Kevin – Kraken Futures: Bitcoin futures 101, market makers vs. wash-traders


Wash trading is a different beast
though. The intention of wash trading is never actually good so it’s always there
to mislead or misrepresent something that’s happening. So there are a number
of exchanges I don’t want it it’s not right to name names but there are a
number of exchanges that are kind of generally known for encouraging or
facilitating wash trading and the reason they do that is actually kind of
interesting so they try to boost their volume numbers so wash trading is
basically you trade against yourself so I put in a buy an to sell at the same
exact price it looks like a trade happened but actually it was just me on
both sides so nothing actually happened Dear crypto community and blockchain
buddies across the globe, welcome back to season two of Cryptonites, the no BS
blockchain channel built with the community for the community and tonight
we have another timeless interview with the head of business development at
Kraken futures Kevin Beardsley. A pleasure to have you
Kevin thank you very much. How are you doing my friend? Doing well thanks, doing well. I
appreciate you having me here tonight it’s awesome to have you and especially
in this interview we’ll talk a lot about some technicals regarding to crypto
finance and some really interesting stuff so without further due, Kevin you
have an incredible career in this space starting kicking off in 2014
yeah so I was the director of membership at the Bitcoin foundation in 2014 so
it’s been about nine months there and that let me meet a lot of the community
that’s awesome you must have jumped through a lot of Hoops going through or
did you have any struggles going to these years or yeah it’s been a wild
ride I remember sitting in a meeting room with some some large custodian banks and
we were trying to convince him that Bitcoin could be a hundred billion
dollar asset class and they looked at us and said there’s no way and they said
what what what makes you think it could be we didn’t have an answer so I mean
that was only two three or three or four maybe three years ago and it was still
inconceivable that it could get to the level it is today so it’s been a really
exciting ride yeah and talking about rides you know obviously it’s a very
emotional ride for many people and people you know when there’s a bear
market they tend to give up or capitulate and what deep inside of you
Kevin made you think oh I believe in this I believe in Bitcoin was there
something in particular that kind of just led that horse you know – yeah I
think it’s it’s a bit corny to say these days but I actually really like the
technology so I like the way the incentives are aligned so that everyone
can act with their own self-interest as in the miners, exchanges,
developers can all act with their own self-interest but as long as things are
broadly in the right direction the system will will sustain itself and
I think that’s really fascinating so I try to be involved in the technology as
much as I can I mine cryptocurrency in my spare time I’ve run nodes of Monero
and lightning network nodes so I try to stay involved in as much as I kind of
find it fascinating that’s cool so not just investing but actually using the
technology and being a part of the ecosystem
yeah absolutely that is awesome so there’s one thing I really want to ask
you Kevin obviously you’re working at crack in futures and futures in general
is quite a complicated topic yeah so if my grandma Susie was here today how
would you explain a futures contract to somebody in layman terms yeah and it was
a new concept for me as well I don’t have a finance background so I had to
learn it as I went through in crypto so the way in the regular world the way
futures generally work are they help an operator that has future cash flows in
something hedge the exposure so if you and I have an airline and we have future
cash we need to pay for airline fuel in a few months
futures contracts allow us to hedge that exposure or if we’re a farmer and we
have to deliver our crop to the market in three months time futures contracts
allow us to hedge our price exposure in cryptocurrency they started out with
more traditional style futures contracts there really wasn’t there really aren’t
still today that many people that have expected future cash flows in Bitcoin
may be miners that’s a relatively small group so futures in Bitcoin and
cryptocurrency really took off with what’s called the perpetual futures
contract I believe Bitmex was the one that at
least brought in the I don’t know they pioneered it but they brought it into
the mainstream and that is a futures contract but the future state is like
hours away instead of months so it basically what it actually means in
practice is with a perpetual futures contract users are able to trade more or
less the spot price of Bitcoin and cryptocurrency with leverage so up to
50x leverage on crack and futures and up to 100x leverage on some of the
unregulated changes that’s really really interesting so if I understand correctly
futures are used mainly to hedge and mitigate risk for people is that though
