For all the talk about liquidity, bitcoin and crypto-more thinly traded assets. Investors who buy and sell large volumes can not do so directly, without slippage, or changes in price between order and execution.
They switched to over-the-counter (OTC) trading desk to manage them, whether buying crypto for the first time, or trade to generate alpha (above-market returns).
As a result, this table handle anywhere from 30 percent to 65 percent of the total market volume crypto, depending on who you believe forecasts. To get a look inside the business, CoinDesk Research spoke to two veteran traders OTC in a live webinar on October 28
Martin Garcia is the director and co-head of trading at Genesis Trading. Yinfeng Shao is a former trader at Circle and now CEO of OTC development stage company, reciprocal Trading.
OTC table taking a huge risk, while. Traders like Martin and Yin is assigned to manage risk by transferring large amounts quickly and offsetting the derivatives markets, including BitMEX, Huobi, OKEx, CME Futures and Bakkt Bitcoin. (For background, CoinDesk Research has produced a white paper on the state of crypto derivatives market. You can download it for free here.)
As a result, they are the most sophisticated traders in derivatives exchanges crypto. Here are some insights Martin and Yin together during the hour-long conversation we have.
1. The investor mentality has shifted
The mentality of investors has changed since the earlier days of crypto, of the business-like for hedge-fund-like.
“There is more speed among traders that are out there, whereas in the early days it was very much more buy-and-hold” strategy, said Martin. “People today understand that the market is super stable and a lot of different crypto funds and those that are out there, they try to add alpha for their shareholders.”
2. Derivatives market moves in the spot market
First, start the derivatives exchange market moves more often than in the spot exchange.
“Because there are so many trading venues, the constant question, where the initial act?” Said Yin. “Often it starts derivatives exchange because it is where many people have a connection and that is where many of the most highly leveraged bets in progress.”
“Crypto is already a fairly random, stable running in terms of price action and collection of these derivatives and exchange their lists effectively act as leverage on top of it,” he continued. “Every time you start to move, there is a good chance it will get worse as the number of open bets that are out there.”
In isolated instances, such as the flash crash May 17, a small amount in the spot market may lead to a major step in the offshore derivatives markets, in particular BitMEX, allowing traders to manipulate the spot price support their market derivative positions.
Theoretically, it is possible on derivatives crypto regulated markets such as the CME, but it is more expensive and difficult because leverage is not as high.
That’s not the only way the derivatives market could fail.
“Where things tend to break down a little bit and you get more slip is when you have the ability simply exhausted everybody to actually use derivative instruments for hedging, so if the amount of the guarantee that every person who is posted is not enough, or market conditions such that you really can not get access to this platform, “said Yin.
3. Two products dominate derivatives
The most popular product is the perennial swaps, supposedly created by BitMEX. futures crypto is a close second. Some OTC desk can provide custom swaps and derivative products, including contracts for differences, but the two products have dominated the market volume so far.
Bitcoin options appear, but still a fraction of the overall volume. As providers including Bakkt and CME has announced plans to bring bitcoin options on futures markets, Yin and Martin said this might prove attractive to large investors enter the crypto, looking for a hedge against big losses in a volatile market.
“I think it means there is a hedging strategy that is more sophisticated. It allows people to become more comfortable with the exposure spot, if it can be more easily protected, “said Martin. “The market is moving very fast and a lot of places a greater wanting to start trading, there are a large number of major risks attached to it. How do they protect against downside crazy move? Options may very well help eliminate some of the risk to them. ”
Listen to the full webinar to Linden and Martin opinions unfiltered risk, market liquidity and derivatives in crypto.
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