Trading Powerhouses: Current Market Dynamics and Evolving Strategies - TOKEN2049 Singapore 2023

expect what a crowd welcome everyone to the trading powerhouses session my name's Sylvia I'm the research lead at bullish joined by me is Nicola white CEO at b2c2 Rich Rosenblum president as well as co-founder at GSR and Jason urban Global head of trading at Galaxy so we're currently in the depths of a bear market and you could say training activity is relatively muted CVI which is crypto volatility index is ranging from 34 35 to like 40 which is really at the troughs you could say I think in addition to that liquidity is thin crypto yields aren't seeing exuberant yields as it once was and then when you pivot over to something like macro you've got elections coming up next year we've got inflation at came in at 3.8 for August year over year yesterday It's relatively down from the nine percent that we saw last year economic growth hovering at about two percent and unemployment at 3.8 which is within that three to four percent target range for the Fed so do we expect a pivot to happen or do we think that that's still far maybe Jason I'll start with you I mean as far as the inflation goes and as far as what we're seeing the FED do there's conflicting data right now but it certainly doesn't seem like they're going to be moving soon and I think that's a little bit of a of a headwind that we have I think the other headwind that we have in the industry to talk about the depths of the bear Market is who is the marginal buyer and I think we're all waiting for news about an ETF we're waiting for somebody to step in I think right now what you see is some fatigue or you've seen fatigue I mean we're coming out of 18 months of of slog quite frankly but I do think that there's there's green shoots and positive things on the horizon I think the election regardless of what happens could usher in some new leadership in certain regulatory positions uh as well as you know so that should be a a tailwind and obviously the ETF if and when that comes will will certainly bring in those marginal buyers that you know will buoy the industry yeah the ETF this is a very big one to watch and Rich do you have any yeah I'd say I I hope there's some type of pivot I think that for a while being in uh you know this boring period has been nice it's kind of been a healing period both covid post FDX but at some point starts to get a bit boring I think without knowing the terminal level of rates the IPO markets closed the the token Market groups are reluctant to to list so it does seem like just shopping around 25 to 30 000 in Bitcoins getting a bit boring for the market at least there's you know probably five major catalysts that shop in the next year or so it shouldn't last too long okay and Nicola yeah I would just Echo what Jason said um you know I think ETFs are a big could be a big pivot for the for the market in general in Q2 we saw Global ETF volumes at 141 billion think about it if a small portion of that goes into crypto and I think you know people mention things like oh well there's already uh Futures crypto ETF but actually what this ends up doing is is essentially you can put it in Pension funds you can put it in you know your 401k all of that is uh is kind of on the table once we get to the spot ETF side of things yeah so up only from here hopefully and when we're talking about institutional demand I think in this space when we try and zoom in and identify these players for large ticket sizes are they coming from hedge funds are they miners who are these kind of counterparties and also in low Vol environments what kind of flows are you guys seeing maybe I'll start with Nicola yeah look I think in terms of we've definitely seen it more on the Trad Phi side of things the large tickets recently we're still seeing some good flows from foundations we're still seeing good flows from hedge funds I think hedge funds just like to trade the market so their volumes are always going to kind of be there um we've definitely seen miners drop off recently but uh you know in terms of in terms of Interest I do think that it is fundamentally still there we haven't seen any clients come to us and say we're pulling back we're slowing down our plans to get into the space which I think is really encouraging I just think we need that positive Catalyst to kind of get volumes back the other thing that's we haven't seen is retail return um in any way shape or form so I think you know you get a little bit of positive news hopefully you get some of that retail flow back as well yeah we'll hopefully get more peppy coins out there and Rich Jason gsrs business is has a lot of concentration around working with issuers groups that create coins and tokens so they tend not to trade large size rapidly but whether it's a issuer foundation or a Founder senior employees they'll passively get out of large volumes over time and that's volumes that can go over the course of many years and that continues to be a cardinal flow that we see okay yeah I think on the on the Flow side you see you see things come in in fits and starts right and it's Market driven the participants that are doing that you know you know to Nicholas point the the the miners aren't haven't been Super Active I think you're seeing them more in lending products and derivatives products right now so you're not seeing spot demand uh we are seeing it from you know the hedge funds as always and and quite frankly the institutions that had pulled back that we heard that story in q1 and parts of Q2 we're actually seeing green shoots there as well where people are starting to to dabble or starting to open up the pipes again and pipes that have been dormant were you know and I think a lot of that has been around the ETF news I think people are wanting to they're unsure of the timing you know the soonest it can be is October you know the latest is you know sometime in q1 you know that's the the general consensus and so people want to make sure that their pipes are open and and that they can trade and transact accordingly and so I think that that's something that we've been seeing as well okay what are you supposed to do and in terms of potential OTC Trends in the next few years do you have any insight