On The Vol Show, Peter Chen, founder and CIO, comes back to further discuss perpetual futures as Cboe global markets launched continuous futures after he explained that is the crypto community preferences. Chen also looks at where ETFs could be pulling investors off-chain, and he unpacks the 10/10 crypto crash he had warned us could happen, where a a geopolitical shock and pon chain platforms failures triggered a record $19 billion liquidation cascade. Finally, Chen raises alarm bells about risks around digital asset treasury companies and how he believes they amplify boom-bust cycles. However, their predictable flows can create strong trading opportunities.
Interview
Etienne Mercuriali – Welcome to the Vol show, a Trader TV production where we cover every corner of retail and institutional derivatives trading. I’m Etienne Mercuriali, and with me today is Peter Chen at Riverside Blockchain. He was with us on our previous crypto episode, where he correctly called several developments in the crypto world.
Peter Chen – Hi Etienne. How are you? I’m good. How you
Etienne Mercuriali – So in our latest episode, you said crypto natives love trading perpetual contracts, perhaps, and they love trading 24/7 since your wishes have been listened to and Cboe has announced the launch of continuous futures for bitcoins and Ether, and several other exchanges have announced the trading of options 24/5 or 24/6. Will that be enough to move people off-chain?
Peter Chen – I think that’s a good start, but it’s going to be a big ask for crypto natives who are used to trading Perps to start trading options. Perps are just too simple. They’re too easy and attractive to use, because people can express a directional view on the market with leverage. And if you think Bitcoin is going up, you just go long. You select the amount of leverage that you want, and you hit Buy. It doesn’t get easier than that. With options, you have to consider a bunch of variables, like implied volatility Theta. I mean, you have to learn Greek letters for God’s sake, and this is why zero DTE options are so popular, right? People don’t want to think about all those variables. They just want something simple and a way to get high leverage, and that’s what Perps offers. That being said nowadays, there are a lot of reasons for crypto natives to take their funds off-chain into a traditional brokerage.
Etienne Mercuriali – Can you tell us more about that?
Peter Chen – Yeah, it used to be the case that you had to be on a chain to buy crypto, meaning you had to have funds on Coinbase or another crypto exchange or in a crypto wallet. Now that there are crypto ETFs, you can just buy crypto without ever being on chain. Now you’re kind of limited in your selection. You can only buy coins that have an ETF associated with it, like Bitcoin, Ethereum or Solana, but those are the biggest coins by market cap. Those are probably what you want to buy anyway. And there are more ETFs launching every single week. So now you can access crypto through a brokerage account and not deal with the headaches of having funds on chain. And there are a lot of headaches, right? You can lose your private keys. You can get hacked. There’s smart contract risk. You can get kidnapped and ransomed for crypto. The list just goes on and on, and not to mention, stocks have been doing very well. You don’t have to get on chain to get good returns on speculative assets, if that’s what you’re into. So we’re seeing Tradfi and crypto converge, and that’s a trend that’s likely to continue.
Etienne Mercuriali – Last time, you also mentioned to us that you took a really careful view of the risk of liquidation in Perps, and obviously since then, we had the 1010 event. Can you tell us more about that?
Peter Chen – Yeah, the crash of October 10 was pretty dramatic. In the span of one week, you went from Bitcoin hitting all time highs to a global liquidation cascade, which was the biggest of all time, and over $19 billion in Perp positions got liquidated. And that really shows you how risky these perps are and how liquidation can just end up hitting people even with low amounts of leverage. Now, what happened was a perfect storm, because Bitcoin was hitting all-time highs. There were a lot of people who went long on perps, and these people were caught offside when it looked like the US and China were going to have a trade war again. Now, Trump carefully timed his announcement of additional tariffs on China for Friday after traditional markets had closed. But crypto trades 24/7, so crypto kept going down during a time of low liquidity. Normally, this would be a manageable liquidation. But what happened this time was that binance, which is the world’s biggest crypto exchange, they had some problems. They screwed up. And they made everything worse. What happened was they had a stable coin that’s native to their platform that depegged, and also their API just went offline and this caused complete chaos for market makers, who are unable to hedge or trade, and it caused them to pull out of the markets, so liquidity completely dried up. Prices crashed, and especially for altcoins, on these Perp markets, some of them briefly went to almost zero. So a lot of funds and traders, even if they used very low amounts of leverage, got liquidated because of this. Even if they wanted to post additional margin, they just couldn’t get their orders to execute, and it was just a disaster.
Etienne Mercuriali – That calls for the strengths of some regulated exchanges. One thing that was true before 10/10, though, was for Treasury companies like strategy to see their premium to net asset value eroding all year, which was kind of a bearish move even before those even of the 10/10. What do you make of that?
Peter Chen – Yeah, so I run the crypto fund, and I wrote about these digital asset Treasury companies or DATs for our fund, second quarter investor update, and our view is that strategy and these other DATs. They increase the reflexivity of crypto. Crypto is already highly reflexive, where prices and sentiment and fundamentals, they just drive each other up or down in a self-reinforcing cycle. So in the bull market, it’s great because investors are piling into both crypto and DATs. The DATS are able to raise a lot of money. They’re able to issue more securities and use the proceeds to buy more crypto, and that makes crypto prices go higher, but at some point the momentum stalls out. The crypto market turns south. And when that happens, this whole dynamic reverses. And this is kind of where we are today, because if crypto is going down, like you said, demand for DATS just evaporates, and the DATs are not able to raise money anymore, they’re not able to buy any more crypto. So if we truly enter into a bear market, and I’m not saying that’s happening right now, a lot of these DATs are not going to survive. I think strategy and some of the bigger ones probably will, but others will not. And their shares are going to continue to trade at a steep discount to NAV, and that means they’re going to have to be acquired or forced to sell their crypto to buy back their stock. And when the headlines are filled with DATs capitulating their holdings, you know that’s going to be a great time to buy. And I think the the good thing about dealing with DATs, it’s pretty straightforward to try to out trade them. They are predictable. Their holdings are public. Their moves are telegraphed ahead of time, so they’re easy to trade against. For example, with the Solana DATs we and other funds were able to front run them. We knew they were coming. We bought Solana before they did. They ended up deploying billions of dollars into Solana within just a week or two. And once they were done buying, I mean, we, we sold and and that was the whole trade and it doesn’t take a genius to do that.
Etienne Mercuriali – I suppose, forced, passive, predictable flows make for a good trade. That was the case for late merger arbitrage or for equity index reweights. So yeah, good trade. Well done, and thank you for sharing with us your thoughts today, Peter, thank you for watching, of course, and to catch for other shows like Trader TV This Week, every Monday morning at 645 UK time, go to Tradertv.net.
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