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More than three months after the contagious collapse of the FTX exchange, the cryptocurrency industry is still reeling. Folkvang, a market-neutral, Singapore-based trading firm is still going despite suffering a major blow during November’s crash.

“Our equity was halved, so we lost a lot of the gains we made in 2021,” Folkvang founder Mike van Rossum said in an interview with CoinDesk. “This is the risk, right? This is the risk of the game. I guess we’re happy we’re still standing.”

Founded in January 2020 by a team of seasoned crypto quant traders, Folkvang rose to prominence across all major exchanges. For instance, it edged toward the top of FTX’s volume and profit leaderboard in 2022. Folkvang’s emergence on FTX was expected after Alameda Research, the trading firm that played a central role in FTX’s demise, invested in Folkvang and Folkvang returned the favor by investing in FTX. (Sam Bankman-Fried owned both FTX and Alameda.)

Speaking on a recent video call from a high-rise Singapore office building, Folkvang’s van Rossum provided a candid account of the “messy” situation in the aftermath of FTX’s collapse.

“It was a tough pill to swallow,” van Rossum said after revealing that half of the company’s equity was tied up on FTX. “We were able to survive, but as we were quite active borrowers we had to pay the lenders back out of pocket.”

At its peak in 2021 Folkvang managed around $400 million in assets, including equity and loans. And even though it has a lean team of fewer than 10 quant traders, it once did $8 billion of volume during a single trading session during that bull market.

Folkvang acts solely as a proprietary high-frequency trading firm. It doesn’t offer any other services as an over-the-counter desk or do market-maker token deals. It relies on a blend of algorithmic strategies that includes arbitrage trading, yield farming and market making.

Strategy shift

“We learned a hard lesson with FTX,” van Rossum continued. “We found that risk is real. We thought it could never really happen in the way it did, so we are a lot more risk averse now.”

He added: “We just trade our own balance sheet. We aren’t really borrowing at all. The risk is just too big.”

As Folkvang is a market-neutral trading firm, it avoids directional risk and profits by providing liquidity and trading off negative and positive funding rates against each other. It is the antithesis of long-only shops like Three Arrows Capital, which spectacularly collapsed in a cascade of liquidations last year as the market tumbled.

Although directional risk for Folkvang is minimal, the fall of FTX has intensified the fears of counterparty risk. Holding assets on an exchange has always been frowned upon by bitcoin (BTC) maximalists, but for a trading firm like Folkvang it’s unavoidable. Arbitrage trading involves buying an asset for a certain price on an exchange and selling it immediately for a higher price on another; this requires active capital across multiple centralized venues.

When asked where Folkvang trades now that FTX is defunct, van Rossum replied: “Binance is the biggest, but I don’t think it’s because of trust.”

He continued: “We still have a company. We have an office. We have a team of people. We still have to pay the bills. So Binance offers a good risk/reward ratio, but the risk is still there.”

Hopeful of FTX resolution

After losing around 50% of its trading equity on FTX, Folkvang remains confident that a portion of the funds will be returned, even if it takes between five to eight years.

“We’re definitely engaging with lawyers,” he said. “We’re engaging with the bankruptcy people, but it’s hard to do something here as the situation is complicated.”

Alameda “invested in us so they’re on our cap table and we invested in FTX, so it’s all intermixed,” he said. “And then we had our money there, so it’s a very messy situation.”

Folkvang finds itself as a redacted entity on FTX’s top 50 creditors list, with individual creditors at the top end of the list being owed as much as $226 million.

“This will be a long process,” van Rossum added. “We have mentally written it off to zero. We aren’t thinking we’re going to be getting back X or Y. Mentally, it’s written off but we are hopeful that we will get something. But it will take many, many, many years.”

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