Crypto’s Liquidity Engine, OTC Desks and CEXs | Jonah Van Bourg & Genia Mikhalchenko

Transcript

All right, everyone. Welcome back to another episode of Empire. Today, I'm joined by my co-host Santiago Santos and two very special guests, Jon Van Berg, the head of trading at Cumberland. Jon, I have to put that emphasis on like the Van Berg. I feel like it makes you sound very professional here. Let it rip. Let it rip. Yeah, let it rip. And so the head of trading at Cumberland and uh man, I should not have put the emphasis on the last name because I can't do this one. Zhenya Mikhalchanka, the VP of spot exchange. Uh the VP of the exchange of BitMEX. Two really, really special trading guests. Zhenya, how did I do with the last name there?

Uh nine out of 10. You did okay. Nine out of 10, we'll take it. With a name with a last name like Yano what's I I feel like I'm allowed to butcher last names. So, anyways, guys, today we're there have been a lot of episodes both on our podcast, on other podcasts exploring what is going on with the markets, right? Everyone wants to know have we hit bottom? What's going on with things like Celsius and three arrows and like how does the macro impact crypto? I obviously think that's a really interesting conversation. We've had that conversation several times. What I want to actually do with this is a little bit different. Uh we have two folks here who know the depths of crypto markets better than really anyone, better than most I would say. One runs a spot exchange, one runs a trading desk. I'm really excited

to have them for this conversation. What I want to do here is actually talk very, very micro about trades. What is the detail of a trade? What happens when you create a trade? What happens when you execute a trade? And only once we understand the real micro of these trades, then I think we can zoom back out and get their big perspective on it. So, Jon, maybe I could pick on you actually. Um there are two ways to make money in finance, right? One is taking directional bets. You go long Bitcoin, you go short Bitcoin. The other way is sitting in between those trades, providing liquidity, earning revenue by capturing a spread. You sit on the bid and the offer of each side of that. Can you just talk about a day in the life of a market maker during times of crisis, during

times of What is the What is a market maker do in the last 30 days? What is the day in the life there? Yeah, sure. I mean, it's a great question. So, I guess basically the way to think about it is, you know, you describe these two types of trading, right? You have making and taking, market making and then sort of when you're just taking bid or an offer from from a market maker and and, you know, warehousing that risk and taking a directional bet. So, I guess when I started my career at Goldman as an oil trader as a market maker, really, you didn't really have to take much risk. You could just kind of sit there making markets all day and get in and out of stuff and it wasn't really that hard. People would People would come in and trade with you and then you would

get out of it on screen or on an exchange at a much better price and it was kind of a it wasn't really the most complicated game. And then I switched to, you know, let's call it taking. I was a prop trader for 7 years and, you know, the better the liquidity you get, the more money you make because you don't pay as many transaction fees on each trend, you know, sort of trade that you're doing. It It adds up over time. So, now, you know crypto the market has matured so quickly that you can't really be a market maker like what we do at Cumberland without taking risk because if you're trying to do that sort of game of making wide markets and then hoping to get out at a better price, you know, it's it's already too mature for that. So, pretty much every

time somebody comes in to do an OTC over-the-counter trade with us, we're taking on one form of risk or another. And we're we're also constantly streaming two-way markets to exchanges all over the world in a, you know, sort of a rapid kind of latency sensitive way. So, let's say somebody comes in to to give us a big block of Bitcoin. We go and buy a bunch of it. There's going to be sort of an idea of what Bitcoin is worth right now, an idea of what Bitcoin is going to be worth in 1, 2, 3, 5, 10 seconds. And we're going to sort of consider how we hedge that based on where we expect prices to go.

And you're trying You're not trying to win every single time like what used to work back in the day. You're you're trying to win, you know, more often than not. Get it Maybe tell me more details about this. I want to know exactly what this looks like. So, Santi Santi wants to buy 1,000 Bitcoin in typical Santi fashion. He comes to you guys and and and and what does he do? He messages you He messages you on Telegram. You guys have an an a desktop app. He pings you on Skype, on Slack. What does he do? And when he sends that to you, what are you guys saying? Are you saying we you have to take that You basically have to give the other side of that trade or you're basically doing some calculations on your side saying saying is this a good trade for us to

execute upon? We're not going to last very long as a business if we don't take the other side of Santi's trade. So, if Santi wants to buy 1,000 Bitcoin, he can come to us over Telegram. We call that voice even though it's really chat. Um there's another way you can do it. He could uh you know, click trade on our API or, you know, we have a we have a product called Moria that basically is more of a you know, more of a visual tile that you can interact with and and you know, buy Bitcoin or sell Bitcoin on it. Basically, then what happens, where whatever price we show and a lot of times it's systematically driven, but for really large trades, we're going to have, you know, people looking at it and making sure that it looks okay. Um once that trade goes through, then we're

short 1,000 Bitcoin. What are we going to do with that? Well, if we happen to be long 1,000 Bitcoin at the time that Santi came in to to lift us, you know, then we're flat. Happy days. Um if we're if our position was flat when Santi came in, we're going to have to think about how to go and buy that back. And there are all these different instruments and maybe Zhenya can talk us through some of them, but um one of the big things that BitMEX innovated was this thing called perpetual future. There's a ton of liquidity in those and um there's also liquidity in spot exchanges all over the world. So, basically what you have to do when Santi comes in to buy either direct from you, by your API, or whether Santi is just lifting the exchange and we're seeing that flow indirectly, um Um, we're going to have

to decide how quickly we want to get out of it with, you know, while we minimize our market impact um, because that's that's the name of the game. And we're also going to have to try and figure out exactly what like what risk position we want anyway. And so we're not necessarily going to be getting out of all of it. We might be keeping some of it or we might be internalizing some of that versus another strategy we have that wants to uh, wanted to sell anyway. Yeah, that No, that's helpful. I mean, um, I'll I'll pick on you for one more question then Jenny, I'll flip it over to you uh, to talk about this on the exchange side of things. But what happens So this makes sense for something like Bitcoin or ETH, right?

