113: Benjamin Small – Normalizing Bitcoin, and Exploring the Cryptocurrency Ecosystem

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You good folks, this is episode 113. Thank you for being here. Let me introduce you to my guest. My guest today is Benjamin Small. Benjamin is an electrical engineering PhD. He's worked in quantitative research roles since 2006 at UBS, Citadel, Credit Suisse, and the Stock Exchange IEX. Today though, Ben is head of market structure at Gemini, the world's first fully licensed and fully regulated Bitcoin exchange.

Now some of the things we get into during this chat, we talk about payment for order flow and how retail orders are treated by high frequency market makers. Why there's an incentive to normalize Bitcoin, the cryptocurrency ecosystem, potential outcomes for the future of Bitcoin, and becoming a cashless society.

Before we jump to the interview with Ben though, I just want to make one thing very clear. Although Jim and I have sponsored recent episodes of Chat With Traders, this interview is totally separate, meaning I was not paid to do this. I invited Ben onto the podcast because of his experience with markets and to learn more about Bitcoin and cryptocurrencies. I think it's a really interesting space. Anyway, with that being said now, let's get straight to it. Please welcome Benjamin Small.

All right, I've hit record and we're rolling. Benjamin, how you doing, sir? Great, how are you? I am doing just fine. Tell us a little bit about where you got your start. What was your first involvement with trading? Uh so I actually got my PhD in electrical engineering, uh and this was back in two thousand six. It was very popular for Wall Street firms to hire uh people with engineering or sort of quantitative backgrounds in general.

uh to sort of back then begin the process of automating their trading operations and sort of start building things that are more electronic in nature. So in the spring of 2006, I started at UBS. um in an equities trading group that did everything fully electronic, fully automated. Um at the time they were actually one of the few groups on the trading floor that did that.

Um so it was a really interesting uh and exciting opportunity and and it really captured my my interest in the trading space because I got to see how much math and computer science concepts uh were used in in day-to-day trading. Okay, so prior to that you had pretty much no interest in markets. It just so happened that UBS was looking for someone with your qualification.

That was most of it. I did have a background uh in a little bit of macroeconomics and some microeconomics as well, but I never had intended on doing it as a career. Um, but then Wall Street came knocking and uh it sounded like a lot of fun and it actually turned out to be a lot of fun too. So can you describe a little more about what you were doing at UBS?

Sure. Uh so my first role there was as a junior quantitative researcher. Um so what that kind of means is figuring out various statistical models To help improving the electronic trading strategy. Um, at the time prop trading in banks was permitted, this is before the Volkor Volcker rule. Um so UBS at the time had a huge

wholesaling department or retail market making as it's sometimes known. So that meant taking order flow from ordinary retail kinds of investors that they enter uh at like fidelity.com or Charles Schwab or something like that. And those orders were sent to my desk. And we decided the best way to route those orders out to the street or to internalize them ourselves. Internalization is a process by which we actually trade the order out of our own book.

And if we do that skillfully enough, it can lead to a profit. So a lot of my early quantitative research models were based around that kind of trading paradigm.

Okay, now I really want you to dumb that bit down for us because I think that is particularly interesting. So talk to us about. I mean this is something we have covered on previous episodes, but not from someone in your position who was sort of uh there in the control panel, if you will. So how did you decide whether that Okay, so someone on a retail broker has placed an order. Let's just say they want to buy a hundred shares of Apple, okay? Sure.

That comes to you. You then decide whether you're going to route that to I'm not sure where or whether you're going to internalize it. Can you just explain what goes on in that moment? Sure. Yeah. So obviously it's a computer program, an algorithm that we've trained that's making all of these decisions that were informed by previous research. But the basic trade-off is is it smarter for me the desk?

To internalize the order now and potentially build up my risk by selling that 100 shares to the buyer. Or is it better for me to route route that buy order off to the street um to the best price like on the New York Stock Exchange or Nasdaq or wherever? And pay a little bit of fees in doing so. Of course, if this order can cancel out risk that I already have on my book, I almost certainly choose to do that.

So the whole game is sort of minimizing fees that I have to pay in order to maximize the shares executed by these customers. And UBS pays the broker to receive these orders, this order flow, don't they? This is what's called payment for order flow. That's what we're talking about here.

Yes, that's right. It it's done in various different flavors. Um, UBS, Citadel, and KCG are the biggest players in the space and they all pay the retail brokers in one form or another for exclusive access to this order flow. So obviously it's a profitable trading strategy for these uh for these trading desks. And the reason is retail order flow tends to be mostly market orders and marketable orders, which means the retail investor is willing to cross the bid ask spread.

That gives the trading desk a great opportunity. because they essentially get to capture this spread uh from the retail investor. Um and if they do things cleverly with respect to risk management and uh predicting the returns on the stock, they can actually make a whole lot of money at the end of the day. So how are limit orders treated differently? Um well it depends whether they're marketable or not.

