“Investors Want Crypto Exposure Without the Drawdown Risk”: A Conversation with Maxime Seiler

This newsletter is part of The Assetizer, GenTwo's thought leadership platform.


 

In early September we wrapped up our Structured Products on Digital Assets Summit. If you missed it, that was a four-day, six session program of webinars covering the nascent market in sophisticated, asymmetric products for crypto underlyings. (You can download the report on the Summit here.) 

One of our sessions was with STS Digital. Not only is STS a close partner of GenTwo, it’s also a pioneer in the field of options pricing and structured products on digital asset underlyings.  

Over the years I have had the pleasure of talking with Maxime Seiler, STS’s co-founder and CEO, on a number of topics around blockchain and crypto, and have always enjoyed both the depth and breadth of those conversations.  

Our recent webinar seemed like a good time for another in-depth one-on-one. We talked STS, what sophisticated clients are really looking for in crypto these days, and what’s going on in the market below the headlines. 

Below are the highlights of what we discussed. 

Let's start with the STS platform. What is it? 

STS makes markets in options on digital assets. The thing to understand about how we do that is the difference between a principal dealer and a broker. A broker helps a client find the other side of a trade and takes no risk itself. It connects a buyer and a seller. We work the other way. We are the venue and the bilateral counterparty to every transaction our clients do. When a client wants to trade an option, STS is the counterparty. We price it in-house, show a tradable price, and then hold and manage the risk that comes with it. That makes it far simpler for the client, because they are not waiting on a broker to go and source liquidity somewhere. 

In practice it means one account from which you can trade options on more than 400 tokens, with no constraint on strike, maturity or the number of legs. If you want a structure with four or five legs, you build it, send it to the desk by API, portal, voice or chat, and get a price back, in a second or so over the API. You are building your own exposure rather than taking something off a shelf.  

On top of it we have built a structured products platform, which is the same engine made more accessible. It is fully composable, with a range of payouts rolling out in stages, from yield enhancement through to principal protected notes. You choose the underlying and the parameters, and you solve for whatever you are after, a target yield, a barrier, a particular payout or a defined exposure, without having to run an options book yourself. 

Why build a structured products platform on top of the options book? What were clients asking for? 

We had been dealing mostly with crypto natives, people already comfortable with the asset class. But there is a large group of investors sitting just outside that, who either have no exposure to crypto yet or have only recently started wanting it, and who do not want to go simply long and risk large drawdowns. Some want yield. Some want something closer to market-neutral than buying a coin and waiting for it to go up. 

Options are the tool for all of that, but most of those investors do not want to run an options book. A structured product packages the options into a single payoff they can subscribe to. They define what they are trying to achieve, we implement it, and they hold one instrument rather than manage a set of legs. Options are the tool. The structured product is the thing you can actually distribute. 

So who is actually coming to you, and what are they asking for? 

Two broad groups, and they behave very differently. The first comes out of traditional finance and stays close to what it knows: plain-vanilla payoffs on Bitcoin, on Ether, and increasingly on other large tokens, but rarely outside the top five or ten by market cap. For that group it usually comes down to yield, selling options to earn income, in Bitcoin or in dollars, on top of an existing exposure. 

The most common version is call overwriting, and it has become a real force in the market. The more options get sold for yield, the more volatility compresses, and the more volatility compresses the better the risk-reward looks for selling more. It feeds on itself, and it pushes Bitcoin into tighter, less volatile ranges. That began around the time the Bitcoin ETFs were approved and has grown steadily since. 

The second group is crypto-native, foundations, token projects, businesses whose costs and balance sheets are in digital assets. They tend to be reactive to the cycle. On the way up they are too excited to sell or hedge, and on the way down they regret not having taken profit or protected their operating costs, so you see a lot of late hedging. What has changed this year is that group becoming more disciplined, re-engaging with selling options for yield and hedging downside instead of waiting for a better price that may not come. 

What are you seeing that people outside the market are not? 

How much institutional adoption is happening below the surface. Most traditional finance firms have now entered crypto, or started to last year, and it has stopped being exploratory. It is part of the core strategy, and the conversation now is about implementing a crypto offering rather than deciding whether to have one. 

There are two currents in that. One is infrastructure, stablecoin payments and the tokenization of liquid real-world assets, equities, foreign exchange, precious metals. I think those markets will move toward trading around the clock over the next couple of years, which is a real change for firms built around a five-day week. 

The other is in the options market itself, and it does not show up on the price screen. Implied volatility has traded down to all-time lows and the term structure has flattened, which has made upside optionality about as cheap as it has ever been. With Bitcoin well off its highs, that has created an unusually clean setup for institutions that want to re-enter with defined risk, low spot and low volatility at the same time. A lot of that repositioning is going on quietly. 

And crypto as an investment? Are institutions still going in? 

You have to separate two things that often get lumped together: adopting blockchain as technology, and buying tokens in the hope they go up. There has been a very strong divergence between the two. Blockchain as a technology layer is being adopted by institutions all over the world. 

Token prices are a different story. Since the start of this industry, tokens have traded at large premiums to any conventional valuation, often with little or no product-market fit and barely any revenue, on the assumption that the revenue would show up eventually, or by valuing network effects far above what network effects are usually worth. Over the last two years those prices have converged toward what a bottom-up valuation would actually justify. The market cleared much lower than people hoped, because there was a structural oversupply of tokens from investors heading for the exit and not enough buying to meet it. The institutions coming in now are mostly after the technology, integrating it into their systems and workflows to protect and grow their revenue, not speculating on price. 

You work together with GenTwo. What is the nature of that cooperation? 

It is highly complementary, and it solves the one thing an options desk cannot solve on its own, which is distribution. We can price and structure almost any payoff. What GenTwo provides is the vehicle that turns that payoff into something bankable, an issued security that settles into an investor's existing bank and custody account. That is what opens up distribution, because it reaches a whole segment of investors who are only connected to the traditional finance world and would never approach a purely crypto-native offering. It expands the addressable market for both of us. 

That is not theoretical at this point. We have brought two products to market together, a capital protected note and a barrier reverse convertible, both on Bitcoin and both available to professional investors. They are a good illustration of the model in practice: STS builds and prices the exposure, GenTwo makes it bankable, and an investor accesses it the same way they would any other structured product. 

Note: you can view basic information on the products here:  

• Barrier Reverse Convertible on BTC 

• Capital Protected Note on Bitcoin