You can pretty easily get out of something like Bitcoin or ETH. You don't have to take much directional risk. What about something like Luna or UST or Celsius's token, right? I'm assuming a bunch of large funds are coming to you guys saying pretty quickly, "Look, I've got a massive bag of UST. I've got a massive bag of Luna uh, back in May or maybe more recently something like Celsius's token. I need to dump this quickly." You're saying, "All right, we want to stay in business. We we If we don't take this trade, we're going to lose your business." Uh, but in the short term we might get absolutely hosed on that. So what So what do you do there?

Well, it's a great question. It goes back to what we were talking about earlier about taking risk, right? Like you're not If you're just going to sit there saying, "Wow, look, Luna's so volatile. It's, you know, it's selling off rapidly and Santi wants to sell us some. We're just going to make it as defensive as possible so that we ensure that we don't lose money on the trade." We're probably just going to lose the trade. So it's our job to price things tight and right and quickly and take risk when we quote. So what does taking risk mean in the context of one of those volatile tokens that you just you just mentioned? Well, we're going to have to have some sort of way of running correlations between the prices of those tokens and the prices of things that are a little bit more liquid that we can use

to lay off some of the risk. So in doing so, that involves a lot of technology and work on the back end and research to make sure that in real-time, you don't have to sit there and go and kick the analysis off from scratch in the moment when things are really going crazy because if if that's what you're doing, you're already kind of too late and you're behind the curve. So, you sort of have to have these systems that you've designed in advance to watch the price action of the tokens that you're being expected to quote, no matter how volatile or bespoke or illiquid they may be, and you have to have already thought through exactly what you're going to do in any type of situation in any type of sort of size that you're being expected to quote, so that you can run through that,

you know, it's like like military training, basically. So, that when you're out there on the battlefield and things are blowing up, you're not just wondering what to do next. You have you have a plan. And all of these plans involve risk taking. They involve risk management, right? And I think that's something that, you know, we try to in a scenario where we try to differentiate ourselves. We we really try to, you know, understand the types of risks that we're going to be expected to take in order to make the tightest price. Cuz if you're not making the tightest price, you're just you're out of the trade. Eventually, you're out of the business.

So, we're always trying to think through these risks and and how to how to manage them appropriately. Genia, maybe throwing it over to you. What is a similar to market makers and trading desks way in over the last 2 years when when things are going really well, obviously it's a nice business to be in. When things are hurting, right? Users are maybe leaving the platform, people stop trading, there's the all the liquidity dries up. What does the exchange business look like over the last maybe let's call it 60 to 90 days when things do start blowing up in crypto. What are the maybe the things that happen behind the scenes that we the users and the traders aren't actually seeing?

Yeah, good question. So, you know, I think the the number one thing, you know, that that keeps exchanges alive, of course, is, you know, is the liquidity on the platform. So, the I mean, aside from the fact that, you know, you have to keep your platform up and running to begin with, right? If you have, you know, the first base covered, the second most important thing is to make sure there's enough liquidity uh on the platform and people are able to execute trades and and and you know, directionally both sides, people are able to buy and sell. So, I think, you know, the the most challenging thing and you know, and we've seen this over the last, you know, mark two market cycles is, you know, in in in bear markets the the toughest thing is to be able to maintain, you know, proper liquidity on

platform. So, you know, this the way that most exchanges uh do this is, you know, they have they have all sorts of uh market making programs with with, you know, large liquidity providers. Um you know, such as you know, Cumberland uh being one of them uh aside from, you know, several dozen other probably major popular ones uh globally. So, the number number one thing is for sure maintaining liquidity, making sure uh uptime uh on the exchange uh is is fine and and you know, I'd say the you know, the the third one uh which I think people are starting to probably take a little bit more seriously given, you know, the last last couple months um is, you know, the the trustworthiness and solve solvency of exchange. Um so, you know, we we've seen this with with a

lot of platforms recently where, you know, we've had, you know, withdrawals suspended, we've had, you know, certain you know, additional trading limitations uh put on put on, you know, retail clients and you know, and major clients. And so, you know, you want to make sure that, you know, the platform that you're trading on uh certainly, you know, is is trustworthy and solvent uh and and can actually execute the thing that you need for it to execute. So, I'd say those are those are kind of the the three main things um that, you know, that that everyone is really kind of contending with right now. Uh but but certainly if I were to rank them, liquidity absolutely is is king. Yeah. Uh Santi, can I actually pick on you for this? I was joking about your your thousand BTC trade earlier, but if you want to put on

a trade in size, how do you think about doing it uh through one of three options? You I think option A is you go through an exchange, you go through someone like a BitMEX, B is you go through an OTC desk, and C is you go through maybe a prime broker. Um so, how do you think about what what avenue you choose for your trading? I guess it really depends on on the type of asset that you're trading and and where you see the type of liquidity. Often times it's on chain and so but one of the things that not now but in the early days I was quite sensitive and still am in terms of you know when I go out there and paying one of the one of these desks I just sometimes have observed that the

market kind of moves pretty quickly. And and so you sort of I mean of course like Jonah and like you guys would probably take a long term view in terms of if you start doing that often then then I have realized some desks are are having their own prop capital and and are trading against me and trying to front run me and so it's kind of very disappointing. It does happen a lot more often than you would think like it's just I think by virtue of certain desks are a little bit less sophisticated and professional. But I definitely always I never used just one provider. I always go out to multiple folks to get obviously the best type of quote and then and then execute.

I mean I think the not to give it too much away but I I I don't ever want to work just with one unless unless the terms are are very compelling but yeah a lot goes on into it. Not not to bore you to details but the the front running element and just is important and also the signaling which is you know especially for some not so much Bitcoin ETH but some of the other more kind of long tail of assets it becomes much more important. Jonah can you get into that? Just talk more about what Santi's talking about front running. Like what are the mechanisms there? What how do you guys make sure that that's not happening on your end but maybe more importantly for the folks that do do it what does that look like?

It feels like a very short term game. Exactly. So it's the type of thing where you can ask yourself how how do you make money off of a certain type of flow in a way that people are going to continue coming back to your your desk and asking for more or how do you do stuff where people, you know, over time just say, "Enough of these guys. Like, we're going to we're going to stop trading here because we we keep noticing adverse outcomes." So, what is front-running, right? Front-running is when let's say Santi comes in and says, "I want to buy 1,000 BTC." And then, you know, waits a minute or two before saying, "Done."

