Genesis Q2 2023

Q2 Market
Observations
Introduction
Arriving at the mid-point of 2023, the digital asset space has taken on More Information
a decidedly transitional feel awaiting the next watershed moment. Q2 To learn more about Genesis, or
to work together with the Genesis
saw the arrival of new players set against the prior quarter’s washouts team, contact us at:
of industry stalwarts, prospective new product filings in the wake of
[email protected]
sweeping regulatory enforcement, and fresh rulings on the judicial front www.genesistrading.com
that have begun to assuage chronic concerns about the statutory status
of certain digital assets. Press
All press inquiries should be
directed to:
With a robust rally in prices that once more pushed bitcoin above the
[email protected]
$30,000 threshold, the April-June period also eclipsed the anniversaries
of some of the prior year’s mayhem, which have begun to feel increasingly
distant as progress for the industry on multiple fronts swamps legacy
challenges.

Q2 was at once a valediction and a validation, bidding farewell to long-

lingering gadflies and welcoming the top tier of TradFi mainstays to the
fold in a pivotal shift for the asset class.

Q2 2023 - MARKET OBSERVATIONS REPORT 2 - 15

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1 Q2 2023 Trading Insights

Bruhaha
Trading rhythms alone typically do not set the tone on a three-month
horizon or longer. In much the same way that Q2’s market activity saw
an extension of established practices, a renewed focus on managing
counterparty risk continued to drive client engagement as market
participants evaluated firms with which to continue working after the
succession of collapses that now spans crypto trading venues, banking
providers and custodians.

In that vein, tri-party arrangements with various custodians and execution

venues partnering for off-exchange settlement has lodged itself into the
broader ecosystem as a requisite due to last year’s trauma and this year’s
more recent disruptions. It’s plausible that the tri-party arrangements
will become part of the standard operating framework for many firms
who wish to intermediate bilateral exposure while still accessing robust
liquidity from OTC dealers and exchanges.

The preeminence of counterparty consideration foreshadows the next

wave of institutional crypto adoption, which may include more advanced
iterations of prime services offerings and execution and operational
facilities, both on- and off-chain. In anticipation of those, the buy-side
continues to trade opportunistically in the spot and derivatives market,
specifically with a tilt toward exchange-cleared venues and a selective
approach to OTC activity with reliable and trusted partners

Q2 saw a far more significant amount of activity than might have been
expected with such range-bound markets, as BTC traded listlessly
between ~27,000 and ~30,000. Global banking destabilization, exchange
solvency concerns, and the resolution of regulatory battles dominated
the landscape as constructive sentiment returned with the Fed’s
prospective pause on interest rate hikes and BlackRock’s application
for its institutional Bitcoin product. With the latter milestones coming to
the foreground, the desk observed an increase in client activity across

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segments bolstered by promising developments such as the favorable

Ripple ruling, the launch of offshore futures by Coinbase, and the
emergence of EDX, the trading platform backed by Citadel, Fidelity
and Schwab and partnered with crypto EMS Talos.

In such sideways markets, the search for winning idiosyncratic trades

returned, emphasizing client dialogue. A true value-add OTC desk is
generally known to provide clients with commentary, analysis, and
market color; this quarter’s conversations included all of that and then
some, with a heavy tilt toward trade edge capture from assessing
market structure, flow decomposition and thought leadership
throughout the vicissitudes of the mini cycles observed during the
~90-day window.

Following the rally in March, there was a notable increase in BTC

overwriting amongst longer-term HODLers, while directionally
oriented asset managers purchased longer-dated lower-delta BTC
wing calls to capture both the upside convexity and relatively low
volatility as well as depressed basis exhibited in the market. On the
back of BlackRock’s ETF application, we saw a surge in bullish plays
from crypto native clients who legged into shorter-dated wingier call
spreads while ATM-25 delta skews were still cheap.

Alongside a clear premium being placed on execution and stability,

operational capabilities became top of mind following the wind-down
of certain banks. Since then, we’ve seen market participants clamoring
to onboard with replacement banking partners as a prerequisite for
stability in settlements and uninterrupted transactions worldwide.
Stablecoin settlements surged, as did in-kind collateralization, and
it is expected that market participants will rely on these alternative
forms of financial transmission to the extent that fiat rails remain
compromised in the future. The banking bruhaha also cemented a
nascent predilection of many shops moving operations offshore. While
a select handful of “crypto-friendly” banks in the US captured the runoff
market share from legacy digital asset-oriented firms, it is becoming
increasingly clear that as long as there is regulatory scrutiny without
clear guidance on rules and regulations, financial services firms will
continue expanding their operations abroad.

