Loading summary
Transcript244 lines
- [00:01]
A
Welcome to Galaxy Brains.
- [00:02]
B
An infinite amount of cash.
- [00:04]
A
Cash. I'm your host Alex Thorne. The US banking system is sound and resilient. Bitcoin made a new all time high.
- [00:11]
C
If you're not long.
- [00:12]
B
If you're not long, you're short.
- [00:14]
C
Satoshi is going to come on there, laugh hysterically, go quiet. All bitcoin's gonna be erased.
- [00:20]
A
Bitcoin.
- [00:20]
B
Bitcoin's the best crypto. Bitcoin is going to zero.
- [00:27]
A
Welcome back to Galaxy Brains. As always, I'm your host Alex Thorne, head of firm Wide Research at Galaxy. Bitcoin not zero. We have a great episode for you this week. Gil Wasserman, head of prediction markets at Galaxy is our guest. We're talking with Gil about the standing up of the new prediction markets desk at Galaxy. A big publicly announced trade that they did what the institutionalization of prediction market trading might look like and where Galaxy fits in. So very interesting interview with Gil. Also we'll talk with our good friend Bimnet AB from Galaxy Trading as always about markets. It is a very doldrums market. It's hot, it's the summer, equities are off. Bitcoin is below 60k. And we'll find out from Bimnet why that is and where he thinks things are going. Before we get to any of that, I need to remind you to please refer to link to disclaimer in the podcast notes and note that none of the information in this podcast constitutes investment advice or an offer recommendation or solicitation by Galaxy or any of its affiliates to buy or sell any securities. Let's hop right into it with Bimnet Abbi. Let's go now to our friend Bimnet ABB from Galaxy Trading. As always, Bimnet. Welcome to Galaxy Brands.
- [01:29]
C
Thanks for having me.
- [01:30]
A
Here we are and I'm going to come out and call it, call it the summer doldrums. We got rate hikes. Market is pricing now. Gold is below 4000. Oil was supposed to moon, it's at 70. Bitcoin trading below 60k as we record so basically at drawdown cycle low or near it but firmly not bouncing sort of dripping stocks. I don't flat today ish but been down, down, down.
- [02:02]
C
Yeah.
- [02:02]
A
What's behind the doldrums in markets right now?
- [02:07]
C
The handful of things. I would say that the AI trade has kind of gotten a bit saturated on a local basis. There are some concerns about kind of the economic models. Headlines out about OpenAI reducing pricing. Microsoft looking at potentially offering Deepseek a bunch of corporates looking at their know, token expenses and trying to minimize that. And at the same time that these. There are some doubts over the economic models. You've had a historic amount of issuance where you know, one There was the
- [02:53]
A
SpaceX IPO, but they also just raised
- [02:55]
C
what, 25 yards, 25 billion in debt markets. Google had the 80 billion which is crazy, right?
- [03:02]
A
For a, I don't even know what we call Google.
- [03:04]
C
It's hyperscaler.
- [03:05]
A
I mean it's a late stage public company.
- [03:07]
C
Yes. But again it's important they went from buying back a shit ton of shares to like issuing more equity.
- [03:12]
A
Did an atm.
- [03:13]
C
Right, Right, yep. And preferreds Nvidia also tapped the bond markets. SK Hynix came out today saying that you know, they're going to issue equity. And so there is a ton of capital being drained from, from the market
- [03:32]
A
to build the AI.
- [03:33]
C
Correct.
- [03:33]
A
And the data centers and the electricity and the whatever ram and the GPUs.
- [03:39]
C
And so I think that's dampened the market a little bit. It also comes at a time when positioning is very stretched. If you look at some of the prime brokerage data, gross positioning is know well north of the 90th percentile. And net positioning, does that mean, what
- [04:02]
A
does that mean that people are like longer than they've been.
- [04:05]
C
So the gross positioning is, is combines longs and shorts and so just.
- [04:10]
A
They're deployed.
- [04:11]
C
Deployed, yeah.
- [04:12]
A
So not as much cash on the sidelines been drained by trades.
- [04:15]
C
Yes. And so it just means that, you know, hedge funds are running a lot of risk and you know, institutions are running a lot of risk. And then if you look at the nets for semis, they're very high. If you look at the inflow figures into the popular semiconductor ETFs, some of the levered ETFs, they're very high. I think a couple of them had record inflows last week. And so positioning is quite elevated at this time when you know you've got a ton of issuance and some parts of the economic kind of thesis cracking. And so that's weighed on equities a little bit. But what I also think is weight on equities is the lack of any meaningful positive catalysts in the near term. And so you had the signing of the Memorandum of Understanding.
- [05:13]
A
Oil's gotten back with Iran.
- [05:15]
C
Yeah. And the oil's gotten back to pre war levels. And so there isn't much in the way of like a headline that could come out that's going to send NASDAQ 3% higher anymore. So it feels like a tape that lacks a positive catalyst. And then what I've seen from large dealers is that there's supposed to be a ton of equity selling for quarter end rebalancing. And so you've got this setup where the fundamentals have kind of turned a little bit. Positioning is very elevated. You've had technical breakdowns in a lot of places and the flows aren't looking good. And at the same time the monetary backdrop isn't as easy as it was a couple months ago.