You know, desks that aren't necessarily professional or, you know, forthcoming will be buying that 1,000 BTC before they give Santi the price. So, the price will just tick up and then they'll say, "Done." And I think that's, uh, you know, fairly unprofessional practice that, uh, we wouldn't do here. Um, however, like Santi said, it goes on, right? And the people that do it, they lose their their counterparties and before long they're out of business. Um, you know, I think in terms of ways that OTC desks sort of earn their stripes, um, let's say that Santi came in and wanted to buy $10 million worth of something that's a little bit less less liquid, a little bit further out the risk curve, say Aave, for example.

If we can say done on a price that looks interesting to to Santi and then, you know, obviously we're going to go and hedge with something correlated, maybe ETH, you know, maybe not, maybe some other token that we've done the analysis on. perp uh or something. Some some index, right? And Santi's going to notice that the price of Aave doesn't really move during the quote. And then for a few days or maybe even longer, we're we're sort of in this call it basis trade where we're short Aave to Aave to Santi and we're long something that we've hedged against it and then we work out of it intelligently over a long period of time and minimize our market impact that way. That's work that Santi doesn't want to have to do himself to to buy the Aave, right? He's not going to want to go and buy that

index and then slowly bleed it into Ave over time. And that's that's where OTC desks really differentiate themselves. And during crazy markets like what you were asking about earlier, you'll notice that the people who haven't done this work, they just vanish, right? And screens go blank and things that you just have this sort of air pocket where liquidity disappears and it's, you know, during times like that it feels pretty good to be a well-capitalized liquidity provider both on exchange and OTC. Can we talk about that liquidity positioning because one of the things I didn't mention is increasingly now you want to make sure that the counterparty at the moment where you get the quote, like the delivery is going to be sound and can you talk about the type of different provider or service providers that are in desks that are in the market

and what is something that you can observe by like what is like the in one what is the worst case scenario uh in the counterparty risk that exists because I think a lot of people are now thinking, "Hey, if I use X desk are they going to be able to follow through? And if there's so much volatility in the market, like are they going to explode? Can they explode?" Just talking a little bit more about those kind of risks would be great. Oh, yeah, absolutely. Um so I guess earlier um Jason was talking a little bit about the different types of trading, right? Trading is so vast, what is what is the word trading even mean? You have, you know, prop trading, positioning basically, and then you have market making. Within the world of market making, which is what we're talking about, there's a vast array of

types of market making trades. And, you know, to get into some of those, OTC, over-the-counter, where you're, you know, sort of chatting us up and trading directly with us, that's just one type, right? Another type is on exchange liquidity provision. So, no matter where you're trading, whether it's on, you know, BitMEX or or over our, you know, OTC over the phone with us, like you're you're probably finding your way into our liquidity systems one way or another. And in terms of the risks that can actually sort of materialize as a result of these trades, counterparty risk. I think one thing that a lot of participants in the market worry about is that if they're trading with somebody like, you know, we're we're pretty well capitalized. We're backed by a traditional finance company. Um we we

prioritize risk management, so maybe it's less of an issue with us, but for certain, you know, fly-by-night shops out there, um if you were to say done with one of them, you go and let's say you're buying Bitcoin. So, you send your dollars off to, you know, bucket shop X. And this this is this is the same in any market. It has nothing to do with crypto specifically. You send your your dollars to to this company, um and then you're expecting some coin and it never shows up, you know, that's a problem for you. So, like in any market, trust is particularly paramount and in market making and trading in general and crypto, because it's so volatile, it matters so much more. So, I think you'll find that the better the risk management

and risk taking capabilities of the person you're trading with, you can gauge that however you like, um you're going to find you're going to get your liquidity faster, your tokens are going to show up in your wallet more quickly, they're going to you're going to get more reliable, tighter pricing. And if you introduce if you trade with the exchanges instead of direct via OTC, you know, that's just a layer in between an exchange is just a layer in between the end user who's ultimately taking risk and the liquidity provider um who's sort of streaming those that liquidity out to a variety of venues. Does that kind of make sense?

Hm. It's really interesting. Jenny, can I pick on you for this? There's a saying in exchanges are really just trading liquidity begets liquidity, right? So, more trading volume equals higher, I think I'm going to get this right, more trading volume equals higher market maker market maker profits, which means more liquidity provided, which means less slippage and tighter spreads, which means better pricing for traders, which means more trading volume. And that feedback loop continues. I guess I maybe a two-part question like what is the hardest part like are there different feedback loop feedback loops that drive Blockworks' business, right? And I have an internal mental model of what are the almost easy parts of that feedback loop to increase leverage on and what are the hard parts that I'm always trying to

kind of push that boulder up the hill. When you're sitting in in your seat running the spot exchange at BitMEX, what are the like the easy parts of that feedback loop that you're like, all right, I I know how to do that. I know how to amplify that. And what are the parts right now where you're like, damn, this keeps me up at night. Like I'm not the feedback loop's not I need to connect it closer, you know what I'm saying? Yeah, yeah, it's a it's a really good question and you know, I I I get asked this a lot about you know kind of the the internal mechanics and dynamics within the exchange. So, I think you know, just speaking in broad strokes, the the most delicate and often times the most challenging part with you know, managing quote-unquote liquidity on a centralized exchange is having an equal

balance of participants, right? And so so what I mean by this is you know, often times most market participants get bucketed into one of two categories. So, you have you know, generally speaking institutional you know, traders. So, you know, hedge funds, you know, macro firms, trading shops, you know, prop shops, independent you know, crypto firms, whatever. Any anyone that's like a professional trading firm or or let's say a corporation that gets those those folks usually get bucketed into that into that category.

