As we close the books on 2019, I wanted to take a moment to reflect on the work we have done over the past year and share some thoughts on how GSR will expand into 2020.
Our talented team has grown to 32 people across 8 countries, focusing on providing cryptocurrency liquidity, risk management strategies, and structured products to sophisticated investors and crypto native institutions in the digital asset sector.
Director of Investment, Jakob Palmstierna, gives his thoughts on the current regulatory environment at ‘Institutional Talks’ run by GSR & OKEx in September 2019.
Over the last 12 months, our core Market Making and Trading operations worked with a record number of counterparties. We also gained substantial ground in the nascent crypto derivatives market, pioneering many industry firsts such as the Bitcoin Variance Swap. Also notable is our risk management partnership with Interhash, who currently manages 40,000 mining rigs and is a strategic partner of mining giant Canaan (NASDAQ: CAN). We believe developing risk management strategies for established crypto companies will play an essential role in the maturation of these businesses and positively influence the industry’s attractiveness to outside investors.
Lastly, we continued to promote a fair and orderly marketplace by lending our expertise and insight to the Code of Conduct released by the Association for Digital Asset Markets (ADAM) on November 12th, supporting professionalism and ethical conduct by all digital asset market participants.
Co-Founder of GSR, Rich Rosenblum, speaking at the Mining Summit in Chengdu in October 2019.
Engineering & Research
GSR’s competitive edge continues to be our excellence in research and software engineering. Our ambition remains leveraging our proprietary trading platform to offer tailored services and products for the trading needs of our counterparts. Through analytical feedback loops, our smart order execution ensures the most sophisticated standards are upheld and consistently improving. Our data feeds have expanded and run 24/7/365, and data validation is undertaken each day. We study seasonality patterns of liquidity and implement them continuously in our algorithms.
Furthermore, we made an effort in 2019 to focus on transparency with all of our trading counterparties. We offer fully traceable and auditable reporting at the most granular level, allowing for full visibility and adaptability. In doing so, we believe we are raising the bar for trading reports, performance communication, and strategy customization.
Market Making
At GSR, we continue to consolidate our position globally as one of the most reputable and capable market makers in digital assets. We have deployed hundreds of models in as many crosses and continue to strengthen our connections with over 40 liquidity pools, continually paying close attention to the optimization of this infrastructure. This year, GSR partnered with Blockstack in providing liquidity to the Stack token (STX). Blockstack is the first-ever project to receive SEC approval for a blockchain token offering under Regulation A+. We continue to evolve our service offering by working with a variety of new and exciting protocols, as well as established multi-billion dollar projects, some of which have traded with us since 2013. In the last 12 months, we have also partnered with many of the top exchanges, providing liquidity and constructively helping their technology teams to improve their APIs. We continue to share our knowledge and research with the community by publishing a Guide to Market Making, what our ideal Crypto Trading API looks like, and our thoughts on how to stop Wash Trading in Crypto.
Structured Products & Trading
GSR’s Structured Product Offering (SPOs) were developed to facilitate highly customized risk management solutions for counterparties with digital asset exposure. This involved pioneering new tools for risk management, including the Extendable, Accumulator, and Binary Options. In addition to partnering with derivatives exchanges and acting as a critical volume driver via programmatic liquidity, we have championed OTC options, trading the first Variance Swap on Bitcoin in June 2019 with crypto investment firm Blocktower Capital.
Furthermore, we have been working closely with crypto native institutions to develop products like Swaps, Collars, and bespoke solutions to protect miners against market losses. For example, our team built Volatility Swaps that allow exchanges to hedge against a drop in trading volume and fee revenue. Our yield-enhancing products allow for both token projects and miners to effectively earn interest on their cryptocurrency through lending and Call Overwrite strategies. We will continue to build and develop advanced risk management strategies for the crypto ecosystem in 2020 as it moves towards becoming a more risk-conscious industry.
