The Wolf Of All Streets - How Bitcoin Whales Really Make Money Trading Crypto | Max Boonen, Founder Of B2C2

Episode Date: December 30, 2021

Market makers in crypto are wildly misunderstood, as is the manner in which huge players trade. In this episode, Max Boonen, the founder of B2C2, explained the importance of market makers, and how their services and liquidity make the market more efficient. He broke down the reality of how whales trade, their actual impact, and how they are making money. Max also shared an incredible story on how whales once moved the market, one of my favorite anecdotes ever shared on the show. This conversation sheds a positive light on a powerful force in crypto that makes our market efficient for all players and offers a glimpse of what is to come. -- Arculus: Arculus is the new crypto cold storage wallet that combines the world’s strongest security protocols with an easy-to-manage app. Store, swap, and send your crypto all with a simple tap of your Arculus Key™ card. Order the safer, simpler, smarter crypto cold storage solution today at: https://thewolfofallstreets.link/arculus -- Kava: Kava connects the world's largest cryptocurrencies, ecosystems and financial applications on DeFi’s most trusted, scalable and secure earning platform. Kava lets you mint stablecoins, lend, borrow, earn and swap safely and efficiently across the world’s biggest crypto assets. To learn more visit https://thewolfofallstreets.link/kava --- If you enjoyed this conversation, share it with your colleagues & friends, rate, review, and subscribe. This podcast is presented by Blockworks. For exclusive content and events that provide insights into the crypto and blockchain space, visit them at: https://www.blockworks.co ーーー Join the Wolf Den newsletter: ►►https://www.getrevue.co/profile/TheWolfDen/members

This podcast is sponsored by Kava and Arculus. Stay tuned for more information about both of them later in this episode. What's up, everybody? I'm Scott Melker, and this is the Wolf of All Streets podcast, where two times every week, I talk to your favorite personalities

from the worlds of Bitcoin, finance, music, art, sports, politics, basically anyone with a good story to tell. Well, today's guest definitely has a very good story to tell. Well, today's guest definitely has a very good story to tell, and I'm interested very much in hearing it. Now, he left a cushy, high-profile job as a fixed income trader at Goldman Sachs to go into the nascent cryptocurrency industry, and that was in 2015 before anyone was doing it. And some could argue that Max Boonin's decision to do that was one of the most pivotal moments in crypto because he started B2C2, a liquidity provider that allowed institutions, whales, big players to actually move money in this market in a way that they were

probably more familiar with from other markets. So he's the perfect person to talk about institutional adoption, what's likely coming in 2022. And for me, more interesting, how big money actually moves in the crypto market. Max, thank you so much for taking the time to do this. Thanks, Kutcher, too kind. Well, listen, so I often hear the term market maker used in crypto, and it's almost exclusively used incorrectly, right? I think people believe that a market maker

is the whale who's pushing the price around of the market and who's dumping on you or who's buying huge amounts of support. What is a market maker, really? Well, that crypto definition, I love it, though. We used to have the meme, the wood chipper. Maybe you remember it from OKCoin. There was the idea that when there were big liquidations and big market moves, OKCoin had an internal market maker that they called the wood chipper. And they would just throw your position in it and out would come confetti and I guess more profit for OKCoin. But it's, of course, really not what it is.

However, what's true, though, is that the market making scene in crypto has evolved quite organically. And so a lot of the big market makers today, they were just started by two guys in a garage a couple of years ago, which is not something that you see often in traditional markets nowadays, just because of the very high bias to entry to becoming a market maker. But basically what the market maker is, is if you think of it in traditional terms, maybe that's the easiest. And you want to buy some Microsoft stock, then you call your bank, your broker, and they say, well, there's a price you can buy there. And there you go, you've got your stocks. But the question is, who do you buy from? And conversely, who do you sell to? Well, the thing is that buyers and sellers, they don't normally meet at the same time everyone wants to do a transaction.

So the way that the markets evolve, and it's always quite natural that an evolution happens, is that some people decide that they're just going to stand in the middle and they're going to make sure that when there's a buyer, there's supply available. And when there's a seller, there's someone who's willing to buy. And they turn out to do those two functions. So you used to have at the New York Stock Exchange what they called a specialist. So there was an actual person, typically a guy, I suppose, an actual person sitting there with a computer and picking up orders and always making sure that there was a bid and there was an offer. And the name of the game there is that you want to buy low and sell high, but you're doing that as the market price evolves. And so the game is to do that often enough at a good enough spread, but still a competitive spread because you're typically

competing against others such that you're not going to lose money even when the market moves. And that's what market making is all about. So naturally used to be something that was done quite manually. I talked about the specialist at the New York Stock Exchange, and now it's completely electronic. It's high frequency, as we call it. And the whole power of new forms of mathematics, machine learning, and all that stuff is put behind this simple idea that you want to have the highest bid possible and the lowest offer possible, but still a decent enough spread that you don't lose your shirt when the market moves. That's all that it is. So all the profit is created in the spread. In the spread. Of course, now you have, it's a bit of a spectrum because on the one hand,

you're going to have the high frequency market makers just capturing the spread and doing nothing but that. But then on the other hand, you're going to have more, a slightly slower moving quantitative trading shop that can trade what I like to call the outside spread. So when you think, you look at the book on Binance and you see, you know, it ticks all the time, moves up and down.