Um there is a rule, uh a FINRA rule which comes out of an SEC rule that says that non marketable limit orders, that is ones that can't trade right away but should be posted somewhere, they have to be routed to an exchange. But interestingly, the uh brokerage typically picks an exchange for which it's going to get the most rebates. Unfortunately, those rebates are not passed on to the retail customer, um, but instead contribute to the overall profitability of the

Okay. And has this always happened like or is this something that's just developed in recent years? No, it's actually existed in the US equities markets, the cash equities markets, that is stocks. uh pretty much forever uh in one form or another. It even existed back in the old days, like a hundred years ago on the New York Stock Exchange.

the specialists, which are the actual floor traders, uh used to do this. Um so it's not exactly a new practice, but beginning about ten or fifteen years ago, it uh started to be extremely optimized with statistics and with computerized algorithms. And I think that's the change that a lot of people noticed um is that the trading desk got a lot more aggressive in maximizing their profitability in this space. Um it's something that's not found in many other countries worldwide.

Um and it's not even found in all products in the US. For example, if you want to trade put or call options on the same stock that we were talking about before. um internalization is actually prohibited. There is no wholesaling or retail market making desk that's able to do that. So it's sort of product specific and it depends on the rules of trading for that specific product. Now as the retail trader who's wants to buy these hundred shares of Apple, just for argument's sake.

Are they disadvantaged in any way by their order either being internalized at somewhere like UBS or one of these other uh firms that you mentioned, or whether it goes to the market Is that a disadvantage to the retail trader in any way, shape or form? That's a very tough question. Um and I'd rather not answer from my personal experience. Instead I'll point

listeners to various SEC actions, or even the New York State Attorney General has filed some actions where they claim that it does disadvantage um the retail consumer at the end. Okay, but you can't explain how? Um, well, you can imagine that if these trading desks are quite profitable, they must be making the money from somewhere. Um, it's just difficult to ascertain whether the retail customer is

better off with or without them. If the retail orders were routed directly to exchanges, there are some potenti there are potentially some downsides also. For example, retail orders typically get price improvement. from one of these brokerage desks. Um and they would not typically get that price improvement if their order were routed directly to an exchange. Um so there's sort of trade offs both ways. What do you mean by price improvement?

Sure. So that means that the order is filled at a price better than the NBBO. So if I'm a buyer with a marketable buy order, um, either a market order or a limit order priced above the existing best offer. I'll actually get a fill price, which is lower or more favorable for me than the prevailing best offer. And that's actually standard practice in the wholesaling community. Um so it's a complicated question whether that price improvement offsets

the other potential disadvantages that might be suffered by the retail order. Okay. And let's say that order is internalized. So it never actually goes to the exchange. Is that still counted in the daily volume? I presume it would be. Um it's counted in the overall uh equities market's daily volume, um, and it does have to be reported to one of um the trade reporting facilities.

Um, but it doesn't count in the exchange volume. It's this off exchange volume, which typically comprises uh somewhere between thirty and thirty five percent of daily trading volume. Okay, so let's just say I was to pull up Yahoo Finance and it says there the daily volume, how many shares were traded on this day. Mm-hmm. It's included in that. Okay, got it, got it. Okay. So you worked at UBS. Can you share some of the other places which you've worked in your career?

Sure. Uh so I went to work for a competitor of UBS's, um Citadel, which had a similar business model, uh, and then Credit Suisse, which again had a very similar business model. Um and I did the same sorts of things. um probably for about eight years in all. And that is statistical models to help improve uh the prop trading done by these deaths. Um typically when interfacing against retail orders. And did you enjoy that sort of work?

Uh yeah, I actually found it very interesting and intellectually stimulating. Like I said, a lot of the statistics behind it are quite interesting. A lot of the computer science that goes into the algorithms and the trading systems um are quite interesting. So I I find it to be sort of an interesting engineering challenge.

And what were you doing on like a day to day basis? Like I kind of picture in my head a little bit that like once these sort of systems are in place, like these algorithms are running and everything's kinda chugging along. How much actually needs to be tweaked and what sort of monitoring's involved? Like what's your what's a typical day sort of consist of? It's true that once you establish a a profitable strategy, that's a great start.

But because of various competitive pressures, that strategy typically has to be tweaked every few months um and optimized so that it maintains profitability. So a lot of my time was spent doing additional research and sort of fine tuning the various strategies and models that the desk use. Um and then a lot of my time was also spent monitoring the actual trading strategy during normal trading hours um from nine thirty to four PM and ensuring that the desk's risk never got too large or unwieldy.

Um so it's kind of an interesting, all encompassing role that you typically get at one of these places to be involved in trading on a day to day basis. But also be tasked with improving the trading strategy. And the reason they they typically have uh electronic traders do both of these things, or electronic researchers do both of these things, is because they want to um these people to be truly invested um in the trading profits of the desk and work to optimize its strategy as well as possible.

Okay. And and part of optimizing that strategy, uh, can you speak to us about latency? Was that something that you were involved in i as reducing latency? Absolutely. Latency is a huge question in the US equities markets in particular, um, just because electronic trading is such a pervasive

Part of the markets. Once you start adding computer systems to a trading place, it's now a competition between whose computer systems are fastest, who can which computer systems can make decisions the fastest and can execute trades the fastest. Um so optimizing computer code was definitely an interesting part of the work.

Optimizing computer code to make decisions faster and also optimizing computer code to get the trades done um on the various exchanges as quickly as possible. And were you involved with the hardware side of it whatsoever? Um, a little bit. Um, not so much um at the low level, but it helps I think all computer scientists or computer engineers to understand the basic hardware um of the servers that that he or she is using.

just because in optimizing the algorithm, one typically needs to understand the trade-offs between, say, uh using memory versus using a disk versus using cache. And so understanding hardware can be an important part. Now moving on from you know your positions at Credit Suisse, uh UBS, Citadel, you moved on to IX. I think that came after those few. Um tell us a bit about your time at IX.