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Trend Following
At this juncture, the once-heterogenous ecosystem of cryptocurrency 1 Bitcoin Liquidity Dries Up With
‘Tourists’ Recoiling From Chaos,
venues has begun to converge into two definitive focal points: OTC Bloomberg

and listed trading. Within these two domains, each now entails its own 2 Trade Volume Surging to Start 2023,
Conor Ryder, CFA, Kaiko
taxonomical hierarchy for trading spot, linear derivatives, and, most
3 CCDATA: 10 May 2023: “Derivatives
critically for our desk, options. In that context, there were comparatively trading volume on centralised exchanges
few new trends in Q2 2023, but rather a solidification and acceleration fell 23.3% to $2.15tn in April. However,
the market share of derivatives reached
of those persistent phenomena, of which many have been flagged in a new all-time high for the second

Genesis’ prior quarterly retrospectives. consecutive month, with a market share

of 77.6%”

1. Derivitization 4 Surging Demand for Derivatives

Is Fueling Bitcoin’s Resurgence,
With spot market liquidity suffering1 and spot order book depth Bloomberg

chronically flagging2, it has become increasingly apparent that a 5 Bitcoin Options Volume Soars Above

significant portion3 of the future growth of crypto volumes will be in $3.3 Billion In 24 Hours As BTC Price
Sniffs $31,000, ZyCrypto
derivatives4. Deribit, the apex crypto options exchange, set a fresh 6 Institutional-sized Bitcoin and
YTD high for the number of option contracts traded in a 24-hour Ether futures contracts launching
on Coinbase Derivatives Exchange,
window as bitcoin reclaimed the $30,000 mark5. The second quarter Coinbase
also witnessed the launch of onshore institutional-sized fixed date 7 CME Bitcoin (BTC) and Ether (ETH)
and offshore perpetual futures by Coinbase6. At the time of the writing Options Volume Rose to $940M in July:
CCData, Coindesk
of this report, CME crypto options volumes have seen a material
pickup in volume by nearly 25% to ~$1bn, even as futures trading
volumes fell, boding well for a continuation of the trend that options
are increasingly seen as the go-to instrument for institutional players7.

Global Crypto Options Volumes

Deribit Delta Exchange Bybit OKX Binance PowerTrade
BIT.com Aevo Lyra Optimism Lyra Arbitrum Zeta Markets
$5.0B

$4.0B

$3.0B

$2.0B

$1.0B

$0.0B
17-Jul-22 17-Aug-22 17-Sep-22 17-Oct-22 17-Nov-22 17-Dec-22 17-Jan-23 17-Feb-23 17-Mar-23 17-Apr-23 17-May-23 17-Jun-23 17-Jul-23
Source: Laevitas

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Monthly Spot vs. Derivatives Volume

Spot Derivatives

$12,000B

$10,000B

$8,000B

$6,000B

$4,000B

$2,000B

$0B
Jun-20 Oct-20 Feb-21 Jun-21 Oct-21 Feb-22 Jun-22 Oct-22 Feb-23 Jun-23
Source: CCData

BTC Real Volume (7-Day Moving Average)

$45B
$40B
$35B
$30B
$25B
$20B
$15B
$10B
$5B
$0B
Dec-20 Mar-21 Jun-21 Sep-21 Dec-21 Mar-22 Jun-22 Sep-22 Dec-22 Mar-23 Jun-23
Source: Messari, Kaiko

2. Institutionalization
Just as crypto mainstays like Coinbase rolled out new offerings, Q2
also heralded the arrival of an establishment armada which appears
now to be docked on the shores of this asset class. We view this
development as the omen of a bright future that foreshadows a
restoration of access, a proliferation of fresh products/services,
and an unblocking of legal logjams. All of which will contribute
meaningfully to the texture of a marketplace that, by the numbers,
has been sizing up as a secular consideration. Block trade volumes,
a proxy for institutional grade activity, have been rising relatively
unabated for some time. The prospective ability to express views
on crypto majors through one or more spot-based ETFs managed
by household TradFi names like BlackRock and Fidelity alongside a
spot-trading venue (EDX) supported by them (and their peers) is likely

