Video title: A conversation with Rich Rosenblum | Co-founder of GSR Trading
Transcript:
INTERVIEWER
0:00
Hey, thanks for tuning into the Scoop. I hope you and your family are safe during these unprecedented times. Before we dive into today’s episode, I want to take a minute to give a shout out to our sponsor. If you’re building in the blockchain space, then I want you to know about a company called Block Set. I’ve been speaking with their team closely and I have no doubt that they are going to enable the next wave of developers and business leaders to build amazing applications. Block Set offers accessible data from all the major chains. Through easy to use API, it acts as your hosted blockchain infrastructure. It ultimately enables high quality apps to be built at a fraction of the cost at a fraction of the time. Go sign up for a free account@blockset.com and start building today. Stay tuned for more information later in the episode. Some housekeeping before we get started, I really enjoy chatting with our guest Rich Rosenblum, co-founder of GSR, a crypto trading firm. Rich is a former oil trader and we touched on some interesting points about market dynamics in oil and crypto. But this episode was recorded prior to oil historically falling below zero. We wanted to publish this a little bit closer to happening, but I think it will be interesting context given what we’ve seen recently in oil markets. I hope you enjoy the episode. 13s Ladies and gentlemen, we have a very special episode of The Scoop with Richard Rosenbloom. Not blum like a flower blooming as he puts. He’s the co founder of GSR Trading. They are a liquidity provider and trading shop in the crypto options and derivatives market. 1s It’s a corner of the market that, if you’ve kept up with our coverage, saw breakneck growth throughout 2019 with new players coming on board, new exchanges, new trading operations coming into the space. But since the Coronavirus linked health and financial crisis has gripped all asset classes, we’ve seen it come under a bit of pressure and Rich is really in the thick of it all, so we’re excited to have him on. Rich. Thanks so much for joining us.
RICH
2:22
Thanks for having me, Frank.
INTERVIEWER
2:24
No, it’s really my pleasure. We’ve gone back and forth on the telegrams too frequently. So it’s great to sort of have you on the show to talk about your expertise. So I hit you up, I guess. It was a few days ago. About this piece I was working about. Volumes compressing in the derivatives, space in the crypto. Options. Space traders and market makers were telling me about how we saw, obviously, a widening of spreads. We’ve seen some participants retreat from the market. Give us the quick overview about what the state of I guess we’ll start with crypto options is right now. We’re recording on April 15, 2020.
RICH
3:09
Sure. I think it could help to, you know, give you a bit of a background before we jump into it on GSR to help frame up the the conversation. You know, having started in 2013, we’re very much a crypto native institution, and we got started using software to trade programmatic liquidity provision, largely for tokens, but then a couple of years later, this is still before ethereum, before Tether even got started, we were already making markets for issuers as well as exchanges. But then in the past two years, we’ve realized that there’s a void in the market for risk management services. So even though that’s a bit more of a barbell approach since focused on the milliseconds, the microstructure is something we’ve done for prior six years. The last couple, we’ve continued that approach servicing issuers to realize that it’s the miners that need some help facilitating force management. And we’ve built out a framework for the collateral and margining of OTC flows that are bilateral. So there’s a lingering risk component. And I think that that’s a helpful segue into your question, in that when there’s crypto native institutions, we’re fully focused on the space, and so when the market gets more volatile, there’s a lot more to do. The phones ringing off the hook, or working nights and weekends versus the groups that aren’t dedicated to this space. And they’re just trading once in a while on CME, and it’s basically an ancillary product, and they’re a macro hedge fund, and they focus on commodities, they focus on FX, they focus on equities. This isn’t a full entree for them, it’s more of a side dish. So when they’re suddenly very full from their own entrees in the equity market crashing, FX going crazy, they’re no longer focused on crypto. I think that’s why we saw the initial fast drop on March 12 and 13th. If your focus is on other parts of traditional finance, and crypto is more of an afterthought, if you need liquidity because you need to make margin calls, you need liquidity because you have redemptions coming at the end of the quarter from your investors due to the losses, you want to sell them in order of liquidity. And there’s good transparency and liquidity in crypto. So some of those players getting out ended up causing that drop. But then we’ve only seen really buying from the point the market traded forth thousand in bitcoin, including from the miners. And there’s certainly been a focus on risk management, and there’s been more interest to trade volatility, but I think it’s not been on the same venues that the less dedicated players had been focused on.
