“Well, the market is small and not really growing.”
Darius Sit doesn’t like to beat around the bush. And that’s the typical frank response he gives when I check in on trading activity in Asia’s crypto over-the-counter markets.
Sit, a managing partner at QCP Capital, a crypto trading firm based in Singapore, is a former trader at BNP Paribas. He’s been working closely with other trading firms across the market — including the likes of Jump Trading and Galaxy Digital — to create new standards to help OTC and market making firms flourish. It’s a market that exploded as bitcoin rushed to $20,000 at the end of 2017. But the easy-money times are over, from Sit’s perspective.
“There’s a bit of an arms-race going on in market making spreads,” Sit said. “Guys are burning cash to win market share.”
Firms like QCP, and others like DRW’s Cumberland’s or Mike Novogratz’s Galaxy Digital, broker large spot crypto trades for counter-parties, which can be miners or other trading entities — a service for which they charge a fee. They also use their own proprietary trading technology to buy and sell crypto, making cash off the spread.
But with volatility much lower than it was in 2017 and early 2018, and fees compressing for brokering large trades, crypto OTC desks are in a pinch, says Sit. Adding to those troubles is the fact that large investors are still sitting on the sidelines.
“Unlike other asset classes you don’t have asset allocators or pension funds or index fund guys saying ‘hey lets allocate X percent to crypto,” he added.
“Not yet at least.”
Indeed, The Block previously reported on the OTC market’s woes, including recent lay-offs.
Still, recent efforts by Sit’s firm show OTC firms aren’t sitting on their hands. QCP Capital is behind a large effort among crypto’s largest traders in the market dubbed CORA to build out a clearing house for digital assets and set standards for a derivatives market. Bloomberg’s Alastair Marsh first reported on CORA’s initial meeting in Asia.
Simon Nursey, cofounder of CORA Network, said the organization is tackling the incongruities in the nascent crypto market.
“There are really basic things, like what expiry time really means, physical or cash settlement, quoting conventions, standards for settlement …these things are important to running a smooth market,” Nursey said.
Derivatives, according to Sit, will be the industry’s saving grace. The complex financial instruments aren’t new to crypto, but the market for them is growing with new contract types coming online each week, issued for the most part by OTC and market making firms. GSR, another crypto trading firm, recently rolled out a new bitcoin hedging product, dubbed Bitcoin Variance Swap. More products means more trading, ideally, which translates into more money for such firms.
“Yield and leverage are keys for critical growth in the space and these will come from derivatives like swaps and options. This is actually the reason we started CORA in the first place,” Sit said.
A previous version of this post incorrectly said GSR was a member of CORA.