it’s yeah and that’s the traditional use of it and that’s very much what most of
our clients use it for there is also the speculation aspect of it which some
people use because it does trading with leverage does magnify gains and losses
so some people like that as part of a trading strategy that’s really
fascinating Kevin because I remember reading about modern-day futures trading
and I believe it was the Japanese in Osaka that were just afraid for
their rice crops because if the weather went bad and they were just afraid of
not being able to sell it at the price they needed to survive and therefore
futures contracts just blew up in Japan because it was a great way for them to
be ready for the unexpected in that sense like it’s really cool to be a coin
but just now you mentioned margin trading do you mind telling my grandma
Suzy again what is margin trading why people use it that would be fantastic
yeah so if you’re a trading firm or an investor and you want to gain
exposure to cryptocurrency one of the big determinants is how much leverage
you want to take so if you trade on the spot markets like your traditional crack
in coinbase bitstamp you’re generally not you’re not trading with any leverage
in most cases you were just buying and selling based on what you actually have
and you pre-fund the account so if you want to trade with leverage where if you
want to magnify your trading gains and losses or hedge more effectively you
need to take on leverage and there’s two ways to do that one is margin trading
and a number of exchanges around the world offer this and that’s where you
borrow the capital that you’re using to trade so you’ll always pay an interest
rate on it and that can be variable on some exchanges it can be a fixed-rate on
other exchanges and that usually gives you between two and five x leverage now
the drawback with margin trading is that even if the price stays flat so let’s
say you buy-in at $10,000 today a year from now it’s $10,000 you have to pay
interest throughout the course of that year so if it’s 20% interest for example
you’re 20% worse off than when you started with a futures contract if
you’re trading the monthly or quarterly there’s no fees that I don’t know
exchange fees I think at any exchange actually and if you trade the perpetual
futures you can get up to 50 X leverage and you might encounter what’s called a
funding rate which we can go into more detail if you’d like but um more or less
if the price stays flat your position should stay more or less flat as well so
futures are what they allow you to just have more leverage and also have lower
sort of ongoing fees all things being equal or all things being flat that’s
really fascinating again so that kind of leads me to another question which is as
you know we have stable coins these days and some people like to hedge you know
their portfolio with stable coins although not are not all of
them are really reliable perhaps but um in terms of the person a person who
wants to use stable coins and futures like what are the pros and cons if you
don’t mind sharing yeah so one of the big uses of futures I think across all
of the exchanges is people wanting to hedge their price exposure to
cryptocurrency so let’s say Bitcoin is ten thousand dollars today and it goes
up to fifteen thousand dollars tomorrow and you think that’s a good price you
have sort of three options for how you can hedge your exposure one is you can
sell it for dollars or pounds or Fiat the other is you can buy a stable coin
like a US tether or US DC and the third is you can use a perpetual futures to
short the so you putting the few deposit your margin and you short one X and what
that does is it effectively locks in the price of your crypto so the trade-offs
are if you some people in crypto don’t want to take delivery of fiat for
ideological reasons or otherwise so for some people they’re not interested in
taking the fiat if you take a stable coin you do have counterparty risk so
everyone treats them as if they’re this utility but there is actual counterparty
risk associated with a stable coin we saw this with the price of tether moving
too wildly off a dollar when bit 10x had the legal troubles so it’s not risk-free
you’re taking counterparty risk with the issuer of the stable coin and for some
people that’s comfortable with futures when you hedge it 1x you just go 1x
short you are hedging your position and you’re only holding Bitcoin so you do
have exchange risk because you have a position open on exchange at leat but
you don’t have counterparty risk in that something there’s an issuer of this
asset you’re still just holding Bitcoin so some people prefer to only hold
Bitcoin and that allows them to hedge their dollar exposure using futures wow
that was really well explained very easy to understand thank you so much for that
as it is a very complicated topic it’s it’s great to get it breaking down like
that um in terms of I know that when I looked at your background you you also
did market making you worked in that and I feel like there’s something that I
