Editor's Note: This article comes fromChain News ChainNews (ID: chainnewscom), published with permission.
Editor's Note: This article comes from
Chain News ChainNews (ID: chainnewscom)
Chain News ChainNews (ID: chainnewscom)
, published with permission.
If 2019 is the first year of the explosion of cryptocurrency derivatives, then 2020 is the year of the rise of cryptocurrency options. Recently, as the trading market has gradually become active, the trading volume of Bitcoin options has exceeded 5,000 BTC, reaching a record high. Deribit is the number one player in the thriving options market, and it once accounted for 90% of the transaction volume of the Bitcoin options market.
At 8:00 pm on August 3, Beijing time, the new Crypto Tonight series D-Hour "We Love Deribit" was successfully launched. Yama chatted with the founder of Deribit and three top traders in the cryptocurrency industry about derivatives.
The core points of this issue
Co-founder of Three Arrows Capital: The Bitcoin options market is still small and has the potential to expand 10 times
Deribit founder: The cryptocurrency market is far smaller than traditional finance, resulting in scarcity of structured products
XBTO CEO: Deribit's advantage in the options market lies in liquidity, which is difficult for competitors to copy
Founder of QCP Capital: OTC trading of cryptocurrency options is mainly carried out among mature institutions
Guests of this program
Philippe Bekhazi: CEO of XBTOclick hereView full program video available
Guests introduce themselves
click here
Looking back, the following is the transcript of the entire program of this episode, and the content has been edited.
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Guests introduce themselves
Yama: We are using Zoom for this interview now. There is no beautiful environment like a live interview. It is very simple. I hope you don’t mind. OK, let's start.
Good evening, good afternoon, and good morning, everyone. Welcome to Crypto Tonight tonight. I am Yama. It is a great honor to host each Crypto Tonight for you. I hope everyone is safe and happy. The past week has been a very happy one. We welcome four guests first, John Jansen, founder and CEO of Deribit, Philippe Bekhazi, CEO of XBTO, Kyle Davies, co-founder of Three Arrows Capital, Darius, founder and chief investment officer of QCP Capital Sit. First of all, the opening introduction as usual, please introduce your background and how you first learned about Bitcoin, and what initial thoughts you had about Bitcoin at the beginning. Let's start with Deribit CEO John.
John Jansen: When did I first hear about Bitcoin? I have told this story several times. It started with a friend of mine in Amsterdam who was a lawyer and some of his clients were using Bitcoin for some dubious activities. When he told me these things, he was not mainly talking about Bitcoin, but mainly talking about those interesting customers. I asked him what is Bitcoin, and he said: Oh, they receive money through this digital currency on the Internet. I asked Who is the central authority behind his Bitcoin, he said no, it is something on the Internet. I was like how is it possible, this kind of thing is very strange, so I started to study this bitcoin as soon as I got home, and then I kind of understood that this is something very special, and at that moment I was fascinated, I think it was about the winter of 2013 .
Yama: Special events. Interesting, ok, thanks John.
John: In the next few months, I had some ideas that there might have been a bitcoin spot exchange at that time, and then I had the idea of launching this kind of exchange for options and futures trading.
Yama: John, you have been busy trading bitcoin derivatives for six years, what changes have you made? What hasn't changed? (Just kidding) You know that many engineers are very concerned about the hairline and skin care. Did you know that, for example, in the Coinprint office, all engineers use SK II (cosmetics). I'm not sure what a derivatives trader is like.
John: Sorry, I didn't quite understand.
Yama: (repeats the question) Hairline That's a joke.
John: Haha! There are indeed many variations. In fact, it was a project started out of interest at the very beginning, without high expectations. It is a bit ambitious to promote this option futures market. Slowly, our plan has made good progress. Our team, well, no one left, a very tight-knit team, so things didn't change very quickly, and we were the same group of people, still working on the same projects.
Yama: OK, thank you. Hopefully the Deribit team isn't all single. Because I know traders live the life of bachelors. Thank you John. Next up is XBTO CEO Phil.
