Inside the Crypto Options and Derivatives Boom | Nick Trileski

Transcript

everyone assumes cuz they they got product Market fit in crypto for the first time but it actually it wasn't like uh Arthur didn't invent Perpetual so Perpetual Futures actually uh that was actually proposed by none other than Robert Schiller back in 1992 and I just find that such a a fun like path dependence sort of fact of history it never really took off in Trad five but just found product Market fit with our specific type of degens hey everyone this episode is brought to you by say the Blazing fast parallelized blockchain which is unlocking salonik performance for the vast ocean of eth devs out there now you're going to be hearing all about say and their new V2 upgrade but if you take away one thing evm is here to stay there are some problems with it which we're going to get into later in the

episode but say and especially their V2 upgrade is helping solve that so thank you very much say for making this episode possible hey guys big shout out to uniswap Unis swap is delivering the best onchain trading experience period Bar None they've got a bunch of cool new features coming out like Unis swap X limit orders real-time Data Insights we're going to be hearing all about those features later in the program but for now un SW thanks for making this episode possible we get right back to it all right everyone welcome back to another episode of bell curve before we jump in quick disclaimer the views expressed by my co-host today are their personal views and they do not represent the views of any organization with which the co-host are associated with uh nothing in the episode is construed or relied upon as Financial technical tax

legal or other advice you know the deal now let's jump into the episode all right everyone welcome back to another episode of bell curve today I'm joined by Nick treski who's a crypto options Trader at um cumon drw Nick welcome to the show man hey Mike nice to meet you uh nice to be here on blockworks it's uh it's gonna be fun yeah man this is gonna be a great one um yeah I I think what I what I'd love to do is you know you have a really interesting seat in this industry at an options Market making desk and I think there a lot of folks that understand uh would say that they understand what's going on in derivatives options Etc but don't uh have a very clear picture and you have a very boots on the ground understanding of what's going on so can

we just start at a 10,000 foot level and just describe like what is the sort of options and derivative space look like in crypto today yeah sure um so options and derivatives in crypto started quite a while ago actually surprisingly it was like 2017 when der and these offshore exchanges started to kind of pick up um Steam and people started trading small size on them but I would say the kind of the the explosion of crypto options really happened in 2021 as uh more and more sophisticated players kind of came in came in and started to uh Market make um and then also you know start trading strategies to generate yield and to also you know take various kinds of direct

directional risk using options um but the space in general has been uh kind of a quiet grower underneath the like the explosion of the crypto like derivatives markets like I mean obviously everyone knows pers um they're just a great product that is very simple to understand that's just linear risk on instruments with a funding rate um so for a lot of retail and a lot of institutional participants uh perss have been a very good product for either hedging their portfolios or just expressing risk in a capital efficient way um but at the same time options have been growing you know as kind of more and more s sophisticated people enter and wish to express opinions on non-linear risk so like if they want to

express Direction at a certain strike price or at a certain maturity or play some kind of event um and as you know we've had a lot of events in crypto um options kind of allow people to structure like trades in that kind of way um they also have a lot of implicit leverage in them as well so um and another benefit of them is that you get rid of the risk of liquidation and I mean and the biggest thing like the biggest end users kind of in the overarching ecosystem system of options Traders are uh yield generating strategies so like people who have large Holdings of BTC or eth or you know our miners or Staker staking providers um they are the ones that kind of come in

and say like hey you know we have fixed costs um we want to we generate all this BTC and eath we want to also you know figure out a way to extract yield from this so that we can pay for our fixed costs so they have been the predominantly the first mover and first entr into this Market um and then the rest of the market has kind of grown around them all right I maybe we could uh so I think you just kind of outlined the three uh made me major instruments right there's Futures options and then perpetuals so maybe we could talk a little bit about uh sort of the history and like current state of the union of each one of those different um each one of those different instruments like who are ultimately using each of those things then what the market structure

looks like that supports uh trading and then maybe we can sort of back into at the end of the conversation um something intuitive about you know what any sort of metrics coming out of each one or the usage of each of those products tells us about just sort of like where we are in the cycle which is like The Perennial question that everyone's always everyone's always trying to time that um but yeah um I mean yeah so crypto obviously started off with uh spot like you know people uh spot exchanges were the first things to kind of come around in crypto and uh it it was just very simple to understand you know but uh as people started to trade crypto and you know wanted to you know secure borrow to short something or to run a neutral position um it became pretty obvious that you needed a future product um so

one of the biggest like kind of first movers that took off on this space was bitmax I'm sure everyone you know the everyone remembers those days when you know bit Yeah run the stops exactly so bitx was one one of the first movers in that and obviously binance uh dbit uh bybit you know FTX all these other changes obviously came out and like leaned in and they just you know crushed it with per like that was the product to use um so also Nick fun fact like this is a I've got one fun fact about perpetuals everyone assumes because they they got product Market fit in crypto for the first time but it actually it wasn't like uh Arthur didn't invent Perpetual so Perpetual Futures are actually uh that was actually proposed

by none other than Robert Schiller back in 1992 and I just find that such a a fun like yeah path dependent sort of fact of history it never really took off in Trad five but just found product Market fit with our specific type of Deens it's it's really it's really fascinating it's it's such a good I think part of it is just um that we had better technology like in current day to like support this like you know Perpetual funding um you know the way that Banks and you know settlement operates on like traditional exchanges in the US where it's like t+1 settlement um I think was probably not too supportive of that and then on top of that they just banned any kind of swaps um so like this yeah that was like kind of a regulatory uh reason for why perss