- [05:59]
A
You have to be tightening potentially.
- [06:02]
C
We could be. I don't think we will as much as the market is currently pricing. I think if you look at what Lagarde said a couple days ago, effectively the fact that oil's down a ton should help inflation. Should help inflation. And if you believe Warsh that he wants to use more real time metrics and not the metrics that the Fed has historically been using, he wants to go more real time, then I think you could make the case that hawkish expectations are a little bit too aggressive in the US market. But notwithstanding, he definitely tightened financial conditions by coming off as hawkish as he did. And then if you really think about what's been happening, effectively nominal yields have gone up because the Fed was hawkish and inflation expectations have been coming down because oil's been moving lower. You have this dynamic where real yields, which are nominal yields minus expected inflation, have been largely trending higher. And so if you're getting paid a ton of interest over inflation, what's your kind of like incentive to hold something like gold? And your incentive to hold dollars is actually really high now. So the dollar has gone very. It's all dy.
- [07:29]
A
Yeah.
- [07:29]
C
Right. You've had euro traded to 113 handle em currencies, dollar's done great against some EM pairs but generally dollars are bid. And so you've got an environment that's generally very bad for gold, where dollars are rallying as well as real yields moving higher. And you've had a technical breakdown there as well. And some of the central bank flow has been selling. I think Turkey recently sold a bunch of gold.
- [07:59]
A
The gold story is crazy. We're down 20 plus percent from all time high. Now if you look at the chart it does like, I mean it looks
- [08:08]
C
like almost every buyer this year is underwater.
- [08:10]
A
Yeah. And it looks like it could go all the way back to like 3k, like back to the pre rally, like to. Its probably won't. I mean I don't know. I'm not an Expert in this. But I mean, just looking at the chart, crypto traders would be like, oh, here's where the support is.
- [08:25]
C
I think there's reasonable chance that both, you know, bitcoin. I'm sorry, both. Both silver and gold can trade back to close to the 200 week moving averages, which are much lower than here. But long story short, the market seemingly looks a little exhausted.
- [08:45]
A
Exhausted is a good way of saying it because the catalyst has been the AI buildout. Meanwhile, you've got mythos and fable blocked by the government. Yep.
- [08:54]
C
That's also challenging the economic.
- [08:56]
A
It is in my mind because the way the commerce has set up this test, it's unmeatable. Right. They said that if anthropic changes the code to make it impossible to jailbreak the model.
- [09:13]
C
Impossible to do.
- [09:14]
A
That's impossible. And so it starts to wonder, can a new model ever come out under this standard? I don't think under the standard it can. So I'm wondering how we get through that. What is the way through this dispute here. Yeah, but that also should weigh on the, you know, build out and, but, but even if even without that, you know, we've been as a market bullish on the AI build out now for quite a long time. It's like, how much longer can we literally just sustain? You get. You literally become exhausted. You need some. Something.
- [09:47]
C
Yeah, you need. Here's the thing, like if you talk to a lot of equity bulls this year who have been right, they'll say, well, companies are earnings more. Look at the earnings growth. And the flip side to it now is that you've had a re rate of companies where the multiples have increased. And so, yeah, earnings have been good. But you could make a case that the market has properly reflected that already.
- [10:13]
A
Right. You've already run well. And in which case, from a pure momentum standpoint, it's normal to have rallies and cooldowns and rallies and.
- [10:22]
C
Yeah, absolutely.
- [10:23]
A
I mean, a lot of this is just sort of the sentiment we see in the market here. You could imagine in a month or two, just because we had one of these in the winter.
- [10:31]
C
Yeah.
- [10:33]
A
Seek. Freak out.
- [10:33]
C
Yeah. This feels more orderly.
- [10:36]
A
Yeah, it feels sort of like we're just tired. It's summer, it's hot.
- [10:39]
C
Yeah.
- [10:39]
A
We just need like a little take a breather.
- [10:41]
C
A little tired. Yeah, like I am all tired.
- [10:43]
A
You look a little tired.
- [10:45]
C
But anyway, moving back to kind of the bitcoin story, you know, I think all eyes are kind of on microstrategy stretches. Trading almost at $80.
- [10:56]
A
I saw that.
- [10:57]
C
And there's not really a clear way for the MSTR reflexive cycle to begin again. And it's going to come at the expense of something. It's either going to come at the expense of more bitcoin selling or more MSTR selling.
- [11:17]
A
Yeah, it's basically. Or reneging on stretch.
- [11:20]
C
Yes. Like, there's this. There's no good, not at the moment, for owners of, you know, MicroStrategy Capital.
- [11:26]
A
And I've seen market commentators get increasingly agitated about this. There was a story, I think, in Bloomberg today, basically quoting people calling on Michael Saylor to stop buying Bitcoin. Anyway, people are very worked up about this strategy situation here.
- [11:44]
C
Yeah. And I think it's entirely appropriate because really started when he used one and a half billion dollars worth of stretch proceeds to buy back the converts, which
- [11:54]
A
he didn't have to do.
- [11:55]
C
He did not. And so there was a mistake made and bitcoin's paying the price. And so are MSTR shareholders. And so are Stretch shareholders.
