We get real life advice from traders in crypto - this is the first in a series looking at the issues, challenges and opportunities with real world trader, Thomas Maciocco, Trader at Blockchain.com.
Maciocco spent the first three years of his career programming at a traditional quantitative equity hedge fund, before making the jump to digital assets trading, where he has spent the last three years.
Originally, he was hired by Blockchain.com, billed as the world’s leading crypto finance house serving people, projects, protocols and institutions since 2011, as a quantitative trader, and has since held roles in the derivatives, algorithmic and DeFi trading space for their institutional desk.
“The Blockchain.com institutional desk serves clients around the world - providing institutional clients with world-class service in OTC spot, options, and DeFi trading.”
“Over the last year, we’ve been working hard with the team to grow our DeFi trading desk, and we’ve found a lot of synergies with the other parts of our business (spot / options), that have really put Blockchain.com at the forefront of institutional DeFi trading - and more generally, as one of the leading institutional desks in the world.”
“The intersection of derivatives and DeFi happened at an interesting time. 2022 saw two processes running in parallel - the collapse of major centralized financial institutions (Celsius, 3AC, FTX, etc.) and incredible innovation in the DeFi space. The former got all the media attention, while the latter quietly kept innovating and launching new products for users (DOVs, perpetual DEX, exotic products, and many more on-chain use-cases).”
“We found that by trading derivatives and DeFi, we got the best of both worlds; derivatives being capital efficient, and DeFi being transparent, we got a mix of lower counterparty risk, the convex payoff and hedging properties of options, and the decentralization and yield of DeFi.”
“Using options to hedge minimizes our exposure in a more efficient manner and can also provide a nice payoff if it goes the right way.”
Having a technical background is also really helpful in studying options. As Maciocco says, anyone can buy or sell an option - but understanding the math behind it and what can go wrong is critical.
Options pricing and technological innovation
Maciocco is constantly looking at how to refine options pricing strategies.
“I’m constantly learning how to price derivatives. The theory behind the pricing is very complex and it helps to understand it.” The cornerstone of derivatives pricing theory is considered to be the Black-Scholes method, which has been refined over the years to price ever more complex derivatives.
“Pricing options without knowing the theory is like entering a dark room trying to find what you’re looking for. Pricing options knowing the theory is like entering that same dark room except now you have a very dimly lit candle to help you make your way around. It provides a small helping hand.”
About three months ago, Maciocco was introduced to Bumper.fi, a novel derivatives platform which launched on Ethereum mainnet at the start of September. Maciocco did a deep dive on the platform.
“Bumper has a unique design in which option premium is paid out and received based on realized volatility over the term of the option - contrary to premium’s exchanged based on implied volatility in traditional derivatives markets.”
“Overall, I think this makes derivatives markets more efficient, it closes the gap between speculators and hedgers and assigns a fairer mark to the value of the options - what volatility they actually realize over the duration.”
Regarding the yield offered by Bumper for holders of USDC to provide liquidity, Maciocco applies the same rules as he does for his other investments.
“It comes down to risk-reward and what the alternatives are; treasuries pay around 5% at press time, on-chain stablecoin pools can pay up to 8% for the added smart-contract and stablecoin risks, on-chain exposure to volatility can be an attractive investment based on how the yield compares to other alternatives. Users should always do their own research.”
“Ultimately, I think someone who appreciates trading volatility and derivatives will be impressed with what the Bumper team has built. Mechanically it's a complex protocol, and certainly a great read for fans of DeFi and derivatives.
Innovation in Derivatives
Other innovations in the derivatives market are the Option DeFi Vaults or DOVs, which gained traction in 2022. The beauty of DOVs lies in its simplicity. Investors simply ‘stake’ their assets into vaults which deploy the assets into options strategies. Before DOVs, option strategies were only available to accredited investors through over-the-counter (OTC) trading or by self-execution on option exchanges like Deribit. Also in 2022, the rise of on-chain perpetual DEXes, like GMX, came onto the scene offering traders to use up to 50x leverage on futures on the exchange.