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- [00:00]
Joshua Lim
The underlying bid behind the bitcoin is a lot of these corporate treasury vehicles that are buying up bitcoin and Eth and Solana. So that is new capital that's coming into the space and there's a lot of old capital I would say that's rotating out of crypto.
- [00:22]
Jen Senassi
Hey everyone, I'm Jen Senassi here with Andy Bear and this is your weekly markets roundup. Joining us for today's show is Falcon X Global co head of markets Joshua Lim. Hey Josh.
- [00:32]
Joshua Lim
Hey, how's it going?
- [00:34]
Jen Senassi
Not bad. Thanks for joining us for our weekly roundup. Now we gotta start here. I know you've noted that implied volatility in crypto is near historic lows. Talk to us about what's driving complacency.
- [00:47]
Joshua Lim
Yeah, and you know, there is some cyclicality to markets. As we all know, the summer months tend to be a little bit slower. But I think there's something a little bit bigger than that that's kind of driving this, this very range bound market in bitcoin and majors, which is that of interest and kind of the speculative capital that drives crypto market activity has started to migrate away from crypto. Right. We're seeing a lot of excitement amongst investors and even amongst people who were previously trading altcoins. You know, the sort of crypto degen community in trading these new equity products that have crypto exposure. You know, biggest headline there is probably the circle IPO that launched a couple of weeks back. We got to see some of the sort of, you know, 10x type returns that we haven't seen in crypto and altcoins in a long time in equities. So I think, you know, and, and you, you know, there's a much easier access channels now for retail investors to migrate from crypto to equities through things like Robinhood and the apps where it's now very easy to migrate funds from one category to the other. So on our side I think we, we're seeing the, that as a major trend that's kind of driving the range bound side of the markets. We're also seeing the fact that you know, there are a lot of early adopters in bitcoin and large holders that are taking advantage of the price of bitcoin being up here. And obviously the underlying bid behind the bitcoin is, is a lot of these corporate treasury vehicles that are buying up bitcoin and Ethan Solana. So that is new capital that's coming into the space and there's a lot of old capital, I would say that's rotating out of crypto.
- [02:32]
Jen Senassi
So we're sitting in the summer months. We're heading towards the second half of the year. It sounds like you're saying corporate treasuries, equities, probably going to drive the narrative there.
- [02:41]
Joshua Lim
I think that's right. We're seeing more and more. The idea is let's create real world assets on chain, right. Either like tokenized equities or perps linked to equities, things like that. That's kind of where a lot of the builders are focused these days. That is taking a lot of eyeballs off the traditional areas of speculative fervor, which is, you know, altcoins or meme coins, even low market cap things. And it is becoming much more of a dominant trend going forward. I think that on chain markets are no longer just about crypto assets. They're like prediction markets. There are these stock linked instruments. It's much easier to make real world predictions about events or about future macro developments in these other products rather than it is to buy bonk or doge as a way to get leverage to kind of market speculation.
- [03:43]
Andy Bear
So this is fascinating because we've been watching this 10% Bitcoin range which, except for that, that one day where we had our military event, we've held this kind of 101 and a half to 111 and a half range for I've, I've tracked it since May 7th. So this is like way this is past two months and you, you've suggested. I think, I think I agree, right. That you've just had supply and demand meeting pretty neatly. Right. 12, 13 weeks of ETF inflows versus some OG whales coming in and lightening up into it. And also, and also crypto treasuries buying into it. So you know, where do we exit? Right. The options market usually is the smartest here. Right. Is the options market betting that we, that we launch out of here on the upside or is it downside protection? Which of these two, I guess forces of supply and demand are greater and more persistent.
- [04:37]
Joshua Lim
Yeah, I think generally speaking there is very little appetite to take any kind of leverage or buy protection or express even upside views on crypto right now. And partially I think people are waiting for the summer months to subside and people to come back, you know, post Labor Day.