Philippe Bekhazi: Thank you. I am in Bermuda now. I am the founder and CEO of XBTO. Our company has been established for five years this year. My background is previously in financial transactions. As an aside, I actually majored in film production when I was in college, then I went into finance, fell down the rabbit hole of trading, and started trading in systems, where I was fascinated by computers. It started quite by accident when a friend of mine (now my General Counsel) emailed me the Bitcoin white paper in 2010 and I read it and thought it was interesting, but I was busy with other things. In fact, Bitcoin did nothing at the time. Six months later, when I was traveling, another friend’s cousin chatted with me about Bitcoin, and he told me, Bitcoin is very suitable for you. So, it's a bit weird, two points in time, two different people, it seems that I have established a certain trend of life and insights into life. And then I started getting involved, doing a little bit of mining with a computer, and mining with a CPU was still possible at the time, and I started getting into the Bitcoin community, talking to people, exchanges, miners, developers, users, trying to understand how to get into this space.
I went to Africa in 2014, and I was like, wow, the internet works, but the payment system sucks, the banks don't seem to exist, so I feel like Bitcoin might be a big hit here. After I came back, I created XBTO in February 2015, a global popularity provider, and we trade with our own money the vast majority of the time. Afterwards, we have branches for equity investment, mining, consulting services, a little bit of asset management, and began to introduce a small amount of external funds in the form of Beta funds, partly through Alpha overlay. We have an open venture capital fund, which is our Part of the core early ensemble, it was a pleasure chatting with you all here.
Yama: XBTO's business includes asset management, venture capital, market making, over-the-counter trading, and mining. You also manage a Stablehouse. What kind of business is this and what is the long-term vision?
Philippe Bekhazi: Stablehouse is also a company in our equity investment. It was basically incubated within XBTO, and we are its largest investor. Stablehouse focuses on stablecoins. We believe that stablecoins are a trend that will bring great value to global value transfers in the future and bring money a better transfer track. Stablehouse is regulated in Bermuda, we have recently closed its beta testing version, and expect to open up to everyone in the fourth quarter. Stablehouse is basically a stable currency settlement application, and we use it to do some different businesses. You can imagine, such as remittance, transfer payment, commodity payment, and some level of derivative settlement. We do such things with some of the companies we invest in. There are many use cases, and the promise is exciting, it's just early days. I'd love to talk more, but that's all for now.
Yama: Looking forward to learning more. Thanks Phil, next is Kyle. Kyle is on our show for the third time, I hope you are not bored.
Kyle Davies: Thank you Yama for having me, it's an honor. Three arrows is a hedge fund created eight years ago. My background is a derivatives trader. I was previously engaged in securities derivatives trading in Asia, engaged in cumulative options, knock-in and knock-out options, exotic options, etc. What drove me to create Three arrows was the foreign exchange market. Our early performance was quite good. On this basis, we traded positions in a series of assets, including securities, derivatives, and encrypted assets. At that time, encrypted assets were the assets with the lowest priority. At present, they are mainly used for leasing liquidity and collecting Lease interest, futures basis trading is only done on a few derivatives exchanges, one of which we use is Icbit. They also went bankrupt as a result. It's really not fun. We didn't do much crypto trading until 2017-2018, when I heard that some of the traders I hired early were making a lot of money, a lot of money, and I realized I could give it a go too.
At that time, our entire company’s focus turned to the field of encrypted assets, which was a correct decision. Now we conduct a lot of encrypted asset transactions, encrypted asset loans, primary market investment, including investment in Deribit, investment in DeFi, etc. Our current focus is on encryption field.
Yama: Everyone I talked to spoke highly of 3AC, such as Genesis, BlockFi, Coinin Pool and Hufu Wallet, Kyle, you did a great job. I also know that 3AC operates the largest borrow desk, a quick question and answer, what are you most optimistic about in encrypted derivatives at present?
Yama: Every time I chat with Kyle, I want to buy more bitcoins, but unfortunately I don't have that much cash. Thank you Kyle. Next Darius, do you still remember the story when you first came into contact with Bitcoin?
Darius Sit: Remember, QCP is a trading institution located in Singapore. We do popular transactions, and we do some asset management. We have a public trading strategy, focusing on the Asian market, and we also do a lot of OTC transactions in the Asian local market. Derivatives trading, especially options trading. So my previous financial background is very similar to Kyle's, especially focusing on the foreign exchange market and non-deliverable forward NDF derivatives trading. So my previous financial trading career mainly used the deviation between Asian financial markets to do a lot of arbitrage transactions. Capital controls in the Asian market are relatively strict. It was at that time that I first heard about Bitcoin. I heard that an asset was being traded for arbitrage in China, South Korea, Malaysia, and India. I was curious and wanted to know what it was. Then I started doing arbitrage trading in Asia, and that's how I created QCP, and that's how I got here.