- [12:07]
A
Yeah, but this still, at 59, this is where you expected us to go.
- [12:15]
C
No, absolutely.
- [12:16]
A
It just may so happen that at the moment, some of the weight is being pushed by strategy.
- [12:22]
C
Yeah, but this is kind of.
- [12:24]
A
This is in line with what we've been saying.
- [12:25]
C
No, absolutely. And, you know, I think this is a market that without, you know, clarity, is a potential catalyst.
- [12:34]
A
Yeah.
- [12:34]
C
I don't know how much higher it could take you, but that's the only thing that, you know, could feasibly take you, like, reasonably higher at the moment. But absent clarity, the cycle thesis still holds. And you've done a lot of great work, you know, kind of analyzing all the similarities to past cycles in terms of, you know, the on chain metrics, the, you know, Holder base, et cetera.
- [12:58]
A
Timing is uncanny.
- [12:59]
C
Uncanny.
- [13:00]
A
Don't know how to account for that in my mental model, but it's empirically
- [13:04]
C
empirical and, like, I'm a believer in it and I keep it kind of simple.
- [13:08]
A
Yeah.
- [13:08]
C
Like, we bought them in, like, October, late September.
- [13:12]
A
That's your prediction. Yeah.
- [13:13]
C
And I. I think we go below 50k at some point. And at that point, and if once you're in October and you're at, like, really low levels, I think you got to take a stab at this.
- [13:24]
B
Yeah.
- [13:24]
A
I mean, I think we have been very clear that it's not the end of the bitcoin story, but this is. Well. And yet the funny thing is, too now, you know, the last two times we went to 60 in February, then a couple weeks ago, it was A bit more violent dip to 60 and then a rebound today in particular, it's really just a orderly bleed.
- [13:45]
C
It's like a large twap going through.
- [13:46]
A
It does it looks like it. And you have to wonder, though, and I think this is the other reason people are focusing so much on strategy. Who is left to sell bitcoin? All the tourists have sold. I think that's pretty clear. But we know that strategy has a pile and they appear to need cash. So I think people are wondering whether they are selling or some have even said that they need to basically sell for the cycle to bottom, like they got to rip the band aid off. I've seen some commentators.
- [14:15]
C
I think that.
- [14:15]
A
I don't know if that's true. I think it's feasible.
- [14:17]
C
I think there's a lack of buyers as well, 100%, but I think there's not selling there. You're right. Like, a lot of the tourists have already sold.
- [14:25]
A
Right. So, I mean, it can still obviously go lower. And, you know, you've. You've called for lower. The report that I put out suggested that the base case probably is lower. But at the same time, like, I. I look at this market right now and I don't see anyone who's planning to sell bitcoin having not already done it really yet. So that's why it feels it's. It's very anemic in, like, an apathetic market in Bitcoin. There's for sure a lack of interest in the broader market in Bitcoin at the moment, but I also don't see a lot of panic, you know, So I feel like that's sort of just where we find ourselves.
- [15:01]
C
Yeah, just how the cookie crumbles.
- [15:04]
A
Well, my friend, Bimnet Abibi from Galaxy Trading, as always, thank you so much.
- [15:08]
C
Thanks for having me.
- [15:09]
A
Let's go now to our guest, Gilbert Wasserman, head of prediction markets at Galaxy Trading. Gil, welcome to Galaxy Brains.
- [15:14]
B
Hey, how's it going? Happy to be here.
- [15:16]
A
So you guys were in the news recently. You structured a $10 million trade, a prediction market trade over the counter with Arca, a crypto fund relating to the likelihood that the Clarity act would or would not become law before the end of the year. What was that? Tell me about that story. What did you do?
- [15:37]
B
I'll take you through it. So basically, ARCA came to us. They said, we believe that Clarity is going to pass and we're going to position our book in such a way where we should benefit if it does. However, we're thinking about what is the appropriate hedge vehicle here. And they looked in options markets, they looked kind of around at potential proxies that they could use to hedge and looked at prediction markets and thought, you know what, this actually is probably like the best way to protect our portfolio to the downside. So they came to us, we structured the trade, we transacted OTC and now we're in the trade.
- [16:20]
A
So they're a crypto fund. They're long. I don't know what's in their book exactly, but they're long crypto stuff. And they want to buy downside protection. Basically.
- [16:30]
B
Yeah. So I mean, for any prediction market trade, you can either buy or sell yes or no. And hypothetically buying yes is the same as selling no. So it gets a little bit complicated sometimes.
- [16:41]
A
But they wanted to buy no. The clarity will not become law because they feel that if it doesn't become law that would negatively impact their crypto portfolio. So they want to own it as a hedge, basically.
- [16:51]
B
Yeah, exactly. It basically means that if clarity does not pass, then their other portfolio is potentially going to suffer as a result of that.
- [16:59]
A
That's what they think.
- [16:59]
B
That's what they think. And then there is a. And then they get a bag of cash which in this case is $10 million if it does not pass. And so that's why it's kind of being used as a hedge in that way. What's interesting is we are seeing more and more institutional use cases for this. And what's kind of especially interesting is that they tend to be pretty inventive in the way that, you know, people are trying to use prediction markets at an institutional scale to structure these trades. And that's, and that's kind of where we come in.