The people that fight there, they're the high frequency market makers of which B2C2 is one, Wintermute is another. There's a bunch in crypto including the traditional ones like Jump Trading and others. So the stuff that ticks all the time, that's what I call the inside spread. But when you have a move, then you've also got people waiting on the sidelines trying to provide what I call that outside spread and it's going to be more like, well, the market goes down 1%, our valuation model thinks that's a good price to get in. And there might still be, you know,

reasonably high turnover, they might trade like a couple of times a day, or something like that. But they're more about providing that outside spread, which is more, I guess, I want to say fundamental driven, but it's not. Whereas a high frequency market maker, if the price ticks up, you know, like three ticks, they're going to think this is new market price, right? Whereas on the slower end of the spectrum, if the price ticks up a little bit, some shops will think, we think that's overvalued. We want to sell there. And conversely, ticks down, we want to buy there. So you've got quite a bit of a spectrum. And so you find that because scale is so important in that game and reducing your variable cost,

reducing your exchange fees by trading big volumes, that you tend to have some overlap, right? When you have the highest frequency market makers that do the biggest volumes, well, typically their cost of implementing slower moving strategies is going to be lower because, for instance, their fees are going to be very low. So you tend to find some overlap, but still it's across the entire spectrum. It's something that's typically quite automated, quite tech driven. You started doing this in 2015 in crypto when, as I said, it was a nascent market. I have to imagine that the inefficiencies in the market were much easier to take advantage of at that point. And that maybe that made doing what you

do more profitable. Is that true? I mean, as it becomes a more efficient market, as there's more players, is there less profit to be made as a market maker? You know what? Sometimes, well, in crypto, we've had waves where having even a single specific competitive advantage was enough to really, you know, make you survive for the long haul. So you think of, let's take a BitMEX. I mean, the perpetual swap. It's one, I don't want to say a one-hit wonder,

but it's such a huge innovation. It was copied by everyone, more power to them. Just that was their, you know, USP. I'd be too city when we started 2015. I think one of our USPs, if we're honest, is that because I was trading, so I was a rates trader at Goldman Sachs. I did a lot of FX swaps.

I was very close to the FX desk. And one of the sales guys there was a friend of mine. He introduced me to a very good provider of FX that was willing to work with my company and convert, you know, euros, dollars, yens at a reasonably cheap rate at the time. Something that people would not want to pay today, but back in 2015 was really cheap. And we could just milk the, you know, cross-currency arbitrage across exchanges for a good pretty two years, just doing that.

And that was like a more than 100% annualized return at the time, because you would see, you know, Kraken trading in euros at like 75 bps above Coinbase and things like that and just having access to the pipes the traditional foreign exchange pipes to be able to recycle that quickly enough was a key unique selling point you look at um so other big companies circle became one of the well probably the biggest otc desk at the time well that was really because they had good banking relationships. I think that Barclays at some point, that Silicon Valley Bank, and that enabled them to really deal in Bitcoin in large numbers

with more serious players, whereas the smaller guys had to work with payment processors. It was kind of messy. And just having that simple one or two bank accounts was a game changer for Coinbase. And so, you know, we've moved through from unique selling point to unique selling point. And of course, over time, the markets have become tremendously more efficient.

And what used to work, you know, even six months ago doesn't work anymore in crypto. You have to constantly reinvent yourself, but that's actually nothing new it's something that traditional markets have gone through as well and we're just maybe going a little bit faster there was a piece in the press maybe a year ago that over the past 12 months at the time crypto otc spreads had compressed by a factor of 10 i mean can you imagine that in one year, the spread was cut in 10? It's not really something that you see in traditional markets. They've evolved at a slower pace, but because everything really, all the lessons of traditional markets, they're there

for us to apply to crypto. I mean, the speed at which the market evolves is really crazy. And anytime you really see a slowdown in something new, it's going to be stuff more like DeFi. DeFi is an actual new thing that we didn't have before. And so there it's kind of interesting because you can really create a new competitive advantage of a sort that did not exist before. But everything else, everything that's closer to traditional markets in crypto has become incredibly efficient at an incredible pace. Yeah, I remember going down sort of the OTC deal path in 2018 and 2019, like everyone else. And everything was a scam, first of all, I should say that outright, right?

But there were these sort of unicorn moments when you would match a buyer and a seller and they would actually trust each other and send some proof of funds and proof of coins. And people were getting a 3%, 4%, 5% discount or were paying a 3%, 4%, 5% premium, depending on how the market was. But I have to imagine that does not exist in OTC anymore.

The OTC market is highly institutional now. There really isn't... Well, if you have pockets of more shadowy operations, it's going to be more around countries that have capital controls. You really need to be connected to be able to access the payment system. You know that they're not the typical, you know, so-called developed market countries. The market is quite institutional. I think there's been a few phases. From 2015, 2016, Cumberland, Circle,

Genesis to some extent were the big names. Genesis because actually there used to be a second market. That was a company you could buy and sell private shares of like pre-IPO companies. So that a big private wealth

sort of network that they, I think, recycled to sell crypto to those people. So they found a lot of success there. Cumberland was backed by DRW, a big prop shop in traditional markets. Circle raised a ton of money, including from Goldman. So, you know, those were the desks that initially were able to put together a desk, i.e. a couple of people with phones picking up the phone to do deals. And we had a wave like that of OTC. And then when B2C2 came on, the first innovation was in late 2016, we created the first single dealer platform. A single dealer platform is a very simple concept. Typically, it's going to be a bank.