What sort of things were you working on and what were you involved on? Uh what were you involved with there? So I was the head of quantitative research at IEX for a year. Um, it was very interesting work and it was kind of um it kind of built off the sort of work that I had done at the other trading firms. What's unique about IEX, of course, is that

they had ambitions to become an exchange. When I first started, they were not yet an approved exchange. And so understanding how traders thought about the marketplace was a really interesting experience that I brought to the table. And it gave me some interesting insights. and and really helped further the IEX mission, I think. Working at IX, one of the things which you were responsible for, if I understand correctly, and that you came up with was the discretionary peg. So

I'm not sure exactly what that is. Um, but are you able to explain it in a way that's not too complicated for this format? Sure, I'll give it a try. Um so lots of people were involved with that particular invention. I'm one of maybe a dozen people that are listed. Um but the general idea is to allow an exchange to do a little bit of algorithmic trading. at the benefit of its clients.

Because the trading systems of the clients are located at a little bit of a distance from the trading systems of the exchange itself, that latency can introduce some interesting phenomena. And discretionary PEG attempts to address some of those phenomena, in particular the quote on the exchange moving very quickly. So what discretionary PEG does is try to predict on the client's behalf.

Whether it should switch between a midpoint peg or a near side peg, that is between uh, for example, a buy order that's resting exactly at the national best bid versus a buy order that's resting at the midpoint.

between the national best bid and the national best offer. And the reason that you might want to switch off between those two variations is if you see the quote changing very quickly. So the whole idea behind discretionary peg is to attempt to predict when that quote changing might occur, and place one of the two order types that's best for the client in that particular situation.

Right. And is this something that's only been implemented at IEX or is this pretty much uh across all exchanges now? As far as I know, it's still only at IEX. I believe the New York Stock Exchange uh um group Is attempting to offer something similar in the near future, but I'm not sure whether it has been implemented quite yet.

So moving on from IX, you then went on to Gemini, uh which is where you're currently at still and you are the head of market structure. So, you know, I Yeah, I've got to ask, like it really sounds as though you do dig this this market structure side of the business. What do you think that is?

Yeah, I really do. It's um market structure um is is really an interesting topic. It's an interesting combination of Microeconomics, that is the details behind the exact interaction between buyers and sellers, uh statistics. and computer science or computer engineering, the way modern marketplaces have evolved, they're actually pretty sophisticated.

the way a computer system stores its book of buy orders and its book of sell orders and allows um incoming orders to interact with those is actually kind of sophisticated. And there's a lot of interesting statistics that come out of that, especially when you submit

millions of orders or you manage millions of orders per day. So yeah, I I think I definitely do dig this microstructure kind of idea. Um And even though my background was in trading equities and equity options and some other more traditional products, the same kind of principles apply to Bitcoin.

Um, Bitcoin markets have evolved in such a way that they're actually very similar to these other traditional asset classes. Most Bitcoin exchanges offer a central limit order book in exactly the same way that Nasdaq of the New York Stock Exchange does for stock. Um and that's exactly the case on Gemini. Gemini offers uh customers to enter market orders, limit orders, just the same way that you would expect to enter in your Fidelity account.

Many people might not be aware uh about who the the founders of Gemini are. For those who are unaware, are you able to just tell us a little bit about who the Winkelvoss brothers are? Cameron and Tyler Winkelhaw. Founded Gemini uh a few years ago. Um Gemini first opens it opened its doors for Bitcoin trading after it received licensing from the New York State Department of Financial Services about fifteen months ago.

Cameron and Tyler have always been interested in or have been interested in uh for the last Probably four years or so in Bitcoin. And I think they wanted to contribute to the ecosystem. And starting an exchange and especially a fully regulated exchange like Gemini is. is I think a really meaningful way to contribute

to the Bitcoin ecosystem. Something that tends to discourage traditional market participants like big banks and hedge funds from getting involved in Bitcoin is that there hadn't been a marketplace that they felt comfortable with. for various regulatory and oversight reasons and as well as just understanding the mechanics of the marketplace. Um, I think Gemini is offering that to traditional financial services players.

Okay. And I was hoping you were gonna tell us the Facebook story. Um no you'd have to ask them that, I'm sorry. But they they were also, um, professional athletes, weren't they, for like ten years or something prior to sort of going into investing and business and that sort of thing?

They they were, yeah. They started uh rowing I think way back in high school. They they grew up in um in Greenwich, Connecticut, and then eventually competed in the Beijing Olympics, where I think they did quite well. And aside from their uh stature, if you meet them in person, they're quite tall, both of them, um, I think being involved in athletics in such an intense way actually gives you a lot of discipline um for startups and business in general.

And I think we see that um at Gemini that they've had this focus in this mission ever since it started. Um and that's why I think Gemini has actually evolved to be such a great marketplace because there's this degree of focus and we have a sort of a an end goal in mind. So I was gonna ask what's the vision for Gemini, but I I feel like that's probably a little bit um Maybe not the right way to ask this question. So maybe more so, what impact are you guys trying to make on Bitcoin?

