October 9, 2024
Welcome to the AD Derivatives podcast led by Director of Derivatives; Greg Magadini.
Featuring: Bohan Jiang, Founder at Abra!
Abra is a financial services and technology company that operates a cryptocurrency wallet service including a trading service for buying and selling cryptocurrencies, a service for earning interest on cryptocurrencies and stablecoins, and a lending service for borrowing against cryptocurrency collateral.
Before heading the OTC options trading desk at Abra, Bohan spent years trading FX options at Goldman Sachs. We discuss Bohan's background as well as the various volatility trading insights he learned throughout the years.
Today Bohan trades crypto options on a principle basis for Abra. Facilitating customer flow and warehousing risk on a proprietary basis.
Introduction
In this episode of the Amberdata Derivatives podcast, host Greg Magadini speaks with Bohan Jiang, Head of OTC Trading at Abra, to discuss his journey in trading, particularly his transition from traditional finance to crypto markets. Bohan shares valuable insights into his experiences at Goldman Sachs, Abra’s trading strategies, and the current landscape of derivatives in cryptocurrency.
Bohan Jiang’s Trading Journey
Early Career
Bohan’s interest in trading began during high school, with personal experiments in value investing inspired by Warren Buffet. Throughout college, he ventured into trading single stocks, futures, crude oil, and gold. His passion for derivatives led him to focus on nonparametric machine learning models for pricing derivatives. With a computer science background, Bohan’s unique blend of technical skills and macroeconomic insights prepared him for a quantitative risk-taking role.
Time at Goldman Sachs
Bohan began his professional career at Goldman Sachs, where he worked on the FX shot options team, market-making and trading vanilla and first-generation FX derivatives for G10 currencies. As he gained experience, he moved on to more complex exotic and correlation products, focusing on second-generation exotic FX derivatives.
During his time at Goldman, Bohan started exploring the crypto space on a personal level. Eventually, he joined the firm's nascent crypto desk, trading CME-listed and OTC options on Bitcoin and futures spreads. He played a critical role in market-making and trading for Goldman, gaining firsthand experience in the evolving cryptocurrency market.
Insights into Abra's Crypto Trading
Joining Abra
Bohan joined Abra in April, driven by the desire to capitalize on market dislocations in crypto volatility. He believed that Abra’s access to physical crypto products and the liquidity of crypto markets presented significant opportunities for sophisticated trading strategies.
Trading at Abra vs. Goldman Sachs
Bohan highlighted key differences between trading at Goldman and Abra. While Goldman provided a structured and standardized environment with robust risk management systems, Abra offered more flexibility and agility in responding to market opportunities. Abra’s operations were more crypto-native, with differences in settlement processes, margin requirements, and risk management strategies.
At Abra, Bohan leads the OTC desk, trading spot, and options liquidity for institutional and high-net-worth clients. The firm takes significant proprietary risk in addition to serving as a counterparty for client trades. Bohan emphasized the importance of managing the aggregate portfolio rather than focusing on individual positions.
Liquidity and Market Opportunities
Abra benefits from greater liquidity in the physical crypto markets, allowing for faster execution of trades. Bohan mentioned that while traditional finance markets are structured, crypto markets still exhibit significant inefficiencies and dislocations, particularly in volatility surfaces. These inefficiencies create opportunities for faster, more agile players.
CME Bitcoin Futures and Options
CME vs. OTC Trading
At Goldman, Bohan was involved in both on-screen CME trades and off-screen OTC trades for clients. He explained that most of the CME trades, particularly in Bitcoin futures and options, were conducted in large blocks through voice or bilateral negotiation. The volume of trades executed purely on the screen was relatively low.
Basis Trading and Cash Management Issues
Bohan discussed the challenges of trading CME Bitcoin futures, particularly in terms of realizing the futures basis due to cash management issues. While crypto futures often offer attractive annualized basis, accessing these opportunities has historically been limited by margin requirements and capital efficiency issues. However, the introduction of a spot Bitcoin ETF has the potential to create more liquidity and allow for more efficient hedging strategies, particularly for institutional investors.
Impact of Spot Bitcoin ETFs on Crypto Volatility
Role of ETFs in Market Maturity
Bohan believes that the approval of a spot Bitcoin ETF could significantly impact the crypto derivatives market. Options on Bitcoin ETFs would closely resemble options on spot Bitcoin, and the ability of broker-dealers to custody crypto would bring more liquidity to the market. This, in turn, would create new opportunities for hedge funds and institutional investors to enter the space.
Decline in Volatility Over Time
As the crypto market matures and liquidity increases, Bohan anticipates a structural decline in volatility over time, similar to the trajectory seen in gold over the past 30 years. He mentioned that even during future bull runs, the volatility spikes seen in the past may be lower due to increased participation from institutional players. The sophistication of traditional finance players entering the Bitcoin ETF options market could lead to a more stable and efficient pricing environment.
Ethereum and Altcoin Derivatives
Interest in Ethereum ETFs
While Bitcoin ETFs have garnered significant attention, Ethereum ETFs have seen much less interest. Bohan noted that the recent launch of Ethereum ETFs has been underwhelming, with little uptick in trading volumes or open interest in CME Ethereum futures. He speculated that macroeconomic factors and price action in Ethereum may be contributing to the lack of interest.
Altcoin Options and Solana
Abra does trade altcoin volatility, with Solana being the primary focus of client demand. Bohan pointed out that while Solana is often debated as an altcoin, it has a large trading volume and strong interest from institutional players. Other altcoins, such as Axie Infinity, also attract occasional interest. However, the altcoin derivatives market remains relatively small, and only a few coins may have enough liquidity to support a mature derivatives market in the long term.
Crypto Index Options and Future Developments
Potential for Crypto Index Options
Bohan believes that crypto index options could eventually become a significant market, particularly if an ETF holding a variety of cryptocurrencies is approved. However, the dominance of Bitcoin in the overall crypto market presents a challenge for creating meaningful indices. An index excluding Bitcoin, or a decrease in Bitcoin’s dominance, may be necessary for index options to gain traction.
Conclusion
The podcast concluded with a reflection on the growing sophistication of the crypto derivatives market and the potential for further institutionalization. As liquidity increases and more players enter the market, Bohan believes that opportunities for traders and hedge funds will continue to expand. Abra is well-positioned to capitalize on these developments, offering both proprietary trading and OTC services to its clients.
For more information about Abra visit: https://www.abra.com/
AMBERDATA DISCLAIMER: The information provided in this research is for educational purposes only and is not investment or financial advice. Please do your own research before making any investment decisions. None of the information in this report constitutes, or should be relied on as a suggestion, offer, or other solicitation to engage in, or refrain from engaging, in any purchase, sale, or any other investment-related activity. Cryptocurrency investments are volatile and high risk in nature. Don't invest more than what you can afford to lose.