You connect your bank as an institution and you want to buy euros and dollars and Japanese yen and you see the price tickings and you can click buy sell. That's really what it is. And then if you want, you can have an API connection. That's a single dealer platform. Of course, then you have multi dealer platforms, et cetera, et cetera. But the most basic platform is a single dealer platform where you connect to a bank and you get streaming FX prices to you. So in late 2016, we created the first single dealer platform in crypto. So you could just trade OTC without speaking to a person. You could just click on a website or you could get an API connection. So that was quite important, but of course it didn't take the market by storm immediately. What we did is in

2017, roughly a year after we had launched the platform, we hired the head of EFX from Goldman Sachs in London, who happened to be half Japanese. That's Phil, who runs, who's our co-CEO now. And Phil was a big name in the EFX market, and he knew all the clients in Japan. And if you remember, around 2017, Japan was the most advanced country in crypto. And the reason why is that Japan, since roughly 15 years ago, went through a big moment where gambling, speculating on FX,

became a huge deal. It was basically GameStop and AMC before it happened in the US. And so there's a lot of providers, actually the biggest brokers in the world in terms of volumes, well, maybe now Robinhood's taken them over, but the biggest brokers in the world for a long time were Japanese brokers. FX because basically like one fifth of a FX ex-profit is coming from, you know, retail trading in Japan. I mean, I'm exaggerating, but that's kind of the idea. So we went there first because we thought US market, maybe it's going to be too competitive. There's scumbag as everyone, we're small. And also it was kind of unclear what was going to happen on the regulatory front.

Whereas Japan was quite forward. And in fact, Japan was still like very forward in terms of its thinking until the Coincheck hack, which was one of the first after Mongog's big exchange hacks, I think they lost something like $400 million. And so what we did was through the Goldman connections, we got all the big brokers in Japan to trade with us. And what was at the same time a blessing, but really difficult to manage is that they saw us as a foreign exchange liquidity provider, meaning that they gave us no second chances, even though we were dealing in crypto, which is a market that, you know, uptime of the exchanges was really terrible at the time and things like that. And so we managed to survive that environment.

It was things like if our price feed went down even a minute, which in crypto is, oh, no big deal. 2017 on exchanges, you know, you wake up before exchanges has less than an hour on downtime. Today, you're very lucky. Yeah. And so no second chances.

And if one client told us, hey guys, your feed was down a minute, I had to notify the regulator. You know, that happened once. It doesn't really happen twice, right? It happens like every day on Coinbase, right? And so that was 2017. And then in 2019, we hired senior people in the US.

And then we took what we had created in Japan and got into the US market. And that really changed the game because it used to be a very voice-driven market, people picking up the phone. And then you were able to trade on a screen, same prices, same quantities as good liquidity without speaking to a person. So that really changed the game. And that was 2019, which that's the time that we became the biggest OTC desk in crypto.

And so being the biggest OTC desk in crypto, I have to imagine sort of puts you in tune with the biggest players in the market. And I think there's a lot of, as I said, there's a lot of confusion as to what a market maker is, but there's probably also a lot of confusion as to how big money moves in this market. How does an institution actually buy when they want exposure? You know, how can they do that in a risk managed way? They don't want to go on an exchange and just start buying coins on the order book, right? And so what do you see behind the scenes as far as how whales and institutions are actually moving their money in this market? Yeah. Well, I think if we're honest with ourselves, our industry likes to say that we have big institutional adoption because it makes us look good. But in reality,

for the longest of time, in my opinion still to this day what we mean by institution is really is kind of a subset well i don't understand subset but a subset of traditional institutions generate the vast majority of the revenue on the institutional front in crypto and what i mean by that is the following the institutions that need to be in crypto today they're all in crypto. And who are those? Well, they're all the retail-driven businesses. So back in the day, you had the early adopters, eToro. Kudos to them for being so early. You had IG, IG Markets were really early as well.

I think those guys were like 2016, 2015. And now you've got, you know, the biggest names are going to be like Revolut or Robinhood. Like all those guys were like 2016, 2015. And now you've got, you know, the biggest names are going to be like a Revolut, a Robinhood, like all those guys are very big. And the reason is that, you know, if you're a retail trader, you have the choice. You can connect directly to Binance, FTX, Bigstamp, whatever, or you can go through a Robinhood, you know, no commission.

You can go to Revolut. I think it's also pretty quite cheap. And they're fighting for the same pie, really, like a Coinbase and a Robinhood are to they're fighting for the same pie, really. Like Coinbase and Robinhood are, to some extent, fighting for the same pie. And the more traditional institutions, well, some of them are in the market. But for them, they're not going to be price sensitive. It's going to be someone who's like putting their neck out, you know, taking career risk to push for some sort of crypto initiative at a BlackRock or more traditional firm. But all the Robin Hoods, the Revoluts,

the eToros of the world, they've been in the market for a long time. And for them, it's about, you know, growing a huge business and taking advantage of an opportunity that's there now. But if you're a conservative institution, I mean, the revenue that

you're going to be generating in the market like this is really not going to be interesting. And that's also what you see with the banks, right? You're a client of a big bank, a Goldman Sachs, JP Morgan, and you want to trade crypto, really you can. You can definitely trade crypto. You can connect to an exchange, you can trade the CME futures. And what you're left with is the institutions are so conservative, they can't even trade the CME futures. And what you're left with is the institutions are so conservative, they can't even trade the CME futures or they can't even connect to, you know, well, a B2C2 that's actually part of a banking group because we were acquired by a Japanese bank a year ago. And so that leaves not a ton of revenue, actually.

So those institutions, in my opinion, are not really interesting for our industry, except in as much as they make us more blue chip and more acceptable as an asset class. But other than that, I think none of the big crypto businesses rely on BlackRock or Goldman Sachs or any company like that actually joining the market. So it's really just good PR when a Michael Saylor comes in and puts Bitcoin on their balance sheet, but that's not what's really moving the market. Well, if you look at MicroStrategy, it's interesting because it's still a big number. I mean, I don't know what the average purchase price was like 20,000, 25, something like that. Yeah, I think now it's in 28 or to the low 30s or something because he's been buying up higher. But yeah. Probably the actual money spent is a billion dollars, roughly.