Yama: OTC spot OTC is very competitive and requires a lot of resources, but derivatives OTC seems to be the next wave. What is your outlook for the OTC market?
Darius Sit: Refer to the parallel comparison between the encryption market and the foreign exchange market, look at the foreign exchange options trading, almost 100% OTC over-the-counter transactions, very few order book transactions, the options trading in the encryption market is in a mixed form, you see There's a lot of centralized order book trading, but there's also a lot of custom OTC trading. I guess it's about a 50-50 ratio. I originally thought that there would be a lot more OTC OTC transactions, but now I estimate that the ratio of the two in the future will be 50-50 or auditable liquidity will increase, showing 75-25, and 25% of transactions may involve customized OTC OTC transactions. Physical delivery, expiration date, etc., I think like Kyle said, this is a growing market, and there will be no single player. Both markets will continue to grow.
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Why is Deribit popular?
Yama: Thank you for your wonderful speeches. Let's move on to the next link "Why We Love Deribit". I know Philippe, Kyle, Darius, you all trade at Deribit. The whole world knows you love Deribit. Besides Deribit's lovely CEO John, why did you choose Deribit for trading? After all, there are many other exchanges entering the field of options trading, such as OKEx, Binance, and some new players. What makes Deribit maintain the number one position? Kyle share your thoughts with us.
Kyle Davies: I think that options trading emphasizes that liquidity is king, but mortgage is also king. If there is a new option exchange, it is often chosen by people who have no choice, such as CME Group, where traders Almost all of them are Americans, and there are huge profits to be made from these users who have no choice. But in the final analysis, hedging is required, and the transfer efficiency of a single mortgage fund pool is higher, so I think this is Deribit, which was founded in 2014 and opened in 2016. It has been in business for a long time. Although there are many, many competitors, Deribit's philosophy is that traders are God's exchange, everything is convenient for traders and wins the trust and support of traders, which brings liquidity. We mainly use Deribit for mortgage asset management, and we use margin trading to do long, which is the best way to do long on the market. Effective way, Deribit has a cover put trade, attracting sellers to smooth out the volatility, we act as a taker, which is good for us, benefit from the price increase, and I can use the collateral for other purposes.
Yama: What does Philippe think? Why do you trade and invest in Deribit?
Philippe Bekhazi: But we started trading encrypted derivatives. I think it was the summer of 2016. We just started trading, and the liquidity was basically zero, but what we believe and pay attention to is the general trend 10 years later. I also agree with Kyle’s It can be said that the encrypted options market is indeed very small at present, and there is a lot of room for growth. What Deribit needs to do is to do a lot of things right, and build an options exchange system that can handle massive transaction demand input. rights and other needs, as well as the underlying structure to manage the massive price adjustments of market makers. Investors frequently enter the market and need to get the latest quotations, so the infrastructure is extremely critical. Deribit has done it right from the beginning. It took them some time to gradually Grow, Deribit may not be updating features fast enough, but the quality is a lot better, so they're doing the right thing and not breaking down.
Because they are the first to successfully introduce a large amount of key liquidity, this is an advantage that is difficult to dispel. It is like a network effect. Now they can provide large institutional investors with capital efficiency, hedge their positions, and increase leverage on their positions. , this is very critical, so Deribit has taken the right path, while many peers have not done it right, because the latter do not have derivatives DNA, they used to come from spot exchanges, and entered this field two years late, they see Seeing the potential of the options market, the fundamental approach is to copy it, but it is difficult to copy it. Deribit has indeed built an excellent moat to keep it in the leading position. Deribit’s transaction amount has always been far ahead, and we are very optimistic about its prospects. It is very difficult to think that future competitors want to replace it. Of course, there will be many competitors. We must not take it for granted and be blindly confident, and we need to constantly upgrade and innovate. The team at Deribit is fantastic, and I believe 10 years from now it will be 5 or 10 times the size of the market as Kyle said.
Yama: Do you invest in Deribit first or trade on Deribit first?