INTERVIEWER
5:43
To what degree does the fact that since we bottomed out under 4000 in the middle of March, the fact that the people coming in are mostly buying? Is that the force behind the build up of liquidity that we’ve seen? I
RICH
5:59
think that part is that there’s been a dislocation in the market. If fundamental value would state that the market should be closer where it was trading in January or February, traders that are used to thinking that that’s still closer to the real value are willing to buy. When the market drops. They’ll buy on weakness. I think we’ve seen for the past two years, whales aren’t getting out of the market, they’re increasing the amount of bitcoin they’re holding in their wallets. So I think the drop has just been that they think that there’s good value at 9000, there’s even better value at 5000, and even better at 4000. So they’ve added on the way down. Another thing is that there’s a catalyst on the way people are focused on this having for not months but years, and now it’s only a couple of weeks away. And so I think that’s an event where fundamentally it doesn’t have any impact until the event takes place. But when it comes to market flows and positioning, people will want to buy ahead of the housing. So I think that’s part of why the market was positioned a bit long going into the March sell off. Then even though they got washed out of levered positions, they jumped right back in because they have faith that the market is going to rebound even if it takes a couple of months.
INTERVIEWER
7:13
Well, that kind of raises the almost omnipresent question of is this event, which, according to a rival crypto currency news site that has a countdown clock? I won’t name the site, but we’re 26 days away from the happening event. 1s Is it priced in?
RICH
7:34
I think that in an efficient market, usually news to some degree is going to be priced in. I think we still have a bit of a disjointed market in Crypto and in the middle of a unique event, the Pandemic. I think it’s not fully priced in. I think probably a bit too cheap. Don’t like to usually give forecasts for the market. We tend to be less directed, directional in nature and more quantitative in our trading. But I think in this case I do see more upside. Given the fact that we were so much higher a couple of months ago and the amount of selling each day from their mining rewards is going to drop in half, I think there’s more upside probability in the next few months than downside. And
INTERVIEWER
8:15
It’s interesting. I want to go back to the point you made about miners and how they can hedge their risk going into this event with more bespoke trading products rather than just vanilla options on a CME or other types of derivative exchanges. Walk us through how these products are structured and. 1s What is the gap between what exists out there in the market right now and what some of these miners need?
RICH
8:45
That’s a great question. In terms of what exists, the market is very small, not only in terms of the notionals, but also on a relative basis to the linear markets. There’s a healthy amount of futures trading, of spot trading in bitcoin and some of the other top tokens, but the relative amount of options is small. When you look at traditional markets, options can be up to half or more of the total trading and open interest, but in crypto it’s still in the single digits. So there’s a lot of room for growth in the derivatives and options space, even if there’s not growth in the general space. But we think there’s going to be a lot of growth in the space as well as some catch up on the option side. So what’s available now is vanilla options, puts and calls and you could create your own strategies, a call spread put, spread fence, but what’s traded on screen is vanilla options. But in terms of what’s available, once you use an intermediary like a GSR, we can offer various different products that we’re bridging over from the traditional financial landscape such as extendables or accumulators variance swaps. We’re not reinventing anything, we’re just bringing it over from the traditional space. There’s other products that we’re working on that I think are more unique to crypto hash rate derivatives, difficulty swaps, staking derivatives, and given that these are products that we’re going to offer to a broader marketplace, there’s only so much risk capital GSR has. So we’re working to productize these markets with other partners so that it will be very useful to the community for years to come. And cash rate derivatives is the most seminal in that if you’re a minor there’s a whole host of different risk exposures that you have, including energy prices, the use costs for your land, you have to buy on the cost of the technology, you have to constantly be replacing the machines. But another one in addition to the price of bitcoin is the difficulty that you’re facing, which is based on the number of other competing miners in the ecosystem. So if a miner has the ability not only to hedge by selling forward bitcoin prices, but to sell the actual hash rate or to buy difficulty, then that goes a much longer way to reduce their proxy risk and hedging takes away their more explicit exposure. So there’s a large interest to sell house rate outright or to buy difficulty, but it’s going to be still some time to properly productize the market.
