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Alexia Theodorou, Kraken Futures Product Lead, spoke to Rudolf Falat, founder of the Voice of FinTech podcast, about the role of derivatives in the crypto markets and futures in particular.
Aiming to inspire entrepreneurs around the world to launch their new ventures. Connect FinTech enthusiasts with start-ups, incubators, accelerators, investors and incumbents.
Tobtok: [00:00:00] Voice of FinTech.
Rudolf: Welcome to Voice of FinTech at podcast mapping out the Swiss and global FinTech scene connecting FinTech enthusiasts with startups, incubators, accelerators, business engines, and VCs, and incumbents interested in partnerships. Voice of FinTech will help you navigate the FinTech ecosystem here. You can listen to the startup and founder stories, what investors and incumbents are looking for when dealing with startups and find out more about resources provided by incubators and accelerators. My name is Rudi Falat, and I'll be hosting this podcast.
Hello and welcome to Voice of FinTech. Today we're going to travel to sunny Cyprus and we're going to [00:01:00] talk to Alexia from Kraken Futures, and we're going to talk about crypto derivatives. So how are you today, Alexia?
Alexia: Hey, I'm good. I'm good. Thank you. How are you?
Rudolf: Brilliant. So what's your background?
How did you get to do what you do today? And why have you decided to join Kraken Futures?
Alexia: Yeah, so I have spent most of my career within a traditional final space, as you might call it, mean, due to my educational background on computer science, I started my career as a software developer. I very quickly realized that I wanted to get more into the financial markets and I understand them better.
I moved on to complete my chartering financial analysis and combine then my tech passion with within investment banking and the brokerage space. So I did various product roles in the JP Morgan, Barclay, Capital S, et cetera, and yeah, there I spend a lot of time with [00:02:00] traders. Getting a good understanding on what makes them tick, what makes markets work, et cetera.
Now, the why Kraken, of course, I joined Kraken because I was very attracted to its strong principles on financial independence, innovation of course, and transparency and everything that Kraken stands for. But it was also a great challenge for me to solve problems we've seen in the traditional space and remove barriers to.
Into the financial markets within a brand new asset class like crypto. So
Rudolf: what is the problem that you're solving at Kraken Futures?
Alexia: Yes. I mean, in Kraken in general, Krakens mission in general is supports to accelerate the adoption of cryptocurrency so that people all over the world achieve financial free gomen inclusion.
Especially if you think that more than 1.7 billion people in the world remain unbanked at Croke. And we do try to offer tools [00:03:00] and utilize scripted tweak for potential to give access to clients to participate in the financial market. Now at Kraken Futures specifically, we try to offer more of a one stop shop experience to our clients.
We want to give them the ability to access any marketplace they have a view on all under one ecosystem. Of course, to do these, we need to get many things right, like making sure our risk management is robust. We have product diversification for the clients. The user experience is. Performance, robustness and what have you to make sure we compete meaningfully in a very competitive space.
Rudolf: So financial inclusion in general. So that is the mission for all, uh, cryptocurrencies or blockchain and exchanges. What is the need for the futures on crypto? Why is it worth solving and building today? Yeah,
Alexia: to, I think, to understand them, to understand why the teams are traded [00:04:00] so much and why they're so important.
It's worth looking how much it is used in the centralized market. The first reason that someone would use the derivatives, it's because they offer a synthetic way to trade into the market. So it gives clients the ability to make a directional view on the market without having to physically on the underlying.
So if we bring it home to crypto, you can get exposure. Bitcoin price moves, but never having to own Bitcoin in an exchange or in a wallet, which is quite powerful and important to some. And secondly, the derivative offer a much more capital efficient way to, to trade. So let's say you, you wanna buy $100,000 worth of a stock with click, with the Deriv, you can get into these $100,000 worth of national acquisi.
