• Bianca Chen

Exclusive interview with the co-founder of Altonomy - Ricky Li

Updated: Mar 18, 2019

The past few weeks have been a flurry for the Bitcoin space. The so-called Crypto Winter was as many investors predicted, what seems to be only a temporary phenomenon. Bitcoin has been thawing ever since. Amongst the rest of the first-generation crypto businesses that survived the recent gloomy days, Altonomy, a firm that provides liquidity solutions, trading advisories, and asset management services, predicts a promising future for blockchain technology. In an exclusive interview with Ricky Li, the co-founder of Altonomy, he uncovers the history and fundamental aspects of Altonomy, as well as personal insights into the rapidly changing crypto market and the dangerous factors that have overwhelming power over it.

Left: Ricky Li ; Right: Bianca Chen

Bianca: Before you joined the crypto world, what did you do? What attracted you to join this new and upcoming world?

Ricky: I was managing the energy futures contract for CME group. It was a funny story. My partner Bo and I knew each other for a long time. And then one day he was coming to New York to take a look at this market. So I started to take a look at it and found out that I should start out with 5 Ethereum, and trade between Binance and Huobi and people to manage the overcharge. This market is really inefficient and that's like the dream for traders. So that's the reason why I like to take a leap, left CME and joined, you know, the crypto world.

Bianca: What was your first step?

Ricky: I was managing the U.S. trading desk for FBG Capital, which is another crypto hedge fund in China. Bo, was the partner there, so he and I were together building their crypto trading desks. Philadelphia was FBG Capital's base back then from last year from some time in November last year until the end of April this year.

Bianca: How was the ecosystem at that moment?

Ricky: It was very different actually. Back then everything you know was as bullish as on the brink of being a bullish market. So a lot of new tokens got listed on the exchanges and pretty much all the tokens listed there generated multiple X in returns. It was a pretty heated and insane market. And also all these exchanges started emerging. I remember Binance and Huobi, Binance specifically was gaining traction in the market at an amazing speed. So yeah, it was a very nascent stage of the secondary market in crypto.

First of all Crypto is a new asset class. Pardon me I'm gonna start sounding like a grandpa. Stock. The stock was around 1800. Bond, junk bond, high youth bond it was the 1980s. And mortgage-backed security, 2000's. So this is opportunity pretty much for a generation. And if you compare the progress with the process of how the stock market and bank market matures over those years, crypto is at the very, very beginning. It's at the baby stage in terms of the timeframe right now. So if you put that into perspective, the difference between these two markets right now, Crypto lacks infrastructure, lacking pretty much everything in terms of secondary market, exchanges facilities and professional trading services like what we have here, and also the level of sophistication of the traders in the market are pretty much all at a very very nascent stage compared to the traditional financial market.

Bianca: Let's talk about infrastructure first. Which part do you think is still lacking in terms of infrastructure in the crypto world?

Ricky: Coming from CME, the first thing I want to point out is the exchanges. We have more than five thousand exchanges and probably more coming. Only a handful of them has a physical location and a physical server. All of them are booted on AWS which is a cloud server. Even Binance and Huobi are building on cloud computing. So without a sophisticated or physical location then the computing power and the transaction speed, the matching engine speed, all that is limited by the cloud computing infrastructure. They have these physical locations, physical location services and physical infrastructures. So, because of that, the liquidity of the market and the transactions speed is as at a very very nascent stage even for those well-known, very highly critically acclaimed crypto exchanges.

Bianca: Because the server is on the cloud, it has actually limited the liquidity of access to and of the market.

Ricky: Yeah, so if you compare, just putting into perspective CME or Nasdaq versus Binance. If we executed a trade in CME's colocation services, the measurement time is not going to be a microsecond, it's going to be milliseconds or sometimes even less than 50 milliseconds for a round trip. But if you executed orders say, putting order servers in Tokyo, AWS which is closer to the Binance server, then your round trip is around, I think, 50 milliseconds. So, it's not at the same level. In a nutshell, the transaction speed is not at the same sort of level. I think that's definitely going to mature later on. But right now crypto is in a very very nascent stage so nobody really cares that much. But for us as professional trading teams, those delays in execution trace matters tremendously for us.

Bianca: Interesting. You mentioned a secondary market. It's pretty new to the whole crypto world. The lifecycle of a token from the ICO then hits the exchange, is that when you guys will kick into the market.