INTERVIEWER
11:22
You mentioned before we turned on the Mics that. 1s Large miners in China specifically need a firm like GSR sitting between them to provide the risk that is more adjusted to their risk needs. Instead of bullet XFree options, they want something more. You mentioned some of those products that you guys have rolled out to address those needs. So what are sales looking like? I mean, are they sort of coming on in now? When did they start to sort of look for these new products? What’s demand been like?
RICH
11:56
I’d say the interest level has been high, but it’s been more of a hand holding and learning process. We are trading. But my comparison isn’t necessarily based on other firms. It’s going to be based on my prior history. I was managing the oil derivatives business at Goldman Sachs prior to GSR and the main flow in commodities each year would be the country of Magic, Mexico. Hedging their yearly oil flows by buying bespoke put options on roughly $20 billion of risk. And you know, in the headlines this week, we see that Mexico is in a unique negotiating position with the US. Russia and Saudi Arabia because they still have that hedge on. So it’s very clear to us at GSR that these hedges can be quite powerful. And we’ve been explaining it to the marketplace, especially the mining community as well as the issuers just sat on ETH when it was at $1,000, ran down to $100 and then started getting more serious about Hedging. So I think that, you know, it’s been several years that we’ve been advocating the benefits of having a, you know, a smart risk management Hedging framework in terms of demand. We’re very much in a period of learning and building and I think that, as we’ve seen, educate counterparts, help them really understand their exposures and then eventually they come around to wanting to hedge with us. And in terms of whether we call it intermediary or just bilateral trading and we can use the exchanges for liquidity, I’ve been in prior marketplace. If the country of Mexico wants to go trade, they’re not going to go trade on the CME bullet expiry futures. They’re going to trade a more bespoke product, average rate swaps, average rate options. So in the same way, we can provide these average rate options which are more aligned with the balance sheets and liabilities of the miners or issuers. And it just makes it a bit more simple since the services we provide are a bit more high touch and personal than an exchange would have, we have hundreds of customers that we’re interacting with on a weekly basis, not tens of thousands. It would be difficult for an exchange to go out and explain these products in the same way we can and come up with a custom best fit for one of the clients.
INTERVIEWER
14:09
I think your background in oil is an interesting juxtaposition for this conversation. There is so much risk and uncertainty around production and supply and geopolitics that make those markets so interesting to follow. But I guess my question is, and I think it might be interesting for some of the listeners who may not be as privy to this as you are, but the thing about this bitcoin having event that’s so interesting to me and the mining market as a whole is the fact that you have this event where you know exactly how much your supply is going to cut in half. You may not have certainty around energy use, but you know for a fact that it’s going to go from X to. 1s Whereas in oil you never really have that certainty, right? You see these different shocks in supply and demand. So in a sense, it’s weird to me that or rather to me, it seems like it would be easier for a minor to sort of, you know, do that risk analysis and prepare ahead of an event like this rather than someone holding or maintaining tons and tons of oil. Or is that not a nuanced enough way of looking at
RICH
15:24
it? I think nuanced is the right word. I have a multi page document comparing the two markets and I don’t want to do a disservice by trying to go over it too quickly on this call. But I would say there’s some fundamental differences in supply and demand. And in oil, the price does the work. If the price goes up, you’re going to bring in more supply and you’re going to destroy some demand. When price comes down, there’s going to be some destruction of production and you’re going to stimulate more demand versus in crypto, it’s a completely different framework. When prices go up, it doesn’t have an impact on supply because supply is fixed according to a formula. The mining reward is exactly the same, and then it cups in half every four years. 1s Demand. It’s not as elastic to price because we still have very much a retail framework. I think you’ve heard the term past performance is not indicative of future performance, especially for warnings to credit investors in equities. But when it comes to the mindset as a trader, especially the retail mindset, when the market is going up, there’s a pattern. People think the pattern is going to continue. So if bitcoin price prices touch 21,000, I think you’re going to see more buying instead of selling, because it’s a new technology and that’s proof that it’s working. So fundamentally, people see that there’s a reason why that pattern would be a proving factor and make them want to increase their positions or jump in for the first time. Versus let’s say we did get down to 2000 back in March, instead of rebounding, people would see that as proof that the market really wasn’t resilient. It’s not like gold, it’s not a safe haven and maybe it hasn’t ever worked. I think it was just a bubble. So I think from the demand side, it’s a bit more positively correlated to price, which is the opposite of oil. The markets are quite different. And I think another element is that oil is a consumptive good when it comes out of the ground. It’s not that fun to have around. Versus with bitcoin, you’re not storing it necessarily for future use to get rid of it. Some will get lost and stuck in wallets.