really need to clarify for everyone everyone thinks market making is wash
Trading have you noticed that sometimes say their market meeting you know the
crap out of their token or whatever and since you obviously are professional and
expert in this field as well do you mind sharing a
with my lovely grandma Susie what is market made it King why we use it and
again what is washe trading and and why it’s a problem for instance that would
be great especially as you know there was a report yesterday saying that 70%
of aetherium was a trading volume on earth earring was washed trading 75% for
litecoin and there there’s some serious concerns coming from institutional
players on that and that specific field yeah yeah so I should probably start by
qualifying that I’m not a traitor I’m a terrible trader I shouldn’t go
anywhere near it but I didn’t I was managing director at b2 c2 which is one
of the larger market making firms and over-the-counter trading firms in the
space so market making in a lot of the cases in cryptocurrency it generally
means just buying and selling very quickly in and around the mid-price
by and large market makers and cryptocurrency today will do what’s
called arbitrage market making so a price discrepancy on if cracking goes
below a bitstamp they’ll be buying on cracking selling on bitstamp and vice
versa so they try to keep it more it actually serves a very good function in
that it keeps the prices across the industry across exchange is relatively
stable or consistent wash trading is a different beast though so wash trading
is generally done the the intention of wash trading is never actually good so
it’s always there to mislead or misrepresent something that’s happening
so there are a number of exchanges I don’t want it it’s not right to name
names but there are a number of exchanges that are kind of generally
known for encouraging or facilitating wash trading and the reason they do that
is actually kind of interesting so they try to boost their volume numbers so
wash trading is basically you trade against yourself so I put in a buy an to
sell at the same exact price it looks like a trade happened but actually it
was just me on both sides so nothing actually happened
now the reason an exchange might want to do that is because they’re trying to
make themselves look like there’s more liquidity quiddity and that generally
the people they’re advertising to tend to be token issuers so they’re trying to
bring on traders yes but they’re actually really advertising as well too
if you and I have an IC o—- token come listed on this exchange those tend to be
the audiences of people that the exchanges are are going after because
there’s fees associated with token listings yeah it makes a lot of sense so
I was just watching a presentation the other day with the guys from Krypton
compare and according to their study out of 10
of the top 10 crypto exchanges by trading volume only 1 was legitimate so
9 were basically we’re we’re just going through wash trading and now fake volume
in that sense so yeah and I think it’s it generally correlates with if the
exchange has good Fiat rails so if the exchange like crackin bitstamp coin base
has good stable reliable Fiat rails like you can buy and sell dollars and the
volume is almost always just 100% real it’s when it has like doesn’t have Fiat
rails or it’s bit more difficult to get money like traditional money in and out
that’s generally an indicator that there might be or at least those are the ones
that are more predisposed to engage in washed raining I make a lot of sense so
just quickly going back to Marquis making and wash rating would this
analogy work it might be a bit crazy but I was thinking that for market making
it’s more like you want to make sure that if someone wants to buy so if
you’re playing ball there’s one guy on the other side waiting to catch your
ball or throw the ball to you while watch trading is more just people on the
same team throwing the ball back at each other back and forth is that market
makers in the traditional world will generally have an arrangement with the
exchange where they’re required to have orders at a certain level a certain set
of levels beyond just mid and that exists in some capacity in crypto but
it’s relatively less a lot of the people in crypto that call themselves market
makers are just proprietary trading firms that trade high frequency across a
number of exchanges so in many cases they’re not engaged or explicitly paid
by the exchange they do it for their own profit and in so doing provide a service
to the ecosystem of right like price discovery across exchanges and making
sure there’s fewer arbitrage opportunity interesting because that’s it so there
are different forms of market yeah yeah because I remember like when you had M
POS back in the day it was kind of like the ball analogy like if people wanted
to buy the price post IPO they just wanted to ensure there was liquidity
yeah and so therefore they would either take one of the stances either the buy
or sell but as you said people do market making for their own benefits – yeah and
crypto almost every market maker is trading with proprietary