Philippe Bekhazi: We have actually traded on Deribit before investing in it, but the time is about the same, John, do you remember? Probably six months before investing. We met in Paris, and I told John, we like your team, your technology, your ideas, what can we do for you, how can we help? We negotiated the investment figures, and the investment went smoothly.
Yama: Very good.
Kyle Davies: Philippe can I ask a question? As an additional topic for today. You know that there are many Delta One derivatives exchanges, futures or perpetual contracts, which are mainly collateralized by Bitcoin, such as the products of the bitmex exchange, but their market share has shrunk a lot, while other exchanges have derivatives collateralized by Tether I don’t know if this is a long-term trend. I want to hear your thoughts. How do you see the growth and decline of Bitcoin and other cryptocurrencies as derivatives such as options, futures, and perpetual contracts?
Philippe Bekhazi: Yes, John and I have discussed the possibility of introducing other encrypted assets as collateral many times. I think many people still use their base currency, the legal currency of the real world, to evaluate their own profits and losses, rather than Bitcoin. The currency evaluates its own profit and loss. People are more willing to use Tether, USDC or other stablecoins anchored to the US dollar, so this may be the trend that the world focuses on, at least in the short to medium term. If you want to forget the dollar and use Bitcoin to measure everything in your daily life, use Bitcoin to measure coffee, measure pianos, almost no one does it. I mean you have to be a very hardcore bitcoiner, a bitcoin supremacist, to think that way.
Kyle Davies: I don't measure my coffee in bitcoin, but I do measure my profit and loss in bitcoin, so when I say we are profitable, I mean our assets in bitcoin have increased. The exception is if I do DeFi transactions, in this case with ETH but I use collateral, in which case it makes sense to denominate with Tether. I still can't turn the corner and think that after five years, encrypted asset collateral will become dominated by Tether? To be honest I don't think so.
Yama: Darius, what do you think?
Darius Sit: Kyle, you said that the encrypted options market is a mindless investment target. I think everyone thinks so. John and I met in Japan a few years ago. It took John to invest in him, and it took a while to materialize. Like Kyle said, someone tweeted last Friday that the options market was terribly liquid, but we traded last Friday with a feeling that liquidity was pretty good, volume was good, no issues, slippage was minimal, in that The size of the liquidity is impressive, so I think the options market in the future will be much higher liquidity, and the size will be much, much larger. The core is that when you trade, you look at the trading orders in other markets, such as CME Group, OKEx, or other exchanges, and they all flow back to Deribit. So I think Deribit has become a liquidity center, and I think it's a very wide moat. If you want to trade large amounts with little or no slippage, there is nowhere else to go. As long as it's real trading, you'll mostly stay with Deribit. Of course their team is also very good. If you have been in this trading field for many years and understand the needs of traders, you will agree with Kyle's statement.
Yama: Thank you. John, are you satisfied with your investors' answers?
John Jansen: Yes, very satisfied.
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In addition to options, Deribit also trades futures and perpetual contracts
Yama: Continuing, Deribit's futures and perpetual contract transactions are quite large, but there are still many Chinese traders who have not discovered the benefits of trading futures and perpetual contracts on Deribit. So Kyle can share with us why you guys don't just trade options because I know Three Arrows trades big (not sure if big) futures and perpetuals.
Kyle Davies: We're not actually market makers, we leave that to the smarter guys like Philippe and Darius, we're actually takers, we use options to preserve exposure, we keep our collateral, and we do that Lowering our costs and perpetual contracts are an efficient way to deploy capital and leveraged products, one of the things that I find interesting is I've always wanted to find out what the next big customer segment is, I think if you look at In the situation a few years ago, the cost of futures trading was high at that time, because the buyers at that time were mainly speculative traders. At this time, market makers would enter the game and trade implied yield/real yield products, which means trading underlying options Buying and selling, the option will be sold accordingly, pulling the actual rate of return to be equal to the implied rate of return. Then in the past 6-12 months, you have seen that QCP or other large institutions brought into the market are selling, so the yield players (capturing the yield) have sold to suppress the price, and all of this is for my mortgage Hedging traders are an efficient way to enter the market to sweep goods, pulling up the price. This kind of transaction is always give and take. The transaction of speculators makes the rate of return players feel profitable and enters the market, and the latter pushes down the price , and then we or small hedge funds are bargain hunting. I don't know who is best suited to answer this question, maybe QCP. Darius, what do you think?