And they're up like 3x or something like that, but approximately a billion dollars. Now, what's interesting, and this is also why I think many people that think would be many institutions that would be great milestones for a market to have, they're actually not that interesting. Think about it. A billion dollars of purchases. That sounds like a lot of have, they're actually not that interesting. Think about it, a billion dollars of purchases, that sounds like a lot of money, right? But in reality, it's absolutely nothing. When you look at the daily volume of any of the major exchanges or the daily volumes at B2C2,

a billion dollars, it's absolutely nothing. You do that in a day, right? And so those big names that are still buying like billions of dollars of crypto, that's really not where the big revenues are, surprisingly enough. And if you think of a BlackRock, and I'm not using, it's not that I have any problem with BlackRock, I'm just using them as, actually, it's a compliment. You know, BlackRock, that's maybe the most blue chip financial institution that exists. Well, at BlackRock, if they put together a crypto fund, how big can it get? You look at GBTC, which I think is something like 30 billion under management, you know, and probably how much money was invested is of the order of like 10.

So if BlackRock put together a crypto fund, it's probably going to be Bitcoin only. It's going to be long only. And yeah, it can reach into the billions, I guess. But if it's a long-running fund, even if it's a $10 billion fund, in terms of share of wallet, in terms of the revenue that's going to be generated by that, I mean, it's going to be $100,000, a million dollars maybe for whoever gets that order of that business.

And it's just not that interesting. But that's, I mean, when we're talking about big numbers, you really have to consider the level of spreads and commissions and fees in the crypto market today to realize that, yeah, you need people that actually trade a billion dollars week in, week out to really be a major client. That makes perfect sense. And interestingly, MicroStrategy, we were talking about how big money moves. You've somewhat publicly said, listen, we basically went on Coinbase and we did it. And, you know, I remember it was 16,000 or 60,000, but basically like filled

these orders as if they were just a retail guy sitting at a desk, trying to move a ton of money. Why wouldn't they just use B2C to, or someone like you to buy it all at once? It wasn't like he was looking for a better price, right? He was just trying to not move the market by doing it in that manner. Guys, unless you've been living underneath a rock for the past few months, then you've definitely heard me talk about one of my favorite platforms, which is Kava. Kava connects the world's largest cryptocurrencies, ecosystems, and financial applications on DeFi's most trusted, scalable, and secure earning platform. They have

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Well, I think Coinbase has had an interesting strategy. They did two things, right? One, they were, I think, a bit more aggressive with corporates. And they were also supported by that a bit more aggressive with corporates. And they were also supported by that just because their brand is quite good. You know, no one, I was going to say no one ever got fired for buying Bitcoin on Coinbase. Well, that's pretty not true. You know, pretty some people today would get fired just for buying Bitcoin in the first place, right? But you know, you could go wrong with Coinbase. And if you're a corporate, you're already taking

a bit of a risk because you're, in a a way not really supposed to invest your treasure in Bitcoin, right? And that's, it's a really unusual decision. Of course, it turned out to be great for them. And they're doing very, they're doing us a lot of good in terms of adoption and things like that. But I think there's one question of branding and Coinbase was quite well positioned to go after corporate specifically, which are normally not an attractive business segment in crypto. I mean, how many companies are at the moment buying crypto? So that's one thing. And secondly, you have to remember that Coinbase did a very interesting acquisition, what, a year and a half ago now, they purchased Tagomi. And Tagomi was initially a standalone broker that had a, still does, winning Coinbase, an interesting product.

They had a, like a total cost analysis engine and an execution engine where you could basically send your order. It would aggregate the prices of Coinbase, but also Gemini, but also B2C2, and give you like the best price and also give you some execution algos. So the fact that a corporate trades on Coinbase via their Tagomi business, it doesn't mean that B2C2 wasn't on the other side,

if you get what I'm saying. Right, it just wasn't one mass OTC deal with one broker. They basically are aggregating liquidity from everywhere and filling wherever they get the best price at that moment. Yeah, and in markets, you do see waves like that where initially it's a very frontier market. You start with one liquidity provider, but then of course, if you had a second,

it keeps the first one honest. So you get better prices. So you have two liquidity providers and maybe you're adding an exchange to the mix. This is like a small number. And then you start thinking, I'm going to add more liquidity providers and it's going to be better and better and better. And you end up with 20 liquidity providers, but that's when you start actually over aggregating and you start to have, and I don't know if you want to get into that at some point, but you start having negative effects when you have too many sources of liquidity, actually. It's bizarre why, but it makes perfect sense,

actually. And then you have a wave of disaggregation. And you saw that actually, even in traditional markets, maybe nine months ago, Citi and a couple of banks were in the press and they said, actually, there are too many venues in FX. It's just too much. We're going to cut down. We're going to shrink the number of venues that we price into. People have been aggregating too much. And it doesn't make any more sense anymore.

And so you have those ways where you start not aggregating a lot. Then you aggregate a bit because it's better. Then you aggregate too much. And then you disaggregate. And you have those waves like that. And actually, crypto, I feel like we're on the cusp of going through a wave of maybe over aggregation. Too many players in the market. So you talked about the fact that even moving a billion dollars here, a billion dollars there is really not that meaningful, not that exciting,

no matter what retail thinks. So how big do we need to get to make it exciting, I guess, would be the first question. And the second question is, then where are your company and companies like yours really making the bulk of their money? I'll answer your two questions. First, I think that as an industry, we can be proud of ourselves because what we've achieved in terms of scale

is really tremendous. And I don't think we, like some people say we're still early and I hope we are. At the same time, just the scale of the market is amazing. When you look at the volumes on exchange, OTC, et cetera, Bitcoin is like, or crypto as a whole, it's like a major currency. It's like the Swiss franc or maybe even bigger. That's something to be reckoned with. It's really not where we were three years ago. The idea that our market compares to the biggest FX markets in the world,

not the euros versus the dollar just yet, but still like a top 10 currency. I think that's amazing. And also the quality of the institutions that have joined the market. I mean, the idea that we have the Robinhoods, the Revoluts and big big brokers also, you know, traditional asset managers, even though they're smaller. You know, it's testament to the quality of our market if they're willing to join it.

