Joshua Lim is head of derivatives at Genesis Global Trading, a full-service digital asset prime broker.
Genesis Trading’s derivatives arm is highly successful and still growing: last quarter, the platform saw over $12.7 billion in derivatives trading, a quarter-on-quarter increase of more than 50%.
Lim says that he joined the company at a time when there was a need in the market for more complex digital asset trading products.
‘There was a lot of demand for hedging instruments for a way to express very nuanced views in crypto trading. Really the right way to do that is to use derivatives: puts, calls, forwards,’ he explains.
The types of products Lim refers to have been common within more traditional asset trading for a long time but are less commonly available in the digital asset space. A user might purchase a put on an asset with the expectation that the value of the underlying asset goes down; if it does, the trader profits. A holder of Bitcoin might stake their holding to sell calls to other traders who expect the price to go up a certain amount by a certain date. These products allow for a much wider variety of trades – for digital assets, which are typically more volatile than other asset classes, the demand for these more complex products is inevitable.
In many ways, Lim’s role is a symptom of a rapidly maturing digital asset industry. Until recently, digital asset derivatives were rare; now, they’re commonplace. But the availability of derivatives isn’t just a sign of this maturity – it is also a catalyst.
‘I think the most interesting part of the digital asset industry today is how it’s evolving to become much more institutional. If you think about the evolution of crypto from the early days where it was much more retail-driven, and a lot of retail users were using offshore exchanges to get leverage on crypto.’
‘Even today, a lot of that retail demand is still there. Maybe a lot of it is more channelled into DeFi and more on-chain protocols. What’s happening in the derivatives space is there is much more institutional participation coming in. You can measure that by the volumes that trade on CME (a highly regulated U.S. exchange), you can measure that by the amount of volume traded on exchange-listed products like Grayscale Trust products, the Canadian ETF products.’
‘There’s just a lot of ways and new formats for institutional investors to allocate into Bitcoin without having to directly touch the asset, and a lot of those formats involve derivatives in some way.’
Yet, for all the excitement around the creeping institutional interest in digital assets, from the perspective of institutional investors, it’s still a long way from more traditional markets.
‘I think for institutions, the biggest obstacle is often regulatory or compliance on AML (anti-money laundering) type issues,’ Lim explains.
‘There’s obviously a lot of regulations around the flow of funds into and out of a protocol and the source of those funds and how can you identify the participants in a particular protocol. I think the way that institutions are starting to participate more is to engage actively with the protocols themselves to develop whitelisted solutions, permissioned solutions, gated solutions where there’s a subset of the entire universe that is allowed to interact.’
The rapid pace of change Lim talks about is well-documented, and the tumult of the past two years has evidently helped accelerate this further. A study conducted by Fidelity earlier this year showed that 44% of institutional investors had become more likely to invest in digital assets over the course of the pandemic. Fidelity also revealed that seven in 10 institutional investors expected to invest in or buy digital assets in the near future.
But where is it all headed? The extreme end of adoption of any kind appears to be the likes of El Salvador, a country which has incorporated BTC as legal tender in the country – to much controversy.
‘If you look at El Salvador as an early pioneer for adopting Bitcoin into its currency system, allocating into it as a reserve asset, I think that it is really the early innings for that sort of trend – using Bitcoin as a sort of store of value substitute on a national level.’
‘That’s always been a big dream for early adopters of Bitcoin to have that level of traction with national and supranational entities. What we’re seeing more and more is it is enabling these sort of countries that may historically have difficulty stabilising their currency or their FX regimes, by using Bitcoin in some way it sort of opens up or democratizes access to more stable forms of value.’
‘In some ways, a lot of that role has been filled by the U.S. dollar historically, but because of the accessibility of Bitcoin through a lot of trading platforms and retail payment apps, I think it’s becoming much more feasible for regular users… to adopt it as a way of storing value.’
Another inevitability of this increasing institutional adoption – both as a catalyst and a result – is that regulators are becoming more hands-on in the digital asset space. For a business like Genesis Trading, this can only be a good thing – in fact, Lim says regulators can do more to shore up the rules governing the space.
‘A common problem we face with the regulatory framework is that there’s a patchwork of agencies, both at a federal and at a state level, that want to impose regulations on crypto from many different points of interest.’
‘A lot of the state-level regulators are maybe more concerned about consumer protection, a lot of the federal level may be concerned with things like where crypto sits in the tax code and everything in between.’
‘What would really help is to have a more coordinated approach, I think. And we’re seeing more and more of that happen as these sort of patchwork regulations are being codified into actual legislation at a federal level.’