By using say, 50,000 worth of your dollars and then use the rest into something else. [00:05:00] So that capital efficiency is also very important. Quarterly, at least. Thirdly, I would say derivatives represents something that doesn't exist in in the sport market, in the physical. It gives you access to markets that would otherwise be accessible for you.
For example, in the stock market, you might want to trade an option on a stock whose price relates to its expired, to its volatility, not just it. Price of their stock. In the same way in crypto, you might have a view of Bitcoin's volatility and not necessarily its price. So in that case, you might want to trade a derivative, which will take them to affect them implied volatility of Bitcoin instead.
So that, that's another very powerful way to to think about derivatives importance. And then I'd say finally, derivatives are a risk management tool in every trader's portfolio. again, we think about, let's say, [00:06:00] buying pretty share airway stocks. The value of that stock exposes you to various types of risks.
Say the pound evaluating fuel prices rising. A derivative will help you to get exposure or catch the risk of your exposure in one of those things alone, if you like. So if you're interested in being exposed to the price of fuels in the next couple of. Then you can hedge part of that by getting into a derivative set.
Right. So yeah, I would say overall derivatives help both institutional players and individuals get exposure and manage their in a very
Rudolf: meaningful way. And just like on traditional securities, you need derivatives as well for crypto, right?
Alexia: Correct. Correct. Yes.
Rudolf: All right, so who are your key clients? Are you focusing on retail investors or institutional investors?
How does that work?
Alexia: Oh, it's a mixture. It's a mixture of both, for sure. In Kraken Futures [00:07:00] specifically, we find that there are, say, three types of clients who want to trade derivatives. You find it's the clients that have a view on where a certain quick facet will. And they express that you by going along futures position or, and they are using futures to profit as the price of the underlying false psoriasis.
This can be retail oil, institutional investors, likewise, and then the clients who want to mitigate the risk in their portfolio. So say you have Bitcoin in your portfolio and you believe that it'll experience some short-term volatility. You don't have to sell to protect against your losses. So you don't need to sell your, You can get into a short futures position and hedge that risk or mitigate that risk of the falling prices of your Bitcoin so that, again, we see both institutions and retail clients alike.
And then of course you have the market makers, liquidity providers. These are the [00:08:00] clients who. Are mostly execution. They don't necessarily have a view on where the market goes or how the market will move, and they provide the market for other clients to trade by offering by and sell as a spread and make, make their
Rudolf: money from that.
Then roughly, maybe we can just talk about the market, but when you look at the traditional securities in Europe, unless you are in the uk, people trade the shares directly less than in the UK or the us. And therefore also the retail investors trade derivatives on those less than in the Anglo action market.
So how do you see it around the world and retail investors accepting the derivatives on crypto? Is this still. An early stage game, which is has a lot of potential or you already see some big impact from the retail side as well. It it's
Alexia: more chicken and egg situation, so you do need the retail traders to get into the order book and make sure you have the retail flow in the order book.
[00:09:00] For a well functioning market, you do need both. But if we compare it with the trading for derivatives that we see in traditional markets, we see that in traditional markets. Derivatives volumes are in an order of magnitude of more than the spot volumes, the underlying spot volumes. We do see that in crypto as well.
We do see that roughly, say around 60% of the total crypto volumes come from derivatives, and that means, just to put it in perspective, something like 5 billion to 200 billion in derivatives a day. So that's huge for crypto at. But we are not seeing the ratios that we are seeing on the traditional market yet for the derivatives.
And then there are, I think there are number of reasons for that. There are a number of reasons why we don't see these levels of penetrations to the derivative space. And of course, it comes back to having the right user experience, removing barriers, 20, et cetera. [00:10:00] But it's, I also believe that it is a matter of the space maturing.
If we think about the traditional space, we see that the majority of the derivatives volume doesn't come from speculators. It does come from businesses or retail traders, fulfilling individuals, fulfilling and actual demand. They have to manage their in crypto. Most projects are still at an infancy stage with a very small user.