Capital for their own profit so that’s yet that’s really interesting in in
terms of institutional sentiment obviously the backs launched recently
hasn’t done really really well everyone’s thinking of Bitcoin to the
moon etc etc but from your impression now that you’re with cracking futures is
there truly demand for institutions or are they still kind of you know in the
shadows somewhere yeah I think so the big litmus test for whether institutions
are interested or not in my view or in my experience because I’ve engaged with
quite a few of them is whose money are they managing so if they’re managing
their own money or what they do to be their own capital they’re generally in
or very close to being in so a lot of the high-frequency trading firms a lot
of the some hedge funds are already invested with sort of partner money but
if you’re managing someone else’s money pension funds insurance funds asset
managers there’s still a pretty long way away from it and it makes a lot of sense
from their perspective because if you’re an asset manager in Bitcoin and you
invest your clients money in Bitcoin it does very well you get a slightly bigger
bonus because you perform well but if you invest your clients money in Bitcoin
and it goes to zero for some reason you’re probably looking for a new job
because you’ve taken an unnecessary risk with client money so it the dividing
line is is it your money or is it viewed as your money or as are you managing
money on behalf of somebody else and I think it’s a very very long time before
we see people that manage on behalf of others beginning to participate actively
oh that’s really really interesting just a few minutes earlier we were talking
about all coins just briefly and I have to ask you this Kevin because obviously
cracking offers Bitcoin in all coins and as you know when Bitcoin dominance went
over 70% everyone was like the death of all coins a very negative stance on you
know it’s worthless etc I would love to hear your angle and if you still believe
in alt coins if there is a future and it will it qualify as a new asset class
well I have to be careful because the present company I think you guys have a
token right oh yeah I can be entirely honest yeah so I think the it depends a
little bit on how you define all coins so if it’s a utility token within a
controlled environment I think those have value but those have
always had value because they’re tokens within a controlled environment I think
as you think of if we look at all coins in the definition more of decentralized
cryptocurrency that has similarities to Bitcoin I don’t actually know that well
the the lens I would look at it through and do look at it through is the only
reason you would decentralize something is to provide censorship resistance so
in every case a centralized entity or organization is going to be faster it’s
going to be more efficient it’s gonna be more responsive to customers so like
Netflix versus torrents Netflix is faster it’s a better customer experience
it’s a it’s it’s just better the only reason you’d want to do it in a
censorship resistant way is if somebody might want to censor the thing that you
are doing so torrents for example and they’re censoring the fact that you
stolen you stole in the movie so Bitcoin makes sense to me as a decentralized
entity because it’s censorship resistant store of value or transaction mechanism
and the thing that the people might want to censor those transactions for better
or worse it’s not obvious to me by a lot of these other applications need to be
decentralized so sent for example the defy movement this decentralized finance
movement in principle it’s cool and they might have great innovations and it
might evolve but if you look at it through the lens of the only reason you
decentralize something is to provide censorship resistance well then it
raises the question who is centralized who’s censoring lending and borrowing
today those are actually quite efficient markets in the regular world so it’s not
obvious to me that you need a blockchain or you need a decentralized system to
solve for that because it’s no-one’s really stopping anyone from borrowing or
lending today yeah that makes a lot of sense that’s a really good point so
utility tokens and on altcoins in terms of decentralized infrastructure are
quite different you VM different things in that sense that’s really cool in
terms of obviously you’re working for crypto exchange how do you feel about
the exchange tokens as an asset class would that be one of the utility tokens
in a controlled environment like you said that has more or less value or
potential yeah so we look at Finance token and Leo I think those are those
are very much tokens that exists within a controlled environment they don’t I
don’t even think either exchange advertises them as decentralized
cryptocurrency z– I think Leo is actually one of the coolest
innovations in the space in quite some time and it’s not because I particularly
like Leo won or have a strong feeling about it in and of itself but the
structure they’ve created is really really cool the incentives they’ve put