Darius Sit: I think, it's very clear, you guys are traders who capture raw yields right, but we see for example private banking, now it's the era of globalization, now the world is in negative interest rates, if you go to Japan for a loan, private banking Tell customers a 2% yield, and customers may not be interested at all. Therefore, a private bank may give customers a 10% product yield promise. This is the question of option implied rate of return. I think private banking institutions are targeting this area. We talked to several private banking institutions, and they think this will be the next product that can achieve scale and provide high returns with relatively moderate risk. Private banking clients are also becoming more crypto-savvy and warming up to the idea of a product, rather than thinking it's some crazy, shady deal, that's becoming a mainstream asset. We believe that we are approaching a breakthrough point, so we believe that the next large-scale customer groups will be private banks and asset management institutions. We have also seen some more exotic products, and your people have introduced a lot of interesting new products, as well as products that build liquidity. What I mean is that people in this field are willing to invest and allocate assets into encrypted assets to obtain a higher rate of return, and they are also willing to bear certain risks.
Common two-currency cumulative options, etc., we know that there is such a part of hot money chasing this rate of return. We're excited about how that funding is being deployed and looking forward to the kind of exponential growth that's going to happen in this space.
Yama: John, what do you think?
John Jansen: Maybe this is true for the encryption world as a whole, but we are still mainly talking about Deribit now. We serve a very diverse audience and audience, and the feedback I get from traders is that contrary to some traditional market presentations, assuming that there are many investors, there are more opportunities for professional traders who trade in both directions. So in our market it is not a zero sum game where traders compete with each other, but there are many trading opportunities for traders, making it the most interesting market in my opinion at the moment. This is probably true for futures and options trading on any crypto derivatives platform.
Kyle Davies: John, what do you think of those exotic option products that haven’t been launched on a large scale yet? I started trading options on your platform in 2016, but we really don’t have a strong structured product in the encryption field, and we have started to make progress. Others are waiting and watching, but there is really no large-scale effort. We must know that the current Asian securities structured product market is very large.
John Jansen: Until a year ago some people claimed that encrypted assets were not mature enough for options trading. You have taken a big step forward and asked why these structured products have not yet appeared. I think it will be realized slowly. The encrypted market has not So big, looking at the comparison between the current total market capitalization and the traditional financial market, I think it will progress slowly, which is why structured products are still scarce. Frankly speaking, I only talk about the options market. I am a little surprised. When I started this company in 2014, I envisioned more structured products than existing products, and I envisioned more competitors than now.
Yama: So options are traded on exchanges or bilaterally between buyers and sellers, and bilateral transactions are completely customized and opaque. Kyle, would you like to share with us your thoughts on how the bilateral trading of options works, who are the participating institutions, what products are there, and what is the relationship with the listed exchanges?
Kyle Davies: I hate options bilaterals. I'd like to share my thoughts on this, but this question is for Darius. They are more involved in OTC over-the-counter transactions and more exposed to bilateral transactions.
Darius Sit: Thank you Kyle. Indeed it is. The current option OTC over-the-counter trading is mainly carried out among institutional participants. They make the market, place orders in the order book, and trade with retail investors or larger institutions. Now there are not too many OTC OTC customers. Let’s define OTC here, which refers to pure bilateral transactions, including duration margins. For example, between two institutions in the foreign exchange market, which is governed by the EAST system. This market is very small, mainly It is carried out between relatively mature and well-known institutions. On the issue of screening customers in the OTC market, it is very similar to a structured product market. You learn that there is a certain product and a certain sales strategy, and then you can connect to bilateral transactions. rivals, but not regulated by any agency, much like the product-customer relationship. So this OTC problem is basically a small circle of cliques. It is currently very small and does not have the infrastructure of traditional financial markets, such as banks and funds. So I think the scale is limited. Although it will grow, I think the main transaction Still in the exchange, the exchange has mortgage management, etc., the transaction party does not need to bear credit risk, and the credit problem is a big, big trouble, and the exchange can help solve many problems.