So as the number of businesses and crypto project increase, I think we will be seeing the use cases of more crypto derivatives, potentially increasing there as well from retailers all the way to institutional investors.
Rudolf: I see. So let's clarify. So Kraken is a crypto exchange and Kraken Futures is the subset of that for futures on crypto.
Alexia: Yes. So Kraken Futures. It's part of Kraken and it is the Kraken Kraken [00:11:00] platform to trade your derivatives from. That's right, please.
Rudolf: All right. A lot of people wanna try it out. And you said, as you said, this is highly innovative projects in their infancy. Some of them take off, They are amazing and they have all kinds of use cases.
Maybe not so much, but people who are looking, uh, at it from outside and they may be, are a little bit worried about the headlines that you sometimes see related to certain cryptocurrencies being hacked. And it happened at the interface between the blockchain and some other platform. How would you explain the security about related to trading or cryptocurrencies at Kraken or Kraken Future specifically.
Alexia: Yeah, you're right. So I think VC is one of the biggest hurdles we face in the crypto industry and is that the many people are reluctant to adopt crypto because they do not feel it is safe due to all these headlines you mentioned. But at Kraken, trust and safety are paramount, of course, [00:12:00] and we have people dedicated to work on the security and that people are relying on us to protect their money and digital assets.
Yeah, providing a secure offering is a focus of everything we do from trade transactions, storing their crypto, what have you. So yeah, we've witnessed many examples of, of crypto platforms and services where safety and security was secondary and no matter what product offering you have interface, you know, without the security It ultimately doesn't mean much.
Rudolf: All right. Now we talked a little bit about why you need to trade or why people trade derivatives. Any specifics that you can highlight which relate to trading derivatives on crypto versus traditional markets because people come to crypto because they're attracted to decentralized notion of it.
Yet you need to trade the crypto on centralized exchanges. [00:13:00] And then you have derivatives on those as well. So how does it all fit
Alexia: together? Yeah, that's a good question. I think at the moment we do see that most of the crypto derivative volume does come from speculators, like we discussed about, these are clients that do wanna take a view on the market and they do not want to have ownership of the underlying, but.
Still want to get exposed on the price, but if we zoom in a bit more and, and see who actually uses scripted derivatives, besides speculation, I think we're seeing here the minors and now stakes. So for example, mining is a very obvious case where let's say you are a minor and you have bought all your mining equipment and your plan is to keep mining coins going forward.
So one of. You are exposed to now and in the future is falling prices of the coins you're mining. Miners are using futures to mitigate this risk [00:14:00] by going short the underlying coin you're mining and making sure you are not exposed to falling prices of your coins.
Rudolf: I see. Mm-hmm. .
Alexia: I was gonna say also, I think another good use case that we will start seeing more and more would.
As more merchants accept crypto, then I think derivatives will be a very useful and capital efficient way for them to hedge against the crypto activity, which will be a problem for the merchants as they will be holding.
Rudolf: I see. And you talked about the multiple of the derivatives notion versus the underlying is not the same or not there yet versus traditional markets, and why is that?
But you've touched on retail institutional investors as well, so who are the key players in crypto derivatives and maybe futures specifically, but there are also other ones. Do you have options and forwards and swaps and everything on crypto already, or not yet?
Alexia: We, in the crypto [00:15:00] derivative space, we have What is crypto derivatives?
The products that are available, are the futures, so, So futures, which linearly track the spot price of the underlying. So these are fixed maturity contracts or perpetual swaps features. Um, and these, and Perpetuals, or PERS, as you might have heard them, is the, it's an innovative and crypto native product, which has no maturity, keeps track of the underlying spot price via and index, and there's no need to keep rolling forward.
So this is the most popular future product right now in the market. That's where we see most of the. Of our exchange and most exchanges coming from. And then, yes, there are options not yet on car derivatives, which are non-linear products. And their price is derived by many variables, not just the the price of the [00:16:00] underlying, but the volatility, the time to expire, et cetera.
