Institutional OG: The Fact That You Can Go 100x Leverage on Bitcoin Is Pretty Wild

Crypto-focused institutional trading desks are lately springing up. While Wall Street investment banks and hedge funds are still in the early stages of involvement, a class of crypto-native funds founded by institutional pros is by now well established.

Cointelegraph interviewed the co-founder of one of these funds, CMS Holdings’ Dan Matuszewski, to learn more about his views on the crypto market.

Before involving himself in crypto in 2012, Matuszewski worked for some years at Bay Hill, an institutional hedge fund. Most of his career was nevertheless tied to crypto, with a brief stint at Kraken and a longer tenure as the head of the OTC desk at Circle.

In 2019, Matuszewski left Circle to co-found CMS Holdings, a fund that “operates like a hedge fund” despite only working with principal capital — the co-founders’ own money.

He shared his views on the growing derivatives market in crypto, highlighting some of the differences with traditional markets.

Derivatives seen as a gambling tool

While derivatives have been growing, their volume is still below that of spot, or direct crypto trading. The majority of derivatives volume comes from futures, a derivatives contract that seeks to closely follow the price of the underlying asset. Commenting on this, Matuszewski said:

“The derivatives market is always going to dwarf the spot market, just because there’s bigger access to leverage and it's just a lot easier to trade.”

But Matuszewski finds it odd that leverage in crypto is so high. “The fact that you can go 100x on Bitcoin, it's kind of wild to me,” he added. In his view, these crypto derivatives are “really treated more like a casino” rather than a hedging tool, as they see much higher retail trader participation who have “much more of a gambling mentality.” Though he disclaimed that traditional derivatives products are also highly speculated upon.

The differences in risk approaches are amply shown by CME Bitcoin futures. While the exchange allows double or triple digits of leverage for gold futures, on Bitcoin the maximum leverage is only about 3x, though it varies each day as maintenance margins change.

“I hope a lot of people aren't doing that [using 100x leverage]. But Arthur [Hayes, CEO of BitMEX,] put out a post about BitMEX average margin usage [...] and it’s high. People are pretty wound up on that thing.”

Growth of derivatives

Matuszewski noted that futures by themselves are not particularly new for crypto, as some platforms offered them even when he first got into crypto in 2012. BitMEX popularized them in 2018, which led to a host of competitors springing up. But Matuszewski believes they do not have much to compete on:

“There's only a couple of permutations right now. You give people more things to trade, or you give them more access to trade what they have already. So it’s either leverage or new assets.”

On leverage, he noted that “there’s not that much further you can go.” Until volatility falls to consistently low levels, there will be an upper bound on it. “You can't give somebody 500x leverage in Bitcoin because the bid offer [spread] will just liquidate them,” he added.

Nevertheless, he believes that the derivatives market will keep growing:

“I think that's the trend, I think people will be getting more in the derivatives space than spot going forward. Options markets will grow, Deribit’s had very good growth on that thing, CME just got into it.”