So that is just really good, I think. And it's good to take pause sometimes and realize that we've come quite a long way and we ought to be proud of ourselves. So that's the first thing. Now, I think that we're really getting to quite interesting levels. When you look at an FX desk of a traditional bank, it's going to be like they're going to be trading tens of billions daily. You look at the Goldman, maybe like 30 billions a day. And of course, it changes on the year. The pandemic year was a big year for everyone. But you're talking about those kind of numbers. And then you take a crypto exchange.

Well, I mean, they can actually do tens of billions daily. So you're kind of getting to the same levels for single players. And the OTC market is slightly smaller than the exchange market, but it's still quite big. So those are the, that's the, we're like one order of magnitude away from being one of the biggest, absolute biggest markets in the world, which is amazing. I think I heard, was it on your podcast actually, that GBTC has become, or-

Bigger than gold, bigger than GLD. Yeah, more assets under management than the largest, you know, ETF in gold. Yeah. And the fact that just a bunch of nerds achieved that, I think that's and I'm talking about just ourselves. Right. Yes, of course. Now to answer your second question on where the revenues are coming from. Our market is going through and going to go through the exact same blueprints as you've seen in traditional markets. So initially, you make

money on the spread of just Delta on trading, buy-sell, buy-sell, buy-sell, first voice, then electronically on exchange, et cetera. That's still profitable. And that's where B2C2 makes most of its money. But if you fast forward two years you know that's going to be a game that's going to be only the preserve of the fastest job uh shop just a couple highly sophisticated players that are themselves not going to make a lot of money you look at the pretty the yeah the biggest fx trading firm or i would say the best in my opinion, is XTX, major FX desk in London. That's an offshoot of Deutsche Bank and some other HFT. They're doing so much volume. You wouldn't believe it's like, it might be like, yeah, a hundred, $200 billion of FX a day,

like much more than Goldman Sachs, JPMorgan, even like taken together. But how much they make on that, they're actually not that big a business when you look at their revenue. It's a company that probably doesn't make a billion dollars a year. Is that because they're microtransactions and it's so small and so fast

that they're just making pennies each time? I think they would be lucky to make a penny each time. And so that's what we're going to go through in crypto as well. To some extent, it already is the case. If you're one of the best clients in the industry and you trade Bitcoin, you're going to pay maybe a basis point to trade your Bitcoin. And a basis point, mind you,

so that's in the institutional market, that's lower than the lowest trading fee you can have in an exchange, right? So right there, you're paying less than the best price that retail can ever get. So you're really starting to look at spreads that look like foreign exchange, highly liquid pairs, like Eurodollar, it's going to be like 0.1, 0.2 bps in the most liquid market. And in Bitcoin, yeah, you're going to pay like a basis point. You're getting there, right? So that's where you make money initially.

And then you have to look at the next frontier, the sort of second order effects. So you've seen a branching out in the market between the names that have first started to do options. So that's going to be, I think Galaxy was reasonably early with options. While QCP Capital, you had, was it options early? GSR, I think, possibly. So those brands start to do options because, I mean, naturally options, some more complex products, you can maintain some margin, even if you're not competitive

in terms of pure like spread on the one anymore. And then the other branch, the people that went more the balance sheet intensive route, and that's going to be a genesis. That was, you know, big market maker OTC initially, early on. And I think, you know, they were,

yeah, that was a very good move. They started doing more and more lending and they were the first there and accumulated the biggest book. And that's now they do options as well, of course, but they started out doing the funding business. So that's second order. B2C2 is also now a big player in the funding markets. Actually, that was my first love when I was at Goldman. i traded repo and fx swap so i love those secret funding markets um and now you're gonna really start seeing uh more complex things or i guess third order execution services like once once you have everything all the social liquidity aggregated and you've got all the credits all the leverage is provided to you for roughly free, that's the

lending side, and spotty super tight, what you're going to see is actually what Tagomi wanted to create at the time, but I think they were a little bit early, that's why they're part of Coinbase now, is the execution algorithms, right? I mean, if the market is basically trading, you know, one basis point wide, then the question is, well, I want to do a one billion order. How do I do that most efficiently without moving the market? That's really something that we're more used to in the equities market. And so as time progresses, all the big dealers like Genesis and B2C2 and everyone, but also the exchanges to some extent, because they have their own competitive dynamics on the retail side, you have to start making more money from things that were kind of the frontier, you

know, even six months ago? That makes sense. And we've talked about, obviously, Bitcoin at length here. And we know that there's a ton of volume and liquidity in Bitcoin, but that's not the entire crypto market anymore, right? And I think it was really the focus in 16, 17, 18, obviously, Ethereum has grown. But now we have this sort of long tail of risk with thousands and thousands of coins. And each of those needs a market made as well, correct? So how does that work? Do you guys touch that? Is the future of that, you know, DEXs and more

