The new crypto behemoth rising from the ashes of FTX and Alameda

Hull Invest

Founded in the midst of the 2018 bear market, Wintermute has grown from a small trading house with less than $1 million in revenue to a crypto giant with $1.5 billion in trading volume last year. The company’s road to wealth was paved with cautious trading strategies, wide spreads and thin margins, with a bit of luck in between.

In a recent Forbes profileWintermute founder and CEO Evgeny Gaevoy, described the company’s parabolic rise and the challenges it faced along the way.

DeFi Summer made Wintermute

After spending nine months raising $900,000 from angel investors, Gaevoy and his co-founders brought in less than $1 million in revenue in Wintermute’s first year of trading. Despite the low trading volume in 2019, the team at Wintermute spent a lot of time and resources establishing the arbitrage trading algorithm.

Little did the company know at the time that it was laying the groundwork for one of the most volatile years in the cryptocurrency market. On March 12, 2020, the pandemic devastated the US stock market and brought down the cryptocurrency industry. Aggressive price movements allowed Wintermute to take advantage of the arbitrage trading system and pocket $120,000 daily.

The profit-seeking company raised $2.8 million in July 2020. This was done in time for DeFi Summer.

The DeFi explosion proved to be the perfect foundation for Wintermute’s arbitrage, and the company began trading aggressively on Uniswap and other decentralized exchanges. Of course, the company didn’t have priority on the transaction, but it quickly realized that it could make the most profit on newly issued coins with low liquidity.

The company ended 2020 with over $53 million in revenue and quickly launched as a market maker for DEXs like dYdX. With its high liquidity and appetite for trading, Wintermute has negotiated contracts with token issuers like Optimism to act as the primary liquidity provider. They also started experimenting with his MEV trading on Ethereum, making more profit with arbitrage.

The company traded on 30 centralized exchanges and dozens of decentralized exchanges, buying and selling over 350 different tokens.

This has given Wintermute an unparalleled view of the market, allowing the company and its traders to find opportunities others have not.

Hunting for UST

In February 2021, Gaevoy noticed growing allegations surrounding Terra’s algorithmic stablecoin UST. With around $15 billion in circulation and a target on his back, his UST became Wintermute’s main focus.

When spring came, Wintermute developers spent a month integrating the trading system onto the Terra blockchain. They set up their servers to run Terra nodes and created brand new trading algorithms specifically for LUNA and UST. When the UST lost its peg for the first time on May 7, 2021, Wintermute traders were managing an ambitious arbitrage strategy in shifts.

According to Gaevoy, Wintermute bought the rapidly depegged UST and exchanged it for $1 worth of LUNA. After that, LUNA was quickly sold with profit margins of 10% to 15% on all trades. This is much higher than his 2% arbitrage margin that Wintermute was used to.

They traded over $250 million in UST down to $0.10, making tens of millions of dollars in profit. According to sources, Wintermute’s trading volume was so high that Do Kwon lent millions of dollars worth of his UST to the company to keep the market liquid.

Do Kwon’s attempts to save UST ultimately failed. And while it’s fair to say that Wintermute alone didn’t bring him down on Terra, it certainly didn’t help. His Forbes profile for Gaevoy and Wintermute states:

“Gaevoy didn’t set off Terra’s death spiral, but he lubricated the skids by being a major buyer of UST at a time when people were desperately trying to sell him.”

Terra play is a perfect example of Wintermute’s trading strategy. Trade different assets on different platforms. Ultimately, some of these bets will surely pay off. When asked about the secrets of the firm’s trading strategy, Gaevoy said:

“We are not the best at everything we do.”

According to Gaevoy, the company has made more than 1 billion transactions, all of which made only a small profit, adding a significant amount of money. In 2021, the company made his $1.05 billion in revenue and his $582 million profit. In addition, Wintermute paid shareholders his $35 million dividend and gave some employees millions in bonuses. Gaevoy received about $12 million in dividends and owned his third of the company.

Jeremy Liew, a partner at Lightspeed Ventures, said the company put itself in the right place, so “when the wave came, they came a long way.” Lightspeed is one of his Wintermute’s biggest investors, with an investment firm holding his 15% stake in the company.

Rising from the ashes of FTX

But unlike 2021, Wintermute’s 2022 was a more volatile year.

In September, the company was hacked for $160 million in its DeFi business. About 90 of Wintermute’s assets were hacked, and he was the only two whose notional value exceeded his $1 million.

Wintermute also lost $59 million it had locked on the exchange due to the FTX demise. The company quickly wrote off the amount, and Gaevoy said it believed it was completely gone. As of December, they have consolidated most of their funds into his three centralized exchanges (Binance, Coinbase and Kraken).

Gaevoy said its daily trading volume has fallen from $3 billion earlier this year to just $1 billion, down from $5 billion earlier this year. His earnings for the first nine months of the year were just $225 million. Wintermute probably won’t be profitable this year, Gaevoy said, but said it’s on a solid financial base.

With FTX and Alameda gone, Wintermute remains the largest market maker in cryptocurrency. With $400 million in stock and his $720 million in assets, the company can weather the current bear market.

The company’s relatively low trading volume has helped traders prepare for the next bull market. Gaevoy said:

“We don’t necessarily care about making the most of the moment, because that’s just a small part of a possible bull market.”

Another 2021, this time without its main competitor Alameda, Wintermute could make huge profits. Gaevoy also hopes to fill the hole left by FTX and launch a derivatives exchange for professional traders.

However, he used a much different approach to storing and managing client funds than FTX, spreading them across multiple external custodians.

“I knew they were a little reckless and made big bets, but frankly, I couldn’t imagine how much stupidity was involved in their trading and management decisions.”

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