as to what we're going to expect rich or I think that um once you have an ETF and once there is more retail participation I think Structured Products usually is a is a next step and as you have a more robust options Market the ability to trade um the ETF is an underlyer and more more credit coming into the space you're going to have retail and family offices that want to bring options um into the Spectrum and have more structured payoffs where it can sort of limit your downside by capping your upside Nicholas Anthony I would have said Algos we definitely see a lot of clients focusing on you know how do they disseminate Mark risk into the market with having little impact how do they think about executing a program over two or three weeks months so definitely a lot of Demand on the algo side and hopefully you know a more data-driven trading okay so I'll go signed and yeah I think our business is is a little more white glove and bespoke in in certain aspects and so we're seeing is is demand around how do I how do I transact against staked assets can I hedge them can I overwrite them can I borrow against them you know are there other things that are are not as plain vanilla and how do I access either liquidity around those or at least Capital around them and and credit and so you're seeing that I think that the other thing is it's still unclear what's going to happen with the lending markets part of the big shock was a lot of the lenders are no longer present and so leverage in the system is not there water seeks think of Leverage like water and so you're going to see people who are looking for that and I think options and Structured Products are a big part of that because that allows people to get that leverage that they wouldn't that they were that they were getting from you know the Celsius and the block fives and and so on that they're not getting today so they're looking for other ways to do that and and derivative products are certainly a big part of that although I would say we've definitely seen a lot more in the lending space or it started to recover now um I would say more so than ever since I've FTX right we def in a more responsible way than probably the market had originally operated but we are starting to see people have that appetite to step back into that space yeah 100 I think that you're looking at but collateralization rates the days of of zero collateral and a spit and a handshake and I know you're going to pay me back I don't think we're I don't think we're going to get back to those any anytime soon and so you still need to get that especially as you get more institutional demand around an ETF there's a tremendous need for that and how are we going to fill that I think that's one of the challenges collectively for the industry as we think through what what we need in order to to you know to get back to the Roaring 21s if you will and and because you touched parties or also like are you seeing any corporates seeking yield against tokens like what you know for us Structured Products we're seeing a lot of demand but it's very different demand the demand is really jurisdictional based I think that our European clients are are insist on a rapper and a rapper from a name they know a Trad Phi institution that they can feel comfortable around where I think that our APAC clients are focused on a variety of products wanting to try the new thing and I think our us clients are are you know keeping their heads down in the trenches and hoping that hoping that Mr Gensler doesn't find them and Rachel nickler do you have anything to add on structured product side we see a lot of a lot of demand for uh principal protection it's definitely one of those things that if at this time last year just before this time last year we were having a lot of people come to us and be like I'm sitting on a large crypto portfolio it's now down 30 what do I do and when you're down 30 you've kind of already missed the boat you should have had a options hedge on or some sort of structured product on so um definitely more conversations around that more sophistication around that where before options were probably a foreign word uh they're they're starting to get more mainstream yeah seems like they're getting more yeah I agree with that I think that there's um the term Structured Products and tradify is it's going to take a few more years to really come about properly but in terms of using options or other ways to bring about structure um you know it's happening on everyday basis in a more small you know bespoke format but I think that there's less use of options today than two years ago from groups looking to protect because they've less to protect and overrides you're selling a lower ball so there's definitely some some difficulties today and I any are there any specific regions that you think are going to experience exponential growth in the coming few years what are you bullish on is there an East first West kind of dynamic happening um maybe Jason yeah you know Regional demand if that's if that's where you want to go I think it's product based and and so again clients in different regions have different needs and different and I think some of that is driven by their businesses and who they're servicing and what kind of what kind of clientele that they may have or their end client might have and so that will drive things in terms of you know whether it's principal protection it's overwriting it's people that want to do Delta replacement because they need the capital for something else again going back to that we haven't quite solved the uh The Leverage issue as an industry and so people are like okay well I had a bag of coin I'll turn that into some kind of a an option structure or forward structure and and create liquidity on my my crypto in that capacity so you know the demand I think though is a function of where you see those businesses and and what's kind of in Vogue in the in the moment yeah I would just say that there's I also think there's a difference between Demand right like we definitely see emerging market demand but that's a much more complicated problem to solve especially when you're talking about you know banking rails and uh infrastructure in those regions and so I think there is demand