decentralized and AMMs, or is that something that will be, you think, actively a part of the OTC business? One feature of a market that I really like is that it's big enough and diverse enough now that a lot of different companies can carve a niche and make money in one segment, but not necessarily in the other and things like that. So for instance, some early market makers that, you know, when competition increased too much in the OTC space, you know, they moved back more on the exchange side and now they're doing DeFi and making a lot of money there. I think it's healthy that we can have different ways to make money in this market. Now, in terms of what you mentioned, DeFi and AMM, I personally think that, and all

the tokens, of course, the long tail, well, I don't want to say I'm skeptical. It's just that I've seen those ways before. Actually, well, 2017, 2018, the big ICO boom, that didn't end well for our markets. Now, it's a different boom now. The idea with the ICOs was that you can buy equity in some projects, but you were actually buying equity in something that was centralized. And I guess the innovation here with DeFi

is that it's decentralized, it's less likely to suffer from a regulatory crackdown. We'll see, but it's clearly an evolution, so maybe it won't suffer the same fate. Actually, even before 2018, there was yet another wave. So it's not the first time, it's not the first rodeo that I'm a part of, I guess. Personally, I think that DeFi is quite interesting, but not for the reasons maybe that other people find it interesting. I think from a cost perspective, there's no way that DeFi ever competes with centralized services.

There's just no way. I know that. Never, never get the fees, the gas fees. It's just never. Yeah. I agree with that. I seen some good stuff, you know, curve to trade stable coin versus stable coin. You know, there was a couple of weeks in the market, maybe a year ago, people were saying, wow, look at those prices. They're amazing. That's like an issues case, but just in the main,

the idea that market-making is going to be done on chain, I don't really buy that. Now, I don't think that's a big problem because in my opinion, and I'm interested in your opinion also on that, in my opinion, one of the big unique selling points of Bitcoin first and then crypto in general is censorship resistance. And I just find it interesting that we have financial products now that don't rely on many, if any, intermediaries. And to me, that's censorship resistance squared. You can transfer Bitcoin without intermediaries.

That's like the 101 of censorship resistance. But then when everyone has gotten, quote unquote, rich with Bitcoin and we've got a lot of it and it's it's worth a lot then we want to do stuff with it right or we have a lot you know a lot of tether usdc we have those stable coins all that pool of capital of wealth that is held outside the traditional system but then that also wants to have access to financial services and i think that's one of the most interesting innovations of defy is that you start to have access to financial services. And I think that's one of the most interesting innovations of DeFi is that you start to have something that look, you know, things that look like financial services and they're actually really decentralized.

Of course, they're not perfect, right? But that's much more interesting in my opinion than, hey, we're going to exchange tokens versus one another. I think that's only interesting for the really small ones because you can spin out an AMM just like that for any token. So that's interesting. But, you know, the idea that it's going to make sense to trade Bitcoin versus Ethereum on chain at any point, at any...

You don't need to. I don't buy it. Yeah. Yeah, I think it really is reserved for the coins that you can't access otherwise and for people who are willing to pay a premium for access to those coins. Sort of like you said, right? If there's something that I can't go trade on a centralized exchange that I want access to, and I'm willing to pay those gas fees, knowing that it's outrageous just so that

I can be a part of that market. And I don't think that they'll even become fully decentralized either. I think that's a bit of a dream. I think it's just sort of a sliding scale from centralization down to centralization. So I think everybody, the beauty of DeFi is that everybody will find their comfort zone or the area that they're comfortable with, and they'll have a tool to use to trade in that manner. Right on. And I think one thing we've seen as well is that we sometimes, sometimes you overestimate people's willingness to pay fees. And I think actually, if we think back, and there's been ways where we could have predicted

what was going to happen. And I mean, I'm sure some people did and made a lot of money with that. But back in the day, if you remember, Tether was transferred on the Bitcoin chain. I don't remember the name of the, there was a special name. Yeah, but Omni, Omni. Yeah. It was called Omni. So that's how you move Tether around. And Tether became quite

an important part of our ecosystem, but the fees just became too high with Bitcoin fees. And so that's when most Tether moved to Ethereum, right? And then more recently, it seems a lot of Tether has moved to Tron. Right. I was shocked. I was shocked when I saw the numbers on that maybe six months ago. Actually, it was when I had Justin Sun on the podcast. He made the claim.

He was like, there's more Tether volume being moved on Tron than there is on Ethereum. And I kind of reluctantly begrudgingly agreed. And then I looked and it was absolutely true. There may be some interesting incentives at play sometimes but still i mean you see that there's that big move um and another wave solana i think a lot of people saw it coming that ethereum trading fees were just too high and that people were going to be sorry fees in general that people were going to be willing to compromise some security or,

I mean, it can be fuzzy sometimes what exactly you give up when you get speed in return, and that Solana was going to be a success. So I think sometimes, yeah, we don't really realize that people are just not going to be willing to pay fees. In fact, there's maybe an anecdote from the OTC markets. Sometimes people, especially when you have more institutional guys on the podcast, you'll ask them, well, what's missing for more institutional adoption? And some people will say, well, you know, the provision of credit, leverage, the idea that you have a clearinghouse, that JP Morgan is going to be able to trade

Bitcoin, but it doesn't matter if the other side blows up and there's bankruptcies, like they want to be protected from a credit perspective, right? So people would say that. And mind you, many people have realized that it may be missing from the market. And so a bunch of startups have been launched to actually try to fill that gap in the market, right? But the problem is none of them have succeeded and i mean there's many names i'm not i'm not going to name names because it's a bit sad i suppose um but i think they were just unable to be profitable or to have a real business case based on how much people were willing to pay for that so you know i would go to my clients

because some of the companies came to all the big market makers and said, hey, if you help us launch this product, we're basically, we're going to stand in the middle and clear trades. And it's not going to matter that one side defaults. We're going to guarantee trades, right? Which is something that you have, it's buck standard in traditional markets.