INTERVIEWER
17:32
You can’t bathe in your bitcoin.
RICH
17:33
Some of us would like to, but it’s still not possible. There’s needs more layer four solutions for that. Yeah, exactly. Jokes aside, the oil producers, even though some are sitting on very large fields and assets, and that’s their country’s wealth, the miners, a lot of them, Asia, they’re creating bitcoin for the sake of holding more bitcoin. They’re not even looking to sell it at all. Some that are forced to sell, they’re selling because they use their bitcoin to collateralize a dollar loan to buy more mining farms. And when the market drops, they’re forced to sell a bit. Some are forced to sell because they need to pay salaries. So they’re selling little bits of what they’ve accumulated to keep the mining operations going. But their goal is, I want to have 10,000 bitcoin, I want to have 100,000 bitcoin. So it’s a very different ethos than oil companies who, you know, they want to have higher production, but the production is to be sold. It’s not to hold on to. So in that light, it’s a little bit more like gold in that, you know, all the gold that’s ever been mined in the world would fit into one Olympic sized swimming pool. But I think that how is it different today versus when gold was popular using the coins hundreds of years ago? I think that so long as we do have. 1s Internet. It’s a bit easier to transmit bitcoin around and have it be PeerToPeer versus gold. Yeah, the coins might work, but very few people are going to have the coins. You’re going to need a gold testing kit at that point if you’re going to transact in the coins. So I think that it’s more of a macro instrument and something that older generations are still clinging onto versus from a demographic perspective, I think people under the age of 40, especially under their age of 30, are going to have a lot more belief in the future market for digital commodities and bitcoin to digital gold as opposed to normal gold. There’s
INTERVIEWER
19:26
definitely a lot to unpack there. I can see how you could write a multipage deep dive on this, as you were alluding to, but I guess the basic thing to wrap our heads around is although there’s this certainty around going from 12.5 to 6.25, there isn’t certainty around what the price will be. And that’s what we’re hedging for at the end of the day. Because if it goes lower than a certain threshold, and I’m sure you’ve crunched the numbers on this, you guys are looking at this closely at that point, minors are going to be unprofitable, and if it goes beyond a certain threshold, they’re going to be making money hand over fist in the couple over or flow it. Have you looked at those thresholds? And what’s the sense of where price needs to be for miners? 2s Not be shitting their pants.
RICH
20:18
Sure. So I think you have a curve in which the lowest cost producers, they’re going to be profitable today, even in the low 3000s high 2000s. So when it doubles, the mining river cuts in half, those numbers are going to be 5000-6000. But that’s only a small amount of the mining community. There’s others that are only profitable at $8,000 and they’re already running at a loss and having to get rid of their machines. But it’s very much a moving target as time passes, even with the same price of crypto and not having the difficulty tends to move up and to the right and there tends to be just newer and better equipment and software for mining. So it’s a lot like a shale business in oil where you have a field, it only has about a year and a half capacity and its depletion rates are high. And you’ve got to keep investing in that field but also look to buy new fields and new equipment otherwise you’re going to go out of business. So there’s no minor that just bought a subset of equipment and focused on that set. If you’ve been around for years, you have to continually be upping and reinvesting and
INTERVIEWER
21:32
adjusting your strategy as things change.
