319 · Sam Gaer - From the Copper Pits to Crypto Derivatives: How Trading Edge Evolves

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I was one of those guys in the pits waving my hands, screaming, yelling. I mean, it was really it was very physical. Sometimes people are jumping on you, you get spit on, you're spitting on people. It's I mean, it was real rough and tumble sort of existence, and by the end of the day, you're just exhausted.

So so a couple of things really made me take a the huge plunge in late late twenty three, early twenty four. I sat down and I realized I have I have children who are I have adult children right now. Every one of their friends and them are really, really comfortable with virtual payments. They've never grown up in a world that hasn't had Bitcoin or some

cr some form of cryptocurrency. At the same time, I had the thesis on the election that no matter who won the election, Bitcoin was going to benefit. Then I said, All right, and who's going to be making the decisions after Trump in the next five or ten years? People that are the age of my kids. Those are the decision makers. And so it was an evolve or die moment. I turned around in what I call my Cortez moment. I sold my high frequency software to a firm in Chicago.

And I haven't looked back since because when Cortez came to the new world, the first order that he gave to his men was burn the boats. Thank you for tuning in to Chat with Traders. We're on episode 319, and we hope you're doing well. I'm Tessa here again with you, and today my co-host Ian has another awesome conversation with our guest today. Sam Gare. Sam runs the directional strategy at Monarch Asset Management, and his career spans some of the biggest structural shifts in modern markets.

He started out as a teenager running order tickets on the Comex floor during the gold boom of the early eighties. Not long after, he was trading copper in the pits himself, navigating the chaos of open outcry where information moved through body language, order flow, and instinct. But even back then it was

Sam was already experimenting with technology. While most traders relied purely on Feel, he was writing programs to price spreads and identify inefficiencies, an early glimpse of how computers would eventually reshape trading. Over time, that combination of trading experience and technical skill pulled him beyond the pit. He went on to build exchange technology, sell a trading software company to the New York Mercantile Exchange, and later served as CIO of NIMA.

Helping rebuild the exchange technology and playing a role in the exchange's eventual nine billion dollar sale to CME. Today, Sam applies the same derivatives and market structure background into the crypto markets, focusing particularly on volatility, options, and how institutional trading frameworks translate into a new asset class.

In this conversation, we talk about the evolution of trading edge from the copper pits of the 80s to high frequency systems and now crypto derivatives, and how the mindset of a trader adapts as market structure continues to change. We hope you enjoy this episode. So without further ado, ladies and gentlemen, we're so pleased to present Sam Gare, originally from New Jersey. Yeah, well thanks for joining us today on Chat with Traders, uh, Sam. It's great to be here. Thanks, Ian.

Yeah. So tell us a little bit about your kind of where did you grow up and how did you first get introduced to the uh financial market? Oh, thanks. We're going back to the growing up stuff. So I grew up in uh suburban New Jersey, uh stones throw from Manhattan, a town called Paramus. And it was a very uh a very typical eighties movies style uh teenage life.

Um, and I got introduced to the markets because I was 15 years old. My father was on Wall Street his entire life, uh, had worked with some pretty notable heavyweights, um, George Ball, um, Ace Greenberg, etc. And he had mentored people in the industry and one of the people that he mentored uh had had uh gone down to the commodities exchange, the Comex floor during the the big gold bull run in the early eighties.

and uh agreed to have me come down and be his runner for the summer. Of course, to which the punky fifteen year old, you know, snotty kid that I was was like, I'm not going to to New York to. To run around and take order tickets. I'm like, I don't know anything about that. My dad's like, it pays five dollars cash an hour. I'm like, I'm it. You have to understand 1982, five dollars cash, you know, it was it was a pretty big deal.

And so that first summer, um uh I I went into the place. It was exactly if you picture the movie Trading Places.

Uh it was actually where trading places was filmed in the gold pit. Um and so pretty much everybody in that movie I either knew, knew of, had become friendly with or what have you. And my first summer I was just some kid from New Jersey in a members only jacket running around with tickets, you know, with they say, take this to the copper pit, take this to the gold pit, take this to the silver pit.

And you would run and that's what a runner did. You'd run with the tickets and you'd give them and, you know, bust through the crowds and give them to your broker. Fast forward a few by a few years later, I had done everything from doing charts to answering phones to going out with customers. This is all by the ripe age of nineteen and by nineteen I was essentially running all of the other runners and pages on the on the floor for this uh for this gentleman.

