A legacy trader reflects on how the bitcoin market mirrors the past, and is poised to overtake the traditional market in the future.
Like many, the more I learn about Bitcoin and cryptocurrency markets, the more I see the future of the world economy. However, as a former market maker that started trading equity options on the floor of the Chicago Board Options Exchange in 2001, when it comes to trading in this industry, it feels a lot like old times.
At this point, there’s been so much discussion around how Bitcoin will revolutionize the world, we almost take it for granted. There is a seemingly endless list: It will transform the monetary system; provide banking to the bankless; create an inexpensive and seamless global payments network while generating a non-inflationary currency; provide the monetization of energy, digital real-estate and the currency of the internet — all while eliminating the double spend. I could go on!
But we do not hear as much from a trader’s point of view, and for us, it can be a bit like déjà vu.
Liquidity is a good place to start. It has improved significantly from where we were, but we are still in the early stages. The spot and futures market have come a long way, especially for bitcoin. But when you do trade, you usually find that fees are much higher than you may be accustomed to when trading equities at Ameritrade.
The bitcoin options market is still in its infancy. Deribit holds the most liquidity for BTC options, but it is unavailable to those in the United States. The Chicago Mercantile Exchange feels more familiar to traditional U.S. investors, but at this point still sees little order flow. Given this, we see large spreads between the bid and offer, as not enough competition between market makers has flooded the marketplace.
It all seems like the options market from the late 1990s and early 2000s, when specific exchanges had the rights to trade specific equities, there was less competition, quotes were made in fractions rather than decimals, and execution was not nearly as straightforward as we see today.
Which leads to institutions. While we are seeing more and more hedge funds and trade desks getting into the space, the vast majority are still on the sidelines. Of course, this has been changing quickly, as with each new institution that joins the space, stability and belief in bitcoin grows. And as the institutions begin to flood in, we will see more of the past come to life.
This will mean enhanced regulations and the introduction of exchange-traded funds, structured products and high-yield instruments offered by wealth managers, as well as an entire side industry of vendors specializing in servicing the institutions, with risk-management software and data aggregation. All the while, the DeFi space will continue to compete, grow and replace the need for the middleman.
That said, it must be noted that many new trading concepts have already been developed by the cryptocurrency world. Perpetual futures and everlasting options — these are derivatives that never expire. Exchanges that never close — not for a single second of the year. Real-time margin calls and transfers. Fully-embracing partial contracts. On-chain metrics providing data that was previously unattainable.
Eventually, these concepts will be integrated into the traditional markets. Once everyone realizes what is possible, it’s only a matter of time before bitcoin trading goes completely mainstream.
Right now, many traders are realizing that they have been on the sidelines for far too long, and the time is now to act and take advantage of the opportunities. It’s hard to predict what will happen tomorrow or this month, but experience leads me to believe that in the coming years, bitcoin and traditional finance will look very much alike. The only question is which one will influence the other more. I wouldn’t want to bet against bitcoin.
This is a guest post by Patrick Baker. Opinions expressed are entirely their own and do not necessarily reflect those of BTC Inc or Bitcoin Magazine.