Market Standards
In 2019, GSR continued its efforts to establish fair standards for digital asset markets. We are proud to be one of the founding members of the Association for Digital Asset Markets (ADAM) because we believe trust and fairness are essential for the healthy development and evolution of the global digital assets industry. Setting global institutional standards and practices are equally critical for cryptocurrencies and related products to be accepted as legitimate investments and components of a portfolio strategy. Established companies in the digital asset ecosystem must use their experience and expertise to outline best practices and ensure a level playing field is created and maintained for those considering entering the industry. ADAM’s code of conduct is part of a long-term effort to promote professionalism and ethical conduct by all digital asset market participants, and GSR is proud to continue to lead this effort in 2020.
Cristian Gil, Co-Founder of GSR, discussing how we can improve industry standards in May 2019, at Token2049.
Asia Growth
In the Summer of 2019, GSR appointed Xin Song as a specialist advisor to oversee expansion into Mainland China. With this move, we began focusing efforts on institutional counterparties in China that require advanced cryptocurrency products and services. In a short time, we have seen substantial success in this region, which was highlighted by our recent collaboration with Interhash, a strategic partner of listed mining equipment manufacturer Canaan. GSR will continue to grow its presence in China in 2020 due to its importance and influence in the crypto market
Xin Song of GSR speaking about the growth of Financial Services and Risk Management Solutions for miners at the Miner Summit in Chengdu in October 2019
What to expect in 2020
The year ended with Bitcoin just above $7,000, almost 50% off the highs of over $13,000 at the end of June 2019, and a significant drop from the brief recovery to $10,000 in October 2019. In light of this recent negative sentiment, it’s worth noting that Bitcoin was trading around $3,700 on January 1st, 2019, and both hashrate and difficulty have grown consistently to reach new highs. Throughout the year, we saw periods of high volatility but also periods of lower volatility ranging from 103% to 20%, one reason for the popularity of GSR’s Variance Swap.
Co-Founder of GSR, Rich Rosenblum, gave his thoughts on the rise of Crypto Derivatives to the Wall Street Journal in July 2019.
In the last year, we have seen some of the most prominent technology and financial institutions plan their entrance into the world of digital assets, alongside the European Central bank contemplating stable coins, and the US Federal Reserve exploring the concept of the digital dollar. It was perhaps not been the year of adoption we had hoped for as crypto continues in most cases to be a solution without a problem. However, there is a long list of reasons to be positive for this market in 2020. Some key areas to watch:
Safe Haven Correlation
Increasingly we believe digital assets, but Bitcoin specifically, will behave more in line with safe-haven assets. During 2019, Bitcoin showed glimpses of this, trading closely with an increase in Gold prices over the Summer and more recently reacting to the uncertainty in the middle east. Bitcoin remains an exit for citizens subject to irresponsible governments’ fiscal and monetary policies, which could be argued is widespread amongst G7 nations. The midsummer actions of the Federal Reverse to lower rates seemingly in support of Trump’s US trade policy is a questionable example of central bank independence. We see these loose monetary policies as a major long term tailwind for Bitcoin adoption and its growth as a hedge and store of value.
The Halvening
In May of 2020, Bitcoin will undergo another halvening. Block rewards will reduce from 12.5 to 6.25 BTC. This effective reduction in the inflation rate of Bitcoin has the potential to be a major cause for volatility as miners will see their margins cut in half overnight. Those not running at significant profit margins already will be forced to turn off and run tighter risk management processes, unless prices increase dramatically. GSR is positioned well to support miners in their goal of more effective risk management through the creation of structured products and other instruments that constrain risk parameters. The producers of Bitcoin who are not prepared will be left hoping that the halvening will accelerate the idea of Bitcoin as a scarce asset and be a catalyst for demand. We hope as well, but miners still standing at the end of 2020 will likely also be those who are best hedged.