And uh I went to um University of Pennsylvania, Wharton School. And as is typical, uh, as I was graduating, I I worked at the commodities exchange every summer while I was at Wharton. And uh as I was graduating, I had a couple of different uh job offers in banking and one out for a big trading firm, options trading firm in Chicago.

And I'm like, you know what? I'm gonna go down to the trading floor one more time just to see. And I went down to the trading floor and I looked around and I'm like, you know what? This is for me. The action. Uh I'm like I'm young. I don't have I don't I don't have any obligations. I have no family. There this is the time to take a risk.

So I sold my car, leased a seat, uh started trading uh with people that I already knew from all those years of clerking, and and within a couple of years had built a pretty sizable brokerage firm and uh went forward. Now, where does this all kind of fit into where I am today? Uh and and uh where where it all fits in is I'd all I've been a self-taught programmer. So uh when I was 14 years old, my parents got me an Apple II, uh Apple II Plus.

And an Apple II Plus at that point in time, like nobody knew what it was, but I'm like, I want an Apple II Plus because I was really interested in programming and I wanted to understand it better. And I just it just came naturally to me. So fast forward, self taught programmer. And I went down to the trading floor and used a lot of that automation.

if you will, that I learned programming to speed up things like my monthly billing or my customer contacts or uh what our you know, what our average tickets per day were and run a bunch of reports and do stuff like that. And I wrote an options trading program my senior year of Wharton, which I turned into a commercial product. And that was my first aura into software.

Uh while you're doing all this, did you start trading yourself? I mean, and if so, kind of what kind of trades and any kind of strategies you you started off with? Yeah, so I was a floor trader. I was one of those guys in the pits waving my hands, screaming, yelling. I mean, it was really it was very physical. Very physical. I was trading copper at the time, and this was uh nineteen eighty eight.

And uh for several years I traded copper and it was one of the most volatile products on uh uh uh in in uh the financial sector. Uh and It was also a quite a physical job. You are jumping up and down, running. Um, sometimes you're jumping from a top step to a bottom step. Sometimes people are jumping on you. You get spit on, you're spitting on people. It's just like

I mean, it was real um rough and tumble sort of existence. And by the end of the day, you're just exhausted. But in all that chaos, you really understood how markets work. The highest bid meets the lowest offer. uh just how size moves markets. You can look across the pit and see somebody else's eyes. Are they long? Are they short? They got a big order. They're looking around. How do they want to execute it?

And there were also massive inefficiencies within that inefficiency. And um one of the products, the one of the programs I started to write was a program that priced uh copper spreads uh with a computer. So so were you uh this program, were you utilizing this copper program like live to to uh to find inefficiencies or did you go by your gut feel and describe that process? Like like give us give us an example of like a trade that you would make.

So yeah, so um you I started out by going by gut feel. You get a really good sense of that in the pit because the pit was just a, I mean, the information that you would get. from being in the trading pit and seeing order flow and hearing what people are saying and looking at people. It was a really, it was a really rich kind of sensory overload.

We had an issue in copper where we had uh spreads that were in backwardation in the front end of the curve, and in the back end of the curve it was in Contango. So it was very difficult to price. Ві сетлмент процес.

uh was basically done by what was called a settlement committee because these things are relatively illiquid, the settlement committee met at the end of the day and uh as one gentleman once told me, there are two ways to have spreads, his way and the wrong way. And that's how they were settled. And so understanding that, that was an input into this matrix that I built.

And there was another product that had just come into the market that we lobbied to get out of London and it was called a strip. And a strip was an average price basket of contracts, a a sequential average price basket of contracts. And it was very difficult to price. Uh and so but the trade like to do that because like let's say you want to price all of your 1996 copper production and you're a producer coming out of Chile, uh you would just say, give me 1990, give me the 1996 strip.

It was really difficult to price. Uh a lot of a lot of people kind of guessed. I'm like, well, I don't wanna guess. I have the programming chops to do it. I wrote a program, put it on a laptop, stuck the laptop uh in the booth, and I would run back into my booth. type into my laptop, you know, what what they were asking for and I would get a c a price and I would come out

And it was almost like that scene in trading places where I came out into the uh you'd come in and everyone become quiet when they're like 96 strip. And I would walk back into the pit and I'd go six bit at eight. Now, I knew the the, I I kind of knew that they were buyers because they were always buyers of these strips. So I would skew the quote that way. And but six-bit at eight was a$500 per contract times 12 contracts for one strip.

quote. That's how inefficient these markets were. And what started to happen was first, uh, I would say six bit at eight and then everyone go at seven ninety, right? They would, they would, they would try, they would, you know, they would they would they would nickel or dime me.