Ricky: We're very early on in the ICO project. One aspect is that we pride ourselves in always be the partners and friends for these ICO insurers and project funders because frankly, those are all the technology enthusiasts who know pretty much nothing about finance. When they go launching the new ICO, their idea of ICO and the project's success stopped at a time when they should actually go exchange. When we engage them we actually engage them early on when they design the token economies. We will help to advise them on how many tokens to release and to be traded, as well as how much to unlock during different stages.

Bianca: Why is it important to calculate how many tokens to release on the first day and gradually later on?

Ricky: That leads to another aspect of the liquidity management. You want to be able to release enough market cap of tokens that a market can absorb, enough buyers to buy, enough sellers and net buyers, the sellers plus the new release. And that's where our expertise comes in, based on our analysis throughout different conditions. That’s pretty much how early on we engage with them. It first started to trade on Huobi, and then three weeks later on Binance, and then in Korea or a more Western market like Bitxtrix, Etherpheonix. The process does not stop there from the first day of trading. It's a journey that we're accompanying the projects together to go listen to different exchanges and to go and analyze the liquidity on the exchanges and be able to project how the token would do in the list of different exchanges. And that's where our expertise comes in because we're already trading on all the possible exchanges.

Bianca: Why is it so important for the secondary market?

Ricky: I like to compare the crypto world with the stock market. The size of the stock market and the primary market on the VC side is tiny compared to the trading world of the stock market. And the crypto, it's completely the opposite right now. Everybody is focused on the primary markets, not on the secondary market. But the gains that are on paper is not a real gain. For us as secondary market guys, it's actually when you cash it out into either BTC, ETH or U.S. dollars that you make the game. When in the bullish market when everybody's holding it, everybody's looking at it very cheerfully and joyfully because on paper they made a lot of gains. But on the bullish market especially now from February onwards, when people try to cash out that's where you see the impact of illiquidity and the impact on the portfolio. Which is the reason why we're partnering up with those guys, to help them out.

Bianca: If the market isn’t liquid enough, how can you guys or any firm help increase market liquidity?

Ricky: We source liquidity from everywhere. The token can be trading on, say, 10 different exchanges and the if the order comes in through our OTC access, our infrastructure will help us smart route all those orders with 10 different exchanges to get every possible liquidity in. And then that's where we're going to create that minimal market impact. While the market impacts are minimal, then more buyers and sellers are willing to transact. Which actually increases liquidity.

Bianca: Do you feel like in the crypto world we will see consolidation of exchanges? It sounds like now it's very inefficient. Everything is fragmented.

First of all fragmentation works great for us. So that's the reason why we are in this business. And I do think there will be, in the process, consolidation but definitely not right now. Because there are new ones coming as well. Five thousand is probably their underestimated number of exchanges right now and it's still coming based on the competition with other crypto hedge funds who've made a lot of different equity or token investments in different exchanges. I think we're still seeing another new wave of exchanges coming in.

Bianca: Why are hedge funds interested in bringing more exchanges to this world. What's so lucrative about opening or operating an exchange?

Ricky: Everybody wants to be the next Binance. The Binance Story was so appealing from October last year to pretty much Sybase's position on February this year. It only took a few months for them to be operating at last to making millions- even billions of dollars. The timeframe for investments is short. The most lucrative investments I would say is infrastructure level and at the infrastructure level, the most important part are exchanges. Exchange, custodian services. These are the two one conjures in terms of investment. That's why so many are looking at it and that's what initiated this whole campaign of investment into different type of exchanges and traditional ones like Binance and Huobi and then decentralized exchanges and then we'll have traded as mining exchanges for coin and all those different types of operating models that come into the market. But at some point consolidation is coming. If you look at CME, look at Nasdaq, it's going to keep acquiring those with smaller players along the way. But it took CME 20 years. Everything short of crypto but still not going to be a few months. It's going to be probably a year or two years away.

Bianca: Now we're kind of in the crypto winter, the trading volume is going down for many big players, as well. So in this kind of environment, do you still see people jumping into this market to open exchanges?

Ricky: Planning and running exchanges just takes about I would say at least four months. So, the ones we're seeing right now emerging in the market were the investments made around January, February. Those were the times when the market was very, very bullish. those are times when everyone is making bets on investment in exchanges. But right now, all of that are some cost. It's money already spent. They are either opening it up or writing it off.

Bianca: And also I'm curious because I've heard a lot of times that projects have to pay a lot of listing fees to the exchanges. Is that partially the reason why some of the hedge funds or investors, they are all so interested in opening their own exchanges to avoid certain fees to list them?

