This episode delves into the critical inefficiencies plaguing crypto options and spot markets, particularly in the US, and explores how evolving market structures and the advent of listed products might offer a path to greater accessibility and fairer pricing for investors.
The Fragmented Landscape of Crypto Options
- The discussion begins by categorizing crypto options into three main areas: innovative but often illiquid on-chain options protocols; established centralized derivatives exchanges like Deribit; and newer options tied to ETFs (e.g., IBIT options) or crypto-related equities (e.g., Coinbase, MicroStrategy).
- A key concern highlighted is the poor state of on-chain options, where the speaker acknowledges the interviewer's observation of "horrendous" spreads. Spreads refer to the difference between the highest price a buyer is willing to pay (bid) and the lowest price a seller is willing to accept (ask) for an asset; wide spreads indicate low liquidity and high transaction costs.
- In contrast, platforms like Deribit (a major centralized crypto derivatives exchange) and options on new spot Bitcoin ETFs like BlackRock's IBIT are noted for having tighter, more favorable spreads.
- The speaker questions whether activity is shifting from perpetuals (futures-like contracts without an expiry date, popular in crypto) to options as more viable option products become available.
Challenges in US Spot Crypto Accessibility
- The speaker emphasizes the significant difficulty and cost for US retail clients to gain direct spot exposure to cryptocurrencies like Bitcoin, Ethereum, and Solana.
- Retail investors often face high fees, around "200-250 basis points," to purchase Bitcoin on large exchanges. Basis points (bps) are units of measure where one basis point equals 0.01%, so 200 bps is 2%.
- Beyond costs, investors grapple with custodial risks: who holds the assets, how are they secured, and the trustworthiness of the custodian. These complexities make even basic spot crypto acquisition a hurdle.
Market Structure: The US Equity Options Model vs. On-Chain Crypto Options
- The speaker, drawing on experience from "my old world" of traditional finance, praises the mature market structure of US equity listed options, which operate across 12-15 exchanges.
- This mature ecosystem features sophisticated mechanisms like various order matching algorithms ("price time, maker-taker, pro-rata") and fee structures designed to incentivize market makers to provide liquidity and tighten spreads, ultimately benefiting retail order flow. This is the environment that enabled business models like Payment for Order Flow (PFOF), where brokers are compensated for directing trades to specific market makers.
- The speaker argues that on-chain options markets suffer because they lack this competitive market-making environment. "It's just not going to work because there's no real competition. There's no reason for the market makers to kind of like step up and give you a proper market."
- Strategic Implication: Investors should understand that underlying market structure, not just the asset itself, dictates execution quality and cost. The lack of robust market-making incentives in many on-chain environments leads to wider spreads and higher trading costs.
The Promise of Listed Crypto Options in the US
- The speaker expresses strong optimism for the growth of crypto options within the regulated, listed US markets, viewing them as effective proxies for spot crypto exposure.
- This focus is primarily on the US market, which the speaker believes holds significant untapped opportunities, despite acknowledging global potential.
- Actionable Insight: Crypto AI investors and researchers should monitor the development and liquidity of US-listed crypto options (e.g., on ETFs) as potentially more efficient and accessible venues for hedging or speculative strategies compared to current on-chain offerings.
Concentration and Lack of Competition in US Spot Crypto Markets
- A striking point made is the high concentration in the US spot crypto market, where four exchanges handle 99% of the volume, with Coinbase alone accounting for 75% of that.
- The speaker, referencing a past role "at the helm of that through IPO," details how Coinbase's market share grew from 35% to 75% of US spot volume, attributing this partly to a lack of robust competition.
- "The reality is there was no real competition. We probably could have taken it to 90% with not a lot of work because we could charge whatever we want and nobody's keeping up with us."
- This lack of competition has implications for pricing and product innovation.
A Call for Greater Competition in US Spot Markets
- The speaker advocates for a more fragmented and competitive US spot crypto market, with multiple exchanges vying for business based on pricing, product offerings, and other factors.
- There's a hope that the US spot market will diversify, similar to the desired fragmentation in the stablecoin market. A stablecoin is a cryptocurrency pegged to a stable asset like a fiat currency.
- This desire for increased competition underpins the speaker's current venture, aiming to build infrastructure that fosters a more competitive environment.
- Strategic Consideration: Increased competition in US spot markets could lead to lower fees, better liquidity, and more innovative products, benefiting all participants, including institutional investors and algorithmic traders.
Conclusion: The episode underscores that US crypto market structures, for both options and spot, are critically underdeveloped but evolving; investors should watch for listed crypto derivatives to offer more efficient access, while researchers should analyze how market competition impacts pricing and innovation.
