Was it easy to transition? My clients are outside France, and most of my clients are remote. I am a one hour flight from London. I am an independent consultant. I am working on the structure of non-security tokens and how the market works from the point of an institution. What is happening on the market at a granular level and how will it affect their market?
How did you create this job? It was luck. I was at BNP Paribas in global markets. I helped build a team for DLT/blockchain. What did we want to do? I got frustrated by working in a bank. I took off in 2015 and tried to start up a company doing derivatives clearing. The market was not ready. I was watching the right projects I guess in 2017. This is my 6th year working in the cryptocurrency space. Industrialisation of Camp is where I would fall. We talk about FinTech and Crypto-Economics, talking about coins and the blockchain side of it. I focus on finance and economics as they pertain to these new technologies. I am focused on the institutional side of things in trading.
Miners need to borrow money in fiat and get paid back in Crypto. They want to lock in their revenues on a dollar basis. CME futures do not take delivery on expiry, and I take the dollar value. Cryptocurrency could be easier from a bank risk perspective. I know that banks are trying to purely hedged on everything they offer their clients.
Is it simply about providing regulated products into the market or are their other products that need to be developed first for institutional clients to move into this space? There are a lot of boring stuff to do with these things. How to price/insure or value a bitcoin if you are a hedge fund? What price to the mark to market that if clients want to add or subtract funds? It is not key management, which is safeguarding cryptocurrency. There is so much grunt work that needs to be done.
Currently, cryptocurrency exist in a world of regulatory arbitrage, in this grey and black area, where existing institutions cannot go yet. This was the narrative for the first 5 years of Bitcoin. I guess it still is. Good or Bad, it exists. What I haven’t been able to wrap my head around long term what the middle case and best case is for Bitcoin at the institutional level? What are the long-term benefits are of middleware fintech development?
I think we give financial institutions credit that they don’t always deserve. They are pretty simple creatures. They look at something and think can I make money out of that? How much is it going to cost me to make money on that? We talk a lot about DeFi being around collateralised loans. I can go out and borrow around $750,000 on my $1 million of Bitcoin – I am taking a 25% haircut on that loan. The banks need to realise the risk on that loan – they are leveraged 9x to 11x. Where else can I make money on the basic bid/ask spread? They really like the idea of doing mergers and IPOs in the case of mining they can make money on these. These start to be more attractive to them.
Market Cap terms it is large, but there are not many large companies. Maybe if we see more money coming in then maybe we will see banks getting more involved. Sanctions getting around them is a use case for bitcoin and ETH. Those houses knew they could make a lot of money out of it. In Switzerland trading Iranian oil was not a big deal. This is a fairly new thing having sanctions for dollar trading involving evading sanctions.
Baltic Bank connected with the Russian sanction evasions. The new thing is the governments to use finance as weapons against other countries. It is much more efficient to squeeze them at the financial system level because it all goes through the US. If Bitcoin becomes more stable and less volatile, then it would be new system. Personally, I know that here in Russia pre-2018 people would send the money they earned into Bitcoin and transfer the money back to China to pay their operational costs, now they use Tether to achieve this. The dollar is what people turn to in volatile currency areas.
DeFi takes your volatile currency and turns it into something else that you can use and that is stable. Maker is not overly efficient. Banks only need 10 or 11 cents per dollar. Deeper derivatives markets may start to tame cryptocurrency prices over time. How do you value a Bitcoin? Sam believes that Bitcoin volatility will not change even over time. The volatility will remain.
Colin’s take is that it has not happened yet. Inefficient market structure is what is driving volatility in Bitcoin. What we see in more mature markets is that we have benchmark prices. We will see this happen in Cryptocurrencies eventually. The technology is still only 10 years old. It will come in stages. We will be better numbers to understand hashing rates so we can get an idea of what value should be for Bitcoin. We need to be able to identify certain fundamental aspects of value in cryptocurrency which can lead towards pricing models, in the way it has done for every other one-dimensional asset class via equity, fx or commodities. It’s the one thing that really hasn’t come out yet. Stock to flow is the main model but it is predictive. It is never that easy to make money on capital markets.
My take on Stock to Flow particularly is that there is a fundamental nugget of truth to the notion that the market bases price is based off of new supply coming into the market. Basically, seigniorage or block rewards, as well as the free float in the market that exists which stock to flow, does not take account of. There is 97% of the Bitcoin on the market. Only 3 million bitcoin is left to come into the market. Miners are the primary sellers in the market or one of them. They are naturally selling. The amount of inflation from the last 3 million is relatively minimal. Bitcoin’s price is a demand function because it supply is already hard-wired in.
The volume of bitcoin traded is above 2.8 million a day. The remaining bitcoin to enter the market is what is traded on average daily in volume right now. There are people who are very bought on the idea of bitcoin. If there is less circulating supply, then demand will result in the price going up.
It matters what happens on Layer 2 and 3 that matters in the long run. It is why DeFi is so interesting. The DeFi has an openness to development that is lacking in the Bitcoin community. The Ethereum community is open to building and trying new things. In his fundamentals of Bitcoin as a currency were stronger than Ether but he was very excited about Ethereum given what is being built on it. Whether this should be built at the smart contract level or not is debatable.