- [04:56]
Andy Bear
But I also, I thought those days were over, right. That you know, civility go to go out to the Hamptons and come back. Everybody will go out and we'll just kind of like call a ceasefire on markets but is that just. You're saying that that civility has come back this year?
- [05:11]
Joshua Lim
I think that's the natural consequence of Bitcoin becoming a major asset class, right? That sort of portfolio managers treat it as they would any other macro asset class. And that's what we're seeing now, that cyclicality. But I would say there is, there's other, there's another fact, right, which is basically there's a lot of supply coming from people looking for yield. And yield is no longer present in the less risky basis trade, right? Like normally people would be financing a lot of the speculators that come in and want to take lever views on Bitcoin and ETH by going long perpetual swaps or long futures. That that has always been the persistent backdrop in crypto, that demand for leverage. We've seen a lot of that, a lot less of that recently. And so if you look at where basis is trading, which is where the premium of futures versus spot prices, that's compressed a lot. And what that means is actually there's not a lot of demand for people to go long on leverage. Which means if people want to generate that yield by going short or going short the basis, they need to figure out another route. The other route is selling options, right? If you sell an option, you're basically betting on the underlying asset not moving. And you're also creating a dynamic where the more people are short options, the less likely there will be a big move in the market. Because the dealers who buy these options have to hedge their position. And they hedge their position by selling when the market goes up and buying when the market goes down. So it's a self reinforcing thing, Crypto staying in a very tight range because of this. One really good data point that we keep coming back to on the desk is we look at overriding ETFs or sort of these like exchange traded products like MSTY. The underlying asset of that is microstrategy stock. But it's it to enhance the yield associated with holding long microstrategy stock, they sell options on MicroStrategy and the size of that ETF is $5 billion. So if you think about the amount of open interest and supply and short dated bitcoin options, a lot of that is coming from these types of instruments. Even though MicroStrategy is not Bitcoin, if you're holding a long microstrategy option position and you're a dealer and you're suffering a lot of decay from holding that position, you're selling bitcoin options against it. So that's where a lot of this like sort of range bound, you know, environment is coming from.
- [07:41]
Andy Bear
The basis part I think is non toxic, right. That's just a financing cost. And as you point out, right, if, if, if the world is selling options for yield then then dealers on the other side are going to tend to reinforce that, that, that the container ship, right of the, of the range. But at a certain point volume gets too cheap and, and nobody's long volume, everybody's shortfall. And in volume space and gamma space, you know, you create this kind of a coiled spring, right? You create a little bit of danger. Whereas if something knocks bitcoin out of the range then things accelerate I guess, you know. And that you've seen this happen in traditional markets too, right, where everybody just gets super ultra complacent, like a super frozen lake. Is there a danger that the exit out of the range is exacerbated by just nobody positioning and the whole street being short gamma?
- [08:36]
Joshua Lim
I think there is some risk of that. I think generally speaking, I mean the dealers have a lot of supply right now. So even if there were a large move, it would be more of a grind higher than sort of a gap move. I think. By the way, I think we're talking a lot about the majors but there's a lot of supply also in altcoins and that's something we see a lot on our trading desk which is a lot of the large, large holders of these altcoins that have for the last year or so underperformed Bitcoin. Bitcoin dominance is near highs, all time highs. They are also overriding those altcoin positions through trading desks like ours. Even though those aren't listed instruments. They trade bilaterally in the OTC market. And so yeah, the same effect dominates there. I would say there's a little bit more risk in some of these altcoins of what you're describing, which is a short squeeze event. I think there's some assets. We've already seen a phenomenon like this happen on ETH earlier this year, right. You bounce very hard off like the 1500, 1600 type range because it was such an under owned asset. And you had these upcoming catalysts of these corporate treasuries starting to not only hold bitcoin but starting to hold ETH as well. And that was enough to really jolt the asset back up, you know, 60, 70% off the lows. We think there's probably other assets that are similar where people have been mostly liquidating or you know, early investors are taking profits, there's not enough sort of like people who have long term views on it. And I think it's going to, it's going to predominantly be in some of the higher quality sort of like fundamentally sound cash flowing assets, altcoins that are tied to real productive use cases on chain. Some of the ones that we see a lot of demand with hedge funds today are like the credit tokens, think like aave, those types of protocols where there's actually value being created right to the users of that protocol because they need to swap one asset for another asset to deploy on chain elsewhere. And that type of productive economic use case generates real yield that goes back to token holders. So the more, you know, more those types of assets where there is some fundamental case to be made, a thesis to be made to go long and then there are still like a very active cohort of liquid trading hedge funds, very long suffering hedge funds that are sort of like waiting for the market to really flow back into their core portfolio. They are all kind of like sitting in these sort of altcoins that have that fundamental thesis behind it.
