The Derivative - The Bitcoin ETF parade and Grayscale Trust, with Jason Urban of Galaxy Digital

Episode Date: November 20, 2021

Join us in this, our last episode of the year, where we’re talking Crypto and Bitcoin ETFs with Jason Urban, Global Co-Head of Trading at Galaxy Digital – which is perhaps better known as the folks behind the world’s largest Bitcoin Fund, the Grayscale Bitcoin Trust and its ownership of 650k+ bitcoin!  Today we step into a bit of Jason’s past when he founded and ran the equity index derivative business at a Chicago prop firm DRW and his time at Goldman Sachs where he ran its equity vol business. We talk about all the moving parts of pure flow trading, skew/cheap, skew/rich, the right side of the trade, when to get out;  and his first exposure to Crypto Currencies. Jason talks Grayscale, billionaire founder Michael Novogratz & all things Galaxy Digital, from touching all aspects of the crypto universe, from mining to trading to venture funding; being on the Institutional only side of the market, whether or not DeFi is a Disrupter or tool, the FOMO aspect, staking, and maintaining the ledger, the mining ecosystem and the decentralized way of doing things while trying to solve problems in this Crypto space. If all that doesn’t get you going about Crypto currencies, we still find room to discuss just what the Options space looks like in crypto (the implied vol is how much??), Bilateral trading, and of course - the Grayscale Trust going from premium to discount – and the potential for all the new Bitcoin ETFs coming out. Enjoy! Chapters: 00:00-02:19 =Intro 02:20-19:04 = Goldman, DRW, and Trading House Money 19:05-31:21 = Galaxy Digital, Are you a Disrupter?, and What’s Novo Like? 31:22-44:18 =The Day-to-Day in the Global Crypto Space, the FOMO Aspect, Staking, & Solving the Problem 44:19-51:20 = Options & Bilateral Trading 51:21-01:04:47 =Create or Redeem: The Grayscale Trust and New Bitcoin ETFs 01:04:48-01:09:03 =Favorites Follow along with Galaxy Digital on Twitter @GalaxyDigitalHQ and visit their website for more information at https://www.galaxydigital.io/ Don't forget to subscribe to The Derivative, and follow us on Twitter at @rcmAlts and our host Jeff at @AttainCap2, or LinkedIn , and Facebook, and sign-up for our blog digest. And visit our sponsor, the CME Group at www.cmegroup.com to learn more about futures and options. Disclaimer: This podcast is provided for informational purposes only and should not be relied upon as legal, business, or tax advice. All opinions expressed by podcast participants are solely their own opinions and do not necessarily reflect the opinions of RCM Alternatives, their affiliates, or companies featured. Due to industry regulations, participants on this podcast are instructed not to make specific trade recommendations, nor reference past or potential profits. And listeners are reminded that managed futures, commodity trading, and other alternative investments are complex and carry a risk of substantial losses. As such, they are not suitable for all investors. For more information, visit www.rcmalternatives.com/disclaimer

Thanks for listening to The Derivative. This podcast is provided for informational purposes only and should not be relied upon as legal, business, investment, or tax advice. All opinions expressed by podcast participants are solely their own opinions and do not necessarily reflect the opinions of RCM Alternatives, their affiliates, or companies featured. Due to industry regulations, participants on this podcast are instructed not to make specific trade recommendations nor reference past or potential profits, and listeners are reminded that managed futures, commodity trading, and other alternative investments are complex and carry a risk

of substantial losses. As such, they are not suitable for all investors. Welcome to The Derivative by RCM Alternatives, where we dive into what makes alternative investments go, analyze the strategies of unique hedge fund managers, and chat with interesting guests from across the investment world. That's why you're seeing these other, you know, layer ones come into vogue, right? Solana is able to do that. People call them, what's the next Ethereum killer? And is it Solana?

Is it Avalanche? Is it Luna ethereum killer and is it solana is it avalanche is it luna you know is it cosmos and you can start going down these layer ones who also maintain blockchains and maintain databases and so maintaining that database says okay you know i'll i'll let you move your your solana much cheaper. And there's always a trade-off. The two trade-offs in crypto are do you want security or do you want speed? Speed comes with, you're just not going to be as safe, right? Think about driving your automobile. You're going 200 miles an hour, you're not as safe as if you're going 20. And that's just the constant trade-off that we're all dealing with hello everyone as mentioned last week this will be our last episode of the year as we retool our format a bit and get to scheduling and recording guests for 2022,

which brings me to, if there's a trend following legend you want to hear from, a volatility specialist, some more Bitcoin folks, whatever it is, make sure to comment or drop us an email at invest at rcmam.com and let us know which guests or even which type of guests you'd most like to see in the new year. So enjoy this pod and we'll see you back here after the holidays. Okay. We're here today talking crypto and Bitcoin, ETFs and trusts, the SEC, the CFTC, and all the gray areas in between. We've got Jason Urban with us. Jason's the global co-head of trading at Galaxy Digital. Prior to joining Galaxy, he was CEO of Drawbridge Lending,

which we highlighted on the pod way back when, maybe episode four or five or somewhere in there. So we'll put that in the show notes. Make sure to check that out. And Jason also founded and ran the equity index derivative business at Chicago prop firm DRW and was previously at Goldman where he ran its equity vol business. So welcome, Jason. Hey, thanks for having me. No worries. Thanks for being here. Where are you at today? You're here in Chicago, right? I'm here in Chicago today. So beautiful, windy city. Yeah. Got cold again. It was nice yesterday uh where'd you grow up in chicago area

yeah chicago area out in palatine and so i'm a local guy uh i've been here you know off and on my whole life uh and we have a somewhat unique friend in common i think last time i saw you was at his going away party when he left chicago um so wanted he had a question he wanted me to ask you on the pod if you're up for it. I'm always up for it, but maybe I'm up for it. Yeah, you should be worried. He wanted me to ask you what it's like being the perfect cross between Frankenstein and Moe from Night Court. I don't have to worry about Halloween costumes.

Yeah, exactly. So anyway, that'll lighten the mood. So I want to start by talking about those two pieces on the resume, equity vol at Goldman and equity index derivatives at DRW. So tell us what that was like. Maybe start with the Goldman piece. That was first, right? Yeah. I think that you can think about different trading styles, and there's certainly a trading style at a large bank, a financial institution.

