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January 14, 2021

Bitcoin Derivatives and Ethereum’s Value Proposition With Crypto Broker AG


Teana Baker-Taylor
General Manager, U.K.,

The cryptocurrency market has had a crazy start to 2021. Bitcoin hit an all-time high breakout at around USD 42,000 only to pull back in recent days. It has since stabilized at around USD 34,000-35,000. Rupertus Rothenhaeuser and Patrick Heusser, CEO and head of trading at Crypto Broker AG, respectively, joined host Teana Baker-Taylor to discuss what could be next in the crypto market.

The bitcoin USD 40K top didn’t have the structure of a proper blow-off top. In hindsight, the BTC correction was fairly obvious, said Patrick. Onchain there have been a lot of bitcoins moving on exchanges between USD 40K-42K, and then they sold and pulled the trigger pretty much all at once. Then there was a reverse of stablecoins coming back to the exchanges as the traders who sold their bitcoins returned and tried to buy it back with their stablecoins.

(5:40) “This is now basically the phase where the market starts to stabilize because these guys are now beating the market and getting back their coins. I would say consolidation is on the way right now. There is a level which I’m watching very closely, that is USD 29K. If we break it to the downside, it’s going to get ugly once more. So let’s see if the market is trying to have a run at it. At the moment, it doesn’t look like it. But just keep in mind it can go up as fast as it can go down,” said Patrick.

Ethereum Market

The value proposition between bitcoin and Ethereum is completely different, noted Patrick, and it’s not the same market forces driving the price for both. Certainly there are breakthrough moments in the Ethereum market, however, such as the launch of Ethereum 2.0 that happened just before the year-end. And there is also a lot of action onchain on the back of the DeFi sector, which is booming and trending.

(7:23)) “So there are other forces driving the Ethereum price. But within the hype, it’s one of the coins that will push for the next few months to new highs. I’m certain of that,” said Patrick.

Order Book Dynamics

There have been quite a few changes to the order book structure. One of them, unfortunately for traders watching the order book closely, is that a lot of exchanges started to implement what’s known as iceberg ordering. That means that you don’t really see the big chunky orders in the order books that are now popping up. You only see if you watch the price and the order book all day long to see if there is a constant bid or a constant offer coming in. But that’s definitely an institutional toy, so there is still institutional money flowing into the bitcoin market. And it’s executed smartly. So these orders running through the whole day on the bid or offer side are there, but it’s very hard to detect them through order book measures or other tools.

(9:04) “Up here, between USD 35,000 and USD 40,000, the order books are very, very empty. Not a lot of people are putting in stale orders. They’re not feeling that comfortable to do that. And…the sell side liquidity crisis is imminent. It’s still here. So if the price is pushing up, there are not many orders coming in and there is not much that can stop the price when it starts to roll again, said Patrick.

Bitcoin Derivatives

Volume on options has basically grown faster than the volume on futures. So more sophisticated traders are coming in and they’re placing bets on the options market, which is a sign of the market maturing.  On the other hand, CME open interest on futures is growing every day.

There is a lot of interest in the CME futures contracts even though it’s not the best product to play with if you have other options. It’s not open 24/7 and there are other issues. You need to place a lot of collateral if you want to play it on the short side, said Patrick, adding that there are a lot of restrictions there. But because institutions can only play with that instrument, the volume grows there quite significantly.

Crypto Broker has seen quite a bit of interest coming in from market experts in the derivatives space creating the auto callable notes using the extraordinarily high volatility from BTC, for example, in providing payouts that simply look tremendous, said Rupertus. Auto callables with six month tenure and providing 25% yield if the bitcoin underlying spot doesn’t drop half of its value looks predominantly quite exciting, and they’ve seen more and more of these structures flying around.

(12:08) “These products are purely done for the institutional space and professional investors. It demonstrates that first of all, the more products you sell on the structured product side, the more options you need to hedge in order to cover your risk…Secondly what it means is there is still a lot of interest in the institutional space which are looking for participation somehow in the value generation of bitcoin but do not want to touch bitcoin directly…So they use the alternative in options and futures and structured products in getting access into it. For us, it doesn’t matter; as long as the hedge is done with us, we are happy in providing markets and said liquidity in structured products as well,” said Rupertus.

Licensing and Regulation

Crypto Broker AG has submitted an application for a securities license, following in the footsteps of a number of firms globally that are already licensed. They are waiting for their license and it is a question of days, not weeks or months before they get it.

The entire tokenization, blockchain and DLT space is driven by trust in a new system. Unfortunately, most financial institutions, banks and asset managers are still using their own proprietary solutions.

(16:21) “Everybody is happy with what they do, so the need for the standardization of one technology is extraordinarily difficult. I think it will be extraordinarily hard for anybody…who wants to create this exchange solution with a standardized technology behind it, to solve the right mix. I personally believe it can only be solved by providing instant interoperability.  It doesn’t matter with which technology and blockchain protocol you come to an exchange. It must be made sure that assets can be stored adequately and can be moved from one ownership to another onchain adequately. This is key to be solved,” said Rupertus.

What is lacking is the first global approval, said Rupertus. You can easily capture licenses outside of Europe, the U.S. and G8 countries. But no big players like UBS, BNP, Morgan Stanley or Citi are moving client assets to Gibraltar, Malta, Estonia, Cyprus or Myanmar, for example. You need to have this kind of stability, Rupertus noted. It must be an EU-MiFID regulated entity, UK, US or Swiss entity that gets the license. This is what’s needed, and unfortunately it has not happened yet.

There is a great deal of uncertainty surrounding the regulatory environment in the United States, as the changing classification of XRP has shown.

(23:49) “It is extraordinarily hard to predict what the Americans want. One thing is for sure. So far, they have created the only future contract in the currency space, which is interesting. On one side, they are very protective, very regulatory driven. On the other side, they enable the institutional space to trade on their futures market as the only really liquid future on the planet,” said Rupertus.

Crypto Broker is growing internationally. They are concentrating more on Europe and the APAC region because going West is very unpredictable.

(25:07) “We want to see clearance first before we enter into the U.S. market space,” said Rupertus.

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Gerelyn Terzo
Gerelyn caught wind of bitcoin in mid-2017 and after learning about the peer-to-peer nature of Satoshi's creation has never looked back. Previously she covered institutional investing and fintech for several major trade publications. Gerelyn resides in Verona, N.J.

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