"The Crypto system is the largest arms race in decades" - Steven Hatzakis

Today we open a new series of interviews with some of the most followed traders of the crypto community. We’ll start with Steven Hatzakis (@shatzakis) is the Global Director of Research, Forex & Crypto for ForexBrokers.com, a Reink Media Group brand. Steven is an active fin-tech and crypto industry researcher and advises blockchain companies at the board level. He has authored over 1,000 published articles about the online finance industry. Over the past 20 years, Steven has held numerous positions within the international forex markets and has spoken at industry events around the world. He is a licensed Commodity Trading Advisor (CTA)  in the US and holds a series III license.

You are a forex trader since 1998. When did you join the Cryptocurrencies?

I only first wrote about Bitcoin arbitrage and crypto market inefficiencies in 2013 on Finance Magnates and also mined bitcoin that year – albeit very little using a CPU. I wrote that article about arbitrage as what was happening in crypto reminded me of the early days of forex and the pronounced scalping opportunities that existed before the FX markets became faster and more efficient. The mining I did in 2013 felt more like a novelty or like experimenting with new tech for fun, which is something that I often do as an early adopter (i.e. I did a forex trade once from a mobile android wristwatch back in 2012 - which I ordered from China - before Android watches became commonplace).

When did you buy your first cryptocurrency?

Crypto markets remind me of the early days of forex when FX markets where less efficient and would overreact to news data 

I didn’t purchase crypto (Ether) until June 2017 when I started to witness an entirely new industry emerging in what can be described as the latest wave of awareness regarding the newly formed asset class, and the deeper themes about public blockchain networks and their potential for profound socio-economic impact in the global economy.

You said you mined bitcoin in 2013 but did not buy any crypto until June 2017. Why did you wait so long?

We were writing about cryptocurrencies often but in 2013 I hadn't yet fully understood the deeper themes behind why cryptocurrencies like bitcoin are revolutionary due to their inherent censorship resistant qualities as there is no single actor or centralized authority in decentralized public blockchains, among other potential positive qualities. I also didn't understand at the time the extremely strong (military grade) security provided by cryptography and modern encryption algorithms used by cryptocurrencies like bitcoin.

So you decided to spend time researching on the security topic before jumping in?

Obtaining good data from the right sources is still a challenge for many

Curious about cryptography and the security offered by modern encryption algorithms I started to research their potential current benefits as well as future limitations (i.e. feasibility of key collisions and risks of quantum computers cracking private keys), and the steps involved for private/public keys pair derivation including sourcing initial entropy used to seed bitcoin public keys and the use of mnemonics and how they map to the initial seed.

I was also interested in the importance of cryptographically secure pseudo-random number generators (CSPRNGs) to help ensure private keys are only known to their creator. I feel many confuse the risks of private key theft with a hacker guessing a private key, which are two very different risks that are often lumped together, the former being most prevalent, while no one has yet been known to crack encryption algorithms that use sufficiently long enough keys (i.e. >128 bits). And the same goes for hash functions and their use in Merkle trees which are an integral part of blockchain structures.

How important is this knowledge for the crypto trader?

I believe these blockchain 101 fundamentals should be at the start of any crypto investor’s journey – despite the complexity and extra time required to learn these highly complex financial instruments.

Besides Forex, do you trade other markets?

For my own account, I’ve been trading stocks since 1999 and have traded options on commodity futures and securities, and consider crypto assets to be one of the most complex financial instruments, as they represent an electronic form of a bearer asset, like a container that you can put any type of value into.

What differences do you see between the crypto market and traditional markets?

I believe these blockchain 101 fundamentals should be at the start of any crypto investor’s journey

Crypto markets remind me of the early days of forex when FX markets where less efficient and would overreact to news data, such as in the 90s when a central bank could intervene with a $100m position and make the FX market move thousands of pips, compared to today where a trader doing the same thing has virtually no impact on the broader FX market. Forex markets used to sustain trends for months on end various currency pairs, whereas today those trends are fleeting so a given strategy is short-lived. Therefore, while crypto markets might have numerous trends and information asymmetries creating opportunities for traders, those retail traders are competing with institutional traders and market makers as more players enter the space.

Compared to Forex, how difficult is it for a trader to get good data to trade cryptos?

Obtaining fundamental news about a specific crypto asset can be difficult as there is no standardized reporting requirement, compared to currencies where a country will disseminate economic data from one place at one specific time, something that makes the challenge harder. I think sites like FXStreet are doing a great job aggregating price data and headlines from social media and related channels and providing various tools and education.

While I do expect research tools to improve, obtaining good data from the right sources is still a challenge for many – as those who disseminate data could be incentivized in a biased manner to do so, such as insiders on Twitter or those trying to manipulate the market prices artificially.

Do you expect crypto markets to become more efficient one day?

I do, the only difference is that liquidity will always be limited and fragmented due to the nature of the limited supply of crypto assets, so I don’t think volatility will go away anytime soon.  My takeaway is that when you see news about crypto, you must think whether the market is going to react one way or another as it doesn’t always happen right away, whereas in other markets you usually see the reaction immediately as the news breaks.