Using interest rates to define the time value of Bitcoin or Ether would be a huge step for Cryptocurrency and would bring in huge interest from institutional and more traditional investments or family office money betting on the rates going up and down. This would bring a lot more value into the network than putting new features into how Ethereum or Bitcoin protocols work or making transactions cheaper. If you can make money on top of these protocols, it begins to get interesting.
The most interesting thing Patrick Dugan said is the funding rate on BitMex is the future. The most incredible thing to watch day today and the funding rate you see. It is the one metric you can show a bank or hedge fund to get them excited. All that value can be extracted by smarter people who are building big portfolios.
Interest rates is finance. And If you want to get into the big leagues with these players, they will want to see things like basic interest rates but more than that what are the term structures I can begin to play on. So how do I lend out 10 million bitcoin for 5 years and then borrow it on a daily basis and earn a spread between an interest rate of 5% a year on a ten-year basis? This is being done right now in the DeFi space right now. It doesn’t exist quite yet in DeFi but they will get there. Right now, there is not a lot of fixed-rate financing and the fixed-rate financing that is there tends to be extremely large spreads. You can lend but not really borrow. Collateralisation is possible but only on several platforms for large amounts.
For example, Torque – I have been doing this DeFi fund I am running, if I want to borrow a stablecoin like DAI on Torque the annual interest is 6% and I need to put up 150% collateral in Ether or some other cryptocurrency which makes my leverage pretty low, meaning then I can only lend it out at 4% which is not very attractive. I really want to lend on a fixed rate long term and borrow on a variable rate short term or speculate the other direction.
What do you think about the compound tokens that have been created? They are a really interesting thing. The market is not very efficient on them. There are interesting arbitrage opportunities between the underlying token, like DAI and Compound DAI as an example. The exchange between them should be pretty fixed. As a holder of DAI, you need to lock your tokens somewhere to get the interest rate of 4%. Earning compound interest on tokens where you can tie them up but still lend them out.
This space is going to get really interesting. I love to see the innovation. People should do a bit more reading in the history. They are starting to look a lot like CDOs (Collateral Debt Obligations). I am not signalling it but eventually building more leverage is the goal, and this will result in really scary products being created out there and create risks that people do not understand. A fifth-order derivative of DAI for example – one hiccup can cause everything to go up or down by 30% as a result. This could create a huge problem. Synthetics for me, is exactly like this. Synthetics is a second-order ERC20 Shitcoin that they are basing all these other tokens off of. We have had this before.
People need to think about the fundamentals of the market, not the happy path which is what developers focus on – closing off all other avenues through smart contracts. People should be asking what are all the risks? what could go wrong? This is the approach in finance or trading. On a trading floor, we would have all these what-if conversations about what happens if things happen that are not anticipated?
Maker didn’t fail last time. People aren’t really focused on the principle risk, which is not Ether going up or down, what happens if you can’t get liquidity or can’t move money into Maker? Or because the price is going wherever you are going but you can’t move the contract or you get stopped or you have network congestion? There are all these risks that no one is considering in the complexities of building these products on top of the network.
There are lots of seemingly minor things that can have huge butterfly effect, and that is the way the finance system is built based on the interconnectedness. This is one of the selling point of DeFi and for people to start talking about what we do if things actually fall apart. Usually, that come in hindsight and not in foresight. Stress tests are good things.
The hubris that led to the 2008 crash was about the Eurodollar markets and it seizing up. It was not about property but the Eurodollars market. 2008 will never happen again, but the interbank lending and leverage issues will never happen again but there are other risks that we are going to have to deal with eventually. Currency swap loan or corporate debt will be the next blow up on the onion skin. Junk bonds/corporate debt there are so many things that go wrong. What is the catalyst? Where is the major pain point? It could start it but it may not be the thing that hurts the most. The worst-case scenario is devaluing the dollar by 20% what would the knock-on effect be worldwide? It would be apocalyptic. What is the use case for these cryptocurrencies? Are they a safe haven from major currencies? I don’t know.
A recent BIS survey were the biggest swap currency on the planet; so they have a big currency with negative interest rates, so it makes sense. Money was a bear bond or a commodity asset to a debt instrument that enable a surveillance industry. You could say visa and MasterCard are at the forefront of this.
Do cryptocurrencies combat surveillance capitalism, or do they enshrine it? I hope they can bring privacy into cryptocurrencies. There are all these analytics platforms that track and trace wallets and address ownership. For the currencies that have tried to address privacy like Monero, no one uses it. Because they cost more money, people do not use shielded transactions. I want to remain optimistic that there is a catalyst for privacy to become a priority for crypto. Governments want complete traceability through AML/KYC and tracking.
Is privacy necessary? People lie to themselves about all the data they are creating. Cryptocurrencies create public data on the blockchain; people can use this data to create social credit scores like china, and this is possible now. It does not have to be explicit. It could be something that creates bias. I don’t know if what we are seeing now is any different than history. Maybe we are becoming more aware of this grouping of people. Has it actually changed over time or is it just more visible?
It does happen, and castes have existed for thousands of years. As a modern society, we need to be more vigilant about those things. How can we counter that with new technology? Maybe that is the question we need to ask.
Being an American is quite a tax on you. It requires huge amounts of paperwork being abroad. Being a citizen in an EU country has benefits like free movement. Things don’t meet up rather than less or more. It is onerous, that is the word for it.