Philippe Bekhazi: Right. When you discuss bilateral transactions, you will naturally think of the fragmentation of products and liquidity in bilateral transactions, because it basically means that there is only one audience for a product, and it will take time and effort to finalize the price, requiring a lot of operational workload. Discussing this issue at the beginning made people feel that this approach is unreasonable at all. To build a structured margin product requires a complex legal structure design, and needs to reach a consensus with the counterparty on countless conditions. You have to trust the counterparty. We are here I have tried this field and invested in a company called X Margin. The company mainly wants to solve the real-time basic margin problem without decrypting your position details, so it is basically zero-knowledge authentication, no matter your position is Deribit Whether it is Bitmex or other products, it basically outlines the rights and risks of your positions, can calculate the margin, and can automatically liquidate any bilateral products or instruments with the counterparty, and you can obtain high capital efficiency because you traded on one side , and then do the opposite trade on the other side, meaning you have two trades on the same margin.
With the help of tools such as X Margin, you can make inquiries more easily, quote more appropriately, and have high capital efficiency, which will be much better. In that case, the scale of bilateral option transactions will increase greatly. You will expect structured products in this field. I think the characteristics of miners determine that they are important buyers of structured products, and they can obtain them from structured products. Some things that traditional financial products cannot obtain. So to understand the field of option structured products, we are of course very concerned about this field, as is the field of bilateral transactions. There are many regulated bilateral counterparties who cannot trade in the encryption field, and you can trade with them by choosing bilateral counterparties. More traditional financial institutions will then have the option to trade structured products in a way they are comfortable with.
Yama: John, what would you like to share?
John Jansen: We have received a request in the past to add a function to the platform, allowing customers to determine the expiration time and exercise price by themselves, because sometimes for one reason or another, customers or institutions want to modify the contract based on the products we provide , so we are willing to cater to this market and consider what we can do, but specific issues may bring specific risks, such as risk management and liquidity. So we are not sure whether we will enter this market.
Kyle Davies: I don't think it makes sense. I used to be a member of the advisory board of the Korea Futures Exchange, and every year the number one issue on the exchange was whether they would offer futures products with a weekly settlement cycle, but every year it was rejected on the grounds that it would eat us liquidity. I feel that the exchange is always motivated. There are OTC customized transactions, but they need to be carried out in a separate part of the exchange. However, the exchange should focus on maximizing the centralized liquidity, which is the best way to play its role. way, because that is the largest source of liquidity in the Bitcoin options market.
John Jansen: Yeah, I totally agree with that part. But what I mean is that we can attract the liquidity of option contracts with different durations, which is also helpful to other products. I don’t think that will siphon away the liquidity of our standard contract transactions, and there will be new pillars. However, if such accounts are not visible to other users, there will be some risk management and liquidity issues, at what price the contract is traded, etc., will have an impact on our market, because this transaction is no longer a matter of two parties Instead, we trade with central counterparties instead of one-to-one transactions. This is an issue that we are more concerned about. There may also be a problem of taking away liquidity, but my opinion is the opposite.
Yama: Thank you all, I know you are all top traders in the industry, I would like to ask you about your all-time favorite trading strategy. John, I know you used to be a trader.
John Jansen: Actually, I am no longer involved in transactions. I tend to be a short-term option trader, but I don't recommend this trading strategy, it's just a personal preference. I'm willing to sell some wings for money, then you'll get a surprise that you don't like, it's a personal preference, not serious.
Philippe Bekhazi: I don't have a personal preference, I don't have a favorite strategy, I like whichever trading strategy makes money.
Darius Sit: The general trading strategy works for us. Whether it is a retail investor or a professional investor, selling Cash-covered Put (selling out-of-the-money put options, and if the stock price reaches the strike price of the option, you need to set aside the funds required to buy the corresponding stock.) has always been Good investment strategy, especially if you are very bullish on this space, your risk is relatively low because you don't use leverage, you don't suddenly suffer too much loss, and if the price moves sharply, you get a premium for the token. The premium you earn here is equivalent to free bitcoin options, which is a great way to accumulate coins.
Kyle Davies: For us, one of our favorite trading strategies is futures basis trading, perpetual contracts or futures relative to spot trading, and using this as collateral for borrowing, we have been doing this type of strategy since 2013 Trading, in the field of various financial products, is still doing this kind of trading. Every year people say that this trading strategy will be history as more money comes in and new products come out, but I think as long as Bitcoin continues to rise in price and the amount of money needed for this strategy continues to increase, this strategy will will continue to develop.