- [11:22]
Jen Senassi
You just mentioned AAVE as a token that hedge funds are interested in. Are there any others that are top of mind for hedge funds right now?
- [11:32]
Joshua Lim
Yeah, I think, I mean look, the biggest trend of the last 6 to 12 months has been hyper liquid, right? And this is another one where you can point to real revenues being generated by the protocol. I think people are wondering, right, like why, why now? Like why is there migration from centralized exchanges to on chain venues? And I think the reality is like that's sort of a long term secular trend that was going to happen anyway and now the, the user experience of it is, is good. There were kind of like a good set of circumstances around community adoption and tokenomics and sort of like the airdrop dynamics around that particular asset hype. And now there's like a real set of fundamental buyers, a lot of which are coming from traditional market participants, non crypto market participants who are looking at crypto trying to isolate the source sort of sources of real value creation happening on chain and they're landing on things like hype. I think that ecosystem is at a very early stage, right? We see a lot of other L1s that are more mature, that have all of the normal kind of defi money, Lego type protocols, lending, borrowing, spot trading perps. And of course hype started more on the perp side of things and now it's more migrating down into the other sort of fundamental market Features that need to be built around their L1. So there's so much activity there. I'd say other things that we're seeing a revival of are things like options on chain, right? That like you guys probably remember last cycle there were a lot of options, all protocols, many of which sort of disappeared. Because when you have a deep bear market and sort of the early innings of a bull market, selling options is not really what you want to do. You really want to buy options. So now we're seeing sort of a resurgence as we enter into this range bound market. People are looking for yield more and more activity on the option side.
- [13:41]
Andy Bear
And where is that? Like how are things now that there's a couple of billion a day on ETF options and MSTR options? What kind of venues are people using?
- [13:52]
Joshua Lim
Yeah, great question. I think historically the very dominant venue in crypto has always been Deribit. Deribit has had at times 90% plus of market share on options and it's a centralized exchange. What we're seeing now is a general migration from these sort of very dominant centralized exchanges like Binance and Deribit really in two directions. The volumes are sort of exiting in one of two very different paths. The first path is towards decentralized venues like Hyper Liquid. In the case of options, it might go to a venue like Derive, which is an on chain order book protocol for options. Or it's migrating in a much more regulated direction in the direction of ETF options like IBIT or futures markets like cme. And I think that just speaks to kind of how the makeup of traders, active traders in crypto has changed. It's changed from retail market participants to more institutional users. And then the ones that are retail are getting much more comfortable with trading on chain.
- [15:02]
Andy Bear
Right.
- [15:03]
Joshua Lim
And then of course the other very big dynamic is that there's a lot of corporate treasuries and other vehicles that have much easier access to traditional markets and FCM accounts and broker front, you know, brokerage accounts. Much easier to get access to crypto via an ETF than it is to kind of like open up a Coinbase account and hold it directly.
- [15:28]
Jen Senassi
I want to talk about something you mentioned at the beginning of the interview. It's happening on Saturday and that's the Pump fun ico. Talk to me about how you think that this is going to shape short term market behavior.
