Various cryptocurrency enthusiasts have long been waiting for instituional investors to enter the market in full force. While it's unclear to what extent instituional investors are exposed to the cryptocurrency space at this point, some like over-the-counter (OTC) traders are more involved and have deeper knowledge of what's going on.
CryptoGlobe has recently caught up with the chief executive of Genesis Global Trading Michael Morro, one of the most famous cryptocurrency traders in the space. Genesis Global Trading is a firm providing over-the-counter cryptocurrency trades to institutional investors.
According to Morro, the space has been moving from the early cryptocurrency anarchists to see more high net worth individuals, hedge funds, and family offices put their money in crypto.
CryptoGlobe: You've probably been asked this a lot before. How did you get into crypto?
Michael Morro: So, in 2012, I was working with Barry Silbert. And I started working with Barry at his old company called SecondMarket in 2008. I'd already been there for a few years. Barry consulted discovered Bitcoin in 2011, and then throughout 2012, he wouldn't stop talking about it in the office.
I think bunch of us going to set him down one day and said: “Hey, either us tell us what it is, or you stop talking about it.” So he kind of gave us the, the Bitcoin 101. This in probably middle of 2012. Which kind of started my own personal rabbit hole journey. And then we said: “All right, let's, let's open up a trading desk.” So, this was in March of 2013 when we opened up our OTC trading business.
CG: How have you seen the markets evolve?
MM: As you might imagine, in 2013, while there’s still a, a core group of these guys still around, it was primarily sort of anarchists/libertarians, who [were] still sort of licking the wounds of the financial crisis.
The concept of things like AML/KYC, scared them, like “why am I turning over my ID? The whole concept of Bitcoin is that I can do stuff anonymously, right?” Except for the fact that Genesis is a regulated broker-dealer. So we have federal regulators in the United States, so we have to know who our clients and run the appropriate background checks.
So more individuals, folks, kind of scared of ID have now moved within six years purely to almost an institutional game. We've seen a lot more hedge funds, family offices, as well as kind of the early adopting high net worth individuals, I think, moving into the space. And It's been a dramatic kind of shift and point from kind of the early adopter guys, to the new institutional money
CG: You mentioned that there was sort of a distinction between crypto anarchists and people want to do it by the book, to see that as quite a strong split?
Some people talk about a bifurcation of the network whereby there's a sort of regulated above ground ecosystem, and then you have the sort of no KYC, no AML, sort of less regulated model. Do you see that as quite a distinact split? Or do you think the whole market is moving towards the sort of regulated by the book? s
MM: My guess is with the advent of blockchain surveillance, we're kind of moving towards ‘every transaction can be monitored’. So some level of ID identity kind of gets attached to every transaction. And I think gradually at least for Bitcoin anyway, we’re kind of moving towards that direction.
At the same time, I always try to draw comparables in the “real world” where cash moves anonymously. But it also moves through centralized regulated enemies, like banks and things like that at the same time. Are they two separate ecosystems? Probably not, they're just kind of interconnected.
CG: How Have you seen your client base develop? And broadly speaking, how might you categorize how volume is split between your client base?
MM: Early on, call it 2013/2014, the first guys in were the high net worth investors, because it was their own money, right? So a male or female can decide, “hey, I just want to buy some Bitcoin is my own money.” Most of our clients, the bigger guys were based in Silicon Valley, because the techie crowd was one of the first to kind of catch on to the Bitcoin idea ,and also because there were in the venture capital space.
The idea of like, 1000x or zero, which is, you know, a theme that resonates throughout the entire portfolio. So risk/reward was no different with Bitcoin than investing in any venture capital, right. Genesis is based in New York, New Jersey. Therefore, we have a lot more kind of East Coast mentality of investors who’d rather get the 8% a year in Wall Street mentality.
Over the years, the infusion of hedge funds and family offices is probably changed the landscape, certainly, from dislike almost strictly high net worth guys, and to kind of including some of this institutional money coming in.
Now what enabled it? Some of it is the introduction of CME futures, and the ability to get exposure to Bitcoin via a regulated futures product. It was a huge milestone in kind of the evolution of the asset class. Separately, the lending market, the ability to borrow crypto, which has propped up in the last year and a half to two years, I think has really kind of changed the game as far as allowing some of these hedge funds to actually make some money when the price is going down.
We launched our lending business called Genesis Capital In March of last year, and not knowing that really like a 90% down market was coming, the idea that you could get a borrow on Bitcoin or Ethereum or Litecoin, and then sell it, and then buy it back at a cheaper price: I think it was kind of a more novel idea.
It is a tried and true old method and your equity world. In Bitcoin, it was certainly newer. So, I think those I'm kind of helped to bring more institutional money to buy nowadays.
CG: Speaking of Lending, it seems to be going very well. Were you surprised by the demand?
MM: Extremely. To date, we've done almost 3 billion in originations and we have about call it half a billion dollars of loans outstanding today. I'd be lying to you if I said this was perfectly within my expectations. Certainly, the bear market helped last year to kind of kick start the business.