When trading cryptos, do you prioritize markets news or price action?

Information is power, and since the price is a lagging indicator, following the information makes more sense as that should help show the path to where the value is going which should eventually be reflected in the price

Prices can be a major distraction for both the media and investors. I’ve learned to become more detached from the short-term prices and focus more on the longer-term underlying development of the industry and the immediate-term microstructure challenges which are so highly dynamic – that I can say they move even faster than prices do (but you don’t often hear about those topics on the news as they can be more technical in nature).

Staying up to speed on industry developments is not easy, and you often hear that one day in crypto is like a week or longer compared to other industries, as the speed of development is extremely fast. Therefore, I think the best thing the world can do is dive deep into the technical side of crypto as that will help fuel education and the importance of cybersecurity in safeguarding and understanding the risks with crypto assets.

What would be your advice for the long-term crypto trader?

Personally, I think this is the future, so I am not in it for a short-term gain, but that doesn’t mean I won’t take some profit off the table if needed. My point is, if you are looking for a 1000x return because you expect trillions of dollars to eventually enter a sector, then a 10x return doesn’t sound that interesting anymore, which is how venture capitalists think. Crypto assets are like the democratization of venture capital investing, as networks like bitcoin are public and not reserved just for elite investors. Yet this also means many projects will fail. Knowing which assets will be broadly adopted is very difficult, as adoption does drive price, but doesn’t also mean there is an underlying utility. For crypto assets to succeed long term, you need both adoption and usefulness for the asset, whether it is a distributed application or payment currency or store of value or other token classification. Therefore, I think diversification is important and appropriate position sizing, even if a percentage of a portfolio is dedicated to more active trading. Markets are used to looking at prices but crypto assets don’t behave like traditional assets such as stocks, they have been described more to behave like commodities but I don’t think that is fully accurate either. Bottom-line, information is power, and since the price is a lagging indicator, following the information makes more sense as that should help show the path to where the value is going which should eventually be reflected in the price.

Do you track any measures of adoption and usefulness?

I don’t think volatility will go away anytime soon

Yes, adoption comes in waves and first you need the infrastructure to support it, right now it is still very early but much of the infrastructure is still being built not just for institutional investors but also solutions that aim to make it more user-friendly for non-technical users. Many steps in the usual customer journey can be highly complex but I expect that soon more solutions will emerge for everyday retail consumers who will use them at checkout like when swiping their cards or making other payments and related transactions. Otherwise, it is not so easy to track the number of users as one user can have numerous wallets, whereas tracking transactions is more straightforward as that data is public, and any data that exchanges and brokers release regarding their clients and any trading volumes can also be an indication, in addition to research reports from respected sources.

Do you consider Crypto markets to be suitable for short-term trading?

I think it depends entirely on the risk tolerance of the trader - as risk is relative not only to the reward being sought but to the objectives of the individual and their investment thesis and overall strategy. Otherwise, short-term trading is generally more speculative than longer-term holdings, as the trader might just be looking for gains and not care about the underlying project fundamentals. On that basis, crypto markets can be suitable for day traders who meet the highest thresholds of potential risk tolerance, as markets can abruptly gap or become illiquid, among other tangible and intangible risks that may exist (i.e. potential soft fork or hard fork).

On a scale from 1 to 10, how much do you think technical analysis applies to cryptos?

I think it depends on the length of data available. For example, if there are at least 18 months of data, that would carry more weight when applying technical analysis than an asset with just 60 days of price history. For established cryptos like Bitcoin and Ethereum that have been around for years, I would say that technical analysis holds just as much weight as any other asset class, and depending on your belief in the efficient market hypothesis. I’m a fan of the strong version so I would say 10 when there is sufficient history.

Are there any cryptocurrencies that adhere to technical analysis more than others?

For established cryptos like Bitcoin and Ethereum that have been around for years, I would say that technical analysis holds just as much weight as any other asset class

I think this depends on the timeframe, because if you have many traders looking at the same levels and timeframes and reacting in similar ways on those time frames (i.e. 15 min chart) this can exacerbate the price action on those time scales, and it also depends on the number of venues that a crypto asset is traded on and the number of market makers that might have a mandate to buy and sell the asset across a specific price range (i.e. a token traded on only one venue may be more sensitive to trends such as a triangle formation, or another pattern).

Are there any days or hours that you prefer to trade cryptos at?

I think crypto markets are interesting to look at over the weekend when the rest of the global financial markets are closed, and when some traders may have extra time required to go through often complex steps to move their assets from cold storage onto an exchange for trading and then withdrawing them afterwards. Otherwise, I don’t have a personal preference as it can also depend on news events and related developments as they unfold throughout the week.

This concludes the first part of our interview. In the second part, we will discuss the current state of the cryptocurrency markets and what Steven expects for the future. Read it now!