are still not allowed in the US wait can you um what is the connection between the settlement time there and actually for for listeners who might not be as familiar with like the actual structure of perss can you just describe how those actually work under the hood yeah um so perss uh have some kind of funding rate which just depends on uh the difference between the index price and the market price of the Perpetual future um so that funding price is usually paid out continuously or in some kind of time block I mean a lot of people look look at it on like an eight hour basis so three times a day um some exchanges have it continuous um and then yeah it just hits your account and it's very easy to think about uh why like what the funding rate is uh you know people look at it

annualized or people look at it on a daily basis so it's like okay if I risk you know if I have $100 of position and I have to pay you know 1% funding I know that my margin decreases by this amount um the other thing that's nice about perss is that they you know there's different kinds there's some that you know have a margin in underlying collateral so you can margin BTC to get long BTC or you can margin usdt tethers to get long BTC and vice versa with shorts um so I mean that's the general product is very simple for someone to understand it's just that you pay there's either a long funding or a short funding um you either you either paying funding or collecting funding based on the balance of positions on in this

particular instrument so uh it's and it's just like it's pure Delta Direction so you're you just have exposure in price whichever way it moves um there obviously you also run the risk of liquidations if your margin is depleted so um it allows greater Capital efficiency and one of the biggest like unlocks with perss with you know these exchanges coming around and trying to win over retail users is that they allowed huge amounts of Leverage I mean binance and you know all these other exchanges that kind of had leverage up to leverage profiles on small accounts like up to 100x leverage and you know I think we we start to see some of that as well as like as well in the onchain world as you know they start creating new perss uh per exchanges on chain like

that's how they're drawing in all these um all these new retail users and on top of that I think uh also they were very quick with listings of new new tokens um that was a pretty big uh reason why people love to use perss because every time there's a new token you know you had these implied fuses markets a lot users to speculate and get long or short and Nick is part of the reason as well I I would guess that this is the demand driver on the exchange standpoint for why they do that is there's probably an enormous amount of demand for VCS that have unlocks or something like that like you know they bought some El liquid token it's now been marked up like 100x it's about to go live and they just want to lock their gains in so they'll basically they' still got the underlying

but then they'll just go short the per to lock those games in is that like a big reason why you think like driver of that market yeah yeah for sure and I think like uh you know just on top of that uh they can also uh hedge other instruments that are closely correlated that have might be more liquid and have better you know funding profiles because usually like when some kind of new hotly anticipated coin releases a token and there's like all this lockup that you know sometimes extends past the year it's very difficult to carry per a short per position to lock in your gains for you know when the the funding rate when everyone every single VC that invested into it um goes through and hedges it and pushes the funding rate to something that's unreasonable where you're not going to you know not really going to

make a lot of money and on top of that it's also um it's also Capital intensive so you have to you know maintain margin if this coin if you're short um if you're short a coin that you you know just release a token and you have some kind of locked token on the other side um and it starts to take off from a retail perspective you have to post keep posting more dollar margin usdt collateral um so it can be it could quickly turn into a capital inefficient trade but overall um especially as like um as the unlocks get closer we typically see some kind of um action in per funding as people kind of hedge their allocations so yeah it's definitely a useful tool for funds and Venture yeah so one of the debates that

you often see is all right perss have been this extremely dominant instrument that especially like retail will choose but honestly I feel like there's a decent amount of institutional adoption of per however you want to Define institutional adoption think like amongst Crypton native institutions let's call it and every now and again people will say well what about options options are the dominant uh you know instrument that more traditional institutional money managers like use to to speculate in you know trafi and it just hasn't really seemed like that's taken off in crypto there's obviously derit there's Avo more recently that has onchain options but just doesn't seem like that's taken off and my sort of pet theory for that it's a little bit of a a I mean I just think the average probably retail user in some ways they're more sophisticated than their trafi

counterparts but in terms of like options or more traditional sort of um Market sophistication there may be a little bit lower uh it's like easier from a user perspective and I don't know like what do you think about that like why do you think perss just have so much better adoption than like options in crypto yeah that's a that's the that's the age-old question that people have been trying to solve for quite some time um yeah and you're right like in trafi if you look at like you know just the general um how much market market cap or open interest there is in options on say like a stock like I mean coinbase for instance is like one of the top 10 uh open interest stocks in terms of options on like us exchanges in ter you know that's how much and and the options open

interest you know obviously outweighs anything that's in the future space so like if you look at a product that has Futures like e- minis um there the options open interest is massive relative to the Futures open interest in crypto we kind of have the opposite like you know we have huge Futures open interest scattered across exchanges like binance and CME now which is the market uh kind of like the market leader but the options open interest is like you know not like a crazy multiplier of that and that just shows like that the demand and the option space has not been uh as big as it like should be in a fully developed Market um and I think it's primarily because uh the primary users of options are going to be people that are a little bit more sophisticated and that has been like kind of the the

trajectory of of every single develop Market it's like you know it's like Pension funds like long holders um Banks lenders um so it's like these uh these people that you know own a lot of it on their balance sheet and have to manage it effectively and have to and do it through options and try to think about that holistically um retail most recently has been like a very big uh growth factor in op like zero DTE options and like short options for speculation I mean we saw that Mania in 2021 with gme and other other stocks and most recently we saw this pick up like in short dated options zero DTE um so retail still exists and I think I think