Well, I would ask clients because of those deals were shown. And I would say, how much are you willing to pay for that? And mind you, when spreads were maybe like two basis points, well, the clients were willing to pay maybe a quarter of a basis point. Because if you're paying two basis points in spread, you're not going to spend half on getting some protection against a potential default. I mean, you're in crypto anyway. You're taking the risk

that you don't even know about, right? So do you really care? I mean, the companies, you looked at the circle that raised $300 million. They're pretty safe, you know, and actually they won down without blowing up. So that worked perfectly well. And so when you look at a quarter of a basis point, that just wasn't enough to support those businesses. And so I think that even there, we realize that people are sometimes just not willing to pay the big fees. And so you've been actually a very active part of what's happening in the options market, right? I mean, you're on the cryptocurrency oversight committee for the CME, correct? Yeah, yeah, yeah. That's the oversight committee for the index.

And they're doing a tremendous job there. The initially crypto facilities guys that were acquired by Kraken that support the CME futures. It's really amazing, I think, that they were able to put together a product. When you think about it, the CME futures, they were early. And it's not a product that even the big banks at a price that's now like 5x what the price was when the CME released their future. I mean, it's amazing that they were able to be so early and have a progress so successful. A lot of people say that that was the top of the market, right? 2017, of course, CME famously

launched futures December 15th, 17th, and it was the dead top for Bitcoin. And we've had sort of the same argument, Coinbase, right? When Coinbase went public, it was the May or April top of the market. And a lot of people said that the Bitcoin futures ETF now would be the market top. And it was pretty close. I think we're around 64, 65 and made it to 69. So do you think that those products are actually bad for price? No, I think it's completely unrelated. I think it's completely unrelated. And oftentimes, you know, when people look for market color, if you're really in the middle of the flows of information and buyers and sellers, sometimes you can really put together a proper narrative

of what's happening. But usually it's just people look at a series of facts and a price pattern, and they try to find narrative that would work exposed, but you never know if you're actually right uh so that's quite difficult and i don't think maybe you know i'm gonna get a lot of haters and people are gonna unfollow me unfollow me on twitter for saying that but i don't think short selling is bad i think it's important of course it's not bad it makes the market efficient

you have to be able to do it yeah and so there so there's a reason options exist. I mean, yeah. And the CME futures, I also don't think that many institutions were just waiting on the sidelines looking to short Bitcoin because just the asymmetric risk that you're taking there. I mean, the thing is going to the moon, it's gone from 10,000 to 20,000 in a matter of weeks. And you think that you're going to short it at 20,000, the thing can go to 40,000. Easy. So I think that any self-respecting risk manager would not do a

trade like that, probably, unless they were already in the market and trading day and day out. They were not waiting for the CME futures to do that. Yeah. It's sort of the correlation does not imply causation, right? Those three things happen to sort of happen around the same time. So it creates a very good narrative, but that's probably a retail narrative and not by people who are actually in the know and what's happening. And that's so interesting because you look back now in 2021, it seems silly to imagine that narrative that everyone was waiting to short Bitcoin. But at the time, at the time, it seems so valid, right? It seems so valid to imagine that institutions were just waiting there for this opportunity. But like you said, who wants to short something that just

doubled? I mean, that's gambling. That's gambling. If I have to remember one instance where actually, I think selling really did have an impact on the price and you could identify what was happening. It was, but the price was $300. That was a long time ago. That was the first or second US Marshalls auction. If you remember those, right, the US government had seized Bitcoins. I think one of them were from Silk Road. And then there was another pool of Bitcoin. I think Tim Draper bought those.

Or he was one of the big buyers of that auction. Yeah. That's one of the two auctions. Yes. Yeah. One of the two auctions, yes. But another one was quite interesting because that might not have been the one that Tim Draper won. It was basically a consortium or a bunch of different mini institutions in crypto, like a B2C2, like a Genesis and others. They purchased some of those Bitcoins at auction. But actually, the market was not doing too well. The price was $300.

And I think the all-time high had been, I think, the $1,300 from Mongox. And so the market wasn't in a very good place. I think it was pre-2015. And the auction really tailed, as we say. So it really went below the market price at the time. And what's funny is that the US S Marshall said that they were released. The, they were going to release the result of the auction and whether you had one

or not on the Friday or something, but actually on Thursday evening or something like that, they released it and everyone was kind of surprised that they were, and so you saw right there, it took like maybe 10 minutes the price started really tanking because you knew that people who had a bid in the auction they got a notification that they were filled but maybe they were like 10 below the market price you know and they were like oh my god there's actually no demand for that thing so i ought to sell what i want in the auction immediately and the market really tanked actually i remember at that time. So I ought to sell what I want in the auction immediately. And the market really tanked. Actually, I remember at that time, I was in San Francisco in a Whole Foods

just doing grocery shopping in my pajamas. And I got the notification on my phone, congratulations. We jumped into a Uber and we said, just drive, drive, go back home because we were just two guys in the garage at the time. And we started selling manually as the price was stinking because everyone basically was probably facing the same conundrum. So that was one of the only times that I could really tell, okay, there's a bunch of sellers there, a bunch of whales, quote unquote, and they're selling. And that's why the price is going down. I've never heard that story. That's incredible. That's an amazing story. I've never heard that story before at all. And I think that's absolutely incredible. So what are you looking forward to? I know as we're coming up to the end of the time here, what are you looking

forward to in 2022? Are there any trends? Do you believe that the market's going to continue to grow? I mean, I was surprised at how much we grew in 2021, right? Maybe other people weren't, but do you think we can see a continuation of that level of increases in volume and liquidity and mainstream adoption and interest? Or do you think that maybe it will slow down? What are your thoughts? Well, I'm a glass half empty kind of person. And so I like to look at the downside. I think that we have to be grateful for the fact that the pandemic, for better, for worse, transformed our businesses. It brought a lot more people to the market. Hopefully those people stay. I think that if I look at the risks a little bit, maybe,

or the trends, but not so much in terms of opportunity. I mean, you have so many people on your podcast talking of the opportunity set, and I listen to them too, to inform my views, but I like to focus on something else. I think we're going to see interesting movement on the regulatory fund for the following reason. Every country on earth now is putting together a crypto framework.

