Lim Hui Jie Published on Wed, Jul 14, 2021

Trading in cryptocurrencies have gained popularity in recent years but few veteran investors can claim to know as much about cryptos as they do about the traditional stock market. Digital currencies are an intangible and deregulated entity, after all.

Not one central bank nor government can claim control over these digital currencies, which means that the prices of such assets are likely swayed by invisible hands beyond just market forces and policy stances.

The most popular cryptocurrency, arguably, is Bitcoin. This digital coin was launched in 2009 by an entity known under the pseudonym Satoshi Nakamoto. The founder’s real identity is unknown.

This mystery behind Nakamoto perhaps parallels the enigma that is cryptocurrency trading. Hayden Hughes, co-founder and CEO of crypto social trading start-up Alpha Impact, says 85% of Southeast Asian investors do not have any cryptocurrency holdings.

While this is a huge market to tap into, many are understandably hesitant to venture into the no holds barred landscape that is crypto trading.

A survey from the Organisation for Economic Co-operation and Development (OECD) found a high level of awareness of cryptocurrencies across Vietnam, Malaysia and the Philippines. However, only 30% of respondents across these three markets owned cryptocurrencies.

While awareness is high, with 80% of those surveyed being aware of cryptocurrencies, only 17% of all respondents in the main sample stated that they understand cryptocurrencies “very well”, versus 34% saying they understand “to some extent” and 29% saying “not very well.”

This means that many consumers are putting their money into assets about which they do not have a clear idea about.

Alpha Impact, which recently raised US$3.1 million ($4.2 million) from investors, has come up with a solution to help aspiring crypto investors ease into the trading landscape. It is building a platform for retail investors that will allow them to “derisk” their crypto experience by automatically following professional crypto traders, known as a “guru”.

In other words, when a guru makes a trade, the retail investor makes the same proportionate trade in their accounts. In a way, the professional trader acts like the lighthouse, or the Pied Piper.

Hughes reveals that the platform will be launched in July with three versions. The first version, which will be available immediately, does not automatically trade for the retail investor. Instead, it functions like an “information product” by merely sending notifications that a guru has traded.

The second version, besides the notification, will add a prompt to see if the retail investor would like to follow the trade. “For example, the person you’re following has sold half of their Etherum, [the notification will say] ‘Do you want to sell half of your Etherum?’” Hughes says.

“Maybe they [the guru] doesn’t sell, maybe they trade some Ethereum to go buy Litecoin with 10% of their portfolio, the retail investor will get a notification saying ‘Do you want to use 10% of your portfolio to buy Litecoin?’, it’s always matching on a proportional basis to what the top trader that they’re following is doing,” he adds.

The third version of the platform lets traders fully automate their trades in proportion to the guru’s trades, but retail investors can revert to manual control.

Credibility of ‘gurus’

Naturally, the first question that comes to mind is who are these gurus, how credible are they and how are they assessed?

Hughes says the gurus are based on his and co-founder Austin Chaird’s personal networks. Having been in the crypto scene since 2017, they have relationships with some of the top traders at proprietary trading firms, hedge funds, trading desks and high-frequency trading firms.

Because these professional traders are already actively trading, the goal of Alpha Impact was to “monetise this behaviour.” What Alpha Impact does is that by sharing a read-only application programming interface (API) key, the platform can see the guru’s trades, and can push the alerts out to the guru’s followers.

So if the follower chooses to follow a guru’s trade, Alpha Impact charges a transaction fee, which will be split between the guru and the company. How the split is decided depends on a few factors, such as “how successful they are” and “how engaging they are”, Hughes adds.

There is a very big “social” element in the platform. Just like what billions are doing on the social media platforms, the Alpha Impact gurus can not only share their trades but also images, text, strategies and philosophy as well.

There are two main criteria to be fulfilled for a guru to be onboarded, says Hughes. “Number one, do we know them and do we understand what they’re doing? Number two, do they really have a defensible strategy?” For example, Alpha Impact will look at the potential gurus and analyse their past trades, such as the points they make gains or losses, or when they exit a position and how long do they leave their positions open.