there but I think we're still probably a little bit of time off before we get solutions that work for some of those regions okay yeah I'd say it's it's less of an investment thesis um but the the term bank then banked has been a mantra for a decade that you'd hear a lot but then I think people realize this space is mostly just speculation and there wasn't really much help to to bank the unbanked but I think in the past couple years where in inflation and and uh you know credit events have been a big threat you know places like uh Lebanon and Nigeria where there's going to be a more of a need to have a banking system for you know people every day I think that um those are areas where crypto is actually having an impact it's not something where someone in um first world is going to have as much of a way to benefit from it but I think it's going to help Humanity yeah and I think just to speak to that for you know the other the other challenge that we run into sometimes especially with larger clientele's or Capital controls where we'll find that you know we do a lot of work in a particular area particular region only to have you know somebody say well I'm not really all that comfortable and you taking my my currency and turning it into crypto and so you then have to get creative with some of the things that you do and I think that's a challenge we've all we've all faced over the years but it definitely Ebbs and flows with the current environment there's also a different risk appetites in different regions as well I find certain regions like Asia for example like even when you look at Hong Kong as a market you've got um the population's much more sound in terms of financial literacy you could walk down the street and talk to your janitor or someone in the park that's sweeping the streets and they'll be like okay buy 888 this is not Financial advice by the way but they would know what it is and they would they would go like yeah I'm leveraging margin on it and you're like okay but I come from Australia so I'm like the financial literacy there is is completely different so the risk appetite is completely different in different regions when you're looking at it that way um in terms of managing complexities and challenges of pricing in in terms of Market making strategies maybe Rich could you give us a bit of insight on how you kind of go through price Discovery for Less liquid coins and less liquid tokens yeah that's it's very much core to what my company focuses on since we've um from the beginning from 10 years ago have helped new coins come to Market and I think that um for the the tail assets having a intimate understanding of the the real fundamentals the the token economics and you know where there are Bigger Pockets of uh supplier demand um I think we've noticed in this this past year there's less ability for there to be hundreds of high quality and new tokens coming to Market so um have to have more of a investment framework when you're going to work with a group and promise them liquidity you have to actually be willing to be the buyer of Last Resort and it's more of a promise to be an investor rather than just replicating liquidity from one venue to the next so I think we've been finding that it's hard to work with quite as many projects as we did in a given year as a year like 2021 but I think we can promise a lot higher value Services those groups we we do partner with yeah okay thank you for that and in terms of strategies in managing Black Swan events especially during volatile crypto environments like what what kind of strategies or trading Charities do you guys have maybe I'll start with Jason I mean so there's well just to briefly touch on what what Rich talked about I think one of the challenges before I talk about some of the strategies is finding those pools liquidity in certain time times zones it can become challenging especially with larger larger orders or larger transactions and so you have to be thoughtful now how do you manage some of that to kind of touch on that there are a variety of ways one obviously you know for us we have a large you know franchise business where we're having clients reach out to a variety of stakeholders or sales people reaching out to a variety of clients to find that but you're also then using Algos you're trying to be creative you understand that you know there there are people that are watching what you're doing and so you need to you know it's a little bit of a game a cat and mouse and so you need to be thoughtful around how your how you're sourcing that liquidity where you're sourcing that liquidity and what what actually happens you know once you've started the trade yeah I would say operations are just as important as trading these days whereas before we used to the industry as a whole would leave you know tons of coins and tokens on exchanges like gone are those days and so it's about having a robust operations framework where you know if volatility starts to pick up you can proactively push coins uh and tokens out to exchanges it's about making sure that uh you know you're you're essentially cycling credit with customers instead of extending them massive amounts of credit so it's really about you know making sure that from an operations perspective your Ops are really robust and I would say battle tested for some of those events yeah tested yeah I'd mentioned it's a diversification is such a key term in the same way with real estate it's location location I think with crypto over the past couple years whether it's your bank whether it's custodian or it's exchange when some of the biggest have all gone under within a few months span it's good not to keep all your eggs in one basket and you know have have fail safes for service providers and I would say the amount of service providers or fail-safes like you know I don't think anybody expected to lose three banks in a week like that seemed like enough resilience at the time but maybe in crypto the right number is five I don't know all right well okay so we had D5 summer and then we had the nft boom and then we've seen like metaverse take off and the whole jargon on web3 and now the new cool kid in town is AI are you looking at implementing machine learning or AI into your algorithms at