear of a massive drop in value.
This method is no free lunch, however; returns can also be slightly hampered, especially during periods of long-term linear upward price trends. In such situations, long/short models will catch much of the uptrend, though not necessarily all of it.
That said, if the trend does reverse, systematic investing’s superior timing ability will serve the investor well in terms of returns, especially in a volatile market, which crypto undoubtedly continues to be in for the foreseeable future.
14. How do the new digital assets compare against their predecessors?
This new form of digital asset is set to see every industry in the economy transformed, from financial services to pharmaceuticals, media and manufacturing.
The following best describe their main features:
Expressive: rights and obligations can be directly encoded into the assets and automatically executed.
Controllable via cryptographic keys: cryptographic keys are required to access the assets and sign transactions to initiate asset transfers.
Compatible: digital assets can, barring artificial restrictions, move freely across the system in which they have been issued and interact with other digital assets that exist within the same boundaries.
15. Are we seeing the rise of a parallel universe to the regular digital asset space? What are your thoughts on this?
Calling it a parallel universe might be a bit of an overshoot, but we are certainly seeing the emergence of a new decentralised global system as traditional financial products struggle to hold sway over the market.
DeFi is an ecosystem of smart contract protocols and decentralised applications. Its main thrust is to maximise yields available to crypto-investors through, among other things, yield farming, which typically involves staking, borrowing, lending and following different trading strategies.
A significant number of DeFi platforms were launched this year and many products were built around them, covering derivatives, synthetics, flash loans, collateral, swaps, credit delegation.
DeFi allows everyone to design financial models in a much more accessible way than the conventional route. For anyone with a bit of practice in coding, it is possible to create an application on DeFi.
This has made it possible to create a myriad of innovative financial products. Since the second quarter, we have seen a sharp increase in transactions on DeFi products and more than one million wallet addresses connected to DeFi platforms, confirming the clear shift in the dynamics of the financial sector.
16. What are your growth projections for the next calendar year? How do you intend to achieve these projections?
AUM : Today we stand at around $5 million in AUM. We aim to close the year with M30$. We plan to achieve this by forging new connections with crypto exchanges and liquidity providers, many of which offer cap intros and asset management programmes.
2 Investment formats: AMC, or actively managed certificate, is a listed fund with an ISIN number that is easily accessible to investors through their broker or private bank. It is a structured product listed on the SIX. The other is an investment fund in Luxembourg that we will launch in April 2021.
A total of 10 professionals, including 2 PhDs in research.
17. What efforts is Dfi Labs currently involved in to help improve the adoption of digital assets? Do you have any secrets you’d like to spill?
Our business is to provide investment management services, so our input when it comes to mainstream adoption of cryptos as a medium of exchange is therefore somewhat limited.
Broadly speaking, however, we support the reshaping of the global financial system and act as a crypto-evangelist at events as well as with the national regulatory authority in France and with industry bodies such as Finance Innovation in France, bringing together some of the largest asset managers in France.
Much like the blockchain, we too hold nothing secret, apart from our investment models.
- If you had three wishes and a Genie that could make them come true. What would they be for the digital asset space?
Our hope for 2021 remains that this will be the year when the government gives full recognition to digital assets. We also look forward to other leading retailers accepting Bitcoin and other crypto payments.
Finally, we are optimistic that the bull market for BTC and especially ETH, as well as the entire DeFi space, will extend throughout 2021.