That's a good question. Like I was saying, I think that the way that Gemini can contribute most to the Bitcoin ecosystem is to provide a venue where traditional financial services companies are comfortable operating. And that's

Um, there are many things that go into that. The biggest differentiator, I think, is licensing. Gemini is licensed by the New York State Department of Financial Services. Um there's only one other Bitcoin exchange that has that level of licensing. They're also based in New York.

Um and the reason this licensing is so important is because in modern times, all financial services companies are heavily regulated, often by three or four or five regulators, and that's in the US alone. So interacting with Another company that has a similar degree of regulation, I think, gives them a lot of comfort about risk and compliance concerns and all the rest. Um, in addition to that, Gemini's um marketplace, the way we run our exchange and the way we run this four p.m. auction.

is very similar to other asset markets. Um, and I think that tends to give traditional financial services companies and traditional traders um a lot of comfort as well. We're not offering anything new or exotic. They can buy or sell Bitcoin just the same way that they would buy or sell stock. Okay, but why do you want like traditional banks and institutions and traditional money management firms to trade Bitcoin?

That's a good question. Um I think the biggest reason is because that's where the money is. Um even if all retail investors put all their money together, it would be a drop in the bucket compared to the amount of money available to bulge bracket banks. um mutual funds, hedge funds, retirement savings plans, and all the rest. So making an on-ramp for those kinds of large institutions

I think is only going to do good things for Bitcoin. This provides more capital to the ecosystem and it also introduces more sophisticated trading and sort of more s more sophisticated investing in general.

Okay. But more money flowing into Bitcoin, what's that what exactly is that gonna do? Like what are the good things that could come of that? Um I think it sort of begins to normalize Bitcoin. And what I mean is that the world will start to see Bitcoin as just another asset, not some crazy cryptocurrency that had potentially a rocky beginning.

Um, I think they'll start to see that Bitcoin is an asset a little bit like gold, a little bit like foreign currencies, but still it's something that is familiar and comfortable. And I think that's that's good for Bitcoin overall. um having people think about it as just another asset class and not this exotic, scary thing. What do you think the general consensus of Bitcoin is right now? Like do you think

Like where would you say we're at on on the spectrum? Do you think that most people still just see it as like a speculative vehicle, if that's the right word, or do you think that more people are actually recognising it as a a viable digital currency?

Yeah, um I there's definitely a mix, but I hope the the second camp of people is growing and I think we see evidence like that. Um I think a lot of a lot more people are starting to see Bitcoin as like a virtual version of gold, a virtual store of value. Um, and I think that's really valuable for Bitcoin as well. Not that it's purely speculative, but it actually can potentially be an efficient way for people to store their funds and also transmit their funds.

Yeah, and and have you seen like large institutions moving into Bitcoin? Like is it something big players are beginning to participate in? Like do you have any stats on maybe the the increase over recent years? Absolutely. Um I don't have any stats that I can share, unfortunately. Um the the customer makeup on Gemini is something that we kind of keep confidential.

But I can assure you that more and more institutions and traditional financial players are getting involved in Bitcoin. Um so I think our goal is getting closer and closer to fruition. We see that these large institutions are comfortable with our licensing, are comfortable with the way that we operate our marketplace, and I hope that that trend only accelerates.

Yeah, right. And if you had to guess, how much Bitcoin trading would you say is done by, uh, I guess retail folks compared to professional big money? The majority is done by big money now actually. Um whether it's big money from the traditional financial space or professional Bitcoin market makers, they contribute a lot to the volume. And I think that's good. That's the sort of pattern that we see in other electronically traded assets.

For example, the stock trades, um, only twenty or twenty five percent are typically done by retail. Um the rest are done by large institutions, market makers, pension funds, things like that. Um so I think that's actually a a trend that speaks to the maturity of the Bitcoin ecosystem. Are you ready to get serious about trading? Then join Tasty Trade, Investopedia's best platform for options trading in 2026.

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And as Bitcoin currently stands, are there are there specific opportunities available in Bitcoin that aren't there in other asset classes? Uh, definitely. I think aside from the sort of trading characteristics of Bitcoin, um, the fact that it has high volatility and some other interesting characteristics. I think the fact that it is not too tightly correlated with other asset classes.

can be really interesting for portfolio managers. Um it's the same reason that a lot of portfolio managers put a lot of gold or a lot of FX or other commodities into a big, well rounded portfolio. having an asset class that both has growth potential and is uncorrelated with other assets, I think is something interesting, which is why we're starting to see a lot of portfolio managers

um, allow it to make up one or two percent of their portfolios. It just is a good way to to furnish a well balanced portfolio. That's a really good point you bring up, Patch. That's something that I probably wouldn't have thought of, is the fact that it would be uncorrelated to most asset classes. Along with this though, are there also security risks? that come with trading Bitcoin that don't necessarily exist uh in other asset classes.

Um, there can be. It depends on your choice of exchange and your choice of wallet provider. Um, unfortunately, we have seen hacks in the past. And that's another thing that Gemini uses to differentiate itself. We have a very sophisticated cold storage system, which is just a way of keeping these Bitcoin passwords or private keys. um very, very secure and it's actually done in computers that are not even connected to the internet. So that reduces the the chances of hacking um considerably.

other exchanges and wallet providers in the past have not been so vigilant about their security. So I think the choice that individual consumers should make is deciding for themselves whether or not they trust the business model and the engineering of a particular Bitcoin venue. Um Gemini has a lot to speak for it. The fact that it's regulated and overseen by um by state regulators certainly should contribute to that that feeling of safety.