all when you're trading or a house AI impacting your businesses or your strategies be rich I think uh you know AI is a is important development for facilitating some components of crypto like it was hard to find why decentralized gaming was going to be an important part of the space but when you think about people building a game they don't know each other they're building it from different parts of the world more seems like a problem than a solution but with AI you could have people that want to create and they don't know how to code they could contribute and could bring things together from the perspective of building trading technology especially when Chachi BT really hit its stride six months ago I mentioned to my CTO and others internally like are we using this yet how much are we using Ai and I think for building very curated custom software so far doesn't seem to be that helpful but you know it might be with other types of training strategies than ours okay and uh Nicole I would say it's about incubation at this period of time like you know it's it's interesting I think everybody uses chat GPT but at the same point in time it's like uh it's like when we had all the bridge hacks right like it's a new piece of technology you have to be really safe and secure with it and we're work kind of at the point where we're crawling we're not walking we're not running yet and so I think you know dipping our toes in figuring out projects we're interested in and incubating those projects is kind of where we're at right now but you know hopeful for what it means in you know five years down the road yeah I would I think the the cautious optimism is is the way we're approaching it and being thoughtful around where we deploy it where we use it how we think about it because you certainly don't want to release it into the wild with a trading algo you know day one and have it you know an unintended consequence but there are other ways in terms of how we're scraping data how we're you know servicing clients how we're looking at you know risks in the in the broader ecosystem and so some some areas where it's less I'll call it in production it's valuable areas where you know you're at the tip of the spear and if something goes wrong you know you can really find yourself on the wrong side and we really have to manage that risk from that perspective okay so safe to say you're not replacing any of your Traders with AI yet not not yet all right and uh I wanted to touch on the topic of dollar dominance I think it's it's quite a big one it's still strong you know you've got dollar milkshake Theory countries like Venezuela turkey or Argentina for an example where there's hyperinflation you're seeing dollar demand rise and there's a there's a good reason for that because during quantitative easing and the liquidity pump you know the us could inflate the dead away but other countries or developing nations rather holding U.S dollar US dollar denominated debt are in a completely different position so it gives them a much um a different interest so to say to de-dollarize do you are you seeing any market demand for something outside of US dollar pairings like a Euro stable coin or like a e Hong Kong dollar for an example I've heard Whispers in Hong Kong about a private Hong Kong dollar coming up um I'm not too sure but what what are you seeing on the client demand size we've seen a lot of demand for non-dollar non-dollar pairs it's again comes back to some of the currency control issues and some of the the jurisdictions but but broadly speaking you know with with the the major g20s yeah we've seen a lot more clients asking for that I'm not sure if it's a function of of geopolitical issues or if it's just a function of ease and and comfort and and quite frankly end client demand okay I'd say it's about having options I mean if you look at the weekend of silvergate and signature I think we had everybody move into Sterling and Euro on like Saturday and then you know we backstopped dollar Banks and then everyone moved back and that was when UBS happened so everyone moved back to Dollars and so I think it's really about having options for your customer base such that if there is a geopolitical issue or you know a systemic banking issue there's flexibility to move and make sure that your assets are secure this is the most focused on you know the D dollarization um the theme this past year than I've ever remembered and I think as you go over is it RMB is it to a new you know brics currency but uh the more I think about it it's just that as opposed to it being which Fiat cross it's more that Bitcoin or cryptocurrency is the other cross and things move away from dollars I think the the main alternative is crypto at this point okay so pairing away from from dollars and more sorry the crypto standard yeah and I mean we've seen bricks they're moving away from the dollar you know going for Ren and be denominated like oil contracts Etc and more and more I guess countries aligned to that side um uh joining that and I think yeah day dollarization is is still front of mind for a lot of us uh how are your businesses actually innovating during this period I mean it's a bear market right now we know liquidity's been it's not much happening not much fall going on are you guys how are you going to remain competitive in this current macro environment Jason I mean we're we're building like crazy I think that one of the things that we recognize is there's going to be a new that that liquidity injection is going to come from a different client it's not going to come from the fomo anymore we know we've seen we've talked about some of that it's going to come from people who are who are driving that demand I mean think about some of the people applying for the ETFs the trillions of dollars that they manage either directly or indirectly and for them to say going from zero to one percent of your Holdings in crypto is a huge huge thing it's it'll dwarf all of us that were you know hey this is the next hot coin or this is the next hot Trend this is going to be sustained and so the things that we're building and the things that we're doing are not only to you know appeal to to that client base but also to to be the bridge between that client base