They will also look at what kind of assets were traded and for the winners, whether it was a lucky break for their portfolio or whether there is a solid rationale behind it. “It’s easy to be right in a bull market, but we really want to understand why the trader is doing what they’re doing, and what were the reasons that they made those decisions,” Hughes says.

With cryptocurrencies being notoriously volatile, what are the safeguards for the Alpha Impact clients who follow the gurus?

Firstly, Hughes says that the platform is not a custodial account, which means that customers never send money to the platform. “We give our customers the ability to find and follow a top trader, and we use our technology to execute trades, but the customer keeps funds in their own accounts so we never get access to their funds,” he adds.

Instead, customers continue to trade on their own coin exchanges, but a trade only API allows Alpha Impact to go through with the trade on the customer side. The key is a limited permission key for the sole purpose of executing transactions. This means that the platform cannot take money away, and only has permission to execute trades that the customer agrees to.

Umbrage Coin

Hughes is aware of the volatility of cryptocurrencies, especially in a market where anyone can create a coin (termed an “altcoin” or alternative coin) and list it on a coin exchange.

The major coins like Bitcoin and Etherum have a certain level of credibility, but like junk bonds in the conventional market, there are those that are termed ‘shitcoins’, which have varying levels of credibility and risk.

An example of one is known as Umbrage Coin, created after a notable Singaporean meme that made its rounds on social media after an outburst by Singapore Press Holdings’s CEO Ng Yat Chung to a reporter at a media briefing on May 6.

A check on its live chart reveals that the coin debuted on May 10, 11.04 pm at about US$0.04 per Umbrage Coin. Some 17 hours later, the price shot up to a high of US$14.03, before collapsing again to US$1.18 just three hours later.

As at May 28, Umbrage Coin traded at just US$0.05. The check also revealed that 99% of the coin is held by a single wallet, which means that if the owner of the wallet wanted to sell all of his or her Umbrage Coin, it would cause the price of Umbrage Coin to collapse as the owner cashes out.

Some shitcoins may even turn out to be scams. The scam operation often begins with the coin’s creator listing the coin and promoting the coin on social media, a process known as “shilling”. Once investors pile into the coin, the creator delists the coin and keeps the money. This scam is known as a “rug pull”.

Liquidity cushion

Alpha Impact only allows their investors that are following the guru to trade only if the counter has a volume of 25 million and above for its daily volume, which is deemed to be a sufficient liquidity cushion.

If the total order book of the follower and the guru exceeds 5% of the counter’s order book, the platform will stop the trades beyond that. So if the guru and 10 followers cross the 5% threshold, the eleventh follower will be stopped from making the trade, even though he or she may have agreed to it.

Hughes says as such, this limits trading to the top 75 coins, which have much more liquidity and are easier to enter and exit. He does acknowledge that as the platform shares fees with the gurus on a transaction fee basis, there is an incentive for the gurus to unnecessarily trade.

Therefore, the company has a few methodologies, such as looking at the volume of the guru vis-a-vis the volume of the average trader, as well as the volume of trading, to the amount of return on investment (ROI) that is produced. Should there be an anomaly, it will trigger a manual review of the guru by the company.

Ultimately, Alpha Impact’s platform, according to Hughes, is to help people who don’t have time to pore over every development in the crypto world — such as wallet upgrades, the creation of a new token, or a split in the development roadmap of a token — to safely invest in cryptocurrencies by following a top trader, one that has ostensibly, done their research, along with the safeguards that the platform has.

To him, equities are an “extremely efficient market”, where news of developments and their impact is quickly disseminated and broken down by news outlets. “In the equities world, the development would be written up in Bloomberg and it would contain everything, like the level of detail in the financial sector on the minutiae of, say, missing earnings per share estimates by 1%.”

But it is not the case in the crypto world, where any news is hard to follow and eventually digest. He adds: “There’s this massive inefficiency that gives some people who have that information, the ability to make vast sums of money, while everyone else is sitting on the outside, not understanding crypto.”