Um but consumers should really judge for themselves whether they want to trust their Bitcoin with a with a service provider. Or consumers can decide to keep the Bitcoin themselves and manage their own wallets. Um I think that it's a fairly sophisticated thing. Uh some consumers are comfortable with it, others might not be. Um it does involve a lot of sort of fancy technology, and you also have to worry about the fact that if you lose the private key to your wallet, the Bitcoin is lost.

Um so the extent that outsourcing that kind of security and custody of Bitcoin to a trusted service provider is helpful.

Um, I think that's a decision that that consumers should think about very seriously. Sure, sure. Now before we hit the record button. You were telling me a little bit about how Bitcoin trades and one of the ways that you described it was uh Bitcoin trades as being quite primitive. How so? So Bitcoin still doesn't have a a substantial market capitalization. It's around fourteen or fifteen billion dollars overall. Um, which sounds like a lot until you consider that

about three or four hundred um US companies have more market cap than that individually. Um so it actually would rank kind of low in the S P five hundred index if it were a company. Because of that low market capitalization, um, a lot of the most sophisticated market makers are ha are not yet attracted to trading Bitcoin. Because of that, the way that the bid offer spread moves around, the way momentum propagates through the marketplace.

um is a little primitive compared to more sophisticated asset classes. For example, trading the um the spiders, the S P five hundred ETF. Um in the United States. That to me is the most sophisticated trading product. There are tons of market makers involved. The spread is almost always one penny, which is the minimum spread increment allowed on the exchanges. And there's typically uh tens or even hundreds of millions of dollars of notional available on both the bid and the offer at any time.

So the way in which it trades, sort of the statistical way in which the price evolves throughout the day, is is fairly well understood. It follows some pretty well understood patterns. Um Bitcoin isn't there yet.

Are there is there such a thing as arbitrage opportunities available in the Bitcoin space? Like with so many exchanges spread out, you know, in in various countries Are there arbitrage opportunities that still exist today or I know there definitely was like a while back, um, having spoken to a few guys who trade Bitcoin fairly actively, but um are those opportunities sort of closing up or do they still exist to some extent?

There's different kinds of arbitrage that you can think about in the Bitcoin ecosystem. The most common is arbitrage across exchanges. Um and that definitely still occurs. Um there's a little bit of mice mispricing between all of the Bitcoin exchanges worldwide. And there's lots of different reasons for that. Some of it is liquidity on each exchange, some of it is the credit risk or other kinds of risk that market participants are pricing into each exchange.

Um so that arbitrage still exists. There's also um arbitrage with respect to time. That is because the market for Bitcoin sometimes isn't as thick as we would like. Sometimes the price swings around a lot. And that provides an interesting opportunity, an arbitrage opportunity actually for market makers as well. That if they stand by ready to deliver lots of Bitcoin to the marketplace. they can benefit by um following this momentum.

And that's something that people sometimes call statistical arbitrage in one form or another. That is, market makers are relying on the fact that Bitcoin trades in some predictable ways. Um and are also providing liquidity to the market at exactly the right times. Um and that can be a profitable strategy all by itself. Right. You know, how you're describing Bitcoin here, you you know, you said it's kind of it trades in quite a primitive way as it currently is.

i it's just very different to everything else that's currently um out there on like, you know, your your traditional markets and asset classes and that sort of thing. It it's very different. Do you think that trading Bitcoin is best suited to a particular type of trader? Yeah, I think um small-scale traders that are ready to trade in Bitcoin would find a lot of interesting things to do here.

Not as competitive a marketplace as the most liquid of stocks. So that means that a lot of the sharpest, for example, high frequency trading shops haven't yet entered the Bitcoin ecosystem. I'm sure they will soon, but they haven't yet. Um and that potentially provides an interesting opportunity for smaller scale players who want to experiment in the space.

Now, this might be shifting topics just a little bit, but from the little bit I know about Bitcoin and the things I read and whatever else. It seems to me that Bitcoin is quite a big thing in China. Um, what's the reason for this? Can you talk a little bit about that? My understanding is that there are a lot of capital controls in China, and that can make it very difficult for Chinese nationals in particular to invest in things overseas and get capital out of the country.

Um, Bitcoin provides an interesting borderless solution that allows some of these market participants. To access capital markets beyond the borders of China. In addition to that, a lot of Chinese traders, I believe, like to engage in speculative kinds of trading. Um, up until recently when the People's Bank of China cracked down on various kinds of trading practices.

I think it was very popular for big for Chinese Bitcoin traders to trade on margin and get lots of leverage and sort of treat Bitcoin as this um High volatility, almost gambling. Fortunately, the People's Bank of China cracked down on that last month and even a little bit in December. And I think that's reduced a lot of the excessive kinds of trading that were occurring.

And again, I think this is good for the Bitcoin ecosystem overall because it's bringing the sort of maturity to the space that we expect in other asset classes. So just aside from Bitcoin, I I'd like to pick your brain a little bit about other cryptocurrencies. I mean, what are your thoughts on the uh I mean hundreds, if not thousands, of other cryptocurrencies that do exist. What do you make of these? It's it's sort of an interesting um laboratory, I think.

