Panel on Liquidity Dynamics: Giving Colour to the Charts | Proof of Talk 2024

Hi everyone, and thank you for coming in so early. My name is Max. I run a small company called PV01. We put bonds on the blockchain, government bonds and soon corporate bonds. Before that, I founded B2C2, which is one of the main dealers, main market makers in the space, maybe the biggest, who knows. And before that, I was an interest rates trader at Goldman Sachs.

I think there's no problem actually here with concentration of liquidity. First of all, the crypto market is extremely liquid. I think last time I checked, maybe two years ago, Bitcoin would have been the number 10 currency in terms of volumes if it were accounted for in the BIS published volumes. And Bitcoin would be something like number 10. Secondly, I also compared, when people were talking about the crypto ETFs, I compared the spreads, the depth, the liquidity of oil ETFs because people were saying, 'Well, Bitcoin is a commodity, but it's volatile, it's dangerous.' Turns out Bitcoin is more liquid than oil, at least if you look at public markets. So it's extremely liquid. And it makes sense: foreign exchange markets are the most liquid because they are the simplest. There's nothing dumber than trading a euro against a dollar. And in that sense, trading a Bitcoin against a euro or a dollar, it's also very dumb, it's difficult to get it wrong. And that's why, being so easy, it attracts so much liquidity and the prices are so good. So there's a ton of liquidity in crypto now. Whether it's concentrated? Well, guess what? All markets that operate on an exchange model are winner-takes-all because the fastest, the smartest, they all just take, as you said, you know, do 1% of the volume. That's a very good number. But the biggest market makers are going to do something like 10-20% of the volume. So really you can have five of them, and that's just the way it is. There are a few different models where you can have more players. I guess AMM in DeFi can attract anyone who's willing to contribute, and because AMM puts everyone on the same level, because you don't trade against a specific person, you trade against a pool, so everyone participates in every trade. It's a little bit different. But generally speaking, markets are roughly winner-takes-all or they are oligopolies. So they just attract a few large players, and that's just the way it is. They remain very efficient. So the fact that you have an oligopoly doesn't mean that the markets are not efficient. So I think it's no problem. And I also want to touch quickly on the question of manipulation. I've been in crypto for 11 years. I started electronic market making on a failed exchange in 2013. And ever since then, and maybe even before, people were saying the Bitcoin price is manipulated, the whales, the this, the China, what have you. It's all... No one in 11 years, and that's a discussion I had with the CEO of Wintermute recently, no one has ever been able to explain to us what the manipulation is. Okay, if there's such a trick, give us the trick. I want to know the trick too. And Wintermute and B2C2 pretty collectively have traded pretty much trillions of dollars of crypto, and we've never been able to find a trick. So I think the accusations of manipulation in the crypto market they simply amount to cope.

I'd like to speak to you after the panel because I want to know your tricks. Maybe you have them.

Algos are good. An algorithm is a set of rules that you follow to make decisions. And we maybe should call that automation rather than algo trading, because the idea is always that you try to imagine what as a human you would do, and you try to make it automated by using a machine instead. So I mean, it's simple stuff like if the price goes down 5%, maybe you want to buy because you think it's going to go back up. Then you can add as much complexity as you want on top; it doesn't really change the initial intuition. I think it's fine. There are probably actually some algorithms that are predatory. I remember when Binance launched the futures in September 2019, Alameda, the defeated market maker, tried to manipulate the market. Yes, indeed, and they were actually quite successful. So maybe I should take back some of the earlier stuff I said. What they did is that they placed large sell orders on that new market. It wasn't very liquid at the time. And then they placed bids 30% lower. And that was discovered because Binance had a leak in their API, and you could see the orders of everyone. It's kind of crazy when you think about it. So indeed, yeah, they did succeed in manipulating the market actually. Binance published a tweet saying that they were actually unsuccessful. I'm not sure exactly what happened, but at least it could have worked potentially. So yeah, what we call running stops, which is triggering liquidations in the hope of purchasing at a better price or vice versa, yeah, potentially that can work. Now the thing is that markets tend to be rather liquid. So you could do that on something that's not very liquid, but as soon as it becomes relatively liquid, you're going to compete with everyone else to try to capture the liquidation transactions. And so in the end, you end up not making that much money. I don't think it's a strategy that's profitable nowadays. Now the thing is, crypto markets are extremely capitalistic in a way. You can do essentially anything you like. Yes, sure, there's a bit of regulation, but what is the European regulator going to do if you're some random dude in your garage in Chennai trading on Binance? There's nothing they can do. But what crypto firms end up doing is that they also incorporate in their own processes, in their own algorithms, the possibility that others are trying to take advantage of them. So in the end, it evolves quite fast, and there's a selection of the fittest at play here. So in the end, I think that algorithms are simply automation. Manipulation? It's possible that there is some at the margin, not the main of the market. But crypto firms end up protecting themselves from those possibilities by incorporating those risks.