In the early days at Goldman, we had just invented the VIX, and there were things that were the tradable VIX. There was a lot of opportunity and a lot of things that were happening. You also had to be focused a little bit on client, you know, on client service, client flow, things of that nature. And so your, listen, your goal as a trader is always to buy ones and sell twos effectively, but there are different forces that compete. You know, When you move to the PTG world, in my time at DRW, it's strictly a return-based function. At a bank, there's a little more, I don't want to call it bureaucracy, but you stay in your lane. Where a place like DRW, it's like you stay in your lane, but, you know, and it's not just unique to

DRW, but you stay in your lane, but you also can kind of branch out into other things and do, you know, do some other things if the opportunity set is there. And so, you know, one place is a little more structured, another place is a little more entrepreneurial. And so as you kind of learn to look at the markets, you know, you're taking that mindset to market structure, trade ideas, ways of doing things, you know, and so on and so forth. Goldman, what was your main thing you were today? What was their VIX trade? That's this predated VIX futures. No, this was this was right about the time that the VIX futures rolled out.

And, you know, and so the trade there was simply just, you know, replication and recreation, right? So you would take, you take the VIX, you would take, you know, that term structure, that forward starting variance, you would then, you know, trade either in the variance swap market, the interdealer market, or you could look at the listed market and that triangular trade, that stool was basically, it was never perfect. And there was always an opportunity to, you know, buy VIX, sell variants, you know, figure out your stub trade with the listed market, et cetera. So there was always something, there were moving parts. And so you could kind of, you know, mathematically say, hey, this is where this is going.

And then, you know, subsequently there was also just, you know, pure flow trading and kind of thinking about, you know, these are, these are trades that are happening that are rotating in, rotating out. Is the skew cheap? Is the skew rich? You know, how does the term structure look? Why does it look that way? You know, taking a more macro approach. And with that was for the bank's benefit or for clients or a little bit of both? My side of the business was for the bank's benefit, but you were always kind of dealing with the client, the client facing side of the house that would come in and be like, you know, Hey, I'm four bid. Well, listen, the client really wants to sell fives. And can you do me a solid where if you're at a, at a, in a PTG world, I'm never going

to pay five when, when I, when to pay five when I show a four bid. At the bank, you're like, all right, twist my arm. I'll work like hell to get out of it type of thing. So there's a little different. Right, because they make the entity $3 billion a year on the other side of the business. Exactly. Exactly. So you're looking at the whole relationship, not just what you know, is it, you know, what's my return on my return on equity?

There's probably some people rolling over in their graves right now that we're calling Goldman a bank, but technically they aren't these days. And so this was, this was, this was all pre Dodd-Frank. So that was, you know, the world, the world changed subsequently. Yeah. And so did that push you out of there? Like, why does anyone leave Goldman? Is it just too. That was, that was, you know, for me personally, it was definitely the, you know, the TARP considerations. And I looked at it and said, okay, so there was a lot of talk about clawbacks and things like that. And,

and my take was, okay, so if I, I do really well, I, I run the risk of getting, you clawed back and if i do poorly you'll fire me so that looked an awful lot like you know heads you win tails i lose and you know you know you start to kind of you do the math and you say you know maybe maybe and in hindsight was that the best decision um you know that's alwaysatable, but it brought me to where I am today, which is a, which is a great place. And were you there, were you in New York or are you here in Chicago? Primarily, primarily Chicago at that point. Perfect. And then DRW, I'm hoping to get Donnie on the pod one day. We'll see if that ever happens. I don't think he has any incentive to

share what he's doing, but give us a little bit of the background there. It's well-known here in Chicago, but probably not worldwide or to most of our listeners. So what was that like? I mean, that was another great experience. I mean, a very entrepreneurial place, growing fast, doing things in all aspects of the world. And so you could definitely, you know, come in, try new ideas out. You definitely had the rope to, to experiment at least in the early days. You know, whether it was inside of your, inside of your area of expertise, or if there was something collaboratively that made sense outside. I mean, at one point we were running a physicals business there that I was, you know, part

of, part of launching. And, you know, we had 50,000 head of cattle, you know, things that, you know, it's not as, it's not as, it's not as random as it might actually sound, but it was, it was a mathematical, it was a mathematical, you know, trade. And it kind of, you know, you, you were given the ability to do it if it made sense. It wasn't like you could just walk into Don's office and say, hey, I want to buy some cows. It's like, yeah, sure, go ahead.

No, that's not how that works. But they are very involved in a lot of aspects of the world, everything from real estate to, and obviously where they got their start trading in that universe. But the general model there is it's the firm's money. We're going to bring in traders and give them a little bit of rope. Teach them how to trade or no? Were you able to run your own model? Yeah, you're able to run your own model? Yeah, I was able to, you're able to run your own model and do things, but you're also, you know, as any, as any manager of an enterprise, your goal is to teach people to,

you know, to broaden, broaden your team's scope and reach inside of its area. And so that's what you're doing. So you're definitely developing talent and, you know, teaching them things. And then what kind of, what was, what were those deals like? Or you can just speak generally in prop firms in Chicago, you come in and you, you put up capital or no? DRW did not. Some of the places that we looked at, you were, you would put up capital. And so it's kind of a function of, you know, whatever deal you're looking for. Some

places you put up capital, some places you, you know, they put up the capital and you're subject to a split based on performance and, you know, capital and capital used and everything else. And how much rope do you get? Do you lose one month, you're okay? Two months in a row, three months in a row? It depends. Like, you know, there's, you know, there's different, there's different, you know, sides of that equation, right? Like, why did you lose three months in a row? Was it something that the firm was fine with? And it just, you know, the market conditions were such that it didn't, you know, interest rates went to zero and you were an interest rate trader and they were pegged because they were at zero forever. You know, that becomes a firm decision that says, you know, we don't necessarily want to be in this business versus saying something like, hey, I got short vol and vol went bid.

And now I've lost three months in a row and you didn't cover. Well, that's a you're an irresponsible trader standpoint as opposed to a you know yeah um and then two big trades you guys have one was in a way just buying a ton of real estate right that was um a little bit of harvesting the volatility harvesting the the positive skew and the money you made on the, on the sell-off and then putting that back into kind of short ball assets. You think about it that way? You know, I mean, like. Was it lucky or good is the, is the short version. Listen, there's, there, there, there's always a combination of both, right?

