The changing world of Crypto Options – as explained by TYR Capital CIO

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Ed Hindi’s financial career began in commodity trading, and more precisely in oil and energy commodities. He and his team began in the banking industry in the early 2000s before moving into the high frequency trading world.

“We managed the arbitrage desk and market making desk of a very big oil producer based in the US but then moved back into the proprietary trading world in 2013, before including digital assets in that mix by 2016.

“By 2018, we decided to work exclusively in crypto and in 2019 launched the TYR hedge fund, opening up the fund to outside money.”

As Hindi explains, his team has a deep background in trading across diverse backgrounds.

“We used that experience and knowledge to open one of the first institutional hedge funds in crypto.”

Initially, what attracted Hindi and his team was the pure and unadulterated alpha generation opportunities in crypto.

“It wasn’t the asset class itself, it was all about making money originally and its usefulness as a diversifier in a portfolio. But over time, we began to see its value in wealth protection and specifically for developing countries looking to move and save money. We could see its non sovereign nature and moved from being traditional neutral finance guys to understand the wider values of crypto and now we are big proponents of it.”

Hindi recognizes the biggest challenges for crypto is the lack of a clear infrastructure and regulation.

“There is no regulator to oversee all the crypto exchanges, coupled with a lack of a prime broker with a big balance sheet, and it makes it more difficult. We are very disciplined but these are challenges.”

Since FTX collapsed, overall volume in crypto has also diminished, in some parts crypto volume is down 90% on their 2021 peak.

“We are going through a tough period right now – with the one good development being the growth in the options market. It is developing slowly but we do see options as the future of alpha generation. Currently, the biggest issue surrounding options is that it is concentrated in just one player, Deribit, so that 90% of all options flow into the one exchange.

“Now, we’ve worked with them and they are great. We know them personally and they’ve done an awesome job. However, no trader wants a single counterparty on the other side in case of significant market moves.

“Who is to guarantee you if Bitcoin drops to 5k in the coming three hours or moves up to 100k. When you are trading options, you really need to call weighting risk, to make sure whoever you are trading with – whether an OTC desk or exchange – has got a big balance sheet. That doesn’t currently exist in crypto.”

Despite the downsides – notably a lack of infrastructure and brokers with large balance sheets – Hindi and his team are believers in crypto. At a minimum they see it as a diversifier in a portfolio to protect assets in the potential collapse of the standard financial system – as almost happened in 2008.

“In my opinion, and in the opinion of a lot of portfolio managers, that anywhere from between 3% and 10% of assets should be held in crypto as a protection against the traditional financial system rails.

“In addition, a longer term view would say that philosophically there are enough reasons from geopolitical issues to sovereign decision making in different countries to make bitcoin an attractive, non-sovereign, totally non-inflatable currency.

“In terms of wealth preservation, having at least 2% of Bitcoin in your portfolio would not only increase your prime numbers but also decrease your risk. We believe that holding Bitcoin for anyone, professional or individual, is an interesting value proposition. Numbers don’t lie, you know.”

Last week, another possibility emerged in the crypto option world, with the launch of Bumper, a decentralized (DeFi) finance protocol.

Bumper’s innovation is the culmination of a three-year research and development programme, backed by $20m in early funding, and collaboration with the Swiss Center for Cryptoeconomics, known for work on Synthetix, and coded by renowned developers Digital Mob, who previously worked on protocols such as Barnbridge, Gnosis and Filecoin.

Bumper’s Co-founder and CEO, Jonathan DeCarteret, says “Bumper removes the downside volatility of a user’s crypto tokens, paving the way for them to take leveraged positions with zero-liquidation risk. That in itself is a major breakthrough, but when you consider it’s on average 30% cheaper than the market leader, the value proposition becomes crystal clear.”

The protocol charges a premium which is calculated incrementally during the term, based on a combination of market conditions, protocol rebalancing and proximity to the user’s floor. This generates real yields for liquidity providers who realise returns ranging between 3-18% APR on average without the need to sell option contracts.

 Until now, the methodology for calculating the price for hedging risk relied on the fifty-year-old Black-Scholes model, which has fuelled the $13 trillion options market.

 “Fifty years is a long time in tech and although Bumper uses completely different inputs and a novel rebalancing mechanism, it is surprisingly correlated with Black-Scholes, but more efficient, even under the most volatile of market conditions.” said DeCarteret.

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