And the the second category of course is retail. So, you know, your average basic user you know, may not necessarily you know, be the most well-versed in trading or is just starting out or is just you know, a small independent trader. So, you have these two camps and a lot of the market dynamics have to do with the interplay of these two camps, right? And and so in managing liquidity on an exchange, be it, you know, the spot exchange, which I'm responsible for, or you know, or or the the proper derivatives exchange, you know, you want to make sure you have a pretty decent balance of both of these types of actors. And and so, you know, the especially in bear markets and you

know, in these market downturns where where things are uncertain and you know, and particularly volatile, you know, you have a pullback of retail, right? So retail's not as excited, you know, maybe they got liquidated, they got washed out, and you know, and and they're hurting, right? So so you now have you have a dislocation of you have more institutional guys mostly trading against each other versus institutional guys sniping off retail in kind of more hot hot market conditions, right? So, you know, again, just to to to land the plane here, for me personally, it it's really just understanding and figuring out how to balance those two. And and of course there's there's different you know, there's different ways to incentivize both of those camps, right? They have

they work on different incentives. And so really understanding you know, the how to reach both of those, how to speak to them, they they speak different languages, they care about different things, right? Most most of retail doesn't give a about you know, about what they're paying in terms of fees or at least you know, the the you know, the the basic retail traders they don't they or they care less rather, I should say. Market makers and and institutional traders are a lot more sensitive to fees. They care about these things, they care about rebates, they care about discounts and and all this sort of stuff. So, you know, it's it's a fine balance between those two things and and like I said, especially during kind of market downturns, you know, you want to really think these things through and and kind of review them a little bit more

more more often. Yeah. Jonah, when you have um in the in these down markets like like as you said, you retail leaves the market. So now Now just got smart money against smart money. What are the dynamics that shake out there? You know, actually I think um there's a bit more retail activity than you'd think in these markets. And it ends up getting sort of packaged and and we see it in various ways either through exchanges or through other sort of pipelines. But, you know, I think when I think what's going on in this in this bear market right now is you're having this massive risk transfer from the hands of sort of and balance sheets really of companies that are forced to to liquidate. They don't necessarily want to, but they have

to, onto the balance sheets of the people who've been sitting on the sidelines say, you know, kind of waiting for their chance to get in. And so some of that is pretty orderly. Some of that can be disorderly. Um ultimately I think usually the way that you you see these things play out, right is um the market will sort of be trading in a in a certain range. Then liquidity volumes will just kind of vaporize. Trading just stops. And what that tells you is uh-oh. Like this isn't the right price for, you know, this this price set isn't incentivizing trading between the types of institutions that need to get stuff done. The people who need sell and the people who have the ability to buy, but maybe don't want to buy at these prices.

So when when you get these sort of air pockets in liquidity and volume, usually that tells you there's a big price move coming. And we we kind of saw that we we saw that about a month and a half ago immediately preceding the collapse and then boom, right? Now during when the market is in the midst of this slide you you know, you you sort of want to know what's going on under the hood of the liquidity engine that is, you know, crypto micro micro structure. And ultimately what's going on is nobody wants to catch the falling knife, not even the most well-capitalized institutions in the world. And there are other people that just have to sell. So they're just blasting through bids.

Those bids might be, you know, your dentist, mom and pop. It might be, you know, the occasional act of bravery going on from some institution, but ultimately it's just there's not a lot not a lot trading and a lot of price movement. And then you end up finding this equilibrium where people say, "Hey, you know, this is this is a really attractive price set. These could potentially be generational levels to get long crypto." And then you see, you know, institution versus institution trading. Usually retail isn't as involved in those sorts of immediate stabilization events. Um and then ultimately like when you talk about institutions, at the end of the day institutions are run by people.

So, there's not a whole big difference between institutions and people when it comes to the psychology of these moves because everybody would rather buy a a nice little bounce off the lows than try to pick the bottom. Even big companies that are run by you know, people whose incentives are kind of the same as the the you know, the guy's trading on some platform at home. Jonah, you had this tweet this quote, "This is my first crypto winter, but I've traded through plenty of savage trad-fi winters in oil and FX and in credit starting my career at Lehman Brothers. The worst of it always is always triggered by the disappearance of credit. That is precisely what's happening in crypto right now."

I would love to get your take on and then Jenny, I'd love to hear your thoughts on this too. Just like how much leverage is left in the system? Have we wiped out all of the leverage? There's still a little bit to go. I'd I'd love to get your take on that, Jonah. Yeah, I mean, thanks for bringing that up. I think it's pretty relevant. Honestly, you know, people are very very focused on this particular crypto bear market, but it doesn't feel that different from when oil went negative in 2020 or when I was you know, just just starting out at Lehman Brothers and the whole thing went bankrupt and the world was wondering, "Hey, are we going to have a you know, a financial system tomorrow?" So, ultimately it's these cycles are just kind of driven by the availability of credit and the the

ability of participants in the market to do what they want to do when they want to do it. When there's no credit, people are forced to sell stuff when they don't want to, and that's that's kind of what we're seeing at the moment. It's or what we were seeing, I guess I should say, and part of this stabilization that's been going on in crypto has been um you know, more broadly indicative of the fact that there's not a lot of liquidation left to do at these levels. Now, let's say that um you know, you can visualize this on chain in various ways. Off chain, it's a bit harder, but if the price of Bitcoin were to sell off another 50% and I'm absolutely not saying that's what's going to going to happen, you would probably you would probably see some more liquidations. But, um at current

levels, you just don't need to to liquidate much more, you know, in the digital asset space, and I think that's that's a sign that we're, you know, there are a bunch of different cycles we could talk about, macro, crypto, the relationship between the two, but as far as the crypto specific credit and liquidity cycle is concerned. Unless hits us out of left field, which I I don't think will happen at this point. I I think we're we're in the eighth eighth inning, maybe ninth inning of the crypto specific liquidations. I think Jonah's uh correct in in terms of, you know, where we're at in the in the context of innings, for sure. It feels like we're you know, we're we're getting to the end of flushing out most of the leverage. I mean, we just had the biggest

capitulation and forced selling event, probably in the history of crypto ever, over the last 2 months, right? And so, a lot of like the, you know, the fraud and the off-balance sheet leverage has exited. And so, you know, are there going to be other, you know, quote-unquote bodies that wash up on shore and, you know, some maybe mid-tier, smaller companies that eventually surface and, you know, and it's, you know, it's discovered that they had exposure to, you know, Celsius or 3AC or whatever? But, maybe. There might be a few others, right? But, I think the the big fish have for the the part already been discovered. Um you know, it's and they were they were pretty big, right? We had we had Voyager, right? Celsius were the two big ones. BlockFi was affected. You know, Babel Finance, you know, and

there's a you know, a ton of other kind of more centralized exchanges that were affected as well. And that needed, you know, all sorts of bailouts. And so, you know, I think we're we're definitely at the uh almost at the finish line in terms of uncovering uh where most of the leverage was. But I I I think uh another important thing to uh you know, to to kind of uh to take note of, which I think a lot of people are are underestimating. And this is uh I'll give credit to you mentioned you had Dan on from CMS yesterday. He actually pointed this out and and several others have recently that, you know, we went through a you know, pretty massive credit crisis over the last like 60 to 90 days. And no one stepped in. Well, for the most part, no one stepped in.