together so if you look at the ico model it was really about people raising
capital for a project or for a business and the problem was there was no legal
or social contract between the person that invested and the business that
received the money and you’re seeing that play out today with kin and all
these icos that where the people are just running off with the money or
they’re exploding and things bad things are happening so that was sort of
version 1.0 if you look at version 2.0 I think by Nantz started to do it with the
B & B token where they said we’re gonna put future cash flows towards buying
back this token but if I understand B and B correctly they actually buy it out
of their Treasury as opposed to buying it on the market so one of the things I
really like about the way Leo is structured and again I have no real
feeling about the token in of itself but the way they’ve structured it is quite
innovative because they’ve now committed to put 27% of future cash flows against
buying back this token on the open market
they’ve also solved for what happens in the event of a liquid liquidation event
so they’ve said if we get the hack money back or if we get this 850 million
dollars back I think it’s like 80% of the money will be used to buy back the
token at market rate so they’ve now started to create at least a social
contract that is somewhat audible because the cash flows of BitFenix are
relatively transparent if you know that the fee structures are transparent where
you’re now tying the future cash flows of the business to an investment today
in a token and it solves for things like liquidity events as well so I think that
is maybe version 2.0 and there’ll be many other iterations but I think we’re
getting closer to a new way of raising capital and something that starts to
resemble what the security token model tried to do just in and I think a more
innovative way so I’m a big fan of what they’ve what they’ve come up with there
so you literally structurally so you really like the fact that these future
cash flows can buy back a token Burnet to reduce the supply on the market
that’s one of the cool features in terms of token economics yeah and putting
aside completely whether it’s legal or not because I would be pretty surprised
if it was but just in abstract yes I think that’s really cool
because what you’ve done is you’ve tied the investment today to the future cash
flow of the business the more money they make the more they’ll buy back and that
will drive the price of the asset up so I think it’s it’s the first iteration of
it in a real way and I think it’s actually pretty pretty cool that’s very
very cool and so putting aside whether it’s the abstract it’s cool so you were
talking a little bit about security tokens whether you know these type of
tokens are they utility or security to securities within of course different
jurisdictions there’ll be different rules applied but do you see Kraken or
are these exchanges eventually having security tokens on a platform and
creating this secondary market of liquidity that everyone dreams of
because as you know now we have lots of issuance but we don’t have much
secondary markets for trading security tokens is that how you see the future or
how do you see the future of crypto exchanges in general I know it’s a very
as it relates to security tokens I can’t speak for cracking at all I have no idea
what their plans are but I think in general I would be very surprised if
they continue forward the way they are because what they’ve done is more or
less as I understand it copied and pasted traditional security models on
top of cryptocurrency in 2014 they tried to do that with gold
issuance they’ve been trying to do that with other things where they just take
it they put it on top of crypto and hope it takes off and it almost never does
and it the things that do take off resemble the past but look different
which is why I think the the Leo type issuance is a it looks a lot like the
security offering but it is different in some ways and I think that’s where it’ll
likely go on the exchange space more broadly it’s it’s really difficult I
think the spot markets are more or less the market shares at least have stayed
more or less stable for the past year or two so it’s difficult for one exchange
to gain outside share over the other unless of course there’s a catastrophe
or if the market grows so I think a lot of the exchange operators are waiting
for the market to grow because it’s very very difficult to grow it organically or
steal share from somebody else so I think it’ll be I think the futures
markets still pretty wide open which is what’s exciting about cracking futures
but I think the exchange is more broadly it’ll be we’ll see what them the market
looks like after the next if there is another sort of wave of adoption we’ll
see what the market looks like I think it’ll be quite different than today so
recently Kevin one influencer that I’d love to fall on
Twitter is Raoul Paul and he just posted something saying that bitcoin is the
best performing asset in the history of financial markets and said that even as