- [17:29]
A
That's an interesting point because I've got plenty of follow ups here. I guess let me start with why not just trade that on Polymarket? Arca?
- [17:36]
B
Yeah, absolutely. So there's, you could certainly, you could certainly trade on.
- [17:40]
A
There is a market. I follow.
- [17:41]
B
Yeah, there's absolutely a. So this was referencing a Kalshi contract, but you know, there's a couple parts to that. If you do it on Polymarket, you know, you have to have, it's, it's a defi infrastructure. Like you have to have an address there potentially that could be tracked that is not the same on Kalshi. And one of the things we could have done is we could have printed that trade as a block trade on Kalshi, which effectively would have been the exact same risk transfer to a Certain extent, this one happened to have been done. Otc. There's a number of reasons why people prefer OTC versus doing in a listed market. But when we say otc, I feel like OTC is kind of a misnomer a little bit in prediction markets, OTC over the counter. A lot of the people that I talk to think that that just means block trading, AKA you and I agree to a trade and a price and trade details and then we just block it on exchange. But in that construct, both of us are actually facing the exchange from a credit risk perspective.
- [18:39]
A
I see we're just agreeing to the trade and then we're funneling it through the exchanges pipes. If we do it that way.
- [18:45]
B
Exactly. What this is is OTC trade where it is our credit versus our counterparty's credit. And that mechanism is governed by a traditional ISDA contract. And what's cool about that is we can offer this service kind of out of the box effectively where if you have an ISDA with Galaxy, you can just, you know, this is part of the suite of products you can trade immediately.
- [19:11]
A
Like other derivatives as well, basically.
- [19:13]
B
Yeah. I mean, you know, any sort of derivative transaction.
- [19:15]
A
So we're just taking each other's. ARCA and Galaxy are just taking each other's credit in a bilateral contract with each other. And if one, if it goes one way, the other party is contractually obligated to pay and if it goes the other way, the other party pays the other.
- [19:29]
B
Right, yeah. So basically the counterparty posts IA or initial amount, which in this case is equal to the. Which is equal to the price traded at, you know, times the number of contracts. And that stays with us Galaxy. That's the collateral.
- [19:43]
A
So some collateral is posted.
- [19:44]
B
Yeah, exactly. And then if you know that's normal
- [19:46]
A
for any is to sort of trade.
- [19:48]
B
Oh absolutely. That's like.
- [19:49]
A
That is like a requirement.
- [19:50]
B
That is. That is a requirement. Yeah, for sure. Yeah.
- [19:53]
A
So. And then. But like what. So you talked about the credit risk of facing the exchange, the privacy potential or even the lack of. If it was polymarket. Maybe you don't have the DEFI infrastructure actually. But like, you know, I think the poly market on Clarity act into law this year. I don't remember the number, but we're talking like low millions in total contract volume. Is that Also, I mean, 10 million I think would be by far the biggest trade on that.
- [20:17]
B
I mean, for sure. I mean when we did it on Kalshi, it was, I think there were like 2 million contracts traded at the time. So you know, this trade that we did was five times the size of
- [20:26]
A
the total volume of the market.
- [20:27]
B
Total volume of the market. And from our perspective, we're the sell side in this case. Like, we now need to find a way to hedge out this risk. And I think that's really what we're trying to do in our seat, which is there's a difference between event space and outcome space. Event space, does a thing happen or does it not outcome space? What is the reaction to that event either happening or not? Traditional finance and tradfi markets are all built on outcome space. And sometimes outcome space can be a little bit tricky. I mean, things think about the reaction to the 2016 election think about is good news, bad news for a CPI print. And the tough thing about this is that a lot of institutional players actually care about the event itself, but are forced to transact in outcome space. And what we're effectively doing is a risk transfer. We're going to give you the event space. We are going to hedge ourselves.
- [21:26]
A
We'll handle the outcome side, we're going
- [21:27]
B
to handle the outcome side. But, and what we, and kind of our specialty is the fact that we have an ability to be pretty sophisticated in what we can do with the hedges on the outcome side. I mean, I'm, I also.
- [21:39]
A
But that's, and that's our business though, right? Whatever we want. That, that, that's principle on your side. Yeah, we take it you can hedge however you want, not hedge like whatever you want.
- [21:49]
B
Absolutely.
- [21:49]
A
And that's, that's nice because for the, for the counterparty, because they can come with like really bespoke. The other thing I want to talk. This is connected. They can come with a very bespoke question. They could say, I'm a soybean distributor and I want to buy like, you know, typhoons in South America.
- [22:07]
C
Right.
- [22:08]
A
In case, like my entire business is disrupted, I'll at least own some hedging there. And in the past, what do they have to do, like, you know, short like, you know, Brazilian, you know, gas or something to some proxy. And now they can be much finer in detail. And they're basically saying, you know what you, Gil, figure out how to cover yourself on that.
- [22:25]
C
Right?
- [22:25]
B
Yeah, absolutely. There's one thing I would point out there, which is for bespoke contracts like that, there have been examples of those getting listed on Kalshi to then be block traded.
- [22:34]
A
Interesting.
- [22:35]
B
And that's obviously super interesting. The thing I would say is we require for our OTC contracts to have
- [22:43]
A
a listed equivalent, but there has to be one somewhere.