one of the reasons why like that kind of traditional Finance retail like in traditional markets retail has not kind of spilled over into options on crypto it's primarily because of like uh a there's you know not enough liquidity and you know on traditional Finance exchanges you have insane liquidity on these options um and then here you you just don't um there's only like what the the main leader exchange is is derit um and it's closed off to majority of American ret I mean it's closed off to American retail so you're not going to get that um and then on top of that you also have uh they have they have the ability to trade per so like people have ability to trade Futures and it's just

like an easier product to to understand um so so for retail it's just it's a better it's a better product Mark product that they can understand the direction they can understand the funding and they can they can trade it in a much more cohesive way versus uh on options it's a little bit more tricky to understand so it's you have to deal with many different strikes many different xpres and I think that the current way that exchanges kind of build it makes it really difficult for a retail consumer to come in and say hey like I want to trade some options and then you have like a million strikes and you have a million xpres and there's no like really clean interface that you know simplifies it for you and says like hey if you want to express like upside direction or downside Direction on this particular

crypto um like this is what you got to do um I think for the average retail participant they just Comm in and they're overwhelmed with how how many strikes and instruments there are um and I think that's something that will like as the ux m ux and liquidity matures over time it will get solved and then as there's more institutional interest um and more deep markets and more flow that's going one side and like both two-sided flow essentially I think this is something that's going to kind of mature and call us into like a developed market and this is something we have actually seen over the past like kind of uh you know nine months to a year yeah so one more question before we go a

little bit deeper into options still on the per side what are the different venues that like where volume is uh sort of aggregated around and then how do you see the relative development of like per volume versus spot in general like I'm actually not sure what the relative volumes are I know derivatives there's far more volumes on derivatives these these days than spot in crypto but like what does that look like just per versus spot and how do you see that Trend continuing yeah for sure um so the various uh uh exchanges so there's obviously offshore exchanges like derit and a few others and I would say you could count the the um onchain Exchange like AO as well um there's onshore which is CME uh which has been you know

recently has flipped uh binance in in overall open interest in Futures on bitcoin um if not yet but you know over time I think that'll also kind of happen uh so that's that's the that's the regulated way to trade options in the in the US and then after that there's OTC so that's something that we Cumberland JW kind of specialize in uh we would we think that we see roughly like 50% OTC and like 50% like exchanges as as like the total volume profile for us so uh OTC is uh is kind of special it's more um more tailored for the customer so it allows customers to margin in usdc it allows customers to margin in dollars it

allows customers to margin an underlying token and really fits their profile of what they're actually seeking to do um what they're seeking to trade if they're trying to just buy options it's very simple they just pay the premium and move on uh if they're trying to sell options they have to obviously margin with coins or with dollars and uh I think the flexibility allows them to express it or allows the flexibility of margin is like is kind of the the big winner for why people like to trade OTC and on top of that also just uh different xeres in different strikes different uh instruments like more exotic options that people uh have don't have listed on exchanges as well so those are the three venues um each one of them have benefits and and drawbacks

um CME obviously is a highly regulated uh US driv exchange which is uh never has seen any sense of Str stress at all um you know including like 200a Crisis covid like no one ever thought that anything would happen on the CME like no one ever had any kind of trust issues with the CME um you know people blow up all the time during these kind of crisises and they get carded out and the C stands and has this hundredy year history of never blowing up um derivatives exchanges that are offshore I mean everyone knows every cycle there's there's at least one that gets carded out um the last thing you want to do is have um options positions which

are harder to unwind than a f than a Futures position uh on a failing exchange so yeah why is it harder to unwind an options position um well if you think about it like uh if you're ruring an options position of many different strikes over many different xes versus like you have you know 10 coins that you just need to like hit buy and sell on to get out of them and clear out your margin it's it can get a little bit more difficult there um so options positions also get tricky you know when uh when fall markets go crazy um it might be harder to get liquidity versus like you know if you're never not going to have liquidity in BTC or E for instance so um yeah uh that I mean counterparty risk is kind of central to

why uh offshore exchanges are perceived as a risk um versus like CME and then over the- counter uh same kind of thing uh way more customizable um you know you face counterparty risk on uh directly to the market maker that you're dealing with um some market makers have you know especially if they're Crypt native we saw many Crypt native market makers get carded out last cycle um after you know all the loans and all the FTX and exchange things blew up uh for someone like us that is a traditional Finance uh company that's been around since 1990s and handled many different kind of tail events and crisises um it's not as much of a risk because we also have like

publicly traded debt and we have the risk management of like a sophisticated Trad five firm um so you face less counterparty risk in our end but yeah you kind of give that up with you kind of give up um uh give you have to kind of give up certain things to trade on one venue versus the other some venues will also have better pricing um some venues will have worse pricing but better margin so it's kind of a trade-off uh in deciding which one to to deal with I would say that um institutions and like high net worth individuals will generally opt for either like you know something where they can uh more uh like closely feel the counterparty risk and either you

know face an face a regulated exchange or get like some clar on financials uh versus uh you know more retail participant retail participants won't really care about counterparty risk they're just trying to enter and exit a trade for like you know a day or two so for them it doesn't really matter as much he everyone want to give a big shout out to today's title sponsor SE now I want to talk to you guys a little bit about why I think SE is cool from a design standpoint a big problem that it solves for eevs out there and then some cool stuff that se has coming up the reason I like say from an architecture perspective is again it's a very fast blockchain parallel is all of that stuff but say has essentially been custom building block space which is for Consumer apps and dexes now they have