And uh to the most of the broker's credit, one of the things we might we'll talk about later where, you know, my word is my bond type of thing to the broker's credit, he would ask me for the quote and he say he'd say to me, Do you want to sell at 790? I'd say yes, and I'd sell them at seven. The second thing that was really notable that kind of carried forward into my career at NYMEX and technology and open outcry and the whole transition there was people um

What's the the the the um Dan Aykroyd from spies like us, right? We mock what we don't understand. People who would I I'd have a computer and people were really, really just paranoid about it. What is he doing with that computer? Is he videoing us? Is he taping us? He's got an unfair advantage. What's going on here? Uh yeah. It was um it was like one of those who move my cheese moments. And I kind of filed that in the in in the back of my brain.

Can you give us an example of a specific tray that you put on for your own account and how you used your computer and or and or how you felt the the the environment? at the time and how you decided on where and when at what price to execute that trade.

Sure. So I mean we can we can expand on this and this is going back to the days of the copper pit. I mean, I can go all the way forward to when I had my VIX fund as well and tell you about some of those trades too. But this was in the in the mid nineties, expanding on this particular On this particular trade, uh, I I'd be like, I'd be six-bit at eight. I would sell, let's say, 10 strips at seven at 790, which means I would be short.

Um at ninety seven at ninety point nine seven nine, which is ninety-seven point nine cents. I would be short a hundred and twenty contracts of copper, ten contracts for each month, January, ten, short ten Jan, short ten Feb, short ten March, short ten April. So I'm sure a hundred and twenty contracts I would instantly buy to Hedge. the spot contract or the most active contract. I'd buy 120 contracts there. And then you would just peel off each spread. So I'd peel off Jan uh let's say I bought

Um I was short 120 of the ninety-six. I'd probably buy the marches. So I would have um Jan March. I would have uh March, April. I mean I would have Jan March. I would have Jan March, Feb March, the marches would cancel out. The then I have March, April, March, May, et cetera, all the way down. And then you just go around the pit and you say who wants, you know, Mar March, April, who wants, you know, who wants to sell them? And you just pick those off too. And so it

Um generally the market makers who were giving me those quotes knew what I just did. And so it was kind of this give and take where um everybody made a bit of money. Uh, did your fellow traders, uh were they suspicious of you or uh were less likely to want to do deals with you because they thought you had an unfair advantage with your computer or that and that I mean, you you might dw did you get a lot of attention?

I got a lot of attention. Yeah. I got a lot of attention. But it was it was very different back then. Uh it wasn't that people were like, oh, we don't want to trade with you. It was more along the lines of I was very open and transparent about it as well. So I said, this is what I'm doing.

And I would go back to my pit and I show people and I'd go back to my booth and I would come out with the price. Uh and then people would, you know, people would pile on that trade and that would be that's that's fine. That's kind of how open outcry works. And no, I I didn't get a ton of animosity. Uh I didn't get a ton of animosity from that. No, that was that that was not it. I think the animosity came when one time I actually, and this is going back again, the Apple Newton came out.

And so I wanted to try it. And it's it was this handheld. The Apple Newton was a handheld. It was like the first handheld that came out from Apple. And I walked into the pit with it and I started recording my trades on the Apple Newton. And people flipped. Out. Like, I mean, just like when I they they they called the floor committee and they called everybody in and uh they told me I couldn't use it on the trading floor anymore. Oh, wow.

Uh, then moving forward a number of years, did you continue to uh just focus in on copper? Were there other commodities that uh you paid attention to and occasionally dip in if you saw inefficiencies. Is that what you were looking for? Where were you looking for? I I was always fascinated with building systematic trading systems. So I had a I had like the modicum of a systematic trading system. uh which worked on moving averages, volume and um

and open interest in futures. And I would trade, I would actually call to Chicago and trade on the phone to Chicago, uh, you know, soybeans and soybean oil and wheat and SPs or anything that would kind of fall within this Um this matrix. So that that really introduced me to systematic trading when I started building things like that. And I built an options pricer, which allowed me to price options on the floor. I took my options software and allowed me to

generate options, pricing sheets on the on the floor. And I was always kind of applying technology to this. Um, moving forward, what I did was I pivoted the company into an exchange uh software provider, and that was called Trading Gear. And uh I just I didn't want to be involved in retail. Anymore. And I kind of left the trading floor to focus on building a software company. And this is in like 1998. And uh that that company trading gear uh eventually

uh had clients such as the Philadelphia Stock Exchange, Boston Stock Exchange, Chicago. Uh there was a sh an exchange called the Merchants Exchange. And um then we also had um Then we also had a client called uh NASDR, which was Nasdaq Regular R Regulator, uh, which was doing a a pilot for penny quotes. And so we built the we built the penny quote system for them.