You know, when you, when you think about any trade, right. People can be the right side of the trade and just be lucky. The guys who are good, know when to get out, out when to when to double down and when to you know not look a gift horse in the mouth and i think that you know tried and true drw and don and the team are some of the best in the business and so they're pretty good at knowing you know in order to win the game you got to be in the game but you also have to know what you're doing once you're there. So. And then rumors are they've gotten pretty big into crypto. Was that starting when you were there?

Yes, it was. I mean, they, I mean, they're, you know, Cumberland, Cumberland mining is a known entity in the space. And that was kind of my first foray into it, even though that wasn't, I wasn't directly involved. I was, you know, you're tangential, things touch each other. You know, it's a trading firm and traders talk and people, you know, are always looking like, hey, where's the next great opportunity? And at the time, that was truly, you know, one of the best opportunities in the space. My pet theory is crypto was created by these prop firms as just a gambling contest, right?

Like, hey, you're pretty good at trading all this exchange stuff. Let's just come up with something that has no intrinsic value and see who can trade it better. Well, that's why we're going to have this discussion today, because I think it's, you know, I started off, you know, with that view. And as I learned, you know and I'll give you my foray at how I got into crypto was, I was exposed to it. And my first through DRW and through the guys that were starting Cumberland there. And my first thought was exactly that.

Like, hey, what is this internet money? This is that, right? And I made the mistake early in my career of when the internet came out saying, you know, people are never going to buy their things on the internet. The internet's great. Granted, I'm, I mean, the fact that we can talk and I can say, I remember when the internet was, you know, it was a new thing. You know, I said, but people are still going to want to try their clothes on. They're going to want to, you know, go to the shoe store and, you know, make sure this one fits just right.

And now everybody, every day you show up and there's 10 boxes in front of your, your front door from Amazon and the world changed. And I said, I wasn't going to, to, you know, take a, take a closed mind stance to it, but I was going to, I was going to, you know, try to be, try to be more open-minded and learn. And in doing so, I realized that these cryptocurrencies aren't necessarily assets, but they're a tradable technology. They solve a known or needed problem in the space. And it just so happens that that token is your ticket to the solution, as opposed to where it is the solution in some cases. And so that it's a way to solve a known issue. And if you think about it that way, there is an inherent value. Ethereum

has a value because it is a smart contract. It solves the who goes first problem. It solves it with technology. And similarly, Bitcoin solves the issue of stable, reliable stores of value that are truly portable and unique to the individual. And so as you start to go down the line, all these other protocols, some of them, you know, are maybe, you know, more aspirational, but some of them are legitimately real. And there will be the, you know, if you think back to the internet age, there was Netscape and there was Google, right? Some of them, some of these will be the Googles and some of these will be the Netscapes. And that's just going to be a function of of time will tell. Execution will matter. I just lost. Who is the Netscape guy?

What was that guy's name? Anderson. Yeah, he did all right. Right. He did all right. But I think there are a lot of people that had piled in afterwards or something that you know uh uh mark andreason right yeah um and just this popped in my head saying you remember when the internet was getting started now you're in this young man's game like do you ever feel like the old man at the table and all these young kids are bringing all these ideas and uh how do you how do you navigate that well here on one level you're only you're only as old or as young as you think you are um that's one piece of it two is that if you have a curious mind and you're looking to learn you know you'll always you'll you'll always be part of the young man's game um the advantage that i look at it not as a detriment

but as a as an advantage in the sense that I've traded through bubbles, I've traded through Ponzi's and everything else, things that are real problems in any asset. The same issues that you want to be aware of here and not make those mistakes. And so that's something that I think helps me in my day-to-day inside of crypto is understanding what exactly could go wrong. As the options trader, what's my max loss? And understand how that can happen and then just guard against it and make sure that we're, if not the smartest guys in the room, at least asking the right questions on those guys. Grayscale, so, or Galaxy Digital. So explain, first of all, the difference there, grayscale and Galaxy Digital. Well, grayscale is DC DCG. Galaxy is we have our own trusts and things that we've done with CI. The best way to think about Galaxy is a financial services

company inside of crypto. We're set up in a way that the best way to think about us is five divisions. You have the trading division, which is the division that I co-run, which looks and feels an awful lot like any trading place. We have an asset management division, which does the indexes, the ETFs that we do in Canada, the closed-end trusts, the things that we're doing in the States, both public and private placements. We have an advisory business, which does mostly, think of it as investment banking, M&A activity, things of that nature. We have a principal

investments team that is us basically investing the firm's balance sheet in projects, protocols, things that are tangential to the ecosystem. And then the last piece is the mining division, which does mining and also offers minor services. So for mining clients who are looking for either capital raises or hedging or liquidations, in addition to us actually running the gear ourselves. So as you kind of think through it, you know, we are touching every part of the ecosystem and we're touching it. You know, oftentimes, you know, I say this, people are like, who are your competitors? Well, pretty much everybody's a such a a nascent industry and there's still so much white space out there to grab that invariably you're going to find that

you're working together with somebody one day and you're competing with them the next in a different area and and people i I think, embrace that. And nobody takes it personally. Everybody gets the joke, so to speak. You know, we're somebody, you know, we're bidding against somebody on a particular deal, maybe in the principal investment space. But on the trading side, they're a client of the firm. So it's just a matter of understanding where you fit and where

the lines are and not crossing them. And listen, your reputation matters, right? It's a small world. And so you can't, you're a bad actor. People will find out quickly. Do you find, is it a pretty, you mentioned small world, but is it compared with Goldman and dealing across the Wall Street banks and stuff? Compare it to that kind of sense. Here, the best way to think about it from that perspective is at a Wall Street bank, if you were a vol guy, all the vol guys in, say, equities knew each other, right? But you didn't necessarily know the FIC guys. Crypto is a lot of that, although as it's gotten bigger and bigger,

in the early days, three, four years ago, everybody knew everybody. Now you've got new things that weren't even invented three, four years ago springing up and people know each other but it's still it's still pretty interconnected that that space is growing so it's more like all the vol guys know all the ball guys that's still a lot of crypto but it's it's gradually becoming um more spread out so So tell me about Novograd. Uh, have you gotten to know him since you joined?

Uh, yeah. I mean, I, here, I, I've worked with, you know, a lot of, of really smart people over, you know, my 25 years of doing this, obviously we talked about Don and the team at DRW. Two billionaires. You know, you know, they're Goldman. Goldman, there were a litany of some of the best and smartest minds in the space. I think Novo is right up there near the top. He's very fast. From a trading perspective, you can look at things two ways.