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bitcoin or ethereum and then they use options to to sort of juice their maybe juice their returns as the wrong thing but uh basically look like they're performing favorably relative to their Benchmark can you describe that Dynamic a little bit yeah sure um so I would say uh I talked a little bit about the yield generation you know obviously if you have um large Holdings of BTC and E and you write calls on it or uh you also can write puts on it like if if you want to allocate more you can sell some puts and you know get exercise on them and buy more downside basically buy it if it goes down and get paid um funding uh and get paid you know the premium of the options same thing on the upside if if you you know want to let go of some of

your upside and sell some calls as uh as the price is going up and as volatility is exploding um you get to collect premium on this uh and you get to sell some up sell some if it goes above the strike um that's kind of the the G generation framework and on the other side you have these like liquid funds that are like you said Benchmark to BTC and eath um their specialty most most likely is not to actually trade the liquid is it's more to go out there like get involved in protocols uh invest liquid into like different defi um invest into venture capital and then on top of that um you know maybe hold some liquid BTC underneath But ultimately you know their LPS are expecting returns

that are in line or Benchmark to BTC and eth so if they're um if we have a landmark here for like uh Majors like we did last year where we you know BTC just outperformed everything their LPS are you know tapping on their back and saying like where's where are the returns um you know for some of them you you could promise like oh yeah well this is just the how Cycles happen but for some you also need to show you know that you're going to be in line with you know this performs uh with this performance um so we see a lot of like liquid Venture funds like come out and try to uh buy upside and in options to capture this kind of move move where you know BTC or eth outperform and then they know that you know they have all their other

Venture Capital Investments that will score if the cycle kind of continues but it keeps uh it keeps like a smoother performance for them overall and that's kind of a theme that we saw this year um especially like after like as the ETFs were getting approved and after they got approval is that people started to kind of just buy upside so that they didn't miss out like this further rally um yeah out of curiosity I know it's probably at every fund and actually some of these funds almost came at it more from a trading or more hedge fund oriented standpoint and then they started to do some Venture investing there were definitely some funds that came in it more from The Venture standpoint and we're like hey we should be uh they got distrib distributions of liquid tokens or they started to say hey there's some

upside to having a liquid part of our book as well um but these but these funds that are starting to trade options like do you think that's some of these investors necessarily have the competency to understand the the options like I would just think about like Venture as a as a skill set and you know buying or trading options as like a very different skill set so I'm just like wondering how that kind of plays out in practice Yeah I think for uh so for yi for yield generation and like I I I guess I guess I kind of hate calling it yield generation what you're doing is really selling B risk premium or volatility risk premium you're selling like the the the demand for volatility um which is usually like had you know over time carry some kind of risk

premium as to like how it actually realizes so that's just kind of like a technicality that a lot of people like to highlight um but I think for people that are selling uh selling options for yield uh It generally I don't think you need like that much options expertise because you know exactly what you're doing um you are you know selling saying that oh you know BTC right now is 70k or whatever 65k right now I want to let go of some upside above 70k like I would sell Bitcoin above there I can collect uh you know for June uh you know actually say like 100k like everyone's talking about the 100K strike for June I can collect like $2,700 right now to sell that call um I would sell Bitcoin

at 100K in June anyways like if it get gets up there I would sell it there now um right now I can sell that call for 2,700 bucks and generate that p&l per BTC or generate that that um that yield per BTC um so it's very simple to think about and I think that's kind of like the uh the approach that a lot of funds kind of come into it with and I don't think that requires a lot of expertise obviously timing wise like if you can time it better if you can time like you know Pops in BTC to sell it like on a pop and sell it on a pop in a lot of volatility that's that's better um so I think they you know some funds might have an edge in that um so they can enter and start trading it like that

obviously you know for some funds also can't trade perss it's you know they're they have a mandate where they cannot like especially FTX like have you know capital on other exchanges that support pers so how do they you know Express leverage um they come in through options over OTC um so they will you know if they think that we might have if they just saw like a flurry of onchain activity or like a flurry of retail entering the market um they might come in and say like Oh short dated um I want to buy some like upside calls and effectively it gives you like similar leverage profiles to running a and just like running a trade on a per um obviously it's very defined risk you buy

a certain strike you know that you know you're you can you know your terminal you know p&l uh based on where it settles so that's kind of like the people that enter enter these kind of tra these are the kind of funds I don't think it takes that much competence to to do that to run more like relative value and like BTC versus ethereum and like trade like different parts of the term structure whether they're Trading trading one XPR versus the other and like saying like oh I think like June is very expensive versus like December is very cheap because of the election or something like that um I think that takes a little bit more competency but like for Pure like price action oriented things and yield generation I think it's

it's a very approachable topic so on the uh on the subject of volatility this is this is another one of those things where I feel like uh I understand it at a relatively high level I think if you ask many of folks in the space they would say they understand it but it's unclear sometimes like what the implications of like high or low either realized or uh you know just regular volatility is so can you just give us an overview of like how you think about volatility in general and then maybe we could start to back into some historic information I know we were talking about before the show like eth volatility was at an extremely low level at one point this year and like how should uh folks who are listening in here like kind of generally think about volatility as maybe like a timing indicator in markets

yeah for sure um well yeah I mean volatility is just a measurement of um it's it depends on the time frame that you measure it so people like you know like to measure it over the past month or like a past week um so it's just a measurement of like price action and how volatile price is um and uh you know just to give you a range like so people understand uh it's referred to in an annualized way so like what's the annualized volatility of ethereum right now it's like it's roughly like like 60% uh annualized uh what is the range for that well it can go from like like I talked about in the summer last year um especially when there was a large call overrider on in ethereum uh it got as low as like 25 30 30% annualized and it