And the only one that I couldn't get was the one that I really wanted, which was New York Mercantile Exchange, which is where I had come from. I was on the trading floor um to answer your question a little uh a little bit late. Uh some of the things I had traded on the trading floor also I traded um heating oil, natural gas, gasoline, crude oil. We expanded our brokerage company there. And so I got my first taste of energy and I really, really enjoyed trading energy as well.

Uh lots of inefficiencies there. But I really, really wanted to uh to to to take my systems and bring them onto NyMex and Um, I had met a gentleman named Vin Vinny Viola, who m many of your podcast probably know who this is, but uh Mr. Viola Vinny, my friend, I met him in like the early nineties when during the NyMet NyMex bought Comex.

And I was using some of my Wharton uh education, if you will, and some of the stuff I learned in all the investment banking courses and the investment banker that I never became to evaluate the deal. And I met him back then and we had some, you know, we had some words because I didn't like uh I didn't like part of the deal and I wanted equity in NyMex. And Uh we settled for uh I got the COMEX members um electronic trading rights in perpetuity. uh which actually came into play.

during the NyMex IPO, which was uh uh which was kind of fun because I I all I kept my Comex seat until about uh three years ago or so. So I had my Comex seat at the time. And so uh I, you know, fast forward Um, Vinny became the chairman of New York Mercantile Exchange. They went through 9-11. Vinny uh is legendary for his leadership during that time. And

I uh contacted him one night. It was like eight o'clock. I was in my office. We had the blackberry paddles, you know, those old blackberries that And I just texted him and I said, I have what you need. And it was eight o'clock at night and he's like, Where are you? Come over to my office right now. He was in his office, I was in my office.

And within a couple of months, we came to a deal where I sold um the assets of trading gear to New York Mercantile Exchange, and that system uh became the Clearport Trading System. The Clearport system eventually uh and the Clearport trading and clearing system eventually um solved a liquidity crisis after Enron had imploded.

And uh traders were unable to trade uh peer-to-peer or bilaterally. And this particular system ended up solving the issue because NYMEX uh opened up what was called the Clearport slate. And you were able to privately negotiate a trade and drop that trade in for clearing using NIMEX as the central counterpart.

And that that just that just ballooned. They brought me on as the CIO shortly thereafter. Uh and I I was tasked with rebuilding all of the technology, which I did a couple of years and it was back breaking and it was uh Uh it it was it was uh quite the task, but we took a system we took uh the world's largest uh energy exchange, the world's largest commodities exchange, physical commodities exchange.

And uh they had software that was dating back into the eighties. They had seven different operating systems, all sorts of consultants. They never delivered projects on time. There was no leadership. There was I it was just like Yeah, every problem you could possibly imagine. And um I like to think that myself and my team, which I give a lot of credit to, uh myself and my team, uh specifically the trading gear guys, uh really turned that place around and we got a lot of awards.

And uh did real did really well with that technology. Oh great. Kind of um focusing on on the trading aspect, what was your style of trading? Did you consider yourself as a very short term uh like a scalper just trying to f within seconds or minutes trying to uh um close these inefficiencies or did you take uh were you more of a position trader? And if so, share with us a little bit about your strategies early on and then how did they evolve over time?

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Sure. So early on the strategies were simply scalping. Buy it at 60, sell it at 70. Buy it at 20, um, sell it at 30. Wait for some stops to get hit. Try and buy the, you know, try and try and buy the last batch of whoever was selling them and then just dump them right out. Uh it evolved to becoming a little bit more event driven.

So uh in commodities like copper, for example, or natural gas or gasoline, there are roles with uh where funds come in and they roll their position from one month to another. And so positioning yourself ahead of the role. And then buying into that role or selling the role, depending on which side was was coming in, usually proved to be profitable.

Since you got started at such an early age, how did you notice the inefficiencies that you saw earlier evolve over time? And then what did you do to adjust your strategy to to these efficiencies? Due to the market getting more efficient. Well I left the floor in nineteen ninety eight and then I went upstairs to go to NyMex. We did a lot of really cool stuff there. Um you can see in my bi biography, but really quickly

Uh at NyMex we did a uh a record breaking IPO. We did a deal. Uh we mu we migrated the floor from open outcry trading to electronic trading, which in and of itself was not only a technological but a uh a a cultural issue, if you will, where people didn't want electronic trading. Uh we did the deal with CME. uh where we sold the exchange to CME in a nine billion dollar deal. By that time I was the EVP COO and I I I led most of the synergy part of that deal.