And everything is still working, right? Things are okay, you know? Yes, we had a couple you know, a couple serious uh couple serious deaths in the industry in terms of, you know, big companies and you know, big personalities that that got wiped out and and are no longer with us um or are going to be with us in a different form. But for the most part, everything's, you know, still functioning. Um and and and I think that's that speaks volumes in terms of, you know, kind of the the macro and micro structure of the industry. Can we um is there a way for you to understand your counterparty? And are you surprised the folks that have gone out of business? I assume you all kind of interacted with them in some capacity at some point.

Do you get a feeling for the type of counterparty and how much risk they have in their balance sheet? And the like do you rank them? And I guess just generally are you surprised that that a lot of folks got wiped out? I mean, it happens every cycle, but I think for a while there are a lot of a lot of folks that did get wiped out this time around. Uh I think a lot of people were caught pretty surprised. Yeah, I I so I I think, you know, I think to for me personally and yeah, I I'm sure we all probably share some version of this sentiment, but for me personally, I I think it's the most shocking and like gut-wrenching thing that was uncovered uh over the last, you know, 60-90 days is like how many, you know, how many of the biggest and

smartest players in the industry accepted trust me, bro as collateral. And like that to me is is just it's it's crazy. Like you look at how how much uncollateralized lending went out um from, you know, publicly traded companies that, you know, didn't actually, you know, do any of these risk assessments. Uh and you know, the fallout from that is, you know, it's it's pretty nuts. So, you know, uh to answer your question, you know, we, you know, we obviously have a pretty rigorous uh you know, um process in terms of, you know, determining creditworthiness um internally uh for for anyone that we do business with. So, you know, for us personally, there's no uh

there's none of this uncollateralized lending going out and, you know, any any of this kind of more uh wildish, outlandish behavior. Uh that's that's speaking for us. Yeah, I mean, we we do a lot of the same here. You You just sort of have to know who you're trading with in order to assess whether you're going to get get what you expect out of each trade. And um you know, that that boils that that's the same for an exchange, a counterparty, an individual. You always you always want to know. So, whatever your process is, um you know, we try to be as rigorous as possible about it and as mathematical as we can just so that ultimately when, you know, somebody comes and trades with us, they can rely on us to be there and

not, you know, busy covering up some hole that that one of our other counterparties has created and, you know, causing distractions. So, so we're pretty we're pretty careful about it. Yeah. You guys come from traditional markets, um and I'm curious in crypto, you have this universe called pocket called DeFi and a lot of very transparent information that is happening on chain. There's also a whole host of things that are happening off chain, OTC trades. Um Talk Can you for our listeners, it would be great to get your perspective on how you you know, how you think about this market, crypto writ large, but with this kind of component of DeFi and how DeFi

fits into your flow and do you see that as a threat to your business? Is it actually amplifying what you can do from a risk management perspective? Um it would be great to get your your thoughts on on on that. Yeah, sure. I mean, we're we're big DeFi bulls at Cumberland. We love it. Um we don't really see it as a threat. We see it as an opportunity. Um I don't know if you guys saw the headline hint. We we recently had Cumberland Lab go out of stealth, you know, to focus specifically on certain types of of DeFi and uh other sort of project incubation. Ultimately, DeFi is it it's sort of what finance should be, right? It's this kind of algorithmic trustworthy source of liquidity. Um you

know, for now it's it's primarily borrow lending, but it it is what you expect it to be, right? It behaves algorithmically. You sort of know what it's going to do. Even even Luna and UST did what they were expected to do, right? If you read the white paper. So, the the beauty of DeFi is that if you just understand where the yields are coming from and you look into how the protocols work, um you can kind of trust it, right? And to to behave however it was designed to behave. And for us, at at on the market making side, you know, in addition to providing liquidity there and you know, taking liquidity um there there's all sorts of interesting stuff going on.

Like even even minting and redeeming stable coins, like one one leg of that transaction is it you know, kind of on chain, right? So, ultimately when you when you interact with these DeFi systems, you're augmenting the the liquidity that you can provide to people who don't necessarily have access to what you're accessing or don't know how to access it or don't know how to do the analysis. So, it basically helps helps us as a company. We we want people coming into crypto. We want people to understand crypto and use crypto. And whether you're a user, an institution, a retail trader, a prop trader, another trading house, like if we're able to connect more dots and one of those big dots is DeFi, um you know, the better. And it like certain things there's there's just no

better liquidity than on on chain. Um you know, AMMs are an amazing source of uh liquidity for some of the the riskier tokens out the curve. Maybe not Bitcoin and ETH, but if you're going to trade coin number 371 by market cap, you know, why not Uniswap, right? And Curve, insane liquidity for stables. So, you know, we're we're all about it. We love it and we think that it's uh you know, at some point there will be more liquidity on chain than off chain and that's that's the direction we're we're like we don't want to be surprised by that outcome. We we want to be there helping out.