can range up to like it can explode up to like 150 to 200 um so this is kind of the range that you're dealing with and um yeah the way the way you do is you know you measure it over various different time scales like over a week or over a month and uh then you try to predicted based on like future events like events like the merge or you know EIP 4844 or you know the happing or the ETF like all these things will generally increase volatility because there's going to be more price action whether up or down you don't care um but as far as uh timing goes um timing volatil like timing cycles of volatility is pretty important because you generally start to

see um like a pretty like every single top of the market has usually had some kind of very high volatility event leading up to it um I don't think we're there yet because VA is creeping like V got so low over the last you know you know especially the summer like over the summer uh it was just it got so obliterated and it's starting to climb up there you know we're in like the 80 80 ball range which a few funds have always been talking about like oh yeah this is like where where things start to get kind of interesting uh because you know we generally always see some kind of explosion of like north of like 100 Vol um so that's kind of where we're at right now like volatility has been steadily like as these ETFs came on Market has been climbing and it's gotten

into like 80 even though you know it kind of has its abs and flows but generally it's that's where it's at and that's where it's priced and I would say like December is kind of the target December and June are the two like points of interest right now it's like how does it how does everything play out with the election and how does everything play out with the Bitcoin happening um so that's like where you see a lot of um trading and people kind of speculating on like okay right now those two are like around 80 Vol like if it really takes off where does it go so right and there's a relationship right between the price of volatility and the you know profitability of selling options right and one thing that one thing that you and I were talking about a little bit as well before we got

started here is this Dynamic of miners selling call options as we approached previous all-time highs and I don't know I I do think there was a little bit of Market psychology like we've talked about on this program like I've talked about it many times like I thought the sort of mental model that I think was consensus in the market is once we break through all-time highs you know it's go time and it hasn't really been like that this time it's actually been sort of a a break and one thing that has maybe changed you sort of here anecdotally as people you know usually retail is like okay what should I buy but now you actually have bag holders from 2021 or 2022 saying okay is this the right time that I should finally sell these bags and I do think maybe that's something that's a little bit different I mean

what's your read on that whole the whole psychology around the alltime high yeah um I think there's always like you know this it's such like a a psychological barrier to cross alltime highs I remember we had the same kind of thing happen in um you know previous cycle with 20K um I think we broke break broke off like 20K down to like 16k and then like we finally Revisited it and like like Elon was it like Elon I guess like tweeting that would like really like sent us through it um but yeah it was it's definitely like a psychological barrier and you know you see like I would say like a lot of sophisticated investors like come in and just like you know every time we tap that area they just start like unloading calls that

they had before or you know taking some kind of profits especially the the last few times we visited but at the same time you you have those people that are like oh my God I'm underexposed they sold everything out um and there's like a famous like trade that one fund did like where you know they sell out all their spot at um alltime Highs but then they don't want to miss out um on further upside and then they just go out and buy calls so we saw like some of that activity too it's like where you know people are clearly selling spot at alltime highs and then they're just coming out turning around and buying calls like oh this thing like pops off to like we're at 72k like if this if this thing goes to like 80 90k we want to see some of that appreciation as well

so you kind of start to see like a little bit two-way um in that space um I think this cycle uh we you know uh we're also seeing like a lot of these like defi coins that people kind of held on to and never sold and that's always like been like a like a thing in crypto it's like oh you forgot to sell like the all-time highs like you know or you didn't sell it on the way down or you added or whatever um you know now it approaches back up like what do you what do you do I think that's like a actually like a benefit of options is that it allows you to like you know when you're selling calls um it allows you to like force yourself to sell and otherwise you generate some kind of p&l if if it doesn't Eclipse that area um but yeah

that's just I think that it it enforces like stricter like profit taking to to your mindset so what do you uh I mean what is your overall read I guess um you know just backing into all right so we had like a sort of a similar situation play out in if you go back to like November of 2020 where yeah it kissed like 19k kind of went back down Meander side ways to downish for about a month had a couple of like attempts to break through and I guess that that feels actually very similar to today um I don't really remember what volatility was doing or I do remember at that time listening to none other than suzu talking about uh I think 3s Capital One of the one of the

first you know big trades that they made very successfully actually was buying a bunch of cheap volatility at that time so they were buying a bunch of those options then sellers got sort of steamrolled I mean do you see a similar risk today right if there's ACH bunch of folks who are selling uh options that you know if prices really take off they could it's kind of like the picking up pennies in front of a steamroller type trade or what's your thre of analis for sure yeah I mean we see a lot of funds that are continuing to kind of accumulate it upside um especially like again like the 100K area like 90 to 100K area uh especially as you approach the election I think that's kind of like the the trade that Everyone likes to think about like where does BTC end the year

um so obviously if they're buying they're someone else selling whether it's uh Market makers or like you know on the other side uh yield generating funds selling it um there's definitely that I wouldn't say volatility is cheap anymore like I think the real opportunity was to to really get long it um in the Summer where it was just like I mean but people at that point have kind of given up like people thought it was the opportunity was to get long it like in March and April and then like just it it's like people were just giving up and I mean there weren't any like long dated options trading at that time so maybe it was like the right was October um when you could actually get some exposure to the ETF stuff um but yeah um I do think that like there's

people still continuing to accumulate options um if we do kind of break break alltime highs again and you know really send it to like 100k um we will you know the Vault will definitely perform uh it always performs whenever you break out all-time highs and you know it could you know we've seen it go above a 100 so I think that's definitely the the thing the angle that those funds are playing for um there's also ways that you can express it like in way more conservative ways because they're paying a lot of premium for these calls but there's also ways that you can like structure like a trade like um I was looking at the 100 150k call 1 by two where um in December it's like uh roughly oh no sorry it's um