Uh and then I uh partnered with Vinny again and built a trading firm called Tregara Alpha Partners. Tregara Alpha was an energy arbitrage system where looking back at my NYMEX days and also what I knew about the infrastructure of the Globex system and NyMex's systems. I was able to kind of piece together some uh some arbs around crack spreads and strips and all the other things I used to do on the trading floor. And so how it evolved is

The fundamental understanding of electronic trading and specifically high frequency trading is this. It's exactly what we used to do in the trading pits, just way faster and at scale across many markets. And so I took that thesis and put it into my head.

And uh and and that's how I started doing um some high frequency trading at a time when people were uh high frequency trading was was expressed in milliseconds instead of microseconds and nanoseconds. In between, I went after this. I went to uh Finra for a couple of years, became the CIO. Uh that was also an interesting journey, but maybe not for this. Podcast. Um, but suffice to say it was a really interesting deep dive into regulation leadership and uh technology. And uh I'll leave it at that.

And I left FINRA because I still had this entrepreneurial drive and I didn't want to wake up and be in my 50s and uh or even in my late forties and be a regulator, I wanted to I I was just much more entrepreneurial than most folks at uh at at at Finra should be, right? In terms of Uh I just I I wanted to go out and uh be efficient. I wanted to go out and and and create.

So at some point you decided to transition from traditional Wall Street products to this uh scary world called cryptocurrencies. Yes. So After Finra, um after FINRA, I created a firm called Katana Financial and which eventually became a hedge fund. And I decided I'm gonna get my hands dirty. And I wrote every line of software myself and and created a high frequency trading firm that which eventually accounted for about ten percent of Vic's futures. In 2018.

uh due to relationship with cme and knowing all the people there, et cetera, uh started trading uh CME Ethereum and Bitcoin futures, one of the first market makers in those products in two thousand eighteen. And all of a sudden the light the light bulb went off about this crypto thing. And uh I got very interested. A couple of years later in twenty twenty one.

I said, all right, uh, I'm I'm gonna go I'm gonna go into I'm gonna go really into crypto. I returned money to our LPs and financed my own, uh basically bootstrap my own prop trading firm and started trading crypto on my own. So What what but what was it about what was it about crypto that would draw you away from uh you know the the regular markets which we're so accustomed to?

You know, when you have people like Charlie Munger and others would say, oh no, you know, Bitcoin and crypto is worse than rat poison and it's all a scam. And it's like, why, why, why move over to crypto? What what is it about crypto that was especially attractive for you? So a couple of things really made me take a the huge plunge in late late 23, early 24, right? This was the huge plunge where I just kind of gave gave it all up and I'm not looking back.

And I sat down and I realized I have I have children who are I have adult children right now and I realized they're in their twenties and I said, hm. Every one of their friends and them are really, really comfortable with virtual payments. They've never grown up in a world that hasn't had Bitcoin or some cr some form of cryptocurrency. At the same time,

I had a thesis on the election that no matter who won the election, Bitcoin was gonna benefit. One, if Biden won the election, it it wouldn't have it wouldn't have been as fast. But the whole idea was that Basically in Washington, Gary Gensler was out of favor and the crypto lobby that was pouring millions into the campaign would figure out a way to get him out.

But the real thesis was that Trump wins. And this was early 24. And I'm like, if Trump wins, it's you know, no holds barred, it's full on crypto. Then I said, all right, and who's going to be making the decisions after Trump in the next five or ten years? People that are the age of my kids. Those are the decision makers. And so it was an evolve or die moment. I turned around, I sold my software in what I call my Cortez moment.

I sold my high frequency software to a firm in Chicago and I haven't looked back since. And I refer to it as Cortez because when Cortez came to the New World, the first order that he gave to his men was burn the boats. So there's n signifying there's no way back. Mm-hmm. So what aspects of uh of crypto and in DeFi did you get into specifically in your trading? Did you get into the liquidity pools, yield farming, perps, vaults, that kind of thing?