- [15:40]
Joshua Lim
Yeah, I think Pump and a number of other phenomena that are happening in these summer months is really another thing that's impacting the overall volatility level in the market. I would classify all these things as liquidity drains from the ecosystem. Right. Liquidity drain in a good way in the sense that a lot of people want to allocate into these new tokens. Pump is a good example. Another one that has captured a lot of people's attention is plasma. Plasma has a TV all commitment window where people can put assets in and wait for it to launch mainnet and then get those delivered assets. There's assets delivered back on mainnet and also exposure to the plasma governance token itself. Those types of that plasma obviously raised $1 billion very, very quickly, I think in a matter of minutes, as soon as they opened up the window to deposit. And same thing with Pump. I think we've seen just enormous amount of institutional interest in participating in that sale. And then another notable liquidity drain is just the circle IPO and sort of people allocating, getting allocations for that and even retail participants buying it in the second. I think all of these things put together like contribute to the general malaise on chain Pump specifically, I think we're seeing a lot of people formulate valuation theses around the product. Right. Obviously it's been one of the most highly revenue generating protocols in crypto. On Solana, it's clear that they have much bigger ambitions beyond just being a meme coin launch platform. They want to do things around streaming and being sort of a mainstream consumer app. And I think we see a lot of venture investors that would normally not allocate into liquid tokens consider it as part of their mandate to get exposure to something which could have a 10x type upside.
- [17:44]
Andy Bear
We only have a minute left and this may be too long a question for that, but there's a number of ETF applications in front of the sec. Let's say they all get approved in pretty short order. What are your expectations in terms of size? I mean I know Falcon X will be involved in a number of those. Are these going to be trading vehicles? They're not going to be anywhere near the size of Bitcoin, probably not of Ether. But how are people going to use them? And you know, what are your expectations as to success?
- [18:15]
Joshua Lim
Yeah, I think interestingly enough there was so much anticipation of ETFs and staking ETFs and now actually all of that attention has been absorbed by these digital Asset treasury vehicles. So I think there's been a bit of a sentiment shift there because now you can access for instance like Solana and actually the staking yield on Solana through something like a defi development corp, which has committed to sort of like taking their treasury and generating staking yield and putting it to productive use on the network. So I do think there's still a lot of interest in vehicles that don't have any sort of governance risk or sort of like operational risk. And that might be the ETF user base, but a lot of that has probably migrated to some of these vehicles that are effectively permanent capital and therefore they have a much wider mandate with what they can do with those underlying assets. So that's a very interesting phenomenon.
- [19:14]
Andy Bear
Yeah. So Vol. Is volume doesn't matter. It doesn't matter what shape it is. That's, that's really interesting.
- [19:20]
Jen Senassi
Right, Josh, I know Andy said we only have one minute, but before we wrap up, tell us what should we be watching next week?
- [19:28]
Joshua Lim
Yeah, I mean, I think there's still a lot of concern around the tariff news. Right. Everyone's kind of watching for the next headline there. There's still a lot of concern around what happens with the Fed and the independence of the Fed. And in some these are all things that ultimately do flow through to crypto. It flows through to gold, certainly, and it flows through to the dollar. And all of these things in theory should have some positive impact to Bitcoin. The liquidity overlay that people look at usually when they look at bitcoin price is just the amount of monetary supply out there from the US and other central banks. And that is flashing pretty bullish signals on a go forward basis. So I think people are paying very close attention to the macro. But in the meantime, all of the excitement is really in equities and other asset classes. So I do expect like what people will be buying from us is probably long term exposure on Bitcoin call options on Bitcoin and ETH in the September to December time frame. We think that that part of the curve is particularly cheap. It's being dragged down by the fact that the summer months are so low in volatility terms. But when are starting to pay attention to crypto again, those things should explode in value.
- [20:46]
Jen Senassi
Josh, thanks so much for joining us for our weekly markets roundup. We appreciate your insight.