Um, the basic idea of Bitcoin um is sort of old now. It's more than half a decade old. Um, but it was just one idea in the space of cryptocurrency. I think the idea the fact that there are a lot of altcoins. Um means that developers, computer programmers and other enthusiasts are potentially playing around with different variations that they can make on this core concept of Bitcoin. And I think that's good for Bitcoin in the whole ecosystem overall.

Because it provides a laboratory, it provides real experimentation so that we can sort of figure out as a community which ideas are good and which ideas are bad. A particular test case was Ethereum. Um, Ethereum added a whole lot of new features um in ideas to the basic idea of a cryptocurrency.

Uh, in retrospect, some of them turned out to be good ideas, some of them turned out to be bad ideas, but the whole thing was still a learning exercise. And I think that's great for the evolution of the ecosystem. Can you just talk a little bit about uh what is it, Etherm? Is that how you pronounce it? Uh Ethereum is the name of the network. Yeah. And Ether is the name of the token. Uh for some reason they made it different, unlike Bitcoin, where we call both Bitcoin.

Yeah. Can you just talk a little bit about that? Like what are some of the extra features of that? that particular cryptocurrency. So one of the the most um interesting features of Ether that differentiate it from Bitcoin are these smart contracts. Um, which is a sort of computer science idea that the Ethereum network itself can attempt to enforce. uh bits of computer code and execute transactions based on prescribed um and pre written principles.

So for example, um I could make something like a derivatives contract even in the Ethereum network that would exercise a contract if the price of ether goes above a certain amount or below a certain amount or something like that. But instead of um this contract being enshrined in law as most contracts are today, it's actually enshrined in computer code. Um so that's kind of a really interesting concept that took off.

Um some people claim that it's been abused at this point, um, but I'll I'll leave that for listeners to decide. I think the important thing behind it is that it's an experimentation in this new idea. Um Some minor features that Ethereum also introduced was different ways of adjusting block sizes and doing some other cryptographic transactions that actually allow Ether to be substantially faster.

than Bitcoin when it comes to clearing and settling transactions. Um, there's some other minor features as well, but still the fact that people are experimenting with this basic idea of cryptocurrency is going to help the ecosystem overall. Okay. And one of the things which well I thought was particularly interesting about this Ethereum is unlike Bitcoin, we know who the founder of this was. Can you tell us a little bit about the founder of Ethereum?

Um I honestly don't know much about him. Um I think he's a young kid from East Brooklyn, uh who's of Russian nationality, um, but I I really don't know too much about. Uh his name is Vitalik. Buterin, I think. I I don't remember, I'm sorry. Sure, yeah. Well, I mean he's he's very young, very young and you know, he'd be doing such big things, it's it's pretty cool to see. Do you envision that Bitcoin will always be the dominant cryptocurrency or for at least a long time still to come?

Um yeah, I think that it it has a substantial first mover advantage advantage. Um and and that's great. I think that it's good to see the whole ecosystem sort of focus most of its energy on one asset in particular. Um, I don't think it'll last forever. I wouldn't be surprised if ten or twenty years from now.

somebody comes up with a substantially better idea that improves some of the sl flaws of Bitcoin and that becomes the dominant cryptocurrency instead. But for now, having a lot of assets Um and a lot of sort of brain power tied up into the Bitcoin ecosystem is only going to push ideas forward.

Sure. And just on that point, like I don't know if you have this sort of information, but have you yourself seen some of the money that generally flows in and out of Bitcoin being distributed among other cryptocurrencies? Like have you seen that at all? Um yeah, Bitcoin is kind of used as the the common denominator of other cryptocurrencies. Um it's kind of the jumping off point. So we do actually see uh money coming from other exchanges that trade between asset classes.

Of course at Gemini we have very high standards for anti money laundering and client onboarding in general. Um so we try to prevent illicit funds from coming onto the exchange. But it is interesting to see the way that Bitcoin is sort of the center of this ecosystem that has spokes reaching out in all sorts of different directions. Yeah. Now one thing I'd like to ask you a bit about um while we're talking about other cryptocurrencies is because there are so many

From my understanding, if someone actually sort of knows what they're doing, it's fairly straightforward to form your own cryptocurrency. Because of that Are there cryptocurrencies that exist which are kind of sketchy? I don't know if scams or Ponzi scams is the right word, but do those sorts of things exist in this field? They definitely exist. Um and I think it's not unique to cryptocurrencies.

There are scam stocks or other kinds of scams in different cla different sectors of the economy as well. For example, the the penny stocks um are known for being rife with different kinds of pump and dump schemes or assetless companies or all kinds of things.

So that sort of scam is bound to crop up in any marketplace. I think that I uh a lot of investors typically quickly realize that a um one of these altcoins doesn't really have a lot of legitimacy behind it and the prices typically don't go anywhere. Um, overall I think that the investors in this kind of marketplace are fairly sophisticated. Uh they tend to have computer science and computer engineering backgrounds as well as an interest in finance or trading.

Um, so they're a lot they're typically able to separate the good ideas from the bad ideas, but it's definitely uh a possibility that um people could get involved with less than reputable altcoins. Um at this point in time, Bitcoin has sort of proven itself to not be one of these scams. So for people getting interested in cryptocurrencies for the first time, I think it should be the first step.