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to contribute to burgeoning volumes and broadening participation

amongst larger-sized allocators. Between US Pension funds,
401ks, and Hedge funds alone, sits roughly $50T in capital that can
hopefully soon gain exposure to Bitcoin via a spot based BTC ETF.
The introduction of ETFs has in the past proven a meaningful catalyst
for further price appreciation in the underlying asset. Such was the
case for assets previously considered ‘fringe,’ from junk bonds to
emerging market debt and precious metals, which now form a core
part of most macro portfolios, for which index and ETF access product
is now rife and which experienced a material appreciation post-ETF
launch. If those patterns hold for bitcoin, a modest allocation by such
institutions could fuel a return toward all-time highs, or beyond. Market
participants appear to agree; with sizable purchases of medium-term
call options on bitcoin throughout the last weeks of Q2 and, as of the
time of writing, the first month of Q3. There’s also been no shortage
of sellers of bitcoin downside, who seem undaunted by the prospect
of delays in ETF approvals or lags in adoption rates thereafter. It’s also
worth noting that, similar to those aforementioned asset classes, a
secular decline in volatility across both bitcoin and ether, for which
the relative price of optionality neatly converged in Q2, has certainly
boosted the affordability of options as a tool for directional leverage.

Additional considerations, such as the surveillance sharing

arrangements (“SSA”) underlying those ETFs’ applications reflect
material progress in the peace process amongst regulatory
contenders. Therefore, it’s hoped that the arguments over legal
jurisdiction and classification may, to some extent, be finally
settled. Clarity on landmark cases such as the Ripple ruling will
further add to confidence to the view that: this is an asset class
with permanence and not a fly-by-night proposition without roots.

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BTC Option Blocks as % of Total Deribit Volume

(1-month moving average)
Block/Premium Block/Notional

60%

50%

40%

30%

20%

10%

0%
15-Aug-22 15-Nov-22 15-Feb-23 15-May-23
Source: Amberdata

ETH Option Blocks as % of Total Deribit Volume

(1-month moving average)
Block/Premium Block/Notional

70%

60%

50%

40%

30%

20%

10%

0%
15-Aug-22 15-Nov-22 15-Feb-23 15-May-23
Source: Amberdata

As we have mentioned in past reports, a robust crypto derivatives

market can usher in institutional adoption on a global scale. The
crypto options market volume for the first half of 2023, while
growing feverishly, was still only ~10% of underlying spot volume.
As a corollary, the notional volume of equity options in the US
exceeded the notional traded value of the underlying equities
in 2021 for the first time. If following this TradFi trend, the crypto
options market has room to grow 10-fold from current levels.

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2023 Crypto Spot and Options Notional Volumes

Spot Derivatives

100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
Jan Feb Mar Apr May Jun
Source: Laevitas

3. Commoditization vs. Specialization

The market has become increasingly bifurcated between low
edge, smaller vanilla flow and transactions at an institutional scale,
often occurring under the auspices of a high-touch framework.
Genesis has been trading an ever-greater percentage of our
volumes via deliberately structured, sizable trades with some of the
industry’s largest participants, both crypto native and TradFi alike.

BTC Multileg Option Blocks as % of Total Notional Traded

80%

60%

40%

20%

0%
1-Jan-21 1-May-21 1-Sep-21 1-Jan-22 1-May-22 1-Sep-22 1-Jan-23 1-May-23
Source: Paradigm

That is reflected in the overall proportion of our volumes that are

bilaterally negotiated prior to execution, often with a highly bespoke
degree of dialogue and analysis. This allows clients to customize
the expressions of their views in a way specifically tailored to their
mandates and needs. It’s also evident in overall market evolution,
such as the growing share of option blocks that now trade as multi-

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leg packages, which provide payoff profiles that reflect the distinctive
demands of various pools of capital being put to work in crypto.

Screen Trading vs Block Trading (ETH + BTC Notional)

On-Screen Block

100%

80%

60%

40%

20%

0%
Aug-22 Sep-22 Oct-22 Nov-22 Dec-22 Jan-23 Feb-23 Mar-23 Apr-23 May-23 Jun-23
Source: Amberdata

This has placed an added burden on market makers, who must handle
outsized, concentrated flows from such corners, whereby the risks
of zero-sum interactions may increase. According to an exhaustive
analysis conducted by industry peers, there may be negative expected
value for blindly providing liquidity absent requisite conditionality on
knowing the absolute magnitude of flows in advance and intimately
understanding multi-player game theoretic dynamics, including pre-
existing strike risk in the market and simultaneous taker activity.