100 170k 1 by two so like that's something like something like that would be like you outlay almost next to zero premium to buy it um obviously your max win on that thing is 70,000 so it's between the call between the two call strikes uh that's your max win and then your break even so it goes back to zero at 240 so like if you think Bitcoin is not going to go above 240 by the end of this year I don't know some people probably think it could um but it's like a pretty solid way to play BTC going up to 70k with outlaying like very little money um or next to zero premium so these are the kind of Trades that you can structure like an options that are really interesting um versus like in if

you want to get loot if you think that BTC is going to end at like 140 or 150k um in spot it's very capital and efficient or like you have to pay a ton of funding and margin to put something on like that versus an options like you can just literally outlay zero dollars in post margin um and you will you know if BTC ends out with 70k and you do just one contract of this you make 70k um obviously if it goes anything above 240 that's when you start losing money but that's like a pretty good like you know you can see how high volatility is in general that something like this you know is a trade that you can actually put on and Nick can you like I mean just from your seat at Cumberland drw what does the appetite look like on

the institutional side here and you know probably folks who are listening Along on this call have seen those charts of open interest on CME for both Bitcoin and eth kind of being up only um you know what is what is your sort of sense on what the the demand looks like on the institutional side for these sorts of products um yeah I think the demand is is growing a lot um I think there's like there is a lot of Barbarians in the gate I would say with these ETF options at the moment um obviously they got delayed um now it's looking like the end of this year it's going to get approved but there are a lot of uh hedge funds uh either traditional or Crypton native that you know again want to trade on a

regulated derivatives Exchange have not like maybe they don't trade on the CME because uh they you know traditionally trade just pure equities uh those funds you know they are were able to create make coinbase be like like I said before like the you know one of the top 10 options traded and mstr was like up there as well um you know they're trading all these derivatives of what they actually want to trade um which is PTC and E uh eventually when those things have ETFs and ETF well eventually when uh eth has an ETF and then when those two have ETF options I think it's going to be a huge unlock for institutional demand that loves to trade equities and has everything set up with their Prime Brokers and everything like

that um that will be like a pretty big uh demand influx and on top of that I mean we've seen you know while that has not occurred yet and while we're waiting on regul Regulators to you know approve this um we've seen pretty tremendous growth and on CME I mean this product just keeps you know chugging along making new alltime highs in open interest as these funds kind of get onboarded and you know OTC as well as people like you know start to think about how are they going to take profit how are they going to be more sophisticated with managing their risk uh maybe they weren't uh last cycle I mean certainly showed how many people didn't hedge or didn't think about you know downside risk at the peak of last cycle so um that just um you know we're

seeing like continued like on boardings with you know isas uh of coming up coming to us to start trade so do you think that this market like now really moving into the editorializing you know part of this like does it feel a little bit like this Market has barbell like you've seen so obviously uh CME volumes and open interest has been uh there's been a massive Spike there lots of institutional like Bitcoin eth buying Etc and then it sort of feels like meme coins are working and then that's and then that's just about it and my assumption would be the missing participant here is retail and you really have like crypto doing these like PVP sort of games they like you know they're the one the natives are the ones

that have seen these Cycles play out they know it goes Bitcoin eth you know Blue Chip defy all L1 altcoins Finn with Doge you know like that's where and they're trying to skip to the end of the cycle and just buy the meme coins right out and it feels like that's what's happening over in sort of me like even if you just look at what's going on today you know everything is down like bitcoin's down eth's down anywhere from like 5 to 10% whatever but catcoin is up 43% uh this not an endorsement of catcoin like I just that was just the number one trending thing that I see on coin ibly shouldn't even name specific meme coins on this podcast but you know what I mean like does it feel like that's what's going on yeah and I think that's something that you touched on

before it's like a lot of people like coming in and like you know they were vesting their whatever Blue Chip D5 over the last like four years and you know this is like their final vest of them taking this part off um so yeah I mean some of these protocols obviously have tremendous growth and tremendous tvl and you know tremendous use case like you know the the Classic Blue Chip defi but the same time I think uh you're also just getting like all these new coins that are entering the market at these like in like very high um either market caps or ftvs and I think they're just being priced more accordingly um you know I mean look at like Blue Chip defi when it first came out and then when it you know ripped a lot was not Blue Chip defi it was something new where people

just started using it and no one like really knew what the hell it it was and how big and how useful it could be just like later now we refer to as Blue Chip defi because people keep using it people keep using Unis Swap and a and you know compound or uh you know all these other things now you have you know these like news new narratives come out um whether it's like you know algorithmic stable coins or uh you know reaking um is really hot right now um and you know these Protocols are going to launch at like billion dollar ftvs like multi-billionaire like or you know double digit buildon ftvs um so you know that capital is coming or that capital is coming from somewhere and I think that's like what you know the the next like Blue Chip defi of the next cycle is