Yeah. Will said, Will said, I I think that was a very valid point. You know, there are scam stocks as well. There's, you know, sketchy uh sketchy things in all marketplaces. Um are there any red flags or things that uh That that should be obvious to someone that one of these altcoins uh is to be treated with caution.

That's a that's a great question. I think Uh from personal experience, I would wait until one of these altcoins has substantial market capitalization because what that means effectively is that people are voting with their dollars and enough people have voted that this Uh, altcoin has a lot of capital behind it. I wasn't too interested in Ethereum until it had about a billion dollar market cap.

because at that level of capitalization it shows that a lot of people have vetted the idea and you can sort of trust the the money to a certain extent. Um something to watch out for though are uh is um altcoins that are based on memes. That's actually quite popular. There's something based on Doge, which was a meme from, I don't know, five or ten years ago. There's something based on Kanye West. Um there's all kinds of ideas that seem on the surface like they're probably scams.

Um, so that should be the first filter for people. In addition to that, I think you can actually, if you have a computer science or a computer engineering background, you can actually look at the source code. All of these projects are open source. And if it looks to you like it's one developer working on on the project and not a lot of community involvement, uh that's something that should make you suspicious.

However, if you see a lot of community involvement, um, a lot of optimization of the code, a lot of discussion about what would make the proposed cryptocurrency better. I think that's a good sign as well. Uh so sometimes you just have to do a lot of background research into the fundamental code on which the cryptocurrency operates. Kind of the same way that you might do a lot of research into the balance sheet and the financial statements of a company before investing in their stock.

Sure, okay. And can we just go back to the point you made about a cryptocurrency being Based on a Kanye West meme. I didn't quite catch that. Can you just ex explain that? Um I I forget the name of it. Um but there's um I think it's called Kanye Coin or something like that. There's all kinds of oddball altcoins based on very weird ideas

Um, you know the internet is full of memes and weird ideas and I think a lot of people take it as a joke. Um, but it's certainly contributing to this overall ecosystem of um this laboratory for experimentation. It's kind of like artists, I guess, playing around rather than people that are truly interested in furthering a payment mechanism or an asset class.

That's hilarious. Oh, there's there's e there's even one called uh shitcoin, I think. Um there's there's all sorts of weird weird ones. That's probably not something I'd want to put my money in. Right. Um let's go back to uh the four PM auction. I wanna pick up on this point. So How does this work? What's the significance of it? Just really dumb it down and sort of explain it um so that everyone can hopefully kinda get their head around this and understand that you'll

uh benefit or maybe advantage of having this opportunity. So how does the four PM auction work? So the idea that we that we took is one that's existed in the US equities marketplaces for quite some time.

And that is at four PM every day, you should match a bunch of buyers and sellers together to get a nice solid price for the asset. Um and that's effectively what we do. Um customers on Gemini can enter Limit orders and market orders, just like on any marketplace that you would expect, they can also enter such orders as uh auction only. So we take this full set of orders and at four PM we match as much buy interest with as much sell interest as possible and the price at which that

interest best matches is the auction price. Um and we do a trade of all of the eligible buyers against all of the eligible sellers. Um the Auction only orders typically make up the most volume in in the auction because they haven't traded away in the normal continuous trading like the other order types have. Um, it also provides market makers and other market participants with specifying that they only want to trade

if they're satisfied by this 4 p.m. auction price. That is, if their uh limit order, their limit price for a buy order is higher than the auction price, or if their limit price for a sell order is lower than the auction price. So all of these orders are executed exactly the same time at four PM. Um and because market makers know that this is going to happen, they begin placing orders um at least 10 minutes before 4 p.m. and sometimes even more in an attempt to uh set the auction price.

at um a value that is favorable for them. And this is actually the kind of thing that happens in the equities marketplaces before. You have competing buyers and sellers that are trying to work together to come up with a good execution price for this large volume that's going to transpire at exactly four PM. Okay. So there is only going to be one price at four PM still, right? Exactly. There's only one price, and it's based on an algorithm that maximizes matching all of the buyers with.

Uh sorry, as many buyers as possible with as many sellers as possible. Um that's the basic mechanics behind it. Um if you actually do a Google search for Walrazian equilibrium, um that's the algorithm that we're following. Um, the idea is that this price, because it allows the most buyers and sellers to interact, is sort of an optimal price. Um, if you were to lower the price from that point, there would be fewer um

fewer sellers interested. And if you were to raise the price from that point, there would be fewer buyers interested. So because this price, by definition, optimizes and maximizes the volume that's going to transact, we feel that it's a really strong solid price to use. Okay. And how different is the price at three fifty nine to four? Like is there a chance that there's gonna be a gap because of this auction?

Um typically not. Um It the o on average it's um only twenty or thirty basis points, I think, difference between The trading at just before the auction and the auction price itself. And the reason for that is that market makers and other market participants. um are able to see what the forecast auction price is going to be. The Gemini Exchange actually publishes

this value every minute from 3.50 p.m. until 4 p.m. And this provides market makers with an opportunity to sort of submit their orders and control that the auction price occur in line with normal trading volume. Otherwise, there would be an arbitrage opportunity and then there would be competition to reduce that price discrepancy.