4. Macrofication
More so than at any time in crypto’s brief history, clients now rely on 8 Russia has risen to second place in
the world in cryptocurrency mining,
digital asset trading instruments to express non-idiosyncratic views Kommersant

on various outcomes. These range from macroeconomic vectors 9 Russia Becomes World’s Second-
Largest Crypto Miner, The Moscow
like inflation and growth to policy-driven considerations like interest Times
rates and debt limits, including cross-asset plays on crypto vs. equity 10 Marathon Teams Up With Abu Dhabi’s
or commodities and digital asset volatility vs. traditional asset vol. Zero Two for Middle East’s First Large-
Scale Immersion-Cooled Bitcoin
Moreover, there is a growing awareness that crypto now constitutes a Mining, CoinDesk
measurable share of worldwide economic activity, even if only by proxy.

For instance, Russia has ascended to the #2 rank8 in global hash

rate9– effectively monetizing otherwise unsaleable natural gas via
proof of work mining. Similarly, the recently announced joint venture
between Abu Dhabi’s Zero Two and Marathon Digital10 has formally
cemented the presence of a premier Sovereign Wealth Fund within the

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digital asset ecosystem. With the supposition that such mining could
eventually lead to the holding of crypto on the balance sheet of one of
the world’s wealthiest monarchies, Bitcoin has lobbed a counterpoint
to the prevailing invective surrounding digital asset use in developing
economies which often rely on crypto in some measure to keep the
wheels of commerce greased (such as West Africa, Latin America,
MENA, and North Asia).

Conclusion
The second quarter of 2023 may be remembered as the moment
the establishment commenced its veritable land grab for crypto.
Yet strangely, it has also been characterized by a material degree of
apathy from a wide swath of industry participants. With the landmark
announcements of fresh spot-based ETF applications by some of the
world’s largest asset managers, a watershed judicial victory, and the
drumbeat of new trading venues and products offered by marquee
TradFi and crypto-native shops, there were plenty of catalysts for fresh
cyclical highs. Instead, we saw a tendency toward skeptical reception
from several respected crypto pundits, which jived with a market that
appeared eager to fade a breakout higher.

The digital asset space has long defied conventional expectations

about how and when mass adoption may hit, and so too has it
hampered projections as to when bull (or bear) markets begin and
end. With major’s prices ostensibly well supported just below the key
psychological thresholds of 30,000 and 2,000, these figures have
been ascribed a degree of importance akin to lines of demarcation to
a certain extent.

But the reality is that they are numbers, perhaps take profit targets
for tactical players, buy-in limits for momentum-driven investors, or
merely technical heuristics for those who find the occasion to draw
the lines higher or lower on any given chart. The truth is in the statistics
about volumes, volatility, margins, price trends, and the breadth of
participation. When viewed with an elongated perspective, Q2 2023
appears, therefore, to be affirmative in most respects.

Q2 2023 - MARKET OBSERVATIONS REPORT 11 - 15

 Trading Insights → About Genesis

About Genesis Stay Connected

For more information from this
report, contact us at
Genesis is a premier institutional digital assets financial [email protected], or
services firm providing a single access point for select call us at (212) 668-5921.
qualified individuals and global institutional investors.
www.genesistrading.com
Genesis combines best-in-class client service, unrivaled Twitter
operational excellence and a seamless user experience to LinkedIn
provide investors with a full suite of services to manage
their portfolios.

The firm offers sophisticated market participants an

integrated platform to trade digital assets, creating
pathways to benefit from market opportunities while
increasing capital efficiency for counterparties.

For more information, please visit genesistrading.com.

Q2 2023 Report By:

Gordan Grant Ravi Doshi Josh Barkhordar

Managing Director, Trading & Sales Head of Trading Head of Sales

Greg Guttas Jake Kaufman Hanson Birringer

VP, Spot & Derivatives VP, Spot & Derivatives VP, Institutional Sales

Chana White Raji Pillai

VP, Marketing & Communications Associate, Institutional Sales

Q2 2023 - MARKET OBSERVATIONS REPORT 12 - 15

Disclosures
Other than disclosures relating to Genesis, this research is based on current public information that we consider reliable, but we do not
represent is accurate or complete. This research should not be relied upon as investment advice. The information, opinions, estimates and
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