As a trader, you say, who's faster than me and who's smarter than me. And, you know, I think Novo is, is very fast in connecting trends, seeing things, understanding concepts, and he's, he's very smart in that he can, can work through the implications of, of, of a situation, connect the dots quickly and make a quick, a quick assessment of the risks and make the trade. And I think that's part of how he's gotten to where he is. I mean, he's been an evangelist for crypto for a long time, well before it was in vogue. Like a lot of us early days people took a lot of flack from friends in the traditional, the trad five space and said, no no this is actually

transformative and this is going to change the way we all live in and work in finance and was one of the first people to do that you know so to that end he's you know he's he's definitely you know deserves his top billing yeah when did he buy his first crypto? Who knows? I mean, it's early. Early. Early. I mean, put it this way. There's stuff on the balance sheet that is exceedingly early. Yeah.

And talk a minute about, you mentioned you're trying to, you're kind of like one of these trading firms, but all this DeFi stuff is kind of trying to disrupt that. So you view Galaxy as one of the disruptors or someone who could get disrupted? I mean, you're obviously one of the disruptors versus the traditional banks, but as the biggest in the crypto space, it's kind of like you've got another target on you now. Yeah. We are very, obviously pro-crypto. That is the nature of our firm. We think we're on the bleeding edge of this. And so as such, you have to be on chain. So thinking about DeFi as really being on chain, I think that there are challenges with being on

chain that we work very hard to balance. And what I mean by that is there's regulatory status around that and making sure that how you're interacting in that space checks all the boxes. Us being publicly traded, we need to be holier than Caesar's wife, so to speak. We can't make any mistakes. And so we're very thoughtful around regulation. And so that proposes some challenges. But for the most part, I don't look at DeFi as a disruptor. I look at it as a tool in our arsenal of many tools. We're truly embracing the space. I mean, today alone, I've had two calls on DeFi protocols in the derivative space.

And how does it work? How do you interact with it? Does it really solve a problem? Or is it something taking advantage of marketing? And those are questions you always have to ask. I think there are some real DeFi protocols that solve real problems. And they will be disruptors to banks and the current financial system. Because it doesn't take three rent seekers for me to post, you know, a gold bar

to borrow, you know, $2,000 back, right? Like a smart contract, the computer can do that and be very fair and reasonable about it. And why do you think it's these traditional banks and financial players have been so slow to kind of step into this space? Well, I think because we don't have regulatory clarity. And when I got into crypto, crypto was still a career killer for a lot of people.

Like it was like, we would talk to these banks. It's really interesting. You know, you would talk to these traditional finance people and they would scoff at you and say, oh, you're, you're not, you know, you're in crypto. I'd never touched that. This is a, this is a Ponzi. It's, it's, it's this internet money, whatever it is. And now that it's gaining traction and you think about the demographic shift, and when you really step back and think about trading trends and things that have driven adoption, it's demographics. I mean, the baby boomers for years being told, get a 401k, put your money in the stock market, do those things, definitely

drove that. That was something that the previous generation did not do. And maybe that was to hang over from the 20s, 29 and so on. It wasn't until the boomers came in and they drove that. And that was a major demographic push. Now, you've got the younger generations where 90% of the kids have traded some form of a digital asset, whether it's a coin that they got on their game that they traded to somebody else, they're very comfortable with that. And in a world where you have runaway banking, runaway inflation, potentially, fiscal and monetary policy like this could be, and I believe it is, is the shift. And so in the early days, when you got into the space and why weren't banks in, it was scoffed at. And now you're looking at it and people are saying very, very, you know, reasonably like,

we have to get into this and the regulators need to catch up. And I think you're finally starting to sense that they get the joke, so to speak, that they need to do it. But now it's, can they do it because of political infighting and so on and so forth? The two thoughts there, the one, it's the classic innovators cycle right like the big groups are too entrenched and they can't risk their current business to go into something new so that's where

these new players come in and say hey i don't have that baggage i'm going to get into it um yeah and then two i had an interesting conversation the other day of politicians all they want to do is get elected, right? So the world's getting younger. If all these young people have all this crypto, the politician is going to be like, yeah, right. There's going to be more and more people running, saying we should make crypto this, crypto that. It's going to become part of the narrative, I think, just so the politicians can get reelected. Well, that and it's also becomes a national security issue at some level.

Because if China comes through with a central bank digital currency and that becomes a reserve currency in some capacity, you know, what is our answer to that? Nobody wants to give up the nobody wants to give up the throne. throne, and as a dollar being the global reserve currency, if you're looking 50 years down the road, whatever it is, like looking at it through a longer lens, you need to be at least responsive. And so that's just going to create the rails that crypto will run on. Because if you're paying for dollars on a system that's already put in place to handle a digital currency, it'll be just as easy for a shopkeeper to say, hey, I'll take your Bitcoin, I'll take a digital currency, it'll be just as easy for a shopkeeper to say, hey, I'll take your Bitcoin, I'll take your ETH, I'll take your Solana, your Luna down the line. It'll be just as easy for them to do that. And so this phone, every kid who's my kid,

your kid, however you want to think about it, who's now an adult is going to have that at their fingertips. Yeah. And so you mentioned all those other crypto. Are you guys, right from the outside looking in, it seems like you're Bitcoin ETH focused only. We actually are, no, we are, I would say we're probably, you know, while Bitcoin and ETH are certainly parts of what we're doing, we're doing it all. We trade 100 names with clients. We trade 25 of them on platform, so electronically. We are in everything and doing everything in that ecosystem. Global head of trading. What does that mean?

What do you do day to day? I mean, it truly, so if you think back to the earlier part of the conversation with the five groups, one of them is trading. You know, we do everything from spot. So it's, you know, I want to buy a Bitcoin. I want to buy Solana. I want to buy, pick your coin. You know, whether that's electronic or block where guys will come in and look for one time risk pricing. Hey, I need to own 50 bucks of Bitcoin right now. I need to own 100 bucks of each and we'll give risk pricing.