Yes, perps, uh perps, vaults, um, specifically convexity. Uh the options market is very, very rich in opportunity in in crypto and still is even to this day. And um and and and the other the other part of the thesis was that in institutional capital is gonna be coming into the space. And it's kinda time for it's it's kinda time to have some more more institutional style management of capital rather than typical

Um, Ian, the typical crypto hedge fund, uh uh if you invested in typical crypto hedge fund in twenty eighteen, you'd be up two hundred and thirty percent. If you invested in Bitcoin in two thousand eighteen, you'd be up about uh well now, now about four hundred percent. Um but uh but still there's a massive underperformance by hedge funds. And the reason why is they go through these boom and bust cycles much like much like the market does.

where they're up three hundred percent one year and down eighty percent the next year. And institutions hate that sort of return profile. And I what I wanted to do was develop a product that caters more to institutions with a more discrete and consistent return stream. Mm-hmm. You mentioned the word uh convexity as it applies to options. What w uh describe for us what does that mean? That's complicated sounding word. What does that mean? And how can the average trader

um potentially take advantage of this or what what would they even look for? What what does it all that mean? So conve what convexity is how option price performs as the underlying price moves. So for example, to avail yourself of what I call right tail convexity in crypto, you want to buy some out of the money.

uh some out-of-the-money options which give you what's called a high amount of gamma. Gamma is the delta is the rate of change of the options price in comparison to the underlying Whereas gamma is the rate of change of delta.

And so you want you want to own gamma for for in high volatility situations like we have right now. You want to be an owner of gamma because what happens is as markets move one way, one way or the other, if you have a sharp move to

uh to on on the right side of the price scale, which is up, or the left side of the price distribution scale, which is down. If you have those sharp moves, what happens is the price of the option of a high of a high gamma option, which is high in convexity, The price increases at an increasing rate. So you get this natural gearing or leverage effect.

uh that's built into the option, which is how you see, you know, if you watch CNBC, you see people, oh, I invested$100 in this option and I made$10,000. That's how that happens. How did you notice the uh the differences in these type of options in the crypto market versus the traditional markets? Like uh how much mispricing was there in these options compared to what you were used to in the traditional markets?

Sure. So there's there's a couple of there's a couple of ways that you can c you can consider mispricing, right? So the classic mispricing is you compare the price of the option to the Black Scholes formula. And if it's not aligned with it, if it's there's a quote unquote arbitrage there, then the options either cheap or expensive. I viewed crypto options as being mispriced.

because of market makers failing to recognize the the inherent big fat right tail, as I call it, of the price distribution in crypto, which kind of moved the center of the price distribution a little bit to the right. And what that and and what that does is it essentially makes upside options relatively relatively cheap. Uh in addition, uh the the the dynamics in the in the crypto markets are such that in Bitcoin in particular.

Bitcoin does not generate a native yield. You can stake Ethereum and get a yield. You can stake Solana and get a yield. Bitcoin doesn't. So if you hold Bitcoin, the only way that you're going to get yield. Um in using options markets, for example, is you do a call overriding program. And and so what this has done historically, it's dampened upside volatility in crypto, which gives you an opportunity to buy vol cheap when markets are down.

And and so I I kind of instantly recognized the opportunities there as well as um, look, this is a what's called a hyper volatile asset, right? Uh Bitcoin volatility is historically low right now and we're trading at a 50% volatility rate. Right. When I first came into when I first came in, it was 90%, 100%. Uh, implied vol implied volatility. When you have options that have that sort of vol profile, even at 50%.

The spreads are relatively wide. There's the ability for mispricing to happen on the curve. Um, the convexity smile, if you will, sometimes goes into back it frequently goes into a backwardation. uh where uh where you can is where essentially like I what I call it is volatility or convexity is on sale. So you can buy further out on the calendar almost cheaper than you can buy near term.

The big question that many people who follow crypto closely uh have is how is it that with the most pro-crypto administration ever, with lots of pro-crypto regulation and the passing of the Genius Act? And you have all these tailwinds who you think the best possible environment gone down um recently, ahead of you know, recent big plunge, and

This reminds me of a of a something I read in the Market Wizards book. When an asset class or a stock goes down on good news, it's a red flag. And so I'm curious to get your comment on how has this happened? I mean, why Why has this market declined given the favorable backdrop?

Sure. So as you can imagine, this has been quite the topic of conversation, both internally at Monarch, but also within the uh crypto community. I mean, it was just a couple of months ago we were in Singapore and and Bitcoin was trading 126. And so a couple of things have happened since then, right? So my my saying used to be

Um it's a great time to be investing in crypto because we've never had uh we've never had the the economic and regulatory tailwinds that we do now. Well, that's changed a little bit. in the past c in the past couple of months, combined with some um exogenous events that happened both inside and outside of the of the crypto market.