Right. Okay. Yeah, I think that makes sense. And if Anyone listening, maybe if that didn't make much sense or you wanna find out more about it, I'll put a link to um there's a blog post on the Gemini site. I'll link to that uh in the show notes so you can read up a bit more on it there. Um just talking about the future of Bitcoin and sort of where we're headed from this point onwards.

Can you see a day where Bitcoin is widely accepted, just as we accept US dollars, Australian dollars, pound, et cetera? Do you ever think that day is gonna come? Um I think the original proponents of Bitcoin hoped for that. Um I think it's a pretty lofty ambition to have. Instead, I think Bitcoin is going to take a place amongst the commodities like gold. um and oil and wheat and things like that. Um and sort of be viewed as a very stable

um and diversified asset class. That's that's my personal prediction. Um and the reason is I think that Bitcoin and the security and cryptography behind it actually provide a really interesting store of value. The reason that people are interested in using gold as a store of value is that Um, there's a relatively limited supply. Um most of the gold that's been min that's able to be mined out of the earth has been mined. And even if it weren't,

The available supply doesn't change by that much from day to day and certainly even from year to year. So it's sort of a stable store of value. Bitcoin is um very similar in that there's a mathematically defined supply. Part of the Bitcoin protocol um dictates that only a certain amount of Bitcoin is created every day. Um and because of that, I think once Bitcoin becomes a more accepted part of the financial ecosystem, we'll see a whole lot of price stability.

Um and it will become an interesting way for people to store money and kind of hedge against currency risks. and other risk that they might see. What do you think it is that that might actually prevent Bitcoin from becoming as accepted as US dollars and Australian dollars, like I was met um originally asked. Like, what do you think is sort of getting in the way of it being as widely accepted as we accept other currencies.

Sure. Uh so this is actually a really interesting sort of operational question. US dollars and all of the major currencies worldwide, in addition to having a paper form have lots of widely accepted electronic forms like credit cards and debit cards and uh various debit transfer mechanisms and Swift and wire transfers that can be used to affect the transfer of money denominated in that currency. So far, Bitcoin only has the one, and that is transacting Bitcoin

on the blockchain. Unfortunately, that one mechanism is very slow at this time. Sometimes it can take 30 minutes or an hour for a transaction to clear on the blockchain. So that's actually very slow compared to credit cards. Um if sometime in the future people were to build um electronic payment forms For Bitcoin that are analogous to credit cards or debit cards, then I think it might finally be accepted at sort of point of sale.

locations accepted by um coffee shops and um convenience stores and things like that. But until uh the Bitcoin community is able to solve this problem of instantaneous transfer of value, um, I think the wide adoption might not be as as much as they hope. And on that point. What are your thoughts on a cashless society? Do you think that's what we're heading towards? And what effects can come of that?

Um, by cashless, do you mean that we don't touch paper currency anymore, or do you mean that economics has evolved beyond money? I mean that we don't have paper, any money that we can hold in our hands. It's all just ones and zeros. So I think we're almost there. I mean, when was the last time you actually took

um bills out of your wallet to pay for something. At least me personally, almost everything that I buy is with credit cards or I buy it online via Amazon and don't touch paper currency. So I think we're actually almost there. Um people rely on paper currency I think because it's familiar to a certain extent. And there's also another interesting twist and that is uh it's very difficult to track.

Um which kind of makes law enforcement uneasy. Paper currency is still an easy way to get illicit funds around, whereas credit cards and other payment mechanisms are easily traceable. So until um other payment mechanisms arise that solve that that problem for people, um, I think that we'll still rely a little bit on paper currency. So if we were to become a cashless society, how far in the future do you think that would that would be?

Oh, I I really can't speculate. Um that's a that's a tough one. I I I hope I hope for the day that I don't have to touch paper money because honestly it's it's kind of dirty. Um And that we're able to use credit cards or um Apple Pay or some other mechanism for buying day to day goods. Um but we'll see.

Don't you think there's gonna be a lot of negative effects that can come of the fact that we have no paper money? I I don't know what you mean. I I'm not sure how critical paper money is to the to the economy. I mean the fact that banks essentially then have full control of your money. Uh they already do. Um I think

uh at least I anyway get my paper currency out of an ATM that's controlled by a bank and when I need to make a deposit of paper currency, it is to a bank. I think the um the electronization of money has already occurred for ninety nine percent of the the currency that we deal with on a daily basis. So we're really almost there. Hmm. Yeah, I think this could lead us down a whole nother path. Let's leave it at that then. Uh where's the best place listeners can go to find out more about you?

Um, so definitely come to Gemini dot com um and see uh what kind of stuff we're up to. And if you'd like you can also find me on LinkedIn and you can provide a link for that if you'd like. Okay. Yeah, sure. I'll put that in the show notes. Are you on Twitter by any chance? I'm not, unfortunately. Okay. Okay. You're one of the few. I am, yeah. I'm not even on Facebook, which is ironic given the people that I work with.

Right. Well, you are on LinkedIn, so if anyone wants to find out more about you, they can uh find you on LinkedIn or at Gemini dot com. Benjamin, thank you very much for coming on the podcast, man. This has been uh really interesting. I've enjoyed it. Thank you, yeah, it was a really interesting discussion. Thanks for having me. You've reached the This episode of Chat with Traders. updated with each