And those crypto frameworks are, I don't want to say they're incompatible, but they're all different at least. There's no single application. And each of those applications is really time consuming and consumes a lot of resources. And I simply don't think that even large global crypto companies are necessarily going to go after all the licenses that they need in order to operate in all the jurisdictions that they have historically operated in. And I'm not saying a Coinbase, obviously, but I think we might see some companies- We've seen Binance.

I mean, we've seen Binance pull out of a number of markets because it's just too challenging and costly to operate there. Exactly. And I think we will see fragmentation at the regional level. I think we'll see more like regional players emerge a little bit, which I don't think that's a good thing. But I think someone else on your podcast said maybe it was Sam that regulation is going to be bad for some businesses in crypto. And I think I think he's right. But I think we will see that those licenses, they're not going to be all worth having for any specific business, right? Just like actually we had in the US with the state level licenses,

you know, not everyone went after every single license. In fact, Coinbase was one of the only companies that made a genuine effort to get all of them. And that's probably also why they got such a big retail client base and managed to IPO, et cetera. So I think we're going to see that. And I mean, of course, we wish we had a more like global or even like framework and things like that.

They were not. I think that's a consequence of the 2008 crisis, actually, because back in before 2008, regulators tended to trust one another across countries in a way. But then when 2008 hits, where the chips fell was that you would have those mega banking groups with entities, subsidiaries in all sorts of regions, and they would be capitalized differently. And what would happen is that you would have like Citigroup based in the US, but with a subsidiary in, let's say, Ireland. And then because of the mortgage crisis, the losses would actually be in the Irish entity and Citi would just abandon.

I'm not saying Citi, I'm just an example. The Irish entity, which would be facing like huge losses, state bailout and things like that. And so regulators now, they're much more about making sure that, okay, yes, you're a big global group, but we want each and every one of your entities in our country to be highly regulated as a standalone, to have enough capital. And I think those lessons of the 2008 crisis, that's why today the immediate reaction of the regulators with crypto is to have their own regime each.

They don't want to rely on, yeah, sure, you're licensed in the US, that won't fly here. You need to also have the local license. Something we have to live with, I suppose. I mean, Americans have effectively been living with what you just described for the entirety of crypto's existence, right? So it's funny, I think if you're not American, your experience has probably been trade whatever you want

and wherever you want in most jurisdictions. In the United States, if you want to be compliant, there's very few exchanges we can trade on and very few coins that are not considered securities. Yeah, well, that has real consequences. Actually, even before crypto, I started out in electronic market making. I had a job at Google and they did,

they worked on internal prediction markets, like basically getting people to bet on events to get all the good wisdom of the crowd in the price. And when I left, it was just an internship. When I left, I found a platform where you could do that with more like real money and at a bigger scale. That platform was called intrade.com. And it was kind of like a precursor to crypto in the following sense. Well, first of all, you could bet like on Obama versus John McCain, the Academy Awards.

So it was a big betting platform, really. And actually, some of the people there, they're still in crypto now, like some guys at Augur and places like that. Even some of the big names that have invested like as a VC in crypto they were also in that company early on and that company the problem that they faced was that really what they were offering was gambling I guess and in 2012 roughly the CFTC cracked down and said well we know you're an Irish company but 90% of your users are American you got to cut that stuff, which they did. And that was the beginning of the end for that business. In fact, I was at the time the biggest market maker on that platform.

And that's when, late 2012, I was introduced to Bitcoin. And I thought, well, that business over there is going to die for regulatory reasons because they're losing all the US customers. But then there's that shiny new thing, Bitcoin. And maybe the algorithms could be plugged into that fancy new frontier market. That's how it works. So a regulatory crackdown having actual real impact on market access and where the successful businesses are located, yeah, it really is impactful. So we need to be careful in 2022. That's the gist. Yeah.

Yeah. I mean, a lot of people are so dismissive of regulators and the impact that they could have, but it could really change everything. Yeah, scary. So where can everybody follow you and keep up with what you're doing after this conversation? Well, I love shitposting on Twitter. Don't we all. And yeah, I like to follow crypto Twitter. It's just fun, right? I love your tweets also. I like when people also have contrarian views,

which is sometimes more difficult to find in crypto. But there's a couple of good ones there. I try to be a little bit balanced. I think as a dealer, as a market maker, you have to remain, especially one that's, you know, client facing, not like a pure 100% exchange trading one. You have to be reasonably neutral in the voice that you have, because, you know, you're not providing financial advice. You're not, I mean, you're, you're an intermediary. You should be. Agnostic. Yeah. Yeah. Humble and agnostic.

For sure. Well, thank you so so much this gave a lot of insight i absolutely love that story about the u.s marshall auction might be my favorite story that i've heard uh on this podcast yeah it's absolutely incredible and uh imagine something like that happening now it's just that could have only happened in such the early days of the market that's why the market is so much better now yeah it, it's incredible. Thank you so much. Look forward to catching up a few months down the road and seeing where the regulatory regimes have landed and what we are actually seeing in 2022. Thank you, Scott. Lovely talking to you.