We had a deleveraging event on uh October 10th, we call it 1010, when$20 billion of crypto got liquidated in a single day. And that hurt a lot of market makers. It hurt order book liquidity. And uh it would just to give you uh just to give you an order of magnitude context here, this was ten times larger than the liquidation that happened around FTX.

In one day. In that during the month of October, there was$40 billion of crypto liquidations that occurred. Now, crypto liquidations, for those of you who are

Uh, listeners that that don't know what that is, is unlike traditional markets where you get like a margin call and then you can put money up to meet a margin call. Crypto has liquid if you're on leverage in crypto, you will receive a you'll you know what your leg liquidation price is and if you don't put margin into your account on an active basis, in other words, like right now, before it happens, you will get liquidated at that price.

So a lot of traders actually use liquidation prices as stops. They just they'll they'll they'll get out or they'll roll the dice, et cetera. So 10 10 happens. Uh order books are kind of decimated. At the same time, we as an industry were expecting the Clarity Act to be passed in September.

The Genius Act got passed and the Genius Act is genius for a whole number of reasons that we can go into later. Uh and so we were expecting the Clarity Act, and the Clarity Act uh gives clarity to regulation, as well as providing the ability for um for for banks, et cetera, to earn and stable coins to earn interest. um different provisions around DeFi. And it it really is a very progressive and landmark legislation that the industry was really counting on happening.

As far back as the election of Donald Trump in November two thousand twenty four. So would you say that this uh the uh this uh Clarity Act was the most important piece of legislation, even though you had some uh stuff going on in the past that was all supportive of crypto, was this legislation kind of a key uh legislation where many institutions would decide yes or no based on the passage of this

Yeah, I think institutions were counting on this being passed already because again, institutions, what do they want? They want clarity. They don't like risk. And so they want the ability to ensure that, hey, if I'm investing in crypto derivatives, for example, I want to know who the regulator is. Is it the SEC? Is it the CFTC? Is it somebody else? I want to know that it's okay for me to do that.

Uh and so this hasn't come yet. It's still kind of being battered around. And what it's become, Ian, is it's almost become this referendum on the Trump administration's ability. to push legislation and its own agenda outside of crypto forward. So think about um You know, think about things, you know, I I call this the orthogonal cloud of events. Um, but they all all you know, any one of these events uh individually isn't really material, but all taken together kind of contributed to this latest.

crypto sell-off, but it's also contributing to this uh big cloud of uncertainty and uh the price action of crypto, just so you know, all of the election premium, all the gains we've had since the election, gone. And here's why. Marjorie Taylor Green with the Epstein files, what does that have to do with crypto? Right? Um, Prince Andrew, what does that have to do with crypto? Uh and and you can go down, you can go go go down this this whole list of things.

But in reality what what the market is saying is, hey, listen. We're not certain that this administration is going to be able to push forward its agenda. They're going to lose the midterms. Look on polymarket. They're going to lose the midterms. And the Democrats are signaling very, very clearly. That they don't like crypto. They're coming after crypto and they're questioning things like, well, why were all these crypto enforcement cases dropped?

when you got when you when when the when the Trump administration um uh took power. So There's a lot of uncertainty in the market right now, and it's and a lot a a lot of um a a lot of s uh a lot of this uncertainty is being priced in to the to what you see going on in the market. So uh huh. So so even with um the availability of um of Bitcoin ETFs, Ethereum ETFs and so forth and options on those.

That by itself is not enough for institutions that say, hey, let's just go buy uh iBit or or you know, sell or buy some options on IBIT. It's right there. It's an ETF. It's been approved. It's easy. Why do we need this Clarity Act? Let's just go buy the ETF. Oh no, the ETFs are well, we've had massive outflows on the ETFs, right? Massive outflows.

Why why is that though? So part of what so so part of a a big trade that goes on right now, specifically in TradFi uh pod shops, is I'll buy the ibit ETF. And I will sell CME futures because there's a, there's a cash and carry or a basis trade that goes on there. And that's been happening for several years. And that that basis trade has collapsed from about 17% to 5%.

This was a contributing factor to um one of the contributing factors, and I published a paper uh dissecting the the the recent crash on February 5th. Uh this is one of the factors contributing to the to the recent decline in crypto. So um what you saw is as um the market started moving down. Uh people dealers who were short gamma were forced to sell. It was a gamma storm. They were forced to sell.