Yeah, I think regulation really achieves its objectives. And in the end, people who love regulation tend to be the incumbent. So if you're regulated, you love regulation because it's expensive and that's a barrier to entry. When I started B2C2 in 2015, I did it with my last bonus. It was less than a million dollars, and managed to turn that into a reasonably sized company today. You cannot start a market maker with less than $50 million. It cannot be done. Forget about it. If you don't have $50 million to spend, you cannot start a market maker because it's not only extremely competitive, but also the cost of regulation is just completely insane. And in the end, most people don't like regulation. It's just something that we have to work with. And I'm reminded of an anecdote. In 2019, B2C2 onboarded the biggest broker in the world in terms of volume. It's a broker that trades more than a hundred billion dollars a day. So you'd think, okay, pretty serious people, actually highly regulated, etc. And at the time, we had a couple of legal entities, and I said, 'Well, probably you can face one of the entities in the United Kingdom. One of them is regulated, one of them is not regulated. Which one would you prefer to face?' The response from the biggest broker in the world was, 'Don't know, don't care.' They didn't give a damn. And I think that goes to the heart of the fact that everyone in financial markets understands that regulation is something you've got to comply with, but the objectives of regulation are extremely vague. There's always a hint of consumer protection, but in most cases, it's patently obvious that it doesn't really work. I'll give you an example. You mentioned securities laws. So now we have those tokens that represent treasuries on chain. You can get yield, risk-free yield, etc. All those things are securities. So they're almost impossible to sell to retail individuals because of SEC treaties. Everyone's avoiding the US because of that. It's a mess. Now, it's impossible to lose money if you buy short US treasuries. You simply cannot lose money. At the same time, if you have an account on Robinhood, you can buy the shittiest of the shittiest stocks in the United States and possibly abroad with two clicks of a button. Reddit is littered with screenshots of retail users who are down like 99.9% on stupid options trades. And yet, you essentially go to jail if you sell tokenized US treasuries to retail. It's completely insane. And I think just that one example is enough to completely discredit the whole regulatory apparatus. Now, I'm sure that it's possible to create sound and reasonable regulation. I just don't really think we have that today.

I think for crypto, for the price to go down, all you need is people to be bored. So the price has a natural tendency to stagnate or go down. And for it to go up, you need a catalyst. What were the catalysts historically? I remember, I think it was 2013, Cyprus banking crisis, and there was a big pop in Bitcoin because people were afraid that the banks were not safe and the money was going to be poofed. Then we had money printing starting from roughly 2017, that was a huge catalyst as well for crypto prices. What's going to be the next one? I mean, there could be more money printing, but I wouldn't count on it. In my view, interest rates are going up. What about the banks? The banks are, I think, mostly safe. The one thing that's not safe is that we're not safe because there's a real problem in Europe and also elsewhere with the state of government finance. And higher taxes are coming. And I think we're going to be very surprised with the violence with which states are going to come after our money. And I think that might become the next catalyst. So predatory taxation in Europe and abroad, I think is coming. And we'll see what that's going to mean for people and how they want to protect their wealth.

But I simply want to thank everyone for turning up.