And I'll kind of give the the the quick perspective from our side. You know, it's there's no question that, you know, DeFi uh DeFi platforms have certainly cannibalized some of the some of the trading volume uh from centralized exchanges. You know, I'm sure we've all kind of seen the headlines uh comparing, you know, Uniswap uh and Coinbase volumes over the years. It's, you know, Uniswap has overtaken Coinbase several times in, you know, in the last couple years. So, you know, I I I I think just from a numbers perspective, it's, you know, the the picture is pretty clear, but you know, I I I think also DeFi users are also a little bit more sophisticated than kind of the average retail trader, right? These are different types of users for the most part. Obviously, there's some overlap,

but they're they're certainly more sophisticated. They're you know, they're they're they're more comfortable managing their own keys and taking on all sort all sorts of on-chain risks uh that the average retail users, you know, just not going to be, you know, able or comfortable to take on. So, you know, from from that perspective, you know, they they are somewhat catering to different markets. Um as as far as you know, as far as you know, the kind of the the upside of uh the existence of DeFi in the exchange world, you know, additional coins for us to list, you know, whether it's perps or on on the spot exchange, right? These Ultimately, these two are they're complementary and and and you know, there's there's definitely a there's definitely like a a healthy coexistence between the two. So, you know, while while a lot of people

try and, you know, frame this as like, "Oh, one is going to cannibalize the other." Yeah, maybe maybe a little bit, but I I I think there's uh there's a healthy balance with the existence of both of them. I am curious um from your perspective, uh Jonah, you mentioned see uh you know, this lab component that you guys have. I've actually co-invested with a few of your folks and I'm curious um what are your Where do you see the most amount of like inefficiencies or kind of opportunities to build um services either in kind of your like kind of like in off-chain land and also in DeFi.

Um and especially maybe informed by kind of recent market activity. I think every bear cycle kind of just teaches us, "Okay, we really need to focus on X or Y." Um and so, I'm curious if you have a particular take on that. Yeah, sure. Um thank you for asking. I think on-chain the the most exciting areas to build in DFI are probably going to be transferring some of the value that's currently being extracted by MEV type arbitrageurs and delivering that to that that sort of value to end users. There are a couple of really interesting protocols that are kind of leveraging the thinking behind MEV and you know, passing it on to the average

kind of person who transacts in the in these worlds. That's very nascent, but personally I think that's the most exciting opportunity in DFI. I'm not speaking, you know, on behalf of Cumberland Lab on that one. That's just the one that I'm as a trader I'm most interested in geeking out about. Um off-chain you know, I think a lot of a lot of trading companies and a lot of, you know, crypto companies in general, there's a lot of shiny objects in this space, right? It's very easy to get distracted by this or that. Oh, this, you know, this fortune is getting made over here. Oh, look at that. Like let's let's jump on that. We're really trying to stick to our core competency. And what we do at Cumberland is we are a trading company and trading crypto is an extremely

technology intensive effort. So, as markets mature and crypto's just a market, right? Like it's it's tradable technology and there are users of that technology, but if you're providing liquidity so that those users can trade this technology, like you have to you have to keep up with the rate at which the market matures, otherwise you get cut out of the trade. So, what I think the biggest opportunities to build off-chain for a trading company, which is sort of what we're focused on, are ways that allow us to interact with markets faster and ways that allow us to sort of anticipate where the market's going to be. And this is a super interesting systematic um problem that, you know, we like to spend

a lot of time and effort researching because if you have, you know, an idea of directionality, then you can you're effectively taking risk on every quote in a way that's possibly a little bit smarter than the people who are focused on where crypto was one or two seconds ago and quoting based on that. So, you know, any any way that we can to make the market tighter and more efficient and more liquid is going to bring more people into crypto, more users, more investors, more hedgers, all of it. So, that's that's the off-chain building kind of thing we're doing. Uh His journey Dan from CMS said one thing on the podcast yesterday that I thought was interesting which was one of the second order order impacts of this market in the bear market right now is massive consolidation with exchanges

specifically. I think he called out four Kraken, FTX, Coinbase, and Gemini saying that these kind of more like retail lenders should not be operating individually, rather they should probably be part of a bigger exchange with a bigger balance sheet. Howie, I'm I'm assuming you can't talk to BitMEX M&A, but can you talk to more broadly like I don't I mean A, if you can talk to BitMEX M&A, do that, but B, if you can't do that, talk more generally about like how you see consolidation going with exchanges over the the next several months.

Yeah, for sure. So, I I think in general it's it's pretty obvious that in in these sorts of market conditions, you know, you're going to have distressed assets, distressed teams, distressed IP, you know, all of which is is very interesting for some of the bigger players, especially ones that are you know, that have kind of glaring holes in their in their in their let's say in their wider uh business plans and uh and product offerings. So, you know, I I I can't speak I can't speak too much about what we're doing, but I would say as a general observation, you know, and many people have you know, kind of pointed this out over the last few months, you know, we're going to have a a a a pretty, you know, dramatic M&A buying spree over the next, you know, I

would I would guess probably 6 to 12 months, right? We've already seen kind of some a little bit of a little bit of a preview of this over the last little bit, but I really expect this to ramp up. You know, I think that the big one to watch right now, of course, is is Voyager. You know, I think they rejected FTX's offer like yesterday or the day before that, you know, calling it a lowball offer and all this stuff, and you know, people can read about this online. But I I think that's going to be the big one. They have, you know, a ton of users, a ton of IP, you know, it's, you know, obviously a lot of assets. So, you know, it'll be interesting to watch that, and and I think I think there's going to be a lot of, you know, downstream effects from

that. You know, it's it'll be I think it'll be a hot summer for for acquisitions. So, you know, probably like between now and like end of September, I think we're going to see a, you know, a couple high-profile ones take place. Yeah, that's great, guys. Well, I I want to go to a fire round before we wrap it up. Before before we do that, I want to ask you guys a question, which is, how much of a threat do you see existing financial institutions, Fidelity's of the world, come into the space? Are you seeing them in behind the scenes? Do you Do you think that it will be very easy for them to replicate what you're doing, or is there a lot of know-how related to

crypto that would require, you know, that that you think that you guys have built kind of a moat around? Curious to think about Curious to get your perspective on that. I would say, um, a lot of the crypto trading stack looks very similar to, you know, a traditional market. I I worked at a, you know, Goldman, and then Vitol, big fossil fuel company. Um, a lot of it looks pretty familiar, to be honest. It's the last mile of crypto that gets super weird, and it's I think I think it's going to take a lot of effort for some, you know, you mentioned Fidelity, right? A company like that I don't think they're going to be interested in trying to compete with Cumberland. I think they're going to be

more interested, hopefully, in partnering with Cumberland. And we are seeing institutions like like those come in and either attempt to partner with us or just use the liquidity services that we offer or other other types of things on the trading side to help them accomplish their goals. Um I you know, I think there's always going to be competition. Um we're just doing our best to to stay ahead of it. You know. Yeah, I I think you know, just in terms of let's say traditional players coming in and, you know, for example, competing in in the exchange space.