RICH
21:36
And in terms of why it’s a moving target, when the price goes up, there’s going to be more people mining. So there are scenarios where bitcoin at 20,000 will be less profitable for the miners than bitcoin at 2,000, because let’s say this pandemic ends up a lot worse than people were ever going to expect, and no one can get to the mines. It could get back to that day where Frank Chaparro on his laptop could be mining very profitably again if all the other miners shut off because the difficulty rating is purely based on how many other miners there are on the network. So in a market where bitcoin is dropping to a dollar, but you’re collecting every one of those dollars, it’s going to be very profitable for you versus if bitcoin is trading $20,000 and you’re only a very small part of the network, you might not make as much. But generally it’s more profitable as the market rallies, especially if these rallies are happening in an explosive way. If you look back four years ago, the market is going to rally ten x. There’s more than enough pie for everyone to have, even if you have a small slice.
INTERVIEWER
22:49
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RICH
23:43
You.
INTERVIEWER
23:44
There are all these different uncertainties that hang over the space that are crypto specific, but we also have this crisis, this health crisis, and we don’t know exactly when things will completely return to normal, whether we’ll see more shutdowns. When we look at the hash rate, we did see a 30% drop from I think if we look back at the chart we have from my colleagues Larry Cermax research in Bitcoin hash rate, we saw a really precipitous drop in March, but it’s not clear if that was necessarily tied right to those lockdowns. I’d be curious, Rich, to kind of dissect what is tied to Coronavirus, what could be later tied to Coronavirus in terms of that hash rate.
RICH
24:29
I think that it’s a complex system, so it’s hard to really put a finger on it definitively. But from speaking to the miners directly in the province where the mining was happening, I think that the quarantines were already ending mid March because China got it a little bit earlier than the rest of the world. So if you look at the period from February 3 to February 15, bitcoin rallied from 9300 to 10,300. And over that period, I think it was potentially specular flows coming into the market ahead of the having and maybe some Chinese nationals continuing to buy from home, whereas their mining farms were temporarily not acting at full capacity due to the quarantine. There’s a bit of a disconnect there, more than usual, where hashtrate was dropping even though bitcoin was rallying. It’s hard to be definitive in the exact differences because there’s other elements. There’s the fact that when price moves, people are turning on or off the machines. And also it could be that someone who bought their new S Nine S a year ago is finally taking them in and able to use them and that could impact it, or someone who had some old equipment and they’re finally taking it offline or just moving it, impact the system. So I would say that we could tell that there was a bit of a reduction and we think that it was people not able to service their minds while they’re in quarantine, but it wasn’t a huge impact yet. And then I think that as there’s been more of a full global quarantine and China is getting out of the woods, there’s been different impacts, but it’s harder to know how much of that was due to the price drop versus due to a change in difficulty, due to people not able to service their equipment. It’s a good
INTERVIEWER
26:10
segue into a question I’m asking a lot of the traders who come on the show. I think it’s super fascinating and I think it’ll be something when we look back on this crisis, it will be at the heart, I think, of what we talk about. The fact that we’re all working from home, the fact that trading floors have been kind of separated and many exchanges have either shut down their pits or trading floors. And you have. Traders working from their basement dealing with WiFi and latency issues. There’s been a ton of reporting around that. I’d be interested to know what your guys’ experience has been like being not in the places where you typically work. Does it impact your ability to maybe respond to a trade or does it impact your latency? Obviously there’s this whole psychological element of isolation and loneliness. What’s the experience been like?