today it would have it has gone up 25 million percent since creation so he was
like super enthusiastic about it but I would just love to hear from you like
what is your stance on Bitcoin as of today and and what makes it if it is
attractive to you what makes it attractive yeah I think the asterisk on
that tweet is that it started at 0 started at 0 but I think bitcoin is it’s
a really cool place right now if you looked at it from sort of four or five
years ago I remember being around the industry and the biggest concern for
most operators in the space was that it would be made illegal that the
governments of Europe and America generally speaking would because of
people that talked to most would say this is illegal you have to stop doing
it and you can’t operate these businesses anymore and that was a real
threat to the entire industry and what’s happened that’s been very encouraging
over the past few years is the governments have legalized it with
regulations and I think a lot of them are actually very sensible or at least
best-effort regulations to try to control this thing while still letting
it grow but I think we’re at a state now where I would be very very surprised if
the US or any major European government came out and said guys no more it’s
totally illegal you have to stop doing what you’re doing right now
so when you take the regulatory risk off the table
you’re now left with technical risk of course that the blockchain could explode
or something could go wrong but that’s also relatively small almost ten years
into the game so I think you know if we look at Bitcoin where it is today
relative to where it was I think it’s it’s a one of the most exciting times
because you now have you’ve taken regulatory uncertainty off the table to
a large degree and you’ve taken the technological uncertainty so now people
are able to invest in building on top of it and able to invest in trying to
integrate it into their lives a little bit more so I think the next 10 years
will be very very interesting yeah that makes a lot of sense and I guess even if
people do try binding it doesn’t really work we’ve seen what happens in China we
see what happened in India people still end up going OTC flying to Hong Kong and
where there’s a will there’s a way no as you say
and absolutely it’s it’s incredible the markets that have sprung up around the
world to meet that demand even if the country does ban it yeah a lot of people
are always saying yeah but what if the government spent it unfortunately they
could limit the cash outs the the Fiat gateways but that’s about it isn’t it
yeah and then people can go peer-to-peer at the end of the day you go up here to
appear which was I guess that was she’s original intention and if you don’t my
commenting you just said earlier in the very beginning of the interview talked
about lightning notes you you’re running lightning notes as of today I did for a
while back in about December and I I didn’t really know what to do with it so
I got it up and running and I was like yeah and then there’s like not that much
to do you could like feed a chicken and you can go to the wall and then when
you’ve done those two things there’s like really like not much else to do on
the lightning Network so I think it’s it’s a massive step forward for the
space and a very interesting new technology but the Lightning Network
today is a lot like Bitcoin was in 2011 2012 it’s it’s difficult to use it’s not
obvious who will use it but I think the people that are working on stuff in this
space are some of the smartest in the industry so it’ll be very interesting to
see what comes out of it and if they do launch stuff I’ll keep trying it because
I think it’s fun yeah a lot of people are telling me the same thing like
people running notes here in London they say the user experience is not good
however they were able to transfer one BTC at 12 cents rather than the usual
one dollar yeah it’s not obvious who has that need because people actually use
Bitcoin but um but it certainly can be done so it’ll be interesting to see
Kevin this has been so useful in terms of understanding the fundamentals of
futures and margin trading market making washe trading some really critical
things that we need to understand in the crypto space so thank you so much for
your great wisdom if you want to follow you what is the best channel to connect
with Kevin Beardsley first of all thank you very much for having me here tonight
it’s been an honor to be to be part of this and I really appreciate your time
best way to get me is on Twitter it’s at Kevin H Beardsley, B-E-A-R-D-S-L-E-Y so just
@KevinHbeardsley is my full name and you always get me there fantastic thank
you so much and for those who are watching out there don’t forget to like
comment if you have any questions for Kevin please put them in the comments
below we’ll try to respond as soon as possible and blast that bail
notification so that get access to all these timeless
interviews thanks again guys and see you next week

One thought on “Kevin – Kraken Futures: Bitcoin futures 101, market makers vs. wash-traders”

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