Whiskey Tango Foxtrot
Week ending Nov 8
Hi All,
Remember when we all wanted to be uncorrelated to equities?
Asked yesterday as to what I thought about FTX and the rumors:
Gah.
“It ain't what you don't know that gets you into trouble. It's what you know for sure that just ain't so.” - Mark Twain
There is no doubt that this is turning into an awful year and, specific to us right now, awful quarter for crypto. We just finish up “Hacktober” and run right into November’s buzz saw. It is hard for me to see this as anything other than a major negative for crypto. Or, more narrowly, a major negative for unregulated venues. I thought that the exchanges were making so much money these days that there was too much incentive to keep the cash machine going. I certainly cannot claim to know what actually went on. But something does not smell right because it seems to me that every customer asset could walk and then FTX would have just had 0. Not negative / insolvent. The franchise value of FTX apparently was not enough. I guess the fall back for the space has to be that regulation exists to protect from misaligned incentives.
Byron Gilliam breaks it down nicely into 3 “what’s next” categories: contagion, LOI, regulation. I have already admitted that I don’t have any inside information so I can’t help with info on the LOI. As for contagion, I also wonder to what extent there are dominoes left to fall.
Here is what I do think:
This is an opportunity for a venue like CME and other regulated venues to step up with lower fees and highlight the cost of low margins. As our go-to painter had on his truck: “quality doesn’t cost. it pays”. Maybe offer no transaction fees for transferring open interest from Deribit or other offshore futures markets. I realize that this is not a transfer but a fee holiday until 2023 would do the same thing.
This is an opportunity for onshore OTC market making desks that can make the case for being experienced and having strong risk management and willing to be transparent
Whatever the level of structural volatility was yesterday, it will be higher going forward. Traders generally and liquidity providers specifically are going to limit their on-venue capital.
I suspect basis will also be more volatile due to dynamics of #3.
Flight to quality. The bar for everything is going higher. Exchanges, DeFi, market makers, digital assets. Why would an institution want a bucket of rando tokens? BTC? Sure. A demonstrated smart contract platform and/or efficient payment system? Sure.
What are the opportunites here? It is easy to be bearish / negative. On the other hand, maybe this is the opening that DeFi has been looking for. Can the industry pull together standards for testing & code review so that hacks become less plausible? The recent Mango Markets hack and others like it are not code hacks, they are market manipulation hacks, ie, it is a risk management issue. Human risk managers would likely avoid that type of situation. It also would not hurt to limit or eliminate flash loans. Just as TradFi should be adopting lessons from digital assets, DeFi should adopt (good process) from TradFi. I think that there is opportunity here for DeFi and CeFi for digital assets. As a friend just said to Paul:
“Now is the time to build a business because crypto is not done. Crypto 1.0 is done. Be part of 2.0.”
That makes a great segue for the next item. With all candor, this next M&A deal does not make the headlines like Binance & FTX. However, we are very happy to let everyone here know that we are now part of Blockfills. This is not an official announcement; that should come soon. However, it also is not a secret as we now have Blockfills email, etc. We will be continuing to work on derivatives of all sorts and happy to be on the team with such a great and successful crew. We came to Blockfills to offer more to customers in the derivatives space, so please reach out, lets chat and let’s see how we can work together.
Tell me (how) I’m wrong,
Ari
DISCLAIMER: Do your own research. Nothing herein is investment or trading advice. All information here is given on a best efforts basis and there is no guarantee of accuracy. Digital Gamma or the author may or may not have positions in the assets or their derivatives mentioned herein.