- [22:46]
B
Yeah. And the reason that is is because, you know, we want someone else to make the final decision about whether.
- [22:52]
A
I was going to ask about this. Yeah. So on the outcome, I don't want to confuse it. On the. Like the Oracle. Yeah, the event outcome. In this case, we. This contract relies on Kalshee's determination.
- [23:05]
B
Yeah, exactly. And we do not want to be
- [23:07]
A
the Oracle, I was going to say. So that would. That at least forever. Is it structural, is it a business decision on our part right now that we don't want to ever offer a pure one that's so bespoke it's not listed?
- [23:19]
B
I mean, could we.
- [23:20]
A
I mean, is it possible? Or maybe it's impossible? I don't know.
- [23:22]
B
I mean, it is potentially possible, but we would also have to go through the, you know, the process of setting up an Oracle ourselves. And I think that especially if you're doing something bilaterally, it's really great to have a third party to be able to do that. And also the other part of that is you also want to have a listed price. Like the counterparty is going to want to say like, hey, what is this thing worth right now? Right, right. And if it's just like, okay, it's like 40 cents today and it's either going to be zero or 100, that doesn't really. It's difficult to think of that as a hedge if you can't observe the intermediate price.
- [23:54]
A
You know, there was in trade and some other ones, like, over the years, but in general, like pre Polymarket, pre Kalshi, there really weren't like listed prediction markets for event contracts. Were these not being done over the counter at other places then?
- [24:07]
B
Yeah. So that kind of fell under the umbrella of insurance more than anything. And, you know, you can go to, you know, like Lloyd's of London and get whatever contract that you want.
- [24:17]
A
I see.
- [24:17]
B
And that was done there traditionally. And that's obviously another model for downside protection. Yeah, it's another model. And I mean, there's so much interesting stuff that you can do, specifically from an insurance standpoint, I would say, where, hypothetically, if someone who might not have access to the insurance markets needs to hedge a fundamental risk to their portfolio, one of the ways they can do that is via prediction markets and structure these sorts of trades.
- [24:45]
A
Yeah, that makes sense. So it has been done before the listed prediction markets existed, but now that they're here, it's what, much more possible.
- [24:54]
B
Yeah, I mean, it's. So first of all, it's, I would say, the liquidity and price discovery is probably better. The other thing that I would say about that is let's say you didn't want to go down the insure. Let's say you didn't want some super bespoke product. Let's say that you thought that it was, it was fine to hedge an outcome space as opposed to event space. You would need to achieve the sophistication that we kind of deal with on a daily basis. You need a complicated basket of stocks. You might need to think about options. And for a lot of people, they don't really want to spend their day thinking about their like theta bill. Yeah, I do that all the time as a day job. Yeah, absolutely.
- [25:33]
A
Yeah.
- [25:33]
B
And so the idea there is that entire kind of headache of dealing with outcome space is effectively stripped from the end user. And it is our job to effectively manage principally the event risk and the outcome risk.
- [25:49]
A
So do you envision a lot more galaxy counterparties coming to us for this type of trade?
- [25:54]
B
Yeah, I mean, we've seen a number of different trades come through us, be it on the geopolitical side, the economic side. So it is very interesting, you know, the types of clients that we've seen here. What I'm also excited about is I do truly believe that the future of this industry is going to be with large scale, like, you know, corporates in the world where they have very specific event risk that they need to hedge out. And I actually think that this is a, in general, a huge positive for the market because you can make better business decisions if you know that you have an out somewhere. And I think that that's something that's really powerful that a lot of people haven't potentially considered. Just to give an example. And we're not transacting in sports space yet. But I think a good example is the falling. Let's say that there is a. Let's say that there's an advertiser who's sponsoring a team, I was about to say in the World cup, but no advertisers there. Just on the field, um, you know,
- [26:59]
A
like an NBA team.
- [27:00]
B
Yeah.
- [27:00]
A
Like they would just won the NBA Finals.
- [27:02]
B
Yeah, absolutely.
- [27:03]
A
And then forget who's on their jersey.
- [27:05]
B
But someone is some Abu Dhabi. I feel like there's, there's, there's something on the jersey.
- [27:08]
A
Yeah.
- [27:09]
B
Anyway, you know, let's say that they get a bonus for making it to the NBA Finals. You know, that is. Who knows what that the what. Who knows what the present value of that is? Because that's so governed by the probability of them winning or not. So much better to be able to go hedge that in prediction market space and then go and like, root for your team.
- [27:29]
A
Yeah.
- [27:29]
B
As opposed to being like, oh, my God, like, they're about to win. Like, I'm about to. I'm about to like, write, make or
- [27:34]
A
lose a lot of money.
- [27:35]
C
Yeah.
- [27:35]
B
I'm about to write like a $50 million check.
- [27:37]
A
Yeah.
- [27:38]
B
Like, let's, let's.