RICH
27:07
Yeah, I’ve gotten this question in a couple of different ways over the past, especially the past month. And I think that it’s made me more bullish on our space because the main impediments we’ve had to doing business have been a result of traditional financial issues. For instance, there’s a group in Astra that’s responsible for some of the wiring and payment processing and due to security issues and delays they’ve been having, there’s been some issues for the cryptocurrency market not being able to get payments out as quickly and having some uncertainty on timing. And when you look at traditional financial institutions, you know, looking for bailouts and being stuck working on all the issues with the Pandemic, having a decentralized framework where Bitcoin theorem XRP, they haven’t been down, we haven’t experienced any delays, everything’s working flawlessly. So I think that on a relative basis, even though there’s been some volatility in crypto and I think people have been certainly disrupted and in a different type of work environment, being home with their families instead of at an office. I think on a relative basis, things have been very stable and we’ve been able to have contingency planning to continue operating. 24/7 still servicing counterparts across different regions, including the weekends. And so I think it’s been a positive signal that despite this historic event, one of the worst financial calamaries in modern history, it’s been surprisingly business as usual.
INTERVIEWER
28:42
Yeah, well, I think that crypto traders are a bit better positioned for an event like this. And as much as so many of the different trading operations are, first off, they’re lean, they’re distributed across various countries. Right? I know you guys are scattered around the globe. And then there’s that element of operating 24/7. So you kind of need to be ready for anything that will come your way at all hours of the day. 1s I kind of want to stick to this just for a few moments longer. You talk about how everything’s been business as usual, but there has to have been something aside from maybe WiFi getting in the way of a good zoom call. Has there been anything even that you’re noticing out in the market that’s been striking? I’m not asking you to name names here on this show. We do not gossip. But maybe we can talk a little bit about what’s going on out there in the world.
RICH
29:39
Sure. I think that one is that there’s been some growth in the derivative space, and there’s a long way to go. And another space where I think that in the past year there’s been some growth, but there’s a strong curve to work our way up is in the domain of credit. And we’ve seen some sensationalist articles from the media about how there’s a credit bubble in crypto. But when you think about the rates that have been paid call it ten to 10% for 65% LTV type loans on Bitcoin. That means that when you’re borrowing, even though you’re getting US dollars, to get $10 million, you’d have to give $15 million worth of Bitcoin. So I could think about it more as the borrower is actually the lender. And so having it be that to pay 10% or more for that privilege, to give someone more than you’re getting back of something that’s completely liquid, it seems like there’s an inefficient market there, and there’s been too much money paid to the lenders. But one thing that’s been disruptive is the event in March. Even though you mitigate the credit by having this buffer by over collateralizing, when you can have a 40% movement in one day, it’s. You can see how some credit risk does come into play and some of the top players have come out publicly and said they’re not doing any lending or they’re not taking any credit risk. I’m not sure which of the two of the intention has been with some of these public statements, but I think that the increased volatility has been disruptive some from different businesses. Because whether it’s OTC, derivatives or lending, there’s always a credit component. And in normal market scenarios, these things work themselves out, especially if there’s a good understanding between counterparts. There’s a margin call if someone’s sick or at home not able to deal with it as quickly you can work it out but if the market is going to move down 40% or down 70% within a couple of days, it might be a bit more disruptive to some of these relationships. And I think that it’s hard to pinpoint any one story, but I think that the volatility it’s one thing about traders in a levered scenario making or losing money on a speculative basis, but when people are using these contracts for lending or for risk management. I think that the high volatility coupled with people not at their home base where they should be trading or performing their responsibilities, does make things a bit more challenged. That and I also say that 1s I haven’t used the term schmattered, but we are very decentralized. We have people I think ten cities around the globe and have cross currency trades as well trading cryptos in other non US and non European currencies. And there are countries that have just closed off their financial system and we were left with currency risk that we couldn’t even trade, we didn’t even know where the price was. So I’d say that again there’s been some issues that have been caused some instability in the business environment, in crypto, but more of them have been coming at us from the traditional financial landscape. I think that it’s been a story of resilience from the digital asset space.
INTERVIEWER
32:57
It’s interesting you mentioned the looming credit bubble Lehman Brother blow up that Bloomberg News has put in the minds of many people in the space. I think the argument around that is simply tied to just how quickly the credit market has grown. But at the end of the day, this market does grow really quickly. Everything kind of sprouts out. You had one derivatives exchange one day, and then two weeks later you have what seems like dozens and dozens, right? That’s how fast we move. But yes, we have seen some folks pull back in addition to market makers may be pulling back. Yes, Genesis has, at least for the month of March. They decided not to extend credit, as we first reported after he joined us on this same show. I guess we could go into that line of questioning whether or not we talk about a credit bubble and you kind of alluded to the collateral you need to put up to get that. But is there maybe not even ample enough credit in this market?