So that's one bucket. We then have the derivatives bucket, which is options and puts calls. And because we are publicly traded, because there is a visible balance sheet there, we tend to be the bottom of the risk funnel because it's one thing to have the right bet. It's another thing to know that you're going to be able to cash in on that bet and make money. And so that's a big part of us being public is giving that opportunity. So we see a lot of business flow that way. We have a lending business because you have to think about digital assets is everything is hard to borrow because it is a bearer asset. And then we have structured products for people who are looking to borrow, but with overlays and all the things that you're used to seeing in the traditional world. And that's more what I would call like the TradFi product offering inside of crypto.

And then we have what I'll call is the on-chain or DeFi type stuff. They kind of get bucketed together. So, you know, we do market making as a service for a lot of these protocols where they'll come in and ask us to be liquidity providers, to run validator nodes or effectively, you or effectively helping their clients or the ecosystem stake. And then obviously DeFi in and of itself, right? There are things you can do inside of that that are lend, borrow, transact, so on and so forth. So we kind of do a little bit of everything. And some of that is more for our account. Some of it is for clients' accounts. Anything that we do for our account, we obviously offer to clients. But some clients aren't ready or are not capable or comfortable yet with, say,

doing staking. But they are comfortable with saying, hey, I'd love to buy, you know, 100 million dollars worth of Bitcoin. And I'd like you guys to do that for me. And so that's the kind of that's the kind of service. So it's a little bit of, you know, our trading business kind of touches, you know, all aspects of things. And our client base is really, you know, people say, well, what are your clients like? It's very diverse. We have crypto natives on one end of the spectrum, people that are very, very, very deep into that ecosystem. And on the other side of the equation, we're dealing with the big banks that you've mentioned previously, as well as others that you haven't. And there are people that don't want to be known as being in crypto and, and we're in at an early point. And now there are people who are very, you know, very public want to say that they're in crypto. So it's a little bit of, it's a little bit of everything. I was actually going to ask that.

So like more institutional than Coinbase say? Yeah. I mean, we don't, we don't. Bigger tickets and whatnot. Yeah. We don't, we don't, we don't deal with the retail side of things. We are institutional only. And so, I mean, institutional has a wide label. Yeah, I was going to say, it's weird to say because everyone's like, once institutional gets involved, this is going to go to the moon. You tell me, are they involved? They are. Listen, in March of this year, you know, I very, you know, maybe put my foot in my mouth.

I was on a podcast right after the bottom of the market fell out or an interview. And, you know, I said, I think we could still take out the highs by year end. And the next day I had a great headline and all my friends pinning me. You know, Jason says Bitcoin is going to 70,000 by the end of the year. At that time, a lot of what was going on, I would say, was aspirational. People were kicking the tires. How do I get in? You know, what do I do?

You know, and there was a lot of education. You know, we weathered the dip in the summer. And then as fall came online, those guys started to step into the market a little bit. We now are seeing that, you know, the faster movers inside of traditional finance are definitely here. The slower movers are getting here. But I think everybody is now recognizing that this is an asset class that they need to have some portion of in their portfolio. In the early days, it was a career killer if you got in and you were wrong. Now, it's a career killer if you don't get in and inflation continues to roar and this asset class takes off. And so there is a FOMO on that front.

So I do feel it's just de-risk. There's weird stuff happening, right? We have a private fund that Schwab customers want to invest in. And it has a very small piece of it does Bitcoin futures. So Schwab's alternative investment acceptance department automatically reads the PPM and kicks it out because it has cryptocurrency in it and then you can't get to a real person to explain like it not really it's the futures there's no hacking risk all this but and then at the same time schwab on their website is saying like trade bitcoin through us so it's just a lot of this like red tape that they don't even know exists inside their own firms that just has to get worked

through. No, you're, you're a hundred, you're a hundred percent right. And there are different people with different risk profiles and it's a, you know, it's less polarizing today than it was a year ago or two years ago, but still, you know, there's still a lot of people that, that, that think it's just funny, fake internet money. And, you know, that, that's not the case, but, but those people, you know, gradually, I think the, the more informed people are starting to win out the conversation. Yeah. Like, well, just put 2% in it,

which I've always had a problem with. If you just said that about everything, right. You would, you'd have a lot of losses and maybe not a lot of gains. And then quickly, you touched on staking. You want to take a stab at explaining how that all works? Yeah. I mean, at a very high level to maintain the blockchain, you need to have, you need to have, somebody needs to be incentivized to do that, right? So there's proof of work and proof of stake. Bitcoin is proof of work. You go out and you mine and you say, okay, I'm going to solve the equation. And if I solve the equation, I can create the block and therefore

maintain the database. Staking is similar in that those people who are running those validators are maintaining the database. They are maintaining that ledger that says you and I transacted. And so staking, you're required to have a certain amount of asset to prove that you're part of the network. And so what people will do is they'll borrow assets from other people and people will send them to them. The validators will do this and effectively stake those assets. And then they get rewarded by the network to maintain that blockchain. And so, you know, as you kind of work through it, there's two different ways for, you know, there's no free lunch.

The ledger needs to get maintained, right? That's the only way this works. And so, you know, you have to- It seems counterintuitive, right? Like everyone's saying, oh, it's a smart contract and it's all on chain and it all works. But we're also saying, well, somebody's got to monitor. Somebody's got to, right.

But it's done in a decentralized way where you can right now on your computer stand up a Bitcoin mining. You know, you can mine something on your computer as we speak and choose to be part of that ecosystem or not. And the people who are using that ecosystem are going to pay you to do it because the service that you're providing solves a problem somewhere else and they're making more money by solving that problem putting medical records on the blockchain so that you know people's health is you know transferable with them wherever they go well someone's got to maintain that and someone's willing to pay for that service and somebody's willing to you know to provide the service and that's effectively what this is.

It's just a decentralized way of doing it. Is that where the gas fees come in? It's basically that payment for that maintenance? Yes, that is part of it. So there's ways that everybody transacts and pays. So yes, in terms of of gas that is one of the ways miners get paid uh and that to me i moved some i was going to buy some nfts i moved some from my coinbase to rainbow or something and it was all way too confusing but uh just to move it i was going to spend like 500 to buy some nft right It was like prohibitively expensive to move the $500. So I was questioning the validity of that approach. Well, and that's precisely the issue. And that's why you're seeing these other, you know, layer ones come into vogue, right? Solana is able to do that.