Ricky: Investment firms like to be with the ecosystem. The most important part of the ecosystem is the exchange because that's where people you actually can go to cash out to the last, basically, the last chain. For them, the listing fees are definitely one part. I want to comment on how much they charge, even though we know but, in the traditional world, CME didn't charge anything. It's part of the research and we can build it ourselves while Nasdaq cannot charge anything because otherwise SEC is going to come down on them. But in the crypto world, exchange is still in the dominant position. They charge millions of dollars for this thing and that's probably one of the most critical parts of the revenue stream. It still is right now as we’re speaking, even in the bearish market. Because you want to get on the liquid exchange just to get a better token performance. And in the bearish market at least not in the illiquid exchange is going to be a disaster. It can have a disastrous effect on the initial listing, on the price , which means that you have to pay more to get out more liquid exchanges. So the answer to your question is that, yes, they are still probably the most profitable part of the business.

Bianca: You came from a traditional financial background. Are you adopting the way you were doing business before into your new business in crypto?

Ricky: One part has never changed, the level of professionalism. The whole team was bringing together people of similar backgrounds. So, when one trades it's always with a Wall Street level of professionalism. But you definitely have to adapt a lot. First one is the 24-hour market. There's no stopping anymore. That's the reason why we have a New York and Singapore desk, you have to cover both time zones. And second of all the liquidity and trading patterns are way more different than the traditional market. The simple distinction is that the crypto world is mostly a retail-driven market. It's very much based on sentiment. One piece of news came out from SCC or Chairman Jay Clayton. He could be speaking about his breakfast but still, people are going to interpret it as positive or negative news and then the market gets shifted. But in the traditional world it's a lot more different. It's more stable. Oil prices never change based on anybody's comedies, more on supply and demand and projecting the actual rigs and drills and production numbers. The crypto world is not, the crypto world is more sentiment-driven. So for us coming from either the stock market or commodities market or bunk market rate has to be able to adjust to that. Adjust or permit to adjust our trading algorithms to be more based on the sentiment and technical terms instead of based on the actual fundamental supply-demand balance sheet, income reports, all that.

Bianca: You came from a traditional financial background. Are you adapting the way you were doing business before into your new business in crypto?

One part has never changed, the level of professionalism. The whole team was bringing in people of similar backgrounds. So, when trade it's always with a Wall Street level of professionalism.

Bianca: Do you think that crypto is more similar to commodities compared with bonds and equities?

Ricky: I think they are very, very similar to commodities. Everything in commodity, I would say, is supply and demand and of course, there is a story component but in crypto there is no stories component. When we trade we analyze the supply-demand as a fundamental. And of course, when coupled with the sentiment. But in the crypto world that's how we're looking at it. But for the other cryptocurrencies like Bitcoin, they are on their own. They're not actually looking similar to anything. It's another ecosystem they're trading. But for the ones that are new to the issue, the supply and demand still dominate any other aspect. It's very simple, oversupply always pushed the price. More demands coming in always push price rates. And we use the same sort of trading strategy and trading models but we have to adjust the parameters to reflect the tokens.

Bianca: I just read something from the financial regulatory agencies in New York State. They did a study of different exchanges and noticed that it's very popular to just do prop trading. Even coined-based. Something which is unimaginable in the traditional world. It would be hard to imagine Nasdaq doing the same thing that Binance is doing. So it looks like it's very common to have conflict interest going on in the crypto world. Would that be what you observe as well?

Ricky: I'm so glad he brought it up. I started looking at other exchanges like the ones you mention. The first thing I noticed that conflict interest is everywhere. You're not supposed to invest in your own exchange. The FTC would never allow CME to make investments and direct investment into the other changes or in the product as listed. With the SEC you know you can forget about it. If you actually try to go IPO and the day changes investing it is like definitely by definition intrinsic conflict interest there. And but that's actually less worrisome than prop trading because, if you're actually doing prop trading and you're also going to make changes. there's pretty much no way to guarantee that this prop trading desk does not have priority access. And or even worse. Are we even trading on the same order book? We could be on one order book. And its own prop desk could be trading on a totally different order book which has better flows that are hidden from the rest of the world. That's completely possible. The reason why we just only want to focus on trading is that we do not want any part of that doubt in our professionalism or conflict of interest comes in when we do sell-side trading. And the firm does not make any estimates, won't have any tokens investments in any sort of projects and we are not affiliated with any exchanges. We're a money maker for them but we are not affiliated with them or not take any sort of investment from them.