And we are seeing a growing demand on options because it will enable clients to take advantage of many variables within the crypto. So you might want to protect your portfolio with an out of money option or pay a premium for the chance of an underlying going in a certain way. So yes, these are the types of products that we do see in the crypto space.
Rudolf: and following up on these key crypto players. So you said that there is a retail flow, there are institutional investors. So roughly what's the proportion? Is that like 2080 or 80 20?
Alexia: It depends, I guess, on the exchange, but for, if I have to speak for curriculum futures, I would say the majority of our flow is definitely coming from institutional players in and.
Rudolf: Oh, alright. And then you also mentioned you need market makers, just like in traditional markets, right? Let's maybe level set for everyone and [00:17:00] explain what it is and how does that work? Who are the market makers and how do you work with them?
Alexia: So market makers, these are institutional clients that they don't necessarily have a view on where the market will.
They don't care how the market will move. So in this case, a market maker comes into Kraken Futures and they start providing liquidity into our orderable. They provide buy and sales for other clients to take on from the orderable. Now, how do these market makers make money? They do make money by the spread of how they offer by and sell in the order.
And they themselves manage their risk and exposure, and they facilitate the traits happening within
Rudolf: the Order book. All right, So I know that you've recently launched a new product on your platform called mcf, right? So these are multi-collateral futures. [00:18:00] So can you explain what it is and what is their benefit versus other derivatives?
We talked. Yeah,
Alexia: we're very excited about that. We did launch multi-collateral futures earlier this year. It was a huge milestone for Hacken and it was really a result of several months of team effort and we had to work very hard to get many things right, especially the risk management aspect of it.
Especially if you see headlines around risk management, risk management systems going bad around leverage products. I think you, it is. Ultimate importance to get things right and we do feel it is a very competitive product in the market and we are seeing it quickly gain market share versus previous single collateral product.
We've launched and since we've launched it, we like quite traveled the futures we are offering within the client and future space. And we'll be continuing to grow our product set throughout our quarters as
Rudolf: well. But what kind [00:19:00] of collaterals are we talking about? Is it multi collateral? So what can that be?
Yeah,
Alexia: so we do offer fiat currency, so Euro, dollar, pound. We do offer staple coins and we also do offer cryptos. So that's the power of the multi-collateral product. And we now have an. Think of it as a super set of all the future offerings out there. You have the ability to choose any collateral and more than one to get into a crypto future position so that collateral can be fair.
It can be stablecoin, it can be crypto, it can be a mix, and it gives you flexibility to get into crypto asset, future positions using that collateral and the other nation and an important feature that we offer on tracking. As part of multi collateral is that you can also realize your profits in a show, in an asset of your choice.
So say for example, you want to [00:20:00] trade, but you don't want to own Bitcoin in your portfolio, so you come to correct futures, you deposit dollars, you get into a Bitcoin dollar future position, and then you've made some. Now you have the choice to realize that profit in Bitcoin dollars, Ethereum stable coin, any asset of your choice from the ones you offer, and gives you the flexibility to manage your risk depending on your portfolio Such.
Rudolf: And just as a reminder, you need to do this because when you trade futures, you may be in a position where you promised to deliver something and the exchange liken would ask you to put up a margin, right? Correct, yes. Then that's where you need the collateral, and what you're saying is that you can use the cryptocurrencies, you can use the fi, you can use other assets.
Maybe at some point, the old PlayStation. Right. I'm kidding. .
Alexia: But yeah, you get it. It's, we want to be able to offer any type of assets that clients do want to [00:21:00] trade on within the marketplace. So yeah, for sure.
Rudolf: Now, obviously this year, the traditional markets have been. I don't know how to describe it, but there's no pleasant adjective you can use, right?