People call them, what's the next Ethereum killer killer and is it solana is it avalanche is it luna you know is it cosmos and you can start going down these layer ones who also maintain blockchains and maintain databases and so maintaining that database says okay you know i'll let you move your your solana much cheaper and you know there's no there's always a trade-off. The two trade-offs in crypto are, do you want security or do you want speed? Speed comes with, you're just not going to be as safe. Think about driving your automobile. You're going 200 miles an hour. You're not as safe as if you're going 20. And that's just the constant as safe as if you're going 20. And that's just the constant trade-off that we're all dealing with.

What's weird to me is they're not, right? Like Facebook, Instagram was a Facebook killer. And so Facebook bought it. But you don't have that dynamic here, right? Like Ethereum can't buy Solana. Maybe they could, or there's something weird could happen there. But it seems like it'll be a kind of a winner take all. I don't, I don't think we're in a, who knows what the next 10 years is going to hold. But I think in the near term,

what you're seeing is a lot of, of projects and protocols coming on that actually create interchain operability so that it's easy for you to, to do something. And Bitco who was the custodian that we recently purchased, I mean, they offer wrapped Bitcoin. So it's a way to take Bitcoin and wrap it and put it into the Ethereum ecosystem. And so now you can unlock that value. Like there are ways to do all of this. And so as you kind of work through it, like the other way to think about this is think about

all the the brilliant minds and engineers that are working at at facebook at apple at microsoft and how many brilliant engineers and truly you know technological advanced minds are are doing this and then think about the crypto ecosystem and the number of engineers that are working on that, that are equally smart, dwarfs it. Dwarfs it by a factor of a hundred or a thousand. And so when you think about that, they're always going to find a way to make it work, right? There are things that are clunky, you know, yield farming can be clunky. There are things that are, you know, but in time that will change. But today, you know, and that's also why there's the opportunity here. That's why you can see some of these things, you know, 5X,

10X, 100X, because if they solve a real meaningful problem, they're worth it. And that if you can solve your ETH problem where you want to move ETH and it's going to cost you $500 to move $500 of ETH because the gas at the time, like people are actively working on solving. And ETH is actually working on solving that with ETH 2.0. And then they're like changing that on the fly, right? Like in real time, trying to change the plane while it's flying in the air and change the engines, change the wings. It seems a little scary. Well, and that, and that's why everybody's watching it with, you know, and that's why it's a, it's a, it's a long, very thought out,

drawn out process. You know, they're running that in parallel because it is complex. The options part of the trading, just a lot of our stuff on here is talking with options traders and investors. Talk to us a little bit about what that market looks like. I guess we could focus on Bitcoin, I guess, but touch on Ethereum too. Yeah, I mean, here, I'll start off by saying that the activity in the option space definitely falls along the lines of market cap. So Bitcoin being number one,

Bitcoin being number one, ETH number two, and then subsequently the other alts. What that looks like is you have the listed markets or traditional regulated markets, I'll call them CME. I think you can look for something coming out of some of the other spaces as well, whether that's the ARISX, SIBO, VITNOMIAL's got an offering, LedgerX was a traditional, you know, DCM in the space. Those markets are, you know, more comfortable, but they don't give you appropriate leverage. Then you have, and I'll come back to that.

Then you have what I'll call the, you know, the crypto centric, you know, Deribitbit.com, there's a number of, of, of exchanges that you can trade on. And then you have what we see a lot of, at least in the institutional space is bilateral trading done under ISDA or long form. We trade under ISDA because it's safe. Having been a victim of, you know, Lehman brothers and some of the things that fell apart with that,

you know, we're cognizant of some of the holes in long form trading. So we trade under ISDA bilaterally. But if you think back, like people always ask, why is the CME not gaining as much traction? And the issue is, you know, being able to get credit for your collateral. If I want to sell a call to overwrite my position, a very simple thing, it's something that you can do, but I don't get credit for having the coin. And so I now need to post margin against what the CME or the FCM

views as a short position. When in reality, it's a very safe position because I'm long the asset, I'm sure to call against it and I'm just overriding. So that's the current limitation. So I think if you have the ability to, I think the backed option was probably closest to getting there. Nobody's gotten there yet. I think the binomial guys might be working on something, but there are a number of people. If you can get to a point where you're getting credit for your asset and you can pledge it into the risk system, that's really the, from a traditional regulated venue, that's the most important thing.

But that's the tough nut to crack, right? Because they're saying, hey, I need credit on some centralized system, but it's a decentralized system, right? It's not even that. It's just like the CME or the FCMs won't recognize the Bitcoin that I hold as an asset. Yeah, yeah. And so whether I want to sell it. But it's because it's not in their ecosystem.

Exactly. And it isn't a bank account. There isn't a you know, it's not something that they're there yet. They'll get there. And I think you'll you'll gradually see volumes move from some of these crypto native venues to more regulated because that's just where people feel more comfortable. And there's a rule set surrounding it. So, you know, as we kind of work through this, that's going to be the challenge. I don't know if they'll get there. We're battling with trying to hold physical gold and have the physical gold holding be counted as an asset. And it's in the warehouse and the receipt is on the FCM's books. And they're like, it can't be in your name. It could be in the FCM's name. And then, but right.

So it's, it's tricky. Talk to me a little bit about like just numbers. Like what's the vol look like on the implied vol on those options? Is it call skewed, put skewed? It's, it's here. The, the, the implied vol is, you know, it could range. I mean, it's been as low as, you know, it hasn't been 40 in a while. But, you know, I'd say it probably hovers in the, you know, when it gets low in the 50s, when it spikes, you know, it's probably 110, 120.

When it really spikes, it's 300. And that's on, you know, I'll call it the Bitcoin ETH universe. Bitcoin ETH generally trades about anywhere from 7 to 12 vols higher, richer, more or less. And I'm giving generalities here. The SKU is definitely called SKU. Part of that is when you take a 100 vol asset. I mean, what does that tell you? It says there's a two-thirds probability that the asset's either going to double or be worth zero. Well, if you're looking at the zero bound as something realistic, do you really want to buy puts, you know, on something that, you know, is bound at zero?