going to be um and I think it's just getting priced a little bit more accordingly as it comes out of the gates and I think they're also you know this like slow issuance of you know points the whole points meta is like kind of delaying like this you know liquid token being around and then it ripping uh versus like it just kind of launches to this fdv and people like come out and you know have points and they sell it to liquid that liquid funds that end up allocating to it like right on the launch because everyone's kind of aware of it it's been around for so long and has generated so much user growth um I think it's kind that's kind of the difference of this cycle and then the meme coins are just in the background kind of you know there's money sloshing

around the system um that's the exhaust that's how I always think about it like meme coins are just like the exhaust of how much money is slashing around while people people wait for whatever you know for whatever um and yeah retail just loves it it's you know uh like uh explaining BTC and eath is simple to retail they'll buy it they they can now buy it in their brokerage accounts explaining uh liquid reaking or like explaining you know how this like per protocol is going to work um is you know and why they should buy that coin is it's a little bit more difficult to defi um explaining it's cat catcoin season and buy the hottest catcoin it's you know that's that's a lot easier and I think that's why they end up buying them yeah I don't you know I'm like torn

on this because uh I I mean I just haven't seen on the retail side of things like I'm just so used to now when uh you know crypto's taking off I get all these random calls like people come out of the woodwork I just haven't really seen that quite as much and I don't know I mean obviously retail is buying Dogecoin back in 2021 but that took Elon Musk to tweet about it right it wasn't like everyone was doing that he we needed the most famous guy in the world arguably to tweet about Doge and shib and whatever I don't really think that retail for the most part is like finding out about the next like now these things I mean you know you had like bom or whatever that went up to a billion dollars in 24 hours like that's not that's not your grandpa's

like your mama pop retail right like that's 100% Insider crypto natives just aping in to that I just think they're different crowds would be my yeah I think it's it's probably different crowds because I think a lot of like people people have you know set up their coinbase accounts and they probably already bought Doge last cycle and they see it where it is now uh maybe they come in and buy some more but yeah I you know maybe people are exploring I mean people are exploring salana much more because it's much more pable for retail to go in and like you know pay a few dollars for a swap rather than you know pay like a $100 for a swap on on Main net um so I mean I think there's some people that are kind of waiting into the unchain world and there's some evidence

of retail there I would say a lot of it is also you know probably just like crypto natives that have been around and made a lot of money in the last like six months and now they're just like you know playing these rotation games um so yeah it's probably not the the mom and pop retail just yet um I don't think those you know those people have entered the onchain world in MA in mass and I don't think there have been any like super hot exchange listings that outside of I guess you know what whiff or I don't know which exchanges that's list on I mean that's been kind of like the the big it's on binance okay yeah yeah I think or maybe it's Bon that's on binance but yeah whiff is the one that's uh done super well I don't know I just

you know there was a there was an so we just did this uh conference Das London um yeah oh nice great um there was really interesting so a THX one of the podcasts on our on our uh Network Ai and Jonah we did a like a live recording and AI asked this question like how many folks in the the room like bought one of the Bitcoin ETFs and literally in this room of like 400 people two people raised their hand and then it was like well how many people own crypto in the entire room rais their hand and I think that just like what does that tell you like that tells you that there aren't that many new like I don't own any of the Bitcoin ETFs uh because I have Bitcoin spot and I'm probably there's not much like I'm not the target audience for for this am I yeah um and

so I just think it tells you that there just hasn't been much new like yeah yeah um it's possible yeah I mean I I bought the Bitcoin ETF just to get the I I love how when you buy a new ETF they deliver the prospectus the fat stack of paper um so I have that sitting on my desk for the I the ibet ETF that's that's pretty that's pretty that's the fun part about it but um yeah I would say it's it's hard to gauge like you know whether it's a lot of new retail entering versus uh you know this big institutional entry that has happened especially in BTC I mean it's pretty evident that you know through the CME open interest like now you have a lot of hedge funds running the carry trade which is like you know

buying spot ETFs selling Futures against it and kind of providing Capital into the ecosystem um so you just start to see I think I think this is a much more institutional cycle that we have seen kind of take off um and the retail bid it it maybe it will come but you know you know anecdotally a lot of my friends that I've I've chatted with and like talked to I think still feel a little bit stung by the last cycle where they haven't like come in with open arms into something just brand new and I think that's like the retail bid in crypto is always caused by some kind of like new breakthrough and you like something that like you can like I mean Unis swap was like a huge thing that like it took a

while for people to realize what it was and defi that was that was what Drew retail in right now there's not like anything that break Like breakingly New in in the space that is going to draw them in to do the same thing so uh Nick I got a question question for you I was I was seeing on on Twitter today shout out to uh Larry engineer Larry 0x on Twitter yeah he's asking this this question about Athena so if Athena strategy is delta neutral why aren't hedge funds already doing it so basically uh I mean this is this is something I I sort of remember from last cycle as well when people started talking about this um Carry trade or the basis trade Etc they're like why aren't people hopping in and closing the spread if you could just basically get 20% quote unquote you know R free why aren't

more people doing that and I think that that's basically what Larry's asking here with this question of like if there's you know 20 to 30% you know uh basically risk-free yields or at least it's being portrayed that way a little bit not that Athena is necessarily doing that but you know what I mean um like why aren't more particip like why AR more people in the hedge fund Community hopping into close down that spread feels like a no-brainer yeah I mean they they are very much so in um in BTC and eth like on the Futures and CME like that's where they can get access to they're they are hopping on and doing it um I mean there still exists like so much it it just becomes a capital game like uh like the basis trade overall is like how how much Capital do you have