and the large number of crypto natives that we have and so that everyone gets the benefit from that and and kind of merging of those two systems together so I think that's been a big push for us is to use this period as a huge time to build and and to invest in our business and quite frankly to to to be to be there for our clients and be a shoulder to cry on you know when it's you know when it's a Friday night and they decide to sell it down and we're all looking like or worse a Sunday and it's like this again so yeah reservations for that rich yeah I'd say two years ago that the biggest bottleneck we had was just being able to hire enough people fast enough there's just so much demand from token issuers that we're looking for high quality help to help them bring their their tokens to Market and um you know light up the board I think that lately there's still enough work to do to have gainfully employ hundreds of people at GSR but I think that we haven't focused as much on the top two coins Bitcoin ethereum so a lot of the Innovation we're doing is work we probably felt we would have done several years ago to be extremely you know sharp and capable on where most of the liquidity is since with um dominance going up it's as much as 75 percent of the liquidity is in Bitcoin ethereum okay certainly a tough market for you guys as well with like no much retail participation going on and yeah it's rough and Nicola I would have said you know similar to Jason definitely you know we talk a lot about custody this year especially after some of the stuff that happened last year with FTX um and you know if you talk to the true crypto natives in the room they think custody is a step backwards for the industry but actually I don't think that we would see traditional Finance LeapFrog their adoption as fast as they have been if it wasn't for custody and so I kind of see it as a way to get expand the total addressable Market in the space quicker and so while you know it might feel to you know the pure crypto natives in the room that were taking a step back I do really feel that it allows us at some point to take two steps forward once people get more comfortable with you know the space um and and managing the risks that are inherent to crypto yeah definitely and in terms of the new generation of investors gen Z I don't know not belong in that category um how are you guys adopting or adapting your strategies to kind of cater for this new generation because Baby Boom is a kind of waiting out and then you've got this next generation of wealth coming in as well so what are you guys doing that front well I mean the the older generation still spells you know Bitcoin with a space um and so yeah we've started to tell them you got to push it together so the new generation we don't have that problem but but quite frankly we're we're more of an Institutional provider so what we're trying to do is to provide a number of services so for our Downstream clients who are accessing that and who are seeing that coming in can address their client base right if we're going to be the wholesaler so to speak and so you know the demand for those those I'll say more bespoke products whether it's taking staked assets as collateral or doing things of that of that nature I think it's things that we've tried to do because those younger Generations are definitely more crypto literate and and are willing to try to do those things where you know if you look at you know some of the other clients who are the older clients the Bitcoin with the space clients they're they're just looking at it as an asset maybe in a hedge against inflation so there's competing priorities there so you're not gonna no no Tic Tac over here and Rich I'd say one of the most embarrassed things today that's holding the market back is that a lot of the the world's decision makers you think about steering in the U.S Senate the average age is 66 years old and they're they're making 80 000 years somehow they're all fantastically rich and it's not in their best interest to have crypto um you know grow and destabilize the assets there long and what they're most comfortable with but the right side of that is you know take some time but in five years those same people are gonna pass on their wealth goes to the Next Generation and I think these are people that are more welcoming have changed and actually will be happy to to use and adopt all the technology that we've been building yeah definitely users that actually embrace change and Nicola I would say when our traditional Finance clients come into the space and ask you know what is the first thing we should do I think it is it is definitely hire someone that knows about the space they're going to think about things in a different way but then layer on top of it your experience with risk management right so I think it's really about combining the two so everything that you know maybe historically has not come natural for for us I would say like we need to learn from it from the Next Generation right and there's lots of benefits of transparency that the blockchain brings that we can really leverage to make trading safer more secure but we really need to then layer on top experience and teach the younger generation I mean rates have been on hold for a relatively long time not very many people have seen the volatility that has existed in this last year right so I think it's it's really about kind of combining the two and and being open enough to learn from each other yeah all right and we've got a minute left so Market Outlook for next year bullish bearish Nicola uh uh well I thought I was I thought it was bullish but then Jason thinks the ETF is going to get approved in October and I think January so maybe uh maybe I'm not as bullish as Jason is okay Rich bullish bearish January bullish that's why we're here all right I you know I I do think that the market goes where the pain is greatest and I think everyone is planning for an ETF in the back half of the Year early next year and that just tells me that the pain trade is it coming in October which will be phenomenally beneficial to all of us we'll just feel underinvested so go out and get your corn now I'm gonna go bullish because bullish exchange thank you ladies and gentlemen