Earlier this year, I came across a research paper that could make one think for days. exist"Who is on the other side? Who is on the other side?In the article, BlueMountain Capital Management analyst and well-known author Michael J. Mobsen (Michael J. Mauboussinsecondary title

all because of inefficiency

The concept of alpha in financial markets is related to the principle of generating excess returns, that is, exceeding the average market index. This is due to the fact that most financial markets are reasonably efficient and there are some indices that accurately reflect the performance of asset classes. The entire crypto world is the opposite. Another way to think about alpha is about exploiting inefficiencies in an often efficient market.

The concept of efficiency comes from physics and explains the relationship between the energy required for production and the result itself. In financial markets, the term efficiency refers to the relationship between information and asset prices. The Rosetta Stone of efficient financial markets is the famous and oft-revisited Efficient Market Hypothesis (EMH), formulated by Nobel Laureate Eugene Fama in his 1962 doctoral dissertation. EMH states that stock prices reflect all known relevant information and are always traded at fair value. If a stock can't trade above or below fair value, investors can never buy at a discount or sell at a premium. Therefore, on a risk-adjusted basis"beat the market"is impossible. Since its publication, the Efficient Market Hypothesis has become one of the most controversial theories in the financial market, with many supporters and opponents.

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traditional source of alpha

In his thesis, Professor Maubsen argues that there are four basic sources of alpha.

• Behavior: Behavioral inefficiency exists when the actions of an investor, or more likely a group of investors, cause price and value to diverge.

• information. Information inefficiency occurs when some market participants have different information, and this asymmetry can be exploited to trade profitably.

• analytical. Analytical inefficiencies arise when all players have the same or very similar information that one investor can analyze better than others.

• technical. Technical inefficiencies arise when some market participants have to buy or sell securities for reasons unrelated to fundamental value, such as laws, regulations, or internal policies, which can create a gap between price and value. dislocation.

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A New Source of Alpha for Crypto Assets

In the context of encrypted assets, the four sources of Alpha in Professor Maubsen's theory stand out, but they cannot completely describe the inefficiency of this field. In my opinion, there are two new sources of alpha relevant to the current crypto market: new product alpha and protocol alpha.

The new product alpha factor is related to the financial architecture of the crypto market, as well as the impact of a currently launched new product or asset in an inefficient market. In traditional capital markets, a new IPO or new bond issue rarely disrupts the overall market. There have been isolated examples, such as Facebook's failed IPO that sparked months of bearish sentiment on tech stocks, but these are extremely rare, as built-in efficiencies in the broader market tend to compensate for any anomalies over time. But the opposite phenomenon happened in the crypto market. As we transition from inefficient markets to"less efficient"The launch of new products, such as new derivatives or the entry of new institutional investors, can generate incredible alpha returns.

The second factor has to do with cryptoassets running on decentralized blockchain networks whose behavior is governed by different protocols. The actions of these protocols can generate associated alpha returns. For example, the upcoming halving event in the Bitcoin network has been expected to be an event that can affect the price of the cryptocurrency and effectively move the market. While this information is readily available, implementing effective strategies to exploit it comes at a cost. Similar effects often occur when a protocol mines or burns a specific portion of tokens to affect the circulating supply.

Cryptoassets are very unique in many ways and have the potential to generate alpha in many unique ways. The introduction of new products and the network dynamics of the underlying blockchain are two factors that complement the thesis laid out by Professor Morrison, but there is a good chance that this theory will change as the market develops.