In 2023, Protos interviewed Fabio Frontini, the fund manager of Malta-based Heka Funds. Heka is one of the biggest Tether whales, and with its Elysium Global Arbitrage Fund, it arbitrages tether (USDT) by buying and selling around its intended $1 peg.
Protos recently interviewed Frontini again, this time about the latest developments in crypto, including the effect of MicroStrategy’s (MSTR) historic acquisition spree of 447,470 bitcoins (BTC) – 2.2% of the world’s circulating supply.
We began by asking Frontini whether he thinks MicroStrategy poses a structural risk to the BTC market.
“That is a very good question!” he said. “We are trying to dig into MicroStrategy to understand if an arbitrage is possible given the MSTR shares look particularly expensive compared to the value of the underlying BTC but at the moment it is not a clear-cut trade.”
He added, “Generally speaking, their position is very significant indeed. However, in the past, we have always seen very large holders of BTC, such as GBTC, and now Fidelity or BlackRock ETFs.
“There will always be volatility if anything happens to them, but not to the extent that it would impact the ecosystem, which appears capable of withstanding significant volatility events.”
Frontini’s response is significant for at least two reasons.
Not interested in arbitraging MicroStrategy’s bitcoin premium
First, it’s notable that even a sophisticated capital manager able to deploy hundreds of millions of dollars into a well-practiced arbitrage trade doesn’t have confidence that MSTR shares are overvalued relative to MicroStrategy’s BTC holdings.
For context, MicroStrategy currently trades at a 94% premium to its $42 billion worth of BTC holdings. The arbitrage opportunity seems obvious: shorting the $81 billion MSTR counterbalanced with a long BTC position, aiming to capture the deterioration of MicroStrategy’s exuberant 1.94X multiple over time.
However, Heka Funds doesn’t seem interested in this alluring trade.
Curiously, MicroStrategy founder Michael Saylor has been able to attract so much attention to his common stock that MSTR once traded above a 3.4X multiple to his BTC holdings — as recently as November 2024.
Any multiple expansion from today’s 1.94X — and certainly as extreme as 3.4X — would obviously be devastating to a fully hedged arbitrageur aiming for that multiple to decline.
Traders bid up the price of MSTR because they believe Saylor will be able to continue to use financial engineering to attract volatility bond buyers to fund accretive BTC acquisitions for many months to come.
Traders also think that Saylor will be able to unlock value from the world’s largest corporate BTC treasury through other investment banking products, such as loans, derivatives, or other BTC-backed offerings.
Concentrated ownership of bitcoin is normal
Second, Frontini’s perspective is notable for its confidence in BTC’s resilience. Frontini seemed mostly unconcerned about the impact of MicroStrategy, or even larger custodians like Blackrock, Fidelity, and Grayscale, on the Bitcoin ecosystem.
Given his years of experience in the crypto sector, he recognizes that ownership of BTC has always been concentrated with a small number of large custodians.
This was as true in Bitcoin’s early MtGox days as it is in the modern Binance, Coinbase, or MicroStrategy days. Large custodians have always concentrated ownership of BTC wallets, yet the network has remained resilient for over a decade.
Because Frontini understands that control of coins doesn’t necessarily indicate control of the network — miners append data to Bitcoin’s blockchain, and node operators validate consensus rules — he’s not concerned about MicroStrategy posing a systemic risk to the crypto ecosystem.
Away from MicroStrategy, Protos asked Frontini about other topics, including Tether.
Other market insights from Heka Funds
In 2023, Heka’s Funds, including a BTC fund, held total combined assets of more than €1.8 billion and had an increase in net assets of approximately $372m.
Protos asked Frontini how he achieves returns for these funds.
“There is no secret recipe,” he explained. “We just imported from traditional finance very well-known strategies and risk management tools into the crypto markets.
“Our funds are arbitrage funds, so in effect, they make money when price differences appear on the same token in different exchanges, and when the implied interest rate in crypto markets derivatives is higher than the risk-free rate in traditional finance (i.e. the US T-bills rate).
He continued, “There are many funds in traditional finance that make excellent returns doing the same thing on equity and bonds, so we expect to be able to produce very good returns from the crypto markets for the years to come.
“In respect of the Alpha Funds, please keep in mind that the fund, on top of the arbitrage strategy, also tracks the price of BTC so obviously the absolute return looks amazing. But it’s not all our skill, it’s just the price of BTC going up.”
Read more: Tether became a political powerhouse in 2024
Arbitrage fund manager comments on USDT
Protos also asked Frontini about whether he faces competition from bigger tether traders.
“It’s always difficult to say, as large trades are not often easily traceable to specific companies. However, there are certainly some well-known US trading companies whose digital asset arms are very likely bigger stablecoins arbitrageurs than Heka.”
He also explained how he sees the extended pressure that tether’s peg faced in December as an opportunity.
“As you know, we look at movement away from the peg as arbitrage opportunities, so in fact we welcome that.
“When a stablecoin like USDT, USDC, or any for that matter trades above where we can mint it directly with the issuer, then we sell it in the secondary market and we buy it for USD in the primary market from the issuer, making a profit.
“The opposite is true when the stablecoins trade below the price where we can redeem them from the issuer. So, in this case, we will buy it in the secondary market and giving it back to the issuer in exchange for USD.
“In the last few days of the year, I honestly think it was just profit-taking in the crypto market with people closing positions and getting back into USD.”
Read more: Meet Heka Funds, the Tether whale that never stops giving
On whether he thinks that Tether should be trusted, given that it didn’t publish its audits and is also announcing phenomenal returns, Frontini is certainly a Tether believer.
“It’s public knowledge that Tether is making huge profits thanks to the level of the US interest rate,” he said. “After all, it’s an extremely simple yet effective business model.
“Regarding reserves, there was a public quote from Howard Lutnick at last year’s Davos conference (“Tether has got the money”) that implies that the bulk of its assets is now safely with Cantor, the largest US treasury broker.”
Final market prediction
On market predictions, Frontini prefers to remain agnostic.
“I have no idea,” he admitted. “We don’t try to predict markets or policymakers for what it’s worth. Investing our clients’ money in a directional way isn’t in our DNA.”
Read more: Tether’s dreams come true with Donald Trump victory
Finally, Protos asked Frontini if he actually thinks that BTC’s $100,000 price tag is a new normal.
“I have to admit, I’m not very good at calling market direction. In fact, I wouldn’t have expected to see BTC at $100,000 at year-end, so I’ll pass on this if you don’t mind.
“The only thing I can tell you is that as we see constant interest from new investors to explore the opportunities that the crypto market gives, I hope they’ll be directed to reputable and regulated institutional players like Heka instead of venturing with no experience into a market that remains very volatile.”