Too expensive. Zero bound. So your skew kind of flattens. And so your call skew becomes the, you know, your call skew becomes, you can go, you can theoretically go to infinity. Right. And so that's a, that's a realistic, a realistic thing. So you definitely see calls as a general rule trade over. Now that may change with time. It may change with, you know, as more and more traditional people come in and look to protect

you know that may that may change but right now it's generally you know your your 25 delta call trades at a higher vol than your 25 delta but that opens up a lot of cool stuff with vol that high right like you selling covered calls oh yeah that kind of stuff is amazing yeah we're selling puts as an entry point to to get get into the asset for people who feel and the vols that high the yields on that are are actually meaningful so citadel sesquan a lot of these guys have become known names to the retail universe after the game stop stuff and right market makers have become in the news so who are those players in that crypto space are you know is there gamma squeezes all that kind of stuff happening in the crypto space the same as gamestop there there are definitely there are definitely squeezes there are definitely

you know large trades will push the market around um But they're, they're, they're, it's like any new market, right? Like, generally speaking, things come along, and then all of a sudden, you know, somebody big gets in and tries to do something and the markets will move and they adjust. And, you know, it's, it's a, it's more of like trading an emerging market than it is like trading, you know, see something like S&P where, you know, okay, how many, you know, it's more of like trading an emerging market than it is like trading, you know, say something like S&P where, you know, okay, how many, you know, at some point, there's enough people that will step in and normalize things. Yeah. Let's get into the Grayscale Trust. What was the original idea there? How big has it become?

I haven't checked the latest. So yeah, so let's look at the trust in general and talk about that and then talk about the of, of market dynamics. So the, you know, the trusts and grayscale being the biggest, but there are, there are a number of them, you know, whether it's 3iq, CI, you know, Bitwise, there, there are a number. The, the grayscale, you know, or the trust trade was there was no easy way for a retail investor to get exposure to digital without buying the actual Bitcoin. There was no traditional plumbing that I could buy it in my retirement account or I could buy it in my trading account. The trust offered that. What that did was that basically pushed the trust to a, to a dislocated level.

You know, it could be as high as, you know, when it first came out and you saw, you know, 5,000% premiums, but gradually it, you know,

it, it normalized in the, you know, the 20 to 30% premium range. And that was because there was a retail bid for it. Like people, I need to have this in my portfolio. I don't care that I'm giving up theoretically 25%. I I'm happy just to get exposure because I think it's going to 10 X. What that did was it created the mechanism for getting into the trust was twofold. There were

two, there were two ways to think about the trust. There was subbing into the trust directly, and then there was buying the trust on a venue. Buying the trust on a venue resulted in that 20% premium. If you subbed into the trust directly, you got it. What's a venue? Like an O an OTC or pink sheets or something like that, there was still a way to get into your Charlie Schwab account. So people, what they were doing was they were going out and taking Bitcoin, whether they borrowed it or bought it, subscribing into the trust. The trust would lock up for a period of time. In the early days, it was a one-year lockup. As they became 40-act companies, it was a six-month lockup. And in Canada, it was a four-month lockup. But you would basically buy or borrow Bitcoin, put it into the trust, wait your four

to six months. When it unlocked, you would sell it at a premium and you would then replace the Bitcoin that you had borrowed and move forward that way. So it was a quick way to make 20 to 40% annualized. And that's cash on cash rather, I should say. So it was 20 to 40%, which was really 40 to 80% on an annualized basis, just doing that. And that was really a regular, it was a regulatory arb, it was a retail arb, it was some way that however you wanted to think about it, but that was effectively what was happening. Some of the aforementioned Chicago prop firms were all over that, right? Yeah. Yeah.

I mean, everybody that was in the space was doing it or participating in it in some form or another. The lenders were lending coin to the prop shops who were subbing in. Everybody was kind of touching that, right? And that was simply created because the regulators wouldn't allow for an ETF. That all changed very drastically when Canada allowed for an ETF. And they were the first. And so they rolled out the Canadian Bitcoin ETF.

And just almost overnight, the premium disappeared as people naturally rotated because now they could find ways to get that ETF into their portfolio. And so you saw the premium snap to zero. And now because there's no way to know, there is no redemption feature. So the interesting part about the trust was that you could either create trust share. The SEC came out and said you could either create trust shares or you could redeem trust shares, but you couldn't do both. So you had to pick a lane and say, I'm going to create, which is when the premium was high, and I'm not going to let people redeem. So they were locked into these trust shares. Because if you do both, you're basically an ETF.

An ETF, exactly. So that was their way of saying, we're not going to let you be an ETF, but we'll let you pick one lane. So now, fast forward to today, where you've got ETFs that are out there and you can create redeem regularly, at least in Canada, you're looking at the trust is now trapped capital. And so it's now trading at a significant discount because there hasn't been a physical ETF approved yet. There's the futures ETF, but not a physical ETF. And so you're locking your capital up into a vehicle that,

I mean, theoretically, there's no guarantee that the SEC is going to allow for these trusts to convert to ETFs. And that's something that people are cognizant of. But you can sell your ownership in the trust to someone else who wants to buy it. But that's what's created the discount. Right. Because everybody's like, why do I want to buy your trust and come with these terms and conditions that are unknown when I can just go buy the ETF or as it's becoming more commonplace, just go buy the asset itself. As it went from a scarcity premium to a liquidity discount, basically. Correct. And that's on both.

There's a Bitcoin one and an ETH one, right? There's a lot of them on both. There's a Bitcoin one and an ETH one, right? There's a lot of them for both, but yes. And based on their features. So a few of the Canadian ETFs allow for redemption period. There's a redemption discount if you do it at any time, or you can do it one time annually. So each one is a little different. They come with a little different twist. And whatever that twist is, is basically it tells you how it's going to trade. Right. Yeah. If you can redeem at any point and pay a 5% penalty, you're never going to drift far from 5% as a discount. Right. If it gets to 10% discount, I'm going to buy it, redeem and make 5% instantaneously. Yeah. And, but the trust owns tons of Bitcoin. What's it worth? A couple billion, right? So it owns that. It owns billions of Bitcoin.

Yeah. And they sit there and it's, you know, it's locked away. And there's no mechanism to do like staking, to do some of this stuff, to generate a yield on that ownership? I mean, I don't think their docs will allow for it, right? Like it's, it to generate a yield on that ownership? I don't think their docs allow for it. It's in a trust. It isn't held in omnibus or held in effectively street name or however you want to think about it.

We touched on the ETF. All these new ones just came out. What are your thoughts on that? I think you guys, I don't know how much you can say, but you guys were looking at doing one around the services. Yeah. But generally speaking, you've created the futures ETF and like any ETF that's based on futures, it comes with, you know, some conditions. There's going to be roll risk when the future expires. You're going to have to roll to the next term. Can you match that? You know, what's your tracking error? How much are you allowed to deploy into the futures market versus somewhere else?