Bianca: Do you think this kind of practice will hurt retail investors or even institutional investors or people like you guys?

Ricky: For sure, given that all the assumptions are true. I think features and advantages over the others, then we're going to suffer because when we execute the trade we will not actually get a better price. The most vulnerable one is going to be retail investors. For us, we have algorithms to deal with it or sometimes bypass it or even cut the loss a little bit. But for retail investors, when they go ahead and log in the GUI and click trade, they have no idea what's happening behind the scenes. Even if they know, there's no way they can respond fast enough. It doesn't matter how fast you can click to compete with even us, let alone the actual people who have priority access.

Bianca: We have exchanged for the retail investor. Why do we also need the OTC market?

Ricky: If you want to buy one bitcoin. You can go to Coinbase or GDX, but if you buy 100, you might actually want to think about it, because it takes about 15 minutes to see on a screen trading it and there can be a lot of risks. But talking to us. Just like picking up the phone is with me say, Ricky, I want 1000 bitcoin, give me a quote right now. I usually respond to, say, within 20 seconds.

Bianca: How is the market split among investors like retail investors and the OTC market? How is the flow?

Ricky: The OTC market is way bigger than the ones trading on the exchanges. In the crypto market, nobody knows for sure how much volumes is on the OTC side. But we know for sure how much volume is on the exchange side. Based on our rough estimates, it's pretty much ten times or even larger than the ones here on exchange.

Bianca: Does that mean there are more institutional investors than retail investors?

Ricky: Yeah. Big holders. Institutional investors like BlackRock, the not all, depending on how you see institutional investors. Those are not institutional investors, they're just ones that happen to have a lot of stock or the ones want to buy or want to sell. To me, those do not qualify as intuitional investors.

Bianca: And what is blocking these institutional investors from entering this new market?

Ricky: Back to the original point: we lack infrastructure. I don't think they can be comfortable putting millions of dollars on the crypto exchanges that are operating offshore. Nobody knows where they are. Company data is centralized because they have their duty to their own investors. Second of all, it's a lack of custodian services. And those are the two, a sort of cliché in the market. But another part I think all people are ignoring is the lack of professional trading services. Until established firms like Goldman Sachs or Morgan Stanley start having their own sales opening for trading all the different various different tokens. Hopefully and then those guys will be more comfortable getting in on a position using a professional trading service.

Bianca: How far do you think are we away from the big guys coming in?

Ricky: We hear some rumors like other banks such as Morgan Stanley or Merrill Lynch, those guys are thinking about it, offering structure product based on the CME features. That's like baby steps towards trading spot market on the offshore crypto exchanges. I would say at least a year away. Then it means we have a year of time to grow.

Bianca: Your firm has offices in both New York and Singapore. Compared with the Asian world and the Western world or U.S. markets. What's are some differences? Where is the flow really come from? Where's the liquidity really?

Ricky: We definitely have an Asian presence. I think more than 60 percent of deal flows come from the OTC side, comes from the Asian side. That's including Singapore Korea Japan Hong Kong, those areas. Right now Southeast Asia is rising as well. About 20 or 30 percent come from the U.S. and 20 percent come from European countries. We see a huge difference between Asia and the U.S. side. Asian firms, they would tell you if they want to buy or sell first before we start quoting them. They know what they're doing and they know that where you are quoting me, I'm obligated to give them the two-way quotes. And another interesting story, about two weeks ago I was in Shanghai. We just landed, very very jet lagged. Bo and I just stayed in the hotel or just chatting. It was one Asian ICO founder told me this, oh ethereum is looking blink right now, it's 230 dollars. Should I sell something? I'm like, sure. He's like OK let's sell, put a limit order at our desk at 250. Price right now is 230, it's a very limited chance they're going to go up to 250. Are you sure you want to sell? He's said, yeah, putting 8000 Ethereum for us. I asked him, ‘”should you sell a little bit just hedge your risk right?” That's always I want to advise them. He said no I'm gonna hop on a plane in 15 minutes. And the second we hang up on the call, price starts to crash from 230 dollars about 180 dollars for ethereum. It was brutal. If we execute the order at 200, then we're run the risk of ruining our reputation or even though we know we're doing the responsible thing. But then of course, unfortunately, we cannot sell that. Of course, when he got off the plane an hour later, he complained. It’s hedging risk. That's the first priority when you trade, especially when you are retail investors.