- [27:39]
A
I've even thought. I know that, like, you know, there's a lot of dispute, obviously, about sports event markets, because historically in the US and it's not the same everywhere, but that's been considered gambling and it's been regulated at the state level, obviously. And we won't. I think the audience knows about this dispute. The CFTC chairman argues that they're event contracts and covered under the Commodity and Exchange act, which is the authorizing statute of the cftc. There's literally lawsuits going on between the federal government and the states and between, you know, I think Coinbase and Kalshi and the states. There's tons of them. That's out there in the thing. But. And one of the arguments that the people who are opposed to allowing event contracts on sporting outcomes, one of the arguments they make is that it is gambling and that there's no. It's purely speculation that there's no utility. The argument you just made about the advertiser is a counter to that. I've thought it's even simpler. Like, you own a hot dog company in New York City and if the Knicks go far, you make a lot of money, and if they don't, you make a lot less money.
- [28:44]
B
Yeah.
- [28:44]
A
Or you're a T shirt vendor. Like, there's plenty of reasons, like why you would hedge like a World Series or an NBA Finals outcome. I grew up in Boston. You know, if the Red Sox do or don't make it to the playoffs, like, that impacts businesses all over the state. Yeah, absolutely. And so I think it's totally reasonable, frankly, to think about them as events and not sports. I know that's a specific. There's much more to the prediction market conversation than the sports part.
- [29:10]
B
No, no. But the thing that I think is really interesting and I think it highlights what is a little bit difficult about other contracts that exist that can only be thought of as event contracts.
- [29:21]
A
Right.
- [29:22]
B
Is that sports have a really good oracle.
- [29:25]
A
Yeah.
- [29:25]
B
Right. You know, what the score is. At the end of the day, that settles, you know, how many rebounds someone gets.
- [29:30]
A
It's even better too, because they have they literally have referees on the field.
- [29:33]
B
Absolutely.
- [29:33]
A
To help ensure that it goes fairly.
- [29:35]
B
Yeah. There is an arbiter of fairness that is there. Right.
- [29:38]
A
You might hate on the television.
- [29:39]
B
Yeah, absolutely. And you can see all of it. The tough thing that I think is not standing in the way of like broader institutional adoption, but is something that definitely needs to be solved over time is like, how can you like trust the Oracle? Yeah, effectively. And especially when you get into contracts that aren't as cut and dry.
- [29:57]
A
Even like weather, you know, it will rain 5 inches. Well, which specific rain meter? Like, you know.
- [30:02]
B
Yeah, there was that, Was there a
- [30:04]
A
microclimate right around that meter that caused it to be more or less, even though the city saw a fire?
- [30:09]
B
Sure. To be clear, we also have this in traditional markets where there is a settlement like reference rate for a lot of different assets. So that is firmly agreed upon and that is where it will settle to. There's kind of two ways that people have approached this within prediction markets and I actually don't know who the winner will be. Either you can have a completely centralized, you know, board that just says this is yes or this is no. And if you don't like it, then, then the course are at your disposal to argue us, sue us.
- [30:43]
A
Yeah.
- [30:43]
B
And like, and, and, and you know, that's part of, that's part of life.
- [30:46]
A
Yeah.
- [30:47]
B
The other way you can do it is a decentralized mechanism and that requires, you know, some voting and you know, the appropriate like utility dynamics and stuff. And I actually don't know which one of those is going to eventually win out. The one that makes the most sense to me at the moment, I would say is closed door, black and white. Yes or no. But I think that over time this concept of almost like a decentralized mechanism with the right incentive structure could actually end up potentially being like the winner.
- [31:18]
A
If it could work, it's clearly better, but it's got a checkered history, you know what I'm saying?
- [31:24]
B
For sure. I mean, listen, as far as I'm concerned, I don't Right now, like a lot of the conversations we're having in prediction markets are conditional upon this being massive in the future. This is going to be something that's useful. So as it stands right now, we're in the middle of, you know, navigating this, you know, difficult environment where it's like, okay, this might work at scale, but what happens, you know, as you accelerate to 100 miles per hour, like, how does the machine work at like 30? Yeah. So it's Very cool. And it definitely provides a lot of interesting opportunities. A lot of headaches, for sure, but it is exciting, for sure.
- [32:03]
A
What about. Have you thought about the various, I'm going to call it market manipulation problems? Sometimes it's a big bucket here. And it means several different things. We've written a lot about this on the research team. Insider trading in prediction markets or market manipulation. There was the US soldier, the Navy SEAL who traded on the. I don't remember if it was Pauli or Kelshew, but traded on one of them about the Venezuela raid. While. I think either. Right. While he was on the raid, there was an Israeli soldier, I think two, that knew of a forthcoming Israeli attack on, I think, Hezbollah and bet on that. These guys in those instances had private information, I'll even say. But they weren't the ones causing the event to occur. There's others, like mention markets where if you. Let's say there's a market that says, Gil's gonna say yep, in one minute. Yep. Right. But if you're. I would say there's layers to this, like inside knowledge versus actually the capability to cause the outcome to go in your favor and betting on it in general, like, just, you know, how is this different? Does this open a lot of doors? And, you know, the CFTC has a comment, a request for comment right now that includes many questions about this, how it should be approaching that.
- [33:24]
B
Yeah, it is. So one of the things that definitely happens is, you know, people are required to identify themselves on a lot of these platforms. So you should be able to trace back quite easily, like who is going to, you know, is this person insider or not? But I actually think that this is like a. For the mentioned market insurer, if you are going to directly affect the outcome. That's. That's kind of cut and dry to me.