RICH
34:06
Yeah I think that often the terms can be confused and I think that is there any credit being given out on an outright basis? There’s very few institutions that are doing uncollateralized loans, so on a ranking of how much credit risk you’re taking, once you’re over collateralizing, a loan deal, it’s much safer. And you think about the biggest collateralized loan market out there, the mortgage market. You wouldn’t necessarily give someone whether it’s 100,000 or a million, unless there was a house that’s worth, you know, 300,000 or 3 million. So in the same way, whether it’s a minor, an individual tapping a lender like Genesis you mentioned, or decentralized platform like like Compound or Maker Dow, there’s less credit when it’s over collateralized. And I do think there’s not enough credit in the industry. But part of that is because it’s just so nascent and so volatile. If you were going to try to understand someone’s balance sheet enough to give them uncollateralized loan, that would be a lot of due diligence. By the time you finish the due diligence, the market’s already changed. So I think that the only groups that are going to be able to give these uncollateralized loans are going to be the ones that have an intimate knowledge of the counterparts balance sheet. And even then they’re going to be higher rates. Because if it could be up to 10% when it’s over collateralized if there’s no collateral they’d want in the 20s or higher. But as the space matures, then you’re going to have better known credits. It’s going to take more than a few years until we have CDs trading on the crypto companies. And that’s how, you know in traditional finance that whether it’s an oil company, airline, other type of manufacturer. You could see where their credit default swaps are trading and price in the probability of default and use that credit value adjustment in pricing of a derivative for a loan. But we’re obviously many years away from that in crypto since the market is rapidly changing and has some growing up to do, and we’re churn.
INTERVIEWER
36:12
Yeah. No. It’d be interesting to see the day when we have. 1s Credit default swaps in the crypto market. So you think we’re several years out from that. What do they used to call those things? What was the nickname for them? What they called atomic swaps?
RICH
36:26
1s Swaps could be a bit friendlier, but I think along the same veins, the oil market and the Americas very much was driven by the banks lending to these oil producers, but coercing them to hedge with them as well and the hedges would help make the oil companies a better credit. And particularly, I think it’s similar with the miners, since it’s not only volatile, as we’ve seen, especially this week, as it is in oil, but it’s also a cyclical market. So if someone does everything exactly right, they can’t time the bull and bear markets perfectly. So they’re probably going to need to have revolving credit facilities and find some ways to tap credit markets when the surprises happen. So the ability to be a strong producer, unless you’re Saudi Arabia, you’re going to need to borrow. And if you have some hedges on whether it’s bought and bought puts versus sold calls or you’ve sold some swaps those hedges are going to make, whether it’s an oil producer or a bitcoin producer, a better credit, and it’s going to be easier to whether it’s get a higher LTV or just a lower rate for the borrower. So we haven’t been focused on lending specifically. 1s A future business line has been focused on. But in terms of the derivative space, we’ve helped some of the other groups that do Lending Advantage their business by securing the loan and via hedges.
INTERVIEWER
37:56
Well, there’s our scoop for the episode. Eyeing at least thinking about possibly doing Lending. I feel like we could have a three hour long conversation. I could just keep asking you questions because you are. 2s So knowledgeable that all of these topics but I’m getting yelled at by my team a lot of the time about how long these things are and they complain that I spend too much time podcasting and not enough time writing. They think this is easy though. They think this is a lot easier than it is. Anyway, without complaining too much, make it sound easy. What can I much, make it sound easy. What can I say? That’s the glass half full way of thinking about it. I’ve been, in the past few weeks, I’ve been examining the makeup of different market participants. I mean, you were, you guys were around 2016, 2017 and this notion of when institutions was at the forefront. And honestly, you know, as you know, the, the makeup really pretty much looks the same. When we think about people who are engaging with this market family offices, crypto, native hedge funds for the most part, maybe some smaller hedge funds, the bulge bracket banks, which when we think about crypto derivatives, it’s so funny to me now. When we were writing about them in 2017, it was, oh, Goldman is going to come out with their NDF and Citigroup is working on their own version of a digital asset receipt. That’s kind of like how we trade foreign stocks in the US. And that’s obviously when CME’s futures came online. And now they’re sort of dwarfed by almost every perpetual swap provider out there. But we’ve seen a lot change and we’ve seen the participants change in some respects. In your view, what is it going to take? Actually, I’ll frame the question differently. Why do you think you came from Goldman? Why didn’t that product succeed? And CME has seen relative success, but nothing compared to what we see with the likes of FTX or Finance, et cetera. Why did Wall Street fail to launch? Whereas we’ve seen breakneck growth at least in 2019 among firms that are in Asia.