The Growth of Dark Pools
The number of dark pools in the cryptocurrency market has grown over the years, and we believe they will become more widespread in 2020. The growing prevalence of dark pools should benefit institutional market participants who wish to trade block-sized orders. The type of new liquidity venue could take business away from exchanges. However, a dark pool is only as trusted as its operator.
Margin Trading in OTC Space
Margin trading is now available across the majority of cryptocurrency exchanges, and it has become the default rather than a competitive edge. More conservative exchanges offer 5x leverage, while Binance announced 125x leverage on their futures market this past October. Extreme leverage is a widespread discussion in the market that can be seen as irresponsible when offered to uninformed retail traders. However, it is likely we will see this type of trading offered more widely across OTC desks to more sophisticated investors.
Exchange-traded Certificates
While many are still waiting for an ETF, bitcoin certificates first emerged in 2017 to meet the growing demand for regulated financial products that have cryptocurrencies as their underlying asset. These types of investment vehicles provide traders with indirect exposure to bitcoin. The rise of exchange-traded certificates will continue into 2020 to satisfy the growing interest of investors who do not wish to trade crypto directly.
First Noteworthy STOs
2019 was supposed to be the year of the STO, but that never came to fruition. Despite this, capital formation is arguably one of the most efficient areas of this market. The ICO craze left behind a swarm of scams and bad press, but the idea of quickly raising capital using this technology in a more regulated and controlled setting still holds great promise. Recently, the SEC proposed an update to the Accredited Investor definition that would increase access to traditional investments, and less binary legislation in this area could help open the door to STO’s.
Increased Volumes for Options and Structured Products
Options have been the fastest-growing product segment of the crypto market in 2019, with the trajectory of volumes likely to accelerate in 2020. Bakkt (ICE) started its options exchange on December 9th, 2019, which will be followed by the CME on January 13th, 2020. These two platforms engaged in a competitive race to launch, and other major exchanges are now jumping in. In traditional markets, global GDP hit $90 trillion in 2019, while the derivatives market cleared $900 trillion. In crypto, it is still early stages for this scale of trading, with relatively small volumes in comparison to the total market cap of the industry. Nonetheless, it should have a significant influence on the maturation of the space. This is the base with which a whole host of other vol related products can be built on, particularly as it relates to corporate hedging and risk management.
China Dominates
The People’s Bank of China (PBOC) is only a few months away from launching the digital version of the Chinese Yuan, which will make China the first country in the world to have a digital central bank currency. On October 23rd, 2019, President Xi said China must make a “greater effort” to develop and apply blockchain technologies — the question is when and not if, China will release its state-backed digital currency. This launch will stir a lot of interest from not only the digital asset space but also global macro markets. It will be interesting to watch the response of the US Federal Reserve and the European Central Bank. It is also entirely possible that now that China has a focus on this industry, they may aggressively target assets that do not fit their ideology. A digital yuan is the logical first step to enter the market. However, the fate of Bitcoin in this region, and other assets that are built for privacy, remains unknown.
Digital State Currencies and Stablecoins Drive Regulatory Action
Although bad actors are still more widespread than we would like, we expect more regulatory clampdowns in 2020. Regulatory progress has been slow, however with more nation-states pondering their entrance into digital assets it is reasonable to predict that this will speed up, not slow down, the process to regulatory clarity. China’s progress in the digital asset space should drive competition between global superpowers, putting pressure on rival governments and regulators to not get left behind.
Thank you
Thank you to all of our trading counterparties for your continued trust in GSR. We view all of our relationships as partnerships and wish everyone the best of luck navigating 2020.
Finally, I appreciate all the hard work and sacrifices made by our team and their families, as well as the many service providers and counterparties we engage with daily to operate effectively in a 24/7 business. I trust that our communal efforts will have positive impacts on the future of both technology and finance, and I thoroughly enjoy being part of the dynamic movement that is crypto and blockchain.
Regards,
Cris Gil and Team GSR