- [33:46]
A
And that. Yeah. But that one's also kind of like, interesting because let's say I'm giving a speech. I mean, that's really dumb. To be clear. These are small markets that have no real purpose. Right, Right. But you open a market on whether or not I'm going to say X, Y, Z, I mean, it may matter if you're the president or CEO or something talking about your company. But like, if I'm giving a speech and you open a market that says, you know, Alex will say truth, Bitcoin, whatever. Now, because I'm aware of it, I'm. Now you're infringing. I'm not able to say those words or I manipulate the market.
- [34:16]
B
Sure.
- [34:16]
A
That's like infringing on my First Amendment rights.
- [34:18]
B
Yeah, that is a. That's a really tricky one. Yeah, it is. That is a right. Yeah.
- [34:23]
A
I mean, you could just open a mentioned market for all of your enemies and all the words that, you know, they want to say. And now if they say them, they're manipulating a market that they have no involvement in.
- [34:33]
B
I mean, yeah, I think that it's going to require a constitutional lawyer to really get to the bottom of that one. But I actually think the information question is actually really, really interesting. And you could argue, and this could be like a 0 to 100 and we're at 30 right now problem. But you can imagine in a really, you know, in a really liquid, deep market for a lot of these things, you know, you can think of price as being an indicator of, you know, information, like all the available information in the world from a.
- [35:04]
A
We call this information markets.
- [35:05]
B
Yeah, well, I mean, you know what
- [35:06]
A
Robin Hanson described, He said there is the inventor of prediction markets. He said there is no such thing as insider trading in information markets.
- [35:13]
B
Well, yeah, that's kind of my point where hypothetically, if you have information, then you are. And you are not outsized relative to the total size of the market. The additional information that you have is actually probably good signal to. For the rest of the world.
- [35:30]
A
And like, this is the purest position about prediction markets, is that they incentivize people with information to effectively share it with the market to everyone's benefit.
- [35:40]
B
And it's. And, and from my perspective, I'm not really sure, you know, what the right. What the right decision is. But like, these are. These are really like kind of deep philosophical questions about all this.
- [35:51]
A
I agree.
- [35:51]
B
And I think. And it's one of the. It's one of the cool things about the space and in dealing with the space that is so nascent.
- [35:56]
A
Yeah. There was another. Just another example that's not mentioned markets. It's not a soldier. There was a market on one of the prediction markets. On how many seconds long would the national anthem be at the super bowl and someone drove to the stadium and sat outside it for like the day or two before listening to them rehearse and timing the thing and then apparently profited on that market. Like, is that unfair? Like, is that inside information? Surely they had better information than someone who. I forget where it was. San Diego or wherever it was this year. Surely someone in Finland was unable to get that information. Sure, but it's not inside. They weren't the ones singing the anthem. And they weren't even an employee of the super bowl halftime show or whatever. They just had better information. Like, I don't think that's. I think that's pretty clearly okay. That's like, you know, you just did better research. Or if you think about hedge funds, they buy satellite imagery of like oil tankers and they know where the oil is better than the average investor. Is that inside information? No, but it's interesting.
- [37:00]
B
There's, what I would say is like, there is definitely a, there's definitely a spectrum there and it's interesting to see, you know, any new asset class is going to have these, you know, edge cases. And the market is really good at kind of pushing people to an edge case.
- [37:13]
A
Yeah.
- [37:14]
B
And, you know, I think, I think it's, I think, I think it's just fascinating to deal with. And you do deal with these questions a lot.
- [37:21]
A
Mark Hochstein, the VP and editor at Galaxy Research, submitted a comment letter to the CFTC about this on our behalf. And we didn't go all the way to the purist position, but we behooved the commission to consider the value of information markets and that sort of purist idea when conducting rulemaking around these questions. So again, I don't know where that line lands, but we do. Like, if you rule out all knowledgeable parties from participating, then you actually relegate them to purely speculation, which degrades their value and it makes them not the innovation that we know they've been. So somewhere, I don't know, it is tricky. They're going to have to figure this out.
- [38:03]
B
The other thing that I think is pretty interesting, and I think this kind of ties into what we're doing in prediction markets a little bit, is again with the idea of price being the total sum of knowledge, like efficient markets hypothesis, total sum of knowledge that exists in the world about a particular issue at a time. So right now, a lot of people that I talk to use prediction markets as almost like a toy example, a little bit. Like they use it to calibrate assumptions. They use it to be like, okay, so you say that this trade has this expected value. But, but let's say that you.
- [38:37]
A
Polymarket says this, though.
- [38:38]
B
Polymarket says this and therefore that's wrong. That's what it's being used for. It's kind of a toy example right now. So the two markets are very much disparate. One of the cool things about this is when we go and hedge out some of this event risk and outcome space and we leverage either volatility trading in Traditional markets or spot trading in traditional markets. This sort of process is in order to hedge out our risks. We are affecting prices in that market. So we kind of act as the transmission mechanism from event space into outcome space and that kind. And what's cool about that is it's kind of bringing prediction markets in general into the fold of markets writ large.
