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ResearchAsk Titan Anything - Crypto in the wake of FTX

Ask Titan Anything - Crypto in the wake of FTX

Nov 15, 2022

The fallout from the collapse of FTX and Alameda Research has shocked the crypto ecosystem once again. We know how important it is to be transparent, especially in times of severe market fragility. Below are some of most common client questions we have received over the past week.

How does Titan custody crypto assets?

Titan uses custodial services provided by our custodian partner Apex and its subsidiary, Apex Crypto. Apex Crypto does not have any direct exposure to FTX, Alameda or FTT. Apex Crypto has never had a direct relationship with FTX or Alameda and does not offer FTT as a tradable token on the Apex Crypto platform.

Apex Crypto is in close communication with all liquidity providers, custodians, and key regulatory stakeholders to ensure information is flowing through in real time. As a licensed money services business, money transmitter and the holder of a NY Bitlicense, regulatory oversight and compliance is of the utmost importance to Apex Crypto.

Apex Crypto carries out its custodial services through multiple regulated custody partners, none of which have any material direct exposure to FTX or Alameda. Furthermore, these entities are not able to move, encumber, or pool client funds without specific client direction. Apex Crypto does not hold any customer fiat currency – those funds are held in a customer's brokerage account at Apex Clearing Corporation and are available for withdrawal at any time. 

Apex Crypto has never engaged in lending activity, and they do not do anything with customer funds unless a customer specifically directs Apex to do so. Most importantly, Apex Crypto does not trade through exchanges, and does not store anything on exchanges.

Can you describe the investment philosophy for crypto investments?

At Titan Crypto, our Investment Team conducts deep fundamental and quantitative research to identify what we believe to be the highest quality cryptoassets for the next 3-5+ years. We then construct a concentrated yet balanced portfolio of these cryptoassets with strict risk controls to screen out cryptoassets which we believe entail outsized risks around custody, liquidity, regulatory, and other concerns.

The crypto space is rife with speculation across cryptoassets with risks such as questionable fundamental utility, minimal adoption, unsustainable business models, and low liquidity, to name a few. Our Investment Team aims to separate the wheat from the chaff as a first filter before a cryptoasset can enter the universe of public liquid tokens that Titan may consider investing in.

The Crypto portfolio is monitored daily and updated by the Portfolio Manager and Investment Team based on the evolution of each cryptoasset’s utility, adoption, and price action. This includes regular rebalancing and tactical trading during periods of excess volatility to attempt to maximize reward/risk.

We routinely monitor event-driven catalysts, growth metrics, news flow, and other fundamental drivers, and actively re-size positions in accordance to conviction level and assessment of our original investment thesis. This rebalancing / re-sizing occurs opportunistically based on the aforementioned drivers.

How is Titan’s approach different from peers?

1. We don’t use leverage

At Titan, we understand that cryptocurrency is still very much a volatile asset class – and that’s why we don’t use leverage. Ever. This means we don’t have a liquidation price where we are “forced” to sell any of our holdings. All our investments have a long-term horizon, and we are comfortable holding all of our investments for the next 5-10 years.

This is in stark contrast to many other crypto entities out there that use leverage frequently in an effort to use their capital assets more “efficiently” ie. to generate more “yield”. 

It could be a crypto fund using leverage to margin trade long/short positions, or a fund posting collateral to borrow more assets to trade with (i.e. Three Arrows Capital)...

It could be a crypto exchange using their customer assets (ie. not their own money) to conduct certain financial activities/engineering that expose them to market exposure or liquidity risks (FTX)...

It could be a crypto lender that gives out undercollateralized loans to borrowers without doing proper risk management or proper due diligence on its counterparty (BlockFi, Voyager)...

With Titan, you can be rest assured that we don’t participate in any of these activities. We do not use your assets to lend, yield-farm, post as collateral to borrow money, and so on.

2. We have strict risk controls to screen out cryptoassets which we believe entail outsized risks around custody, liquidity, regulatory, and other concerns.

In addition to our deep fundamental research to identify what we believe to be the highest quality and most durable cryptoassets, we also apply screening filters to ensure that every cryptoasset we invest in has sufficient market depth and liquidity, adequate trading volumes, and is listed on multiple legitimate venues (to minimize counterparty risks). We also don’t hold wrapped or pegged assets which may be subject to peg risks. Furthermore, our crypto custody partner, Apex Crypto, conducts an additional layer of its own reviews of custody, liquidity, and regulatory risks associated with tokens it supports on its platform.

3. We don’t engage in activities that make our cryptoassets less liquid such as staking with lock-up periods, DeFi yield-farming, etc.

“Staking” has become a popular term in crypto in recent times – a means to generate additional yields on your cryptoassets. Staking can take shape in many forms. Many proof-of-stake blockchains allow users to stake their tokens directly in their wallets to help secure the networks in return for yields, subject to certain lock-up periods. Many crypto exchanges also offer staking services, subject to the same lock-up periods. Staking may also refer to locking up your tokens in certain DeFi applications. 

Because Titan Crypto is a 100% liquid portfolio, we don’t engage in any of these activities and forgo potential additional yields. We want to make sure that if anything goes wrong, we can quickly exit and are able to safeguard our assets at all times. 

Although there are solutions such as the liquid staking dapps like Lido Finance or Rocket Pool that attempt to remove the drawback of lock-up periods, they could still subject the holders to peg risks, or liquidity risks (as these staked assets don’t have the same market depth as the underlying assets).

We understand staking is a crucial part of being a crypto investor, and we aim to address all kinds of needs of crypto investing. If and when we may launch staking services on our platform in the future, it is likely that it will be offered as a wholly separate product from Titan Crypto.

This view extends to other forms of yield-generating activities in crypto, including DeFi yield-farming/liquidity providing, stablecoin yield-farming, and so on. Although these activities don’t necessarily have the drawback of lock-up periods, they bring additional risks in terms of impermanent loss risks, peg risks, smart contract risks, and so on. We rather forgo a little bit of yields to ensure your assets are liquid at all times.


The last several days have been historic - the size and magnitude of the FTX fallout has been far reaching and we have been working around the clock to make sure that your capital is well positioned for long term growth.  You can find a deep dive into the events that led to the FTX fallout here and read an update on how our team has navigated these changes here

We will be out with a full overview in the coming weeks discussing our strategy, the impacts of the FTX collapse and potential paths forward for the crypto ecosystem. In the meantime, please reach out to our team if you have any questions - we’re more than happy to assist.


Disclosures:

Cryptocurrency advisory services are provided by Titan Global Capital Management USA LLC. Cryptocurrency trading is provided by Apex Crypto LLC. Apex Crypto is not a registered broker-dealer or a member of SIPC or FINRA. Cryptocurrencies are not securities and are not FDIC or SIPC insured. Apex Crypto is licensed to engage in virtual currency business activity by the New York State Department of Financial Services. Cryptocurrency execution and custody services are provided by Apex Crypto LLC (NMLS ID 1828849) through a software licensing agreement between Apex Crypto LLC and Titan Global Technologies LLC. Please ensure that you fully understand the risks involved before trading: apexcrypto.com/legal.

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