I'm also a big believer that, like we're still incredibly nascent in in the space. So as the price of bitcoin rises in a bull market, the share of the pie also grows. So the lending market has to grow, like commensurate with kind of the overall market growth. I won't say that this business does incredibly well in both bulls and bear markets, but so far, it has kind of behaved that way.
CG: So your typical lending, client base, would it be fair to say it's a lot of hedge funds, family offices that have large positions, and they want to earn rate of interest?
MM: I would categorize, broadly speaking, to two: family offices typically aren't sort of buying selling a lot, they're more like buy and hold forever. It is the hedge funds that are primarily kind of getting paid on their performance. And they have to try to beat the market, which might be kind of the buy and hold Bitcoin rate. So that is kind of the typical client base for Genesis, whether it be on the crypto side, or also now on the cash side.
Lending cash or USD and stablecoins was something we started towards the end of last year. It has quickly grown from just a few million dollars on our books to $140 million $150 million of loans outstanding today. So I think that where the clients are actually posting crypto as collateral to get a borrow in dollars or stablecoins.
I think that's been an interesting development, because what that allows some of these hedge fund guys to do is not only go short: let's say they're a long Bitcoin. They can post that Bitcoin as collateral, get stablecoin or dollars and then use that money to buy more bitcoin. So they’re leveraging their hedge fund position through kind of the cash loan that we offer, which has certainly been interesting.
CG: What do you make of the cryptocurrency ETFs that are under review?
MM: I'm not confident that we'll see one of the United States anytime soon. I'm reading some of the recent comments from Chairman Clayton. I think he’s not entirely wrong about trying to get comfortable around not just kind of like custody, but how to prevent market manipulation, that kind of thing.
The challenge. And the difficult part that I think the industry and some of these ETF sponsors have to do is you have to prove that something isn't happening. Right, there was kind of the prejudice that market manipulation is happening, and you have to try to prove a which is really, really hard.
You know, it's ultimately a question of whether the SEC’s responsibility is to only approve good products, or is it really a disclosure body that has to be making sure all the risks are highlighted and then let the market decide? Plenty of Bitcoin investors are clearly OK with market manipulation.
Yeah, rarely am I facing the exchange on one side of the trade. And that's probably the case with mostly large OTC institutions, that they have places to go hedge fund that we know once a bunch of Bitcoin or high net worth guy that wants to sell a bunch of it. So exchanges, by definition, are you are moving the bid ask reference rate. OTC, a lot of that effect is making?
CG: Looking ahead, there's some interesting announcements coming from BitMEX about trying to create a sort of interest rate market. They want to start lending, creating their own money markets. Is that something Genesis is interested in?
MM: It's interesting, I think the market will evolve eventually to kind of having a forward curve structure. And I think there's a lot of interesting products you probably can create off of that. What's interesting for now is: let’s take Bitcoin, for example. The rate at which people are willing to lend Bitcoin to Genesis is actually inverted, the rate is actually higher on the short side, and it falls over the long term.
That happens, because people want to be able to fund a return for a longer period of time. If we take a one-month loan from somebody, we may not need their coin in months. They'd rather be like:” hey, I want to lock up my bitcoins with you, at 2%, for 12 months, then earn 5% for one month, and then take the risk that in month two maybe Genesis isn’t interested.
CG: Looking ahead, What sort of financial products and innovations you see happening in the crypto space? There's ETFs, there's talk of interest rate derivatives, lending market sets. How do you see it playing out?
MM: A lot of the businesses that started in various verticals, whether it be creating or custody or whatnot, are going to start adding products that the other guys are doing, and so the trading guys might try to come up with their own custody solution, the custodians are going to try to add like a trading or lending element.
At the end of the day, we all come out kind of end up in the same place, at a more full service brokerage effectively, rather than kind of a siloed specialist kind of doing any one thing. I think custody is certainly difficult, because over time, I think it's it may be difficult to earn a lot of revenue that just was purely on pure play custody.
For Genesis, we're doing anywhere from half a billion to a billion OTC trades a month. We clearly already have the transactional volume for both, both of those business lines. We're trying to figure out what to do around custody, as to whether or not we want to partner with somebody Or we want to come up with our own kind of like storage solution ourselves, or a hybrid.
It's eminently more easy to find funds to borrow, if we're already holding it. We already have a good target list of folks to go after, if we ever need to borrow coins to help fulfil something.
CG: One final question. You mentioned derivatives, can you go into that a little bit more, and how you see them?
MM: We've got clients that would like to hedge their bitcoins. Or, you know, say, “hey, rather than playing the spot market, I love to be able to play in the futures market” I prefer not to try to turn those clients away, and tell them to go trade with that company, or this company that only does futures. I'd rather try to be able to capture that.
CG: Do you think you’ll expand into options?
MM: Yes, I think I think that's probably natural growth. At the same time, the options market is kind of illiquid at times. So it's a question of whether or not like, really robust, liquid, regulated options, platforms are going to be a motivation. So once that happens, I think that'll make it a lot easier for us to jump in.