- [39:18]
A
Yeah, you're like the connective tissue between the event and the outcome in that spot. If you hedge it with stocks, for example, then some of that risk from the prediction, the event contract is effectively being expressed in stocks.
- [39:30]
B
Yeah, absolutely. I think that as these institutional use cases increase, we are going to get to a point where the effect of hedging prediction markets in traditional markets is going to actually have a real tangible impact in those markets themselves. And that's going to be pretty cool.
- [39:52]
A
So do you think that we're going to start to see. By the way, this is sort of a tangential question but like Fidelity, Schwab E Trade, are they going to start offering predictions market stuff? We haven't seen anything from the tradfi banks and brokerages in prediction markets.
- [40:07]
C
Really.
- [40:07]
A
Not really.
- [40:08]
B
So yeah. And as a kind of like go around from this, we have seen a bunch of ETF providers seeking to offer those sorts of prediction markets packaged as like an etf. So that's something. And so that's kind of like a back way into it effectively.
- [40:25]
A
That's true.
- [40:26]
B
My guess is the platforms where you're going to be able to trade prediction markets are going to be numerous. There are many, many platforms.
- [40:35]
A
I was going to say, I think Interactive brokers has had it for a long time actually. I know there were IBE contracts on the presidential election in 2024.
- [40:44]
B
Okay, well there we go. And also, and also Meta just came out saying that they were going to build a market.
- [40:50]
A
Yeah.
- [40:51]
B
So what I would say about this is I think that what's most important here is to try to separate the pure hype. We're just going to get into this space because it's like the hot new thing and I want a press release and that sort of thing and really try to take away the kind of important part. I think that our I would say strategy into this has been pretty measured. So you know, we had, we've been having a look at this for a call like the past like six, seven months. And from my perspective there's kind of like three ways you can really make money in prediction markets. You can be the exchange itself, you can be a market maker on that exchange or you can take principal risk
- [41:30]
A
or you can be. Right, you can take bets.
- [41:32]
B
Yeah.
- [41:33]
A
Or trades.
- [41:34]
B
Yeah, you can do that. Exactly. You can do all that sort of stuff. And you know, I think that a lot of people so far, I think that the exchanges and the on screen market makers kind of have that sewn up. And so I really felt that the third box, which is taking principal risk and being creative with hedging, et cetera, was something that kind of fit very well into the galaxy. KPIs of we have a big balance sheet and we know how to take principal risk.
- [42:00]
A
That's right. I mean gdt, Galaxy Digital Trading does take principal risk in its trading and that's why it can facilitate such large trades. For example, the 80K Bitcoin whale, you can't take that down on a pure agency basis. If you flood the market, the listed markets with 80,000 bitcoin, see what happens.
- [42:22]
B
And I think that that exact type of creativity that we start to think about before Galaxy I was trading volatility relative value. And in that market you, if a client comes in and they say, hey, I want to buy this particular thing, your job is to say there is something, I want to sell more involved space against it. And this kind of creative hedging, et cetera, that has embedded principal risk is our bread and butter.
- [42:49]
A
That's the most interesting, it sounds like probably the most interesting desk, not just the new prediction markets desk, but just the volatility trading. This must be why all the volume traders I know are such clever people. Because it's, it's, it's a exciting thing to structure, right?
- [43:03]
B
It is exciting.
- [43:03]
A
Selling spots like hey man, you want to buy some bitcoin? Like here it is. Right, but like principal derivatives trading is a whole different ballgame.
- [43:10]
B
Yeah, absolutely. It's why, it's why my health has absolutely fallen off a cliff. Mental health as well. Shot.
- [43:18]
A
Come on.
- [43:19]
B
But no, no, I'm just kidding. But like, you know, it's, it is the ability to trade in derivatives or in event contracts, you are dealing in a higher dimensional space. And the reason that I actually really like this is that both sides can be winners. Where if you're taking something down, just one versus the other and there's no element of like a hedge, like it is a zero sum game, one person is going to win, one person is going to lose. That is just how it's going to work when you're dealing in, across different dimensions in derivatives with respect to Greeks, for example, or in event contracts with respect to I'm going to deal in outcome space as opposed to event space. In both of these states of the world, the client gets good liquidity. They get the trade that they want in the size that they want. And from our side, we're also happy because we take in a certain amount of spread to put that on. We deploy that spread in traditional markets or across a volatility surface, and we manage that basis risk principally. And that's really the core of everything that we do. And it makes sense that the prediction market desk would come out of the derivs desk.
- [44:26]
A
Yeah, it does. Well, this is super fascinating. I can't. We're going to have to have you back on as the prediction market ecosystem develops further, which is definitely happening. And congrats on the, on that announcement and on the operation of this new desk. Gil, thank you so much for coming on Galaxy Brand.
- [44:43]
B
Absolutely. Thank you so much for having me.
- [44:50]
A
Thank you for listening to Galaxy Brains, the weekly podcast from Galaxy Research. I'm Alex Thorne, head of Firm Wide Research at Galaxy. Follow me on X at intangiblecoins. Follow Galaxy Research on X, L, X Y Research. Read our written reports@galaxy.com research and don't forget, if you like Galaxy Brains to like and subscribe on your favorite podcast platforms like YouTube, Spotify, Apple Podcasts and more. We'll see you next time.