Like there becomes a number of issues. And I think it's a tradeoff, right? I think that the regulators came out and said, we're comfortable with futures because there's enough liquidity in the futures market today to support this. And that, again, is debatable based on where basis is. But the reality is they came forward and they said, this seems to check some regulatory boxes for us. And now we're at a point where I think the demand outstripped what people were expecting initially. And so you're creating friction points and you have some unintended consequences.

And that's always like anything, when you do it the first time, you're going to hit some bumps in the road and you're going to have to figure it out. And I think that that's what you're going to see with some of these products. And some of these products come with natural, like the role risk, right? It's very reminiscent of USO, the GSCI, like things that happen and they fix that, but it took some time. And I think you're going to see some of the same growing pains in the process now here. what's that futures curve look like? I should know that, but, uh, right. Is it in contango? So you're rolling to the more expensive. Uh, it's, it's, it's, it's wavy is the best way. So, you know, it's, it's, you're putting a lot of, of, of cashflow into a market. And so whatever term is the Vogue term

becomes bid, right? That that's the best way to think about it. You know, so I'll give you when it launched, October traded way over. And then all of a sudden, you know, October traded almost to a 40% annualized premium because everybody was trying to get into that either through the ETF or in anticipation of the ETF. And then as November came online, you know, I mean, they're all tradable. But as people started to look at the role, then November traded over, October collapsed for the last few days, and Dec traded under. But you have that timing risk. So over time, you would expect the cost to roll. But it's, again, a function of what's the general sentiment in the asset, right? When things are going up, the fronts are bid. When things are going up the fronts are bid when things

are going down you know the fronts collapse the i just pulled it up so the nov is trading 57 7 and the it is in contango so these 58 jan 58 5 feb 59, March 60. And that's what you would naturally expect to see. I think when you start to get out to March, there's a little bit of finger in the air because six months in crypto or five months in crypto is an eternity. An eternity. And so if you guys had your way,

a spot ETF is the goal or to convert the whole trust into an eternity. Eternity. And so if you guys had your way, like a spot ETF is the goal or to convert the whole trust into an ETF? Yeah, I think that, you know, that's just a healthier, that's a healthier thing. Yeah. And what about these, which were way earlier,

some of these ETFs that just buy like companies in and around the space? That's kind of a different play altogether. Yeah, no, I think, you know, whether you, you know, there's, there's a lot of interesting financial ways to play the space, you know, and as you do that, it's a, you know, it's, it all, it all comes with a little bit of risk, right? You're buying companies in the space.

It's different than looking at the technological solution that Ethereum provides, let's just say, versus companies that are mining Bitcoin. But yeah, a rising tide is going to lift all boats, but you're not necessarily getting that pure beta. Yeah, I've said that before. I'd rather own the gold than the gold miners, right? Like it comes with management and debt and equipment.

Yeah, you're taking a different risk and you're getting a different outcome. Any other thoughts on the space in general or your guys' place in it before we move on? Yeah, I mean, I think that there's so many, like I said earlier, you know, the smartest minds in the world are working on this and it's everything from NFTs, which, you know, again, another example of something when I looked at it,

I thought these are just digital baseball cards. And then somebody, you know, explained to me, well, wait a second. An NFT can be anything. It can be your, your medical records. It can be, you know, you know, like it's a way to monetize you know things and it's going to change the way such large portions of the world behave yeah it was like or an artist can every time his art sale sells he gets a piece of those proceeds right via the correct nft i'd look at it as like owning a url right like jeffmallick.com like that is essentially an nft right it's a digital asset that i own um correct

because it has meaning to me doesn't have it doesn't have any meaning to anyone else not really worth anything to anyone else but uh it's got worth to me i'm gonna do some favorites before we go It's got work to me. I'm going to do some favorites before we go. Favorite Nathan story that's PG enough for this show. Doesn't exist. No, I got a good one. So I play bad. I know Nathan from hoops played basketball.

We were in St. Louis in some tournament. As old men, like, you know, like as four-year-old men. And we went out the night before next – and we were getting killed. The teams we were playing – like, I'll give you an example of a game. The first game was – had Terry Porter was on the other team, like the guy who played for the Portland Trail. He was like 60 and crushed us right like it was like that that kind of that kind of game where like the guys were real and then we were like the and I'm sure he seemed small on TV but I'm sure in real life he was the tallest guy I'd ever seen yeah yeah exactly so so we go out the next morning we get up and

we have a 7 a.m game and we're playing the team that's the best team I ended up winning the whole tournament from Los Angeles but they were out till 4 a.m the night before and it's a 7 a.m. game and we're playing the team that's the best team. I ended up winning the whole tournament from Los Angeles. But they were out until 4 a.m. the night before, and it's a 7 a.m. game. And, you know, we're winning. Nate is shooting from all over the court. We're down by four, and Nate misses two breakaway layups. And we ended up losing the game. Like, we had a chance to actually beat the team that won the whole thing and nate missed the layup so that's my favorite nate story because he thinks

he's a great basketball player and you know all this stuff so yeah tell him that's when he's got to throw it down right can't well that wasn't happening no that wasn't happening i always wonder about you uh adult men like traveling you're on a traveling adult basketball team it's impressive well it was like a one-time tournament but yeah it was still it was you know one of those things that maybe we shouldn't have thought twice about uh and some quick chicago favorites favorite chicago pizza uh lumonatis the loo is that what you're going? Yeah. Favorite Chicago restaurant overall? I got four kids, so it's not about which one I like the best, it's about which one I can convince the four of them to agree on. So there are a couple of Italian favorites,

but I'm not going to name any of them. Favorite thing to do with the kids in Chicago? Definitely go to the lake. Yeah. On the boat? On the boat, on the beach, a little bit of everything. Whatever the weather is conducive. Love it. And then ask all our guests, favorite Chicago, not Chicago,

favorite Star Wars character? I don't know. Wouldn't sound like a tool boba fett no that's good he's on my uh um investors guide to star wars like seemed cool back in the day now just looks like a guy in a gray sweatsuit but they're coming out they're coming out with the new uh boba fett series on disney plus again huh all right well no that one was mandalorian now they're gonna have a new boba fett oh oh really okay well i can i can get i can get behind that yeah definitely uh well thanks jason this has been fun and thanks so much for having me yeah let's get together for a real life cocktail soon uh you just pick the time and the place, and I'll be there.

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