AD Derivatives Podcast Feat Michael Dunn, President at Bitnomial Exchange

Welcome to the AD Derivatives podcast led by Director of Derivatives; Greg Magadini.

Featuring: Michael Dunn, President at Bitnomial!

Bitnomial was founded in 2014 to create a marketplace connecting native digital asset hedgers with institutional traders. Bitnomial offers improved derivatives exchange technology coupled with new digital asset settlement systems.

NFA Approval: Bitnomial Clearing, LLC was approved as a futures commission merchant (FCM) by the National Futures Association (NFA) to operate a clearing firm for margined and deliverable digital asset futures and options.

CFTC Approval: Bitnomial Clearinghouse, LLC was registered as a derivatives clearing organization (DCO) by the US Commodity Futures Trading Commission (CFTC) to operate a clearinghouse for margined and deliverable digital asset futures and options, becoming the first crypto-native exchange to be granted the full set of CFTC derivatives licenses.

We discuss Michael's background as a bond market-maker at Allston Trading in Chicago. We also discuss the unique value Bitnomial presents to crypto miners and speculators. Including physically settled futures contracts.

Introduction

The podcast began with Greg, the host, introducing Michael Dunn, President of Bitnomial Exchange, a prominent player in the crypto derivatives market. Both hailing from Chicago, they connected over shared backgrounds in trading, particularly within the Chicago trading ecosystem.

Background and Career of Michael Dunn

Michael Dunn's entry into trading was rooted in his background as a computer science major. He began his career at Allston Trading, a firm where many Chicago trading companies recruited technical talent. Initially starting on the operations desk, Dunn transitioned to the trading desk, focusing on fixed-income futures, including U.S. Treasury products like the 5, 10, and 30-year bonds, as well as European fixed-income products like the Bund, Bobl, and Schatz in Germany. His trading experience also extended to the S&P 500.

Dunn's journey through the trading industry was marked by several significant market events, such as the 2014 U.S. Treasury flash crash, a liquidity event that highlighted the volatility and risks inherent in trading. His experience in market making, particularly in scalping and basis trading between cash and futures, equipped him with the skills needed to navigate these challenging environments.

Transition to Crypto

Dunn's interest in crypto was sparked by observing colleagues trading Bitcoin in their personal accounts during the early years of Bitcoin's rise. The volatility and unique characteristics of Bitcoin piqued his interest, leading him to explore the asset further. By 2015, Dunn had developed a serious interest in Bitcoin, recognizing its potential as a revolutionary financial product.

His initial attempts to apply traditional trading strategies to Bitcoin markets quickly revealed the limitations of the existing infrastructure. Unlike traditional markets, Bitcoin trading lacked the liquidity and efficiency required for strategies like scalping. This realization motivated Dunn to consider the broader implications for the market and the need for better infrastructure to support institutional trading in the crypto space.

Bitnomial Exchange: Founding and Growth

In 2016, Dunn joined Bitnomial, a company founded by Luke Huren, whom he had previously worked with at Austin Trading. Bitnomial was established to build a U.S. based crypto derivatives exchange that could offer the same level of sophistication and infrastructure as traditional financial markets. Dunn played a crucial role in building the market infrastructure for Bitnomial, including matching engines, gateways, price feeds, and market surveillance systems, all of which are essential for a compliant and efficient trading platform.

Bitnomial operates under its parent company, Bitnomial Inc., which has three major subsidiaries: Bitnomial Exchange, Bitnomial Clearing House, and a brokerage arm. Bitnomial Clearing House, which received its final license in December, enables the exchange to run its clearing operations, adding a layer of robustness to its offerings. The brokerage arm, though firewalled from Dunn's side of the business, allows Bitnomial to face customers directly, providing a comprehensive suite of services from execution to clearing and brokerage.

Customer Interaction and Trading Products

Bitnomial's approach to customer interaction is modeled after traditional U.S. futures and options exchanges. Customers can establish relationships with futures commission merchants (FCMs) like R.J. O'Brien, StoneX, and Bitnomial Clearing to trade on the exchange. Bitnomial offers a range of products, including physically settled Bitcoin futures and options, as well as innovative products like hash rate futures, developed in partnership with Luxor.

These hash rate futures contracts are a pioneering product in the listed market, allowing miners and other market participants to hedge against hash rate volatility. This innovation is part of Bitnomial's broader strategy to offer a full suite of products that address the needs of Bitcoin miners and institutional players, enabling them to hedge various risks associated with their business in a capital-efficient manner.

Future Product Development

Looking ahead, Bitnomial is focused on expanding its product offerings to include electricity futures, specifically tailored to the needs of Bitcoin miners in regions with high mining density like Texas. By offering a complete suite of products, Bitnomial aims to provide miners with the tools they need to hedge all aspects of their business, from Bitcoin price and hash rate to electricity costs. This comprehensive approach will allow miners to stabilize their cash flows, secure financing, and scale their operations with confidence.

Maturity of the Bitcoin Market

Dunn emphasized that the maturity of the Bitcoin market is still in its early stages, particularly in terms of financing. Current financing options for Bitcoin businesses are often limited and expensive, with high loan-to-value ratios and interest rates. Bitnomial's goal is to create a more mature market where businesses can hedge their risks and obtain better financing terms, similar to the traditional commodity markets.

Dunn also highlighted the importance of bringing institutional-grade infrastructure to the Bitcoin market, enabling better price discovery, margin trading, and overall market efficiency. By offering a U.S.-based exchange with a compliant and robust infrastructure, Bitnomial aims to bridge the gap between traditional finance and the emerging crypto economy.

Conclusion

In conclusion, Michael Dunn's journey from traditional finance to the crypto space reflects the broader evolution of the market. His work at Bitnomial is centered on building the infrastructure needed to support institutional participation in crypto, with a focus on creating a mature, efficient, and compliant market. As Bitnomial continues to grow, its innovative products and comprehensive approach to risk management will play a crucial role in shaping the future of crypto derivatives trading.

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.