I think that'll be, you know, quite difficult at this point. You know, certainly not impossible and, you know, let's never say never, but, you know, from the exchange perspective, you know, we already have a pretty mature ecosystem globally, you know, not just offshore, onshore. Like you look if you look at the tap history of, you know, the exchange ecosystem, it's it's it's pretty remarkable. And it's very impressive with, you know, how things have developed and matured, you know, over especially over the last 2 3 years. You know, the the the the suite of offerings, you know, the sophistication, you know, the liquidity, it's it's it's pretty it's pretty impressive. So, you know, to to think about, you know, kind of bigger, more traditional players

coming in and, you know, trying to spin up an exchange and, you know, and try and compete on those grounds. I I I'm finding it very hard to, you know, to to see it play out that way. And, you know, and we we've seen this over the years with some, you know, some traditional finance guys try and do this like with with Bakkt and with ErisX. And, you know, just these things just never really took off. And there's you know, there's a whole number of reasons why, you know, in those two examples particularly. Not to pick on them, but just those are the ones that stick out.

There's there's reasons why they didn't work out, right? And you know, it's just I find it hard to to see others uh try and kind of cannibalize the existing ecosystem, but you know, crazier things have happened, so we'll see. Definitely. Exchanges do have pretty nice moats. Trading Trading companies regular moats as well. swallow each other whole regularly. So, I think the fact that we've been around since 2014 shows you that we we paddle pretty hard, but yeah, it's there's always a threat out there. No. Yeah. All right, guys. Well, this has been a great discussion. I do want to end it with a fire round of questions, so you know, I guess the format is I'll just ask you a question and both of you, you know, try to respond fairly quickly.

Sure. Um not to put you on the spot, but but I will. So, first off, how many hours of sleep like do you get? Crypto's 24-hour 24/7 365 market. How much sleep do you guys get? Seven hours. Yeah, same. 6 to 7 is a is a pretty good night. Wow. And then a couple, you know, 20-minute naps in in between the day. Great. Favorite uh metric KPI that you have on your screen. Volumes. Yeah, I I would say open interest and and volumes as well. Price target for Bitcoin and ETH over the next year.

This time around next year. None of this financial advice. Me- meaningfully higher. Thank you for saying that. Jenny, you can't say that. Yeah, no, no, no. I'm not I'm not going to say that. I'll give you actual numbers. Uh I'll say I'll say 55 Bitcoin and 23 2,300. Biggest risk in the industry. Oh my god. Cult of personality, Ponzi schemes, um you know, I'd say those are those are the big ones. And sorry, not to riff on this too much, but we need a mass de-Ponzification within the ecosystem and you know, there's there's a lot of like self-policing that needs to improve, but yeah, those are the two big

things for me. Jenny, what are the remaining What are the remaining Ponzis that need to get worked out? Oh, man. Um Uh I I I don't want to pick on anyone in particular but enough to give the price predictions, so I thought you'd be bold enough to Yeah, yeah, yeah. Yeah, look, I I I I think uh just speaking in broad strokes, again, I don't want to pick on anyone in in in particular, but I and I love NFTs have have had, you know, a pretty decent run in the last year, and it's been really interesting to explore that space, but god damn it, there are so many so many scams and Ponzis in that space. It's It makes the ICO era look like child's play. And and like they're so sophisticated, and and

and people are just They're just People are so brazen uh with NFT scams. It's just It It It makes your head spin. But, um yeah, that that that would be kind of That would be my big one. Because it's Sorry, and and and the reason I say that is because it's also NFTs have become a big retail gateway into the into the industry, right? So, like you don't want to have the top of the funnel users being picked off by scams as they're trying to get into the into the industry, right? So, it just It hurts everyone, and I think there's more self-policing that needs to be uh you know, needs to be present. While we're on this tangent, and and I will betray our rules, but if price were never to go down, is it a scam or a Ponzi? Because a lot of times we call a Ponzi We call a scam

a Ponzi when price goes down. And I'm curious, of course, if the price of the NFT never goes down, it could be a Ponzi, but people may never call it a Ponzi. Terra might You know what I mean? Like We use these terms interchangeably. Or or let me flip that. It's like if I'm I think a lot of people call some NFT projects a Ponzi. It might not be a Ponzi. It's just a really shitty project with like bad fundamentals and never delivers product or executes on anything. Yeah, so So, there there's different versions of this. So in my mind there's like the the two worst versions of this is you have teams over promising, you know, like here's a road map of 10 things that we're going to do in the next year and and either immediately rugging or slow rugging and

you know, they're just gone or or the other version of this is like they'll they'll release like, you know, one collection or you know, one set of items and then immediately go out and release a second one and a third one and totally ignore, you know, the first one and did you know, like don't build anything and it's just it just exists and there's there's no additional value brought to these projects. That's that's where I feel like a lot let's let's perhaps put it more in the scam category rather than the bonds category. There there's a lot of that and then, you know, you have more complicated dynamics with, you know, with projects adding tokens and you know, and staking and all sorts of stuff that like it can really be, you know, gamified and and and and can really be played over over the mid

to long term. So I don't know. I mean I'm also just I'm biased cuz I I spent a lot of time in that space, but yeah. Mhm. Okay, well Jonah, over to you. Biggest risk? Biggest risk I think is just more bad risk management, right? Like you just you don't need any more blow ups. I I think if people just say, "Hey, what what what what am I actually doing with all this money?" and think about it for 10 seconds, then we're good. No more long term capital management or anything. Hopefully hopefully this this rinse has cleaned out the people that are really focused like that.

Great. Uh thing that excites you the most could be a project, it could be not a project, just a thing. Oh, I I mean, honestly maybe I'm too deep into the weeds of commodities, but I think tokenize tokenizing pretty much anything is the most exciting reason to be in crypto. Like I think this Yeah. crypto rails are just better and they're not like 3% better, they're 300% better than a lot of traditional financial rails, particularly some of the things that I saw in the commodities industry. So, that's what gets me excited. I want to trade digital commodities.