and how much can you put into it and how much is there how much demand is there to uh to push it the other way so it's like if you can evenly match the capital like if all in a perfect world um you know your your basis or like whatever your carry rate is going to be the risk-free rate um but you know it's like if you look at like the gold market for instance like it's it's pretty evident there like every single future is like perfectly lined up with a risk- free rate because that's you know every single Bank in the world can uh go out there and trade this thing and they have like infinite Capital to match all the buyers and sellers in crypto I mean you know now with the ETFs has been it's kind of been like the big unlock for uh hedge funds

to that previously they couldn't even touch coin now they can just buy you know the the any one of the ETFs and sell the CMU listed future and you know that that will you know capture the basis it's not perfect I think it's like last I checked it's like 12 or 10% so it's not quite down to like five and a half where like it could potentially go but it's also like a c it's also like a capital game like if they run out of you know if you are posting dollars on CME um uh you're gonna if it keeps going up you have to post more and more dollars so you have to have more capital and kind of work that into the basis trade with uh you know the ideal basis trade which is kind of what ethena captures is

uh where you post coin collateral so like you don't have to add additional collateral you can just post ethereum to sell ethereum Futures so those kind of collateral uh that kind of collateral is like obviously yeah that is those will actually trade even closer to in line to Fed funds um yeah and I think it's just it's a capital thing and there's just not enough people with enough capital and there's too much demand for leverage on the other side uh which is why it hasn't kind of compressed down to that level but like if if banks could participate in you know in uh coin margin Futures those things would be like SL like it would be flat um right now it's just a few funds and the funds thing to have uh like do

you want to earn 20% yield on that or do you want to go airdrop farm and um earn like 70% yield or whatever um so yeah it's like it's an opportunity cost so if it's just a supply and demand uh or like supply of capital problem like what happens when more Capital comes online either directly from Athena itself or just from other like hedge funds that are looking to close down that spread like yeah I guess like sort of asking like a bullish or bearish on Athena here what ises that mean ultimately for the future of that product yeah I mean uh I mean ideally that's you know that's what they want I mean they'll have more tvl and uh it'll help them grow and you know be able to issue more and more Stables um so you know I think that's the fact

the fact that they launched into an environment where there's a very high basis trade is probably like pretty good timing um because it draws more people to create tvl and like uh loop this thing and kind of grow the grow the protocol in general um yeah I mean Athena is a interesting idea um obviously there you know I'm sure you could go and find the fud on Twitter um about you know running such a very large you know trade running such a very large basis trade there's definitely risks with basis trades you can look up how many times have basis trades blown up um in very liquid Securities like treasuries um it's it's a lot like there's a lot of funds very sophisticated funds that blow up on the

basis trade all the time for funding uh whatever how does that happen in like treasuries like how does that scenario happen that a big fund blows up yeah I mean uh it's like some some kind of demand goes uh some kind of either Supply or demand comes through that pushes the basis trade out uh outside of um you know their risk limits and then the people that run it are so levered because it seems so safe um so they just like borrow more and more and more capital and leverage it up so much just to like capture that yield um then you know something happen some kind of big shock like Co blew out the basis trade on a lot of people because you know uh the bid or the offer disappears and then all of a sudden you're you know you're

Mark to Market with an exchange and then you have spot on the other side uh if you're mark to market with the exchange leg so in this case on Athena it's going to be short Futures if that you know goes through the floor or like goes against you then you get you know you could potentially you know get into trouble there um because then you have you have basically realized pnl on one side and then you have unrealized pnl on your spot on the other side so that's like you know that's a part that can always kind of impact you and then on top of that when people run very large like trades like that people know generally know about it because it either shows up in in an open interest or what ever and then that you know that becomes like a target for people to like

oh well they'll have to get out of it X Y and Z here um and I mean on top of that like you know I guess you're always going to have with something that like runs most of its a trade on on a offshore crypto exchange like you're going to have counterparty risk as well so you know do you know people were freaking out about uh counterparty risk of uh uh usdc just the year ago um and it was being held in a US Bank um you know half of Athena is being held on you know offshore exchanges basically so it's like there's always counterparty risk there as well so those are the rests of it um you know you can weigh them uh however you want um I don't know it's it's hard to like say like how how it will play out in the future but I

mean everyone's always talking about how we need like an algorithmic stable coin we'll see how it works out don't really have a straight opinion on on which way it's going to go it's tough man it's uh I've seen today people I mean everyone always wants a decentralized you know algorithmic coin and it's like yeah it's just the you know this is the the challenge that maker ran into all those years ago when it decided to go down the rwa strategy it's really just like what is the demand to borrow here so maybe at some point Athena runs into something similar but uh you know Nick this has been this has been great man you've been super generous with your time I guess like any closing words for the listeners or if folks want to find out more about you follow you on Twitter whatever uh

you know what's the best way to do that yeah for sure um I guess closing thoughts is that I think this this crypto options Market is going to continue to grow um I think it will get to the point of like this the stature of size of how developed crypto cry or options markets are in general um I think retail will be there I think people will be trading zero GTE options just like they did on GameStop and all this other stuff in no time um as just as the uax liquidity and access kind of grows of it um and I would say that for institutions it's it's a pretty great time to get involved because you know you're always going to make it in crypto if you're if you're here but you know if you're um if you don't you know be careful and manage your risks uh that's

sometimes people get wiped out and I think options are just a great way to do that um and you know doing it OTC or on exchanges with uh you know good market makers is generally the way the right way to do it awesome well thanks for coming on dude we'll have to uh do it again soon yeah thanks a lot a