RICH
40:15
Sure. So I’ll answer that point directly, I think with just one tidbit, that. 1s Usually Wall Street or institutions, what have you, are operating off of an existing legal framework. When they launch new products, they launch them on the basis that they have legal precedent. They engage with the regulators, and they don’t move forward until they have full clarity. Crypto markets, they got launched eleven years ago without any clarity, and they’ve only gotten into focus in the past a few years. So due to the fact that it’s emerged as a retail marketplace, you haven’t had these precedents for your traditional institutions to enter with confidence. And not only that, there’s been some ire from whether it’s Warren Buffett or others, saying that it’s a ProBio blahmatic or bubbish type environment and it’s not worthy of seriousness. But I’d say to further the point of when are institutions coming, I think that a quick answer and saying, oh, they’re already here, is partially correct, that not only do we have Fidelity deeply involved in investing and touching the crypto, but we have backed Kelly Lobsterer. Regardless of the success today of that institution, they’re certainly invested. And the fact that she ended up being a US. Senator speaks to the court quality of people that are involved in this space. But in terms of saying that the few institutions that are involved in a traditional sense, I think that. 1s Coinbase has become a flawed institution. Same goes with finance, same goes with BitMEX. Even if these groups have had their issues on the regulatory side, I think that when their valuations are, you know, potentially into the ten plus billion level each, and they have bona fide businesses with hundreds of people and they’re they’re making investments where they’re buying groups out in the hundreds of millions. There would be institutions in most people’s eyes, and it might be that it’s uncertain when traditional financial institutions are going to enter. They’re having to look at their own homes and clean up with the pandemic now, and we might stay a bit more bifurcated. I think GSR is an institution and we’re filling the role that I think banks would be filling in normal circumstances. And we might have thought that two years ago there already be more banks sort of taking market share and what we’re focused on, but now it doesn’t seem like we’re any closer to that happening today than we were two years ago. But I do think that there’s some value that tokenizing, whether it’s security or an asset can bring. And even if so far it’s looked more of like angel investing, where a lot of the ICO projects should go to zero, since that’s just the nature of how angel and VC investing works, there’s certainly more than a handful that will be successful, strong businesses and not only impact crypto, but impact traditional finance. The same way ether has been rallying this year, largely off of the use of potentially the settlement layer in traditional assets. Ether is one of the best performing assets globally this year. So I think that the market is uncertain even without the pandemic. It might be more than two years, might be five or ten, but I do think markets tend to surprise us how little happens in two years, but shock us how much change can happen in ten. And I think the writing is on the wall that even if crypto isn’t getting as much regulatory clarity or respect from the traditional institutions, I think it’s happening in due time and these changes are going to take place at some point.
INTERVIEWER
44:02
Yeah, 1s I think I’m in a constant state of shock just all of the time reporting on this market. I think that’s an excellent place to leave off. Rich, I appreciate you coming on the show and we have to have you back soon. There’s just so much to talk about. We’ll have to do a post having autopsy. Well, if it’s negative, it would be an autopsy but review of what happens and bring you on to sort of talk about what you’re seeing. Rich of GSR, the co founder, a trading shop that is at the center of it all. Rich Rosenblum, thanks so much for coming on the show. Thank you, Frank.
