Dialogue with Dan Matuszewski, Partner at CMS Holdings: The Self-Cultivation of a Professional Crypto Trader

Recently, the official blog of FTX published an article interviewing Dan Matuszewski, a partner at CMS Holdings, reflecting on his years of experience in cryptocurrency trading, including his strengths and weaknesses, how to monitor market news and sentiment, etc. The following is a translation of the article by Chain Catcher:

Q: You have been in the crypto industry for a while; I would love to hear how bad your first impressions were?

A: At first, there were many structural issues just with buying BTC, let alone trading. The banking industry in the U.S. was hostile, mainly because the industry was intertwined with the Silk Road and dark web markets in the public image.

Before Silvergate started supporting the industry by joining multiple companies, many advantages were centered around being able to transfer funds through pipelines. To illustrate how strange things were at the time, many of my initial accounts were cash trades, which was obviously a barrier for many people.

So my first impression was, this industry is wild, and people are still trying to find ways to get into it; clearly, the demand behind this is much higher.

Q: This is an interesting point about functionality/operation suppressing crypto prices. I think even now, there are still many factors hindering traditional investors from investing. What are your thoughts on the segmentation between retail and institutional investors? How will it evolve?

A: I believe that the market is still predominantly retail in cryptocurrency trading. That’s why all the venture capital valuations are so high, as that’s precisely why institutional money is coming in.

But we see a lot of funds flowing into funds that can put trading capital into cryptocurrencies, and then ultimately they buy cryptocurrencies directly, but we might need a generation of compliance officers to retire first.

Q: How did you get into the crypto industry? Was it entirely theory-driven?

A: I was previously trading some VOL strategies at a hedge fund, which didn’t really progress much; it was okay, but the fund’s performance was mediocre, a bit like dying on the vine.

As part of trading, I had a very good understanding of market microstructure and the strategies we used to manipulate the order book and general ordering, so when I discovered that BitFloor paid a real maker/taker model, I thought I could make some money here and started putting in some capital.

It was just trading at first until I really figured out how it worked, and then I became more intertwined with the spirit of cryptocurrency. It was just another asset, with high liquidity and very low pricing efficiency, for many reasons, mainly around structural issues with banks.

Q: What achievement are you most proud of?

A: So far, the trade I am most proud of was in the first half of 2017 when cryptocurrencies were just starting to go crazy, ETH was exploding, and ICOs were booming. So Circle trade grew from $5 million a week in 2015-2016 to $1-1.5 million a day at the beginning of 2017.

We didn’t have a real risk system; we were manually keeping records in Google Sheets, and due to the massive influx of funds putting pressure on the system, all exchanges were misaligned, causing prices to spike significantly.

So what I did was actually handwrite all the information I received, and it was extensive. The trades we made were often far greater than our entire balance sheet.

What I am most proud of is, this was the only time I truly felt the price discovery mechanism of the asset was right where I was sitting, like four tables were deciding the pricing, and I was just moving around on Skype, often just pricing market assets over the phone, glancing at Coinbase, and then moving on. So far, this was the fastest and riskiest time I moved at my fingertips, and we made a lot of money.

Q: I remember during that period, you built quite a reputation for yourself and your circle. How much cryptocurrency did you move at your fingertips back then?

A: At the peak, our trading volume was roughly on par with BitStamp, and I think the largest trading week was $4 billion, which was at 2017 prices, with BTC and ETH volatility much higher than today.

Q: How would you describe the specific process?

A: We largely think of our liquidity trading as a function of relative value and historical pattern recognition. We look for trends in an industry and then buy tokens that align with it.

I often talk about the concept of "hot money," which I support; it’s constantly changing, and you just need to get close to where it’s going. When we look at the overall use of leverage through OI and funding rates, and determine how much curvature of forward deltas we should hold, we might get the most quantity.

Q: How does your trading evolve when trading risks increase?

A: Everything shifts to longer-term investments. We hold larger positions over a longer time frame because our balance sheet is overexposed, and the risk is greater over a longer time. So our illiquid book might have started with a target of 20%, and now it’s about 60%.

Q: What is your edge?

A: It might just be time, and because of time, I have a very high tolerance for market capacity, which aligns with a general belief that the overall size of the crypto market is continuously expanding over a larger time frame, leading me to be almost fully involved throughout the market's entire lifecycle. There’s also some basic pattern recognition, accompanied by the cyclical nature of positioning and direction of moves.

Q: How shocking was your first experience with the Mt. Gox incident? How does it compare to the bear market of 2018?

A: The Mt. Gox situation was worse because it held a significant share of the market. But in fact, everyone knew something bad was going to happen a year prior because Mt. Gox had long been banned from withdrawing dollars before it shut down.

The issue was that BTC was in a very ambiguous regulatory regime at the time, and it was unclear whether regulators would accept the GOX incident and close the door on the entire experiment. This was much more unknown than in 2018; in 2018, you might know it would be bad for a while, but everything would eventually be okay.

Q: What do you think are the differences between the crypto market and traditional markets?

A: Traditional markets are inefficient, and it’s hard to achieve above-average returns or funding. Most people trading traditional financial products are very disconnected from the asset classes they deal with, but the difference in the crypto market is that everyone has more passion for what they are trading.

Q: How do you monitor market news and sentiment?

A: I spend a lot of time on Telegram, I usually pin Binance and Bitmex liquidation information at the top of Telegram, and I use it to see if anything needs immediate attention. I’m talking to various market participants, teams we invest in, different traders, etc., all day long.

Q: Are there any weaknesses or biases you are aware of?

A: Yes, I don’t sell failing trades, even though I resent them, I will sell them at the first opportunity after they rise for no reason, so usually, I try to keep their occurrences to 0.

Q: What do you dislike most about the crypto market?

A: It lacks enough time for us, and it will never have trading hours like traditional markets; if the reverse were true, we would want to see the frenzy of bringing traditional markets into 24x7. But balancing family and constantly reacting to the market is a big issue. You can have people help you trade or handle company business, but there are downsides and risks to that.

Q: What is your strongest market belief right now?

A: I think we will continue to see acceptance of the industry from the outside and its own horizontal growth, which means more funds will be put in, and clearly, the trend here is favorable to me.

Additionally, I believe we will truly drive the scale and growth of on-chain derivatives exchanges and compete with CEXs, just like we have seen the growth of spot DEXs over the past year.

Q: Lastly, what advice would you give to newcomers in these markets?

A: Learning to manage risk is a very important thing.