So, you're long commod- tokenizing real-world assets with all the complexities of that. Yeah. And tail. and redeeming them into uh the tokenized world. Got it. Yeah. Um so, I I mean, I think we've already kind of established the importance and dominance of stablecoins over the last, yeah, two to three years. But, I still think we have a long way to go with stables. There's a lot more that can be done. There's, you know, there's a lot more other currencies that could be turned into into stables. And, you know, not just, you know, the market is obviously dominated by, you know, by US dollar stablecoins, but I still think there's that long tail of other currencies that that could be tokenized is is definitely something interesting to watch uh over the next few years. Um

and then, the other thing I'll say, uh which is a little bit more of a left field thing, is uh I I'm a big fan of what what what what Tether and Bitfinex launched uh this this week. Uh it's a P2P video chat app called Keet. Um I encourage everyone to check that out. Super cool. Definitely didn't expect those guys to put that out. Um and really speaks to the, you know, to to to Paolo Ardoino's uh you know, technical prowess. So, big fan of what those guys are doing. I'm going to ding you if you ever do another more than 10-second response, but Uh I'll slap you. Uh there's charge you five USDT.

Mhm. Question uh do you think the US dollar loses its status as the world's reserve currency in the next five or 10 years? I don't think so, but I think that you can have more than one global reserve currency. And all you need is a few basis points of global commerce to be denominated in BTC before I was going to ask you, is it BTC or is it like the renminbi or some other sovereign currency? I think way, way more likely to be Bitcoin or ETH than um renminbi. than anything else.

Yeah, I I I I don't think uh it'll lose its status. I think I think uh the loss of status has been greatly overexaggerated and you know, like the the Fed is in the drive driving seat right now. And it's it like nothing's going to change in the at least in the short term uh in my opinion. Is inflation Have we peaked inflation? Yes or no? Yes. Okay. Yeah, I think pretty close. I mean, inflation's going to continue, but I don't think it'll keep running this hot. Uh favorite favorite book? Ever?

Oh. Recent or ever? We like to get book recommendations or movies, but let's start with books. Just read Snow Crash. It's pretty awesome. Nice. Nice. Um Man's Search for Meaning uh by Victor Frankl. Victor. It's a good one, man. Nice. Yeah, both great great books. Yeah. Um what This might require more than 5 seconds, which is okay. I'll make an exception and I promise we're coming to an end here. Uh you guys think well, what is it that you wish you knew when you got started in crypto that you know now? I would say um I wish I realized just how easy it is to lose an enormous amount of money uh given like when you when you trade when you trade oil, right? You think it's

volatile because for every dollar you put in, you could lose 30 cents. You know, in crypto, for every dollar you put in, you can lose 100 cents, right? So, you know, I'm not saying that's going to happen to Bitcoin or ETH, but like in just this topic of risk management and providing liquidity and all these things that we've been discussing this whole podcast, it's it's sort of like you know, you have to you have to adapt your risk management thinking when the volatility of what what you're trading is just this high. So, I'd say I wish I had You you can't really know it coming in. You just have to feel it.

Yeah, I I I I would say uh the ability to just be patient uh and and just wait and not do anything. And the reason for that is you know, I think some of the some of the folks in my orbit at least that have been the most successful and and the most most profitable over the last you know, 5 to 7 years have just they just been patient. They just they make their bets, you know, they don't they're not monitoring and checking prices every 10 seconds, right? They're just they're just comfortable with with kind of the long-term view. And and it's obviously not for everybody and people have different straight trading strategies and all that jazz, but I'd say you know, just just having that ability to just sit still and not do anything especially when there's all this like chaotic noise around you. I think that's a very

underrated skill. Sound advice from someone that makes their business off of volume, but I do agree with that. I appreciate it. Jason, any other more questions? No, I don't. This is this is great guys. I I learned a ton. Um Yeah, really appreciate you guys coming on. This is great guys. Any parting thoughts? Anything else that you want to impress on your listeners? This has been a great discussion, but I don't know if there's anything else that you guys want to you know, parting thoughts. Yeah, I'll go I'll go first. I'll I'll I'll plug one of the one of the cool new things we're launching very shortly is FX Perps. So, these are the world's first crypto margin perpetual FX swaps.

You know, we're going to have a whole ton of currencies available up to 50X leverage and that's coming out next week. So, super exciting. We just launched a new app. The token's coming. So, I'll just use an opportunity to plug those things and you know, obviously very very excited for that. Jinyu, I know I know that was a plug, but can I actually just ask you a question on Perps here? Which is what like what is the why behind that? What is the what is that allow that doesn't exist in the market today? Yeah so basically it it you know, it allows people to to speculate on some of the most popular you know, foreign currencies using you know, using crypto as margin. In in in in short, that's that that's the that's the big use case.

Cool. Jonah? Last thoughts? Yeah, I'd say I don't really have a plug other than just uh, you know, trade with us. We're we're here for you. Um, and read our commentaries on Twitter and debate and uh, you know, always always eager to to learn what other people are thinking and be part of the conversation. Cool. We'll plug you guys in the show notes. Uh, put your Twitters. Yeah, we'll put you guys' Twitters in the show notes and um, yeah, this was awesome. Santi, the uh, the joy that these the rapid-fire questions brought you at the end, that that childish smile. I have a feeling I'm getting a uh, Telegram message after this from you saying we're doing that every time. So, We're we're definitely doing this again.

Guy Guys, this is the first time we have interacted with this format. I appreciate you being uh, on the spot and uh, we won't ding you too much for giving long responses, which you know, it's fine. It's okay. I only got dinged once. Yeah, only well, actually twice, but but it's okay, Jay. Next time we have you we'll have to have you both guys on and and we'll make sure to police that rule more so, so. Really appreciate you guys coming on. Very uh, interesting discussion, especially everything that's going on in crypto. So, appreciate obviously you guys are experts in the field and and and you should come back sometime uh, soon um, uh, to to continue the discussion. But otherwise, really appreciate the time.

Thanks, guys. Really appreciate it. Yeah likewise.