Welcome to the interview with Mr. CK Zheng, Partner and CIO of ZX Squared Capital.

ZX Squared is a hedge fund aiming to significantly reduce the risk associated with crypto investments. They accomplish this by combining aspects of TradFi with digital assets. Join us as we discuss why cryptocurrencies are a risky investment, and how ZX Squared reduces the associated risks.

Hi Mr. Zheng. Thank you for your time. Please tell us about yourself and your professional experience. We’d also love to know your crypto story and how you helped build ZX Squared.

Hi! Thank you for having me on board. I am CK Zheng, the CIO of ZX Squared.

I started off my career trading in the interest rate derivatives at the Bank of America and Susquehanna International Group. After spending five years there, I moved to Morgan Stanley, where I was the executive director of risk management for over five years. Then, an opportunity with Credit Suisse came my way, and I spent the next 17 years of my career as the global head of valuation risk, managing a group of 150 people. I focused on assessing risk and value across private equities, mortgages, fixed income and equities derivatives.

I have a PhD in Finance from the University of Chicago, with a specialization in derivatives pricing. With such extensive experiences on Wall Street, I saw the emergence of cryptocurrencies as the beginning of a new era in finance.

However, I also observed how people are skeptical about this new class due to its extreme volatility and risks. It occurred to me that my years of experience with risk and valuation could come in handy in this emerging industry. I could also see how combining aspects of TradFi and digital assets could make crypto investing much less volatile with a better risk-adjusted return. ZX Squared was born thus.

Okay. Let’s talk about volatility. For the sake of new investors, can you tell us why the crypto market and digital assets are so volatile, and what factors affect their valuations?

Well, the crypto industry is volatile mainly because it’s a novelty. It involves some of the world’s latest and most recent asset classes that are very much in their infancy. Now, we must realize that it takes time for any new invention to make its way into the mainstream. Investors are still in the initial phases of discovery and value assessment of these new asset classes.

On the other hand, only 4% of the global population—that is, around 300 million people—participates in crypto markets currently. Because of this, even the slightest change in demand dynamics wreaks havoc on the market. Say [that] one fine morning, there’s some bad press around bitcoin and people start panic selling, sending prices down. But with mature assets like gold, where the ownership rates are high, scattered events of panic selling don’t affect the price as much.

Moreover, cryptocurrencies—by nature—aren’t under the control of any central governing authority that can regulate prices at will. So, with all of these factors combined, the crypto industry is volatile, and a playground for investors with higher risk appetites.

That’s a great insight. But is the crypto market then only meant for investors with high-risk appetites? If not, is there a way for risk-averse investors to enter the space?

As of now, yes. The crypto industry mostly caters to investors with high-risk appetites who are willing to accept steep highs and lows. Risk-averse investors looking for steady income growth steer clear of the crypto space, and are left out of the digital asset revolution.

There are, of course, many who want to dip their feet into the crypto market because of its revolutionary nature. But they are scared of its volatility. This is precisely why cryptocurrencies are far away from mainstream adoption. For crypto to break through to the masses, the industry needs to cater to risk-averse investors. I believe this is where ZX Squared enters the scene.

At ZX Squared, we take advantage of the crypto options market, combined with our view on the medium term market condition. This will lower entry barriers and help interested users jump [onto] the crypto bandwagon.

Wow! You seem to have a pretty ambitious vision with ZX Squared. Can you tell us more about your hedge fund and how you significantly reduce the risk for new investors?

Sure. Our hedge fund serves our investors who want to experience the digital asset revolution without its extreme volatility. We focus on giving our investors sustainable long-term returns with reduced risk exposure. To this end, we employ quantitative strategies with futures and options. We only invest in BTC and ETH, the most established digital assets. We can thus reduce the portfolio volatility from bitcoin’s 80-90% to about 30-40%, which is manageable and more comfortable for most investors.

During bull markets, we target to achieve 40-70% annual returns for our investors. And during market downturns, like the one we are currently experiencing, our fund focuses on substantially reducing losses and keeping investors afloat.

You previously spoke about bringing certain TradFi-native investment strategies to the crypto space. However, there is an overarching gap between the two financial systems. Is there a way to bridge this gap? And if so, what steps are being taken in this direction?

Today, TradFi and digital assets are two different financial systems operating on vastly different principles; therefore the gap. But the most promising path forward for the financial sector is a unified framework that brings these two distinct but complementary spheres together to boost investments and new technological developments.

We can achieve this by imbibing the best models and successful investment strategies of TradFi into digital assets. We are using BTC and ETH options and derivatives for digital assets to reduce the crypto volatility by half and to achieve 2 times of bitcoin Sharpe ratio in the long term. Given Bitcoin’s long-term Sharpe ratio is around 1.0, this shall be very attractive for new investors in this space.

Lastly, what advice would you like to give to investors who are eyeing this space, but are still on the fence because of its volatility?

Bitcoin was born out of the 2008 financial crisis as a digital gold and a super sovereign currency without boundary. Its characteristics include Scarcity, Portability, Recognizability, and Durability (SPRD). When US digital asset regulation is finalized (hopefully by next year), Bitcoin’s Recognizability will be further established.

Because the crypto industry is still in its infancy, it gives investors the chance to access budding projects and reap long-term benefits over an extended period of time. The Internet was in a similar position several decades ago, but those who got in early and endured the storm made immense gains.

Nevertheless, it’s crucial that new entrants steer clear of get-rich-quick schemes since they are mostly unsustainable, if not fraudulent. Getting in for the long haul is important to success in this domain. I’d also emphasize the need for investors to do their due diligence. Nothing beats scams better, in my opinion.

Finally, new investors must enter the industry through secure and risk-minimized platforms like ZX Squared. Generating profitable returns demands experience, and no one can do everything right in the first go. So, if you ask me, it’s always better to make good use of whatever help is available.