If you were long on anything this year, most likely. But how do you see the crypto markets? Also, you could see that Bitcoin and other cryptocurrencies crashed. People talk about crypto winter and originally a lot of people were saying, This is an alternative asset class that should not be correlated to traditional markets.
But now we see it is. So why is it happening? And what do you think is going to unfold in the next few months, roughly? Of course, this is not investment advice or anything like this, it's just analysis, so to speak.
Alexia: Yeah, no, I think the macro environment is challenging, to say the least. And the crypto these days, you're right, it does trade like a high Vida token NASDAQ.
There. There is some decent [00:22:00] overlap between the firms who do trade crypto. And those trading stocks and other traditional asset classes now, So that, that means that when stocks move, people reinforce this it, that the correlation becomes a self-fulfilling prophecy because trading desk models start assuming it.
And then they trade according to these assumptions. But yeah, I get back, back to your question on the crypto winter, I think it does feel especially painful and the reality is that this type of sell-off has been seen before when central banks have raised their rates. 2013 and 2018, and with the federal result, reserve raising rates for the majority of 2020 to now, I think the reality is that almost every asset class has been heard as the dollar gained strength.
And until that changes, a sustainable rally in any asset class isn't unlikely. But I think it's not all gloom and [00:23:00] doom. I think despite the reduction we've seen in recent. The market is increasingly attracting interest from institutional investors, banks, and policymakers. Meaning that we see BlackRock announced the private trust in August to provide institutional clients.
Direct access to Bitcoin. Additionally, we've seen venture capital continuing to flood into crypto projects like Mau, bn, Howard investing hundreds of billions into define and Metaverse initiative. So it's, except that there is a lot attention and, and money flowing in despite the own.
Rudolf: Right. I heard someone say that why there is a linkage between the two is because a lot of institutional investors invested, of course in traditional assets, asset classes, and also in crypto, and when.
Had to face margin calls or traditional assets. They sell the alternatives first. Right? So maybe if you are going to the direction of [00:24:00] using multi-collateral derivatives on crypto, then hopefully that's helpful because people can manage their overall portfolio more efficiently, I would've thought.
Alexia: Of course.
Of course. Yes. Like we said before, derivatives, easy risk management tool. That's how they should, they should be used in any context for that matter.
Rudolf: All right, understood. Now, maybe one technical question. What is your technology angle? Why would you say the trading at Kraken or Kraken Futures is better experienced than somewhere else?
Is that that you have smarter engineers, or do you have a, Do you have this intellectual property already transformed into the product or technology that underlies your offering?
Alexia: Yeah, absolutely. We do believe success lies in the talent and agility of our team. So of course our engineers are super talented. We do have a very experienced product team as well, which helps bring in invaluable [00:25:00] experience and drive our vision forward.
And in Kai in general, we are building our own tech stack from the ground up. So we do absolutely need the best engineers to help us do that. And if you think about crypto being the freest market in the world, trading 24 7, you can't have it any other way. It is essential that we maintain our systems, they are reliable.
And the clients can rely on us to manage their risk without any disruption. All right,
Rudolf: so what's the best way to reach out and find out more about Kraken?
Alexia: Um, I think the best way to go to our homepage and navigate to our future staff. You can find, we have free educational content. We have, you can go straight into our platform.
We also have a demo that, uh, that you can use with virtual money. And of course, we have announcements. Published or on our social media and Learn Center. Brilliant.
Rudolf: Thank you so much. Thank you Alexia. And uh, good luck [00:26:00] to you and Kraken Futures.
Alexia: Thank you so much. Thanks a lot.
Rudolf: Thank you for listening to Voice of FinTech podcast. If you haven't already, check out also voiceoffintech.com where you will find all the episodes and additional resources related to the podcast. You can also subscribe to Voice of FinTech on Apple Podcast, Spotify, Google, or any other podcast app that you like.
If you have any suggestions on the topics or guests or how to make this podcast better for you, please email us at info@voiceoffintech.com. Happy to hear from you. Thank you.