Crypto ≠ risk pandemic vaccine

Wednesday, March 4, 2020

Choosing between selling n95 face masks in exchange for stablecoin and publishing data driven insights about crypto, we clearly prefer the latter. In this update we shed light on exchanges (Deribit and FTX) looking to set the benchmark for crypto vol trading and carve a niche ahead of the incumbents.

Wars, pandemics, and crypto volatility

If you’re active in crypto like us, you are inclined to think about financial markets, “black swan” events, and exponential events. Nassim Nicholas Taleb and Naval are our saviors. The first quarter of this new decade has given us plenty of geopolitical events that have caused many crypto pundits to salivate and want their cake and eat it.

  1. “Rooting for WW3 and BTC all-time-high” – The assassination of an Iranian general by the US in January and subsequent tension in geopolitics was paired with an uptick in price and plenty of “BTC is a safe haven” comments from your crypto twitter pundits.
  2. “Party like it’s 1999” –  Bitcoin crossed 10k in February while equities, tech stocks and risk-assets rallying in dot-com fashion. Familiar memes like “This time it’s different”, “Institutions are coming” and “This will be the last time Bitcoin will cross 10k” popped up everywhere. 
  3. “Want a slice of lime with it?” – While the crypto community has done an amazing job analyzing and debunking stories about corona/n-covid 19 most of us have been silent about Bitcoin prices falling in line with risk-on assets while gold and treasuries have rallied. Until mask manufacturers start accepting bitcoin as a means for priority delivery or all of Asia refuses to touch cash, crypto as pandemic-hedge seems far fetched to us. 

This market volatility has benefited the incumbent (spot) trading venues. Coinbase and Binance have seen volumes bounce up in the first two months of the year. However, the more impressive growth comes from the derivatives exchanges that focus on crypto volatility products.

2 phases of volatility trading

Taking a simple approach, we distinguish between two phases of crypto volatility trading:

  1. In phase 1 of crypto volatility trading, exchanges offer the ability to trade on margin and leverage for people who want to get even more exposure to the volatility of the underlying cryptocurrencies. Bitmex is the best example of leveraged crypto trading for retail punters and CME and Bakkt set the standard for “old fashioned” financial institutions wanting a little go at Bitcoin through cleared futures.
  2. In phase 2 of crypto volatility trading, exchanges offer instruments that allow volatility itself to be traded through options, straddles and volatility indexes. 

Two exchanges have emerged as the pioneers of phase 2 through significant growth and innovative product offerings: Deribit and FTX

Deribit: Dutch Deritives Dominance

While Netherlands-based Deribit also offers futures and swaps, they are mainly known for commanding +90% market share in the crypto options space. 

Deribit saw impressive growth in 2019, clearing more than $150M of Bitcoin options in June and four +$100M days in the remainder of the year. The first two months have been spectacular, with volumes regularly crossing the $100M and $150M mark.

FTX: Roadmap killers

Having launched only in the summer of 2019, FTX has been launching products at a rapid pace, keeping crypto speculators entertained and already handling more than $1B of crypto derivatives on a daily basis.

Something we find innovative is that FTX has launched “abstracted” volatility products (e.g. FTX’ BTC-MOVE product is a straddle on Bitcoin), which allows people to trade volatility without having to enter into separate option positions. However, this does need to come with appropriate education and disclaimers for all types of investors.