In this article we are going to explore the market of professional crypto trading: define its boundaries, structure, and key characteristics, compare it to traditional asset classes trading and analyze how it is likely to evolve going forward.

Professional trading of cryptocurrencies is a part of a much larger market of investing in publicly traded assets or claims on assets. This large market can be broken down into investing in traditional public markets (stocks, futures, options, etc.) and the crypto markets (cryptocurrencies, tokens, etc.).

Here is a diagram¹ illustrating the “universe” of public markets investing: both traditional and crypto.

Publicly traded assets investment universe

The first divide here is between the active and passive investment management. It arises from the cornerstone theoretical question of whether the financial markets are efficient or not.

If, as was argued by the Nobel prize winner Eugene Fama² in 1970, markets indeed are efficient, meaning that the asset prices always incorporate and reflect all available information, then one cannot “beat the market” by actively selecting under- or overpriced assets to buy or sell.

In this case, one’s goals should be diversification (to diversify away the risk of the individual assets), asset allocation (to achieve the desired risk/return profile), and trading costs minimization (through low turnover). For most investors, it’d mean investing in a broad-market index (index fund, to be precise)³.

However, empirical evidence points to the fact that the financial markets are often far from efficient. Lack of liquidity, market fragmentation, incomplete information, and a number of behavioral factors can and regularly do create market inefficiencies. In fact, Eugene Fama himself, by the time he got his Nobel prize in 2013 for his 1970s work on efficient markets, has basically proven their inefficiency⁴.

Market inefficiencies are even more pronounced in the nascent crypto markets where they can often be spotted with a naked eye, creating ample opportunities for the active investment strategies to earn healthy risk-adjusted returns.

The key divide within the active investment management category is between the investing per se and trading or speculation.

“Investing is buying an asset, or claim on an asset, based on an estimate of the fundamental value of the underlying asset. The investor buys the asset because he feels the price is below the asset’s value or that the price will increase because the asset’s value is increasing at a rate that will produce an attractive return. The value is determined by the cash flows the asset will provide its owners over the asset’s useful life”⁵. Investing necessarily deals with the longer time horizons (months to years) to realize its returns.

Trading or speculating (we believe these terms should be used interchangeably) “is buying or selling an asset based solely on expected price changes without regard to either the asset’s fundamental value or changes in that value”⁶.

Trading/speculating, in turn, could be either professional or casual/amateur. It is the proliferation of the latter that is responsible for the often-negative connotation of the word “speculation”.

Professional traders “have extensive experience, have developed key insights and judgment, and are systematic and disciplined in their strategies”⁷. It means that professional traders clearly understand the edge they have, the reasons they have it, and the conditions that are necessary to systematically realize it. Professional trading is dealing with short time horizons — from microseconds to days and weeks, very rarely months.

Two gravest mistakes many inexperienced participants in financial markets make are speculating while thinking that they are investing and considering themselves professional traders while clearly lacking the expertise and discipline to be one.

At CRYPTTO, we concentrate on the intraday, ultra-short-term trading. Speed is our home turf, we have been perfecting our strategies and technology trading US equities, options, and futures for over a decade, and everything we do is optimized for speed by design. We fall into the professional trading bucket — behind our every strategy is a clear trading thesis that is extensively tested before going into production, and then is re-tested and optimized again before scaling. We manage expected profitability and risk of our strategies tightly, we do not rely on the market’s mercy as our strategies do not make directional bets.