A hedge fund in Hong Kong, which had levered itself, funded by the Japanese yen carry trade, which is unwinding. They levered themselves into two things, IBIT options and um and silver. Both of which ended poorly. And so all of this kind of c cascaded within a week. And at the same time, if you were long at one of these pod shops and you had this you you were long the the the cash and carry or the basis trade where you're long IBIT and your short CME futures.

your manager, your risk manager tapped you on the shoulder and said, get out. You got it, you, you got, you got to exit. We saw um cascading redemption ca cascading um um redemptions in the in the IBIT in ETF over the course of days. The CME actually the CME basis actually went soared to nine percent based on that unwind. Why? Because people were selling iBit and buying back.

Selling the IBIT that they were long and buying back the CME futures, which pushed that uh basis trade out artificially. And so There's a little bit there, you know, there's a little bit of uh a cloud of uncertainty there, but here's what I will say regarding institutional participation and institutional adoption. iBit Options open interest is still higher than that of Derabit, which is uh an options an crypto native options exchange.

The Derabit open interest plus iBit open interest hasn't shrunk. In other words, iBit did not take away market share from Derabit. IBIT open interest is all new. It's a larger pie. So institutions are still trading options. They're still trading the ETF. People are still investing. Uh major banks have uh uh blockchain and stablecoin. uh projects on their books right now. So institutional adoption is still there.

Tokenization, as I'm sure you saw some of the headlines around Texas stock exchange, twenty four seven on-chain trading. Tokenization is probably going to be the next wave of what we're seeing in the crypto market in terms of institutional participation, but Uh a lot of people from a speculative standpoint got hurt in both of those ten ten and two five declines.

Uh so speaking of tokenization, uh notice that um the SP five hundred and Tesla and NVIDIA are available to purchase uh through the crypto exchanges, but their market cap is quite small, you know, in the tens of millions of dollars. But one asset that I've noticed that have seen very strong steady growth and is the largest, seems to be the largest uh real-world asset, uh, is gold. uh now at five billion dollars in in just two two funds.

And so question is that there's been a lot of talk about the uh debasement trade and then Bitcoin was put into that with gold, golden Bitcoin considered, you know, because they don't inflate uh protection against a dollar decline and so forth. But yet um now that uh people can buy tokenized gold on the exchange and then send it to wherever they want in the world, what do you think about has

uh gold's major uh downside, that which you can't easily carry with you, been eliminated because we can tokenize it. And then therefore there's less of an urgency to get into Bitcoin because like, hey, I got my I got my gold here on chain. Uh that's a great question. Uh and what I would say to that is is this. Uncertain about gold is you know I started my career as a gold trader. The the thing the thing about gold and you can't you can't deny gold

performance. But what I would say is over the past five years. The highest performing asset is not gold. It's Bitcoin and Ethereum. Those those two over the last five years have outperformed. Over the last year, last two years. Yes, I'll give it to you. Um gold gold has gold has trounced Bitcoin. Um the the uh over the last 10 years, there's never been another asset that's had the returns that Bitcoin has had.

So, in history, it's been the highest returning asset. Now, that being said, as a former gold trader myself, what I can tell you is this: producers always seem to be able to find more gold to sell. So uh if we're thinking that gold is is fixed in in in supply, it's not. There's always more gold somewhere somehow to sell.

The portability problem in terms of tokenizing gold, yes, um I get you do you do solve it, but you also create this, you know, you're you're creating home almost an infinite supply of gold. On paper. The other thing I would say is Bitcoin is still, still relatively young asset. Crypto is a young asset class. Um, if you look, you I I don't necessarily know that Bitcoin, uh well, let's put it this way.

Bitcoin has not performed the way that it was supposed to perform in the past several months due to the exogenous factors that I that I that I just mentioned. That being said, Bitcoin has a market cap of about two point one trillion dollars right now. And gold's market cap is about thirty trillion dollars. So Does Bitcoin find some sort of um value store status? And what what percentage of gold's market cap w would that be? Is it gonna be four percent?

Is it gonna be uh is it gonna be four trillion out of thirty trillion? Is it gonna be five trillion? We don't know. But um great question. Uh would ob obviously I would like to see Bitcoin perform uh uh w as it is supposed to. It is not. Often in these uh huge market flushes, people look at contrary indicators to see, okay, is this a bottom? Is this an extreme uh you know, level, sort of akin to uh during the great financial crisis, front.

cover articles on uh Time magazine saying the end is, you know, Great Depression era, or articles about, you know, oil being down there, you know, these famous contrary articles on front covers. So do you see like w where do you look for and what indicators do you look at? to see indications of extreme, uh like an extreme bottom. The fear greed index for Bitcoin recently or for crypto in general hit, I think, below 10 recently, which is like an all time low.

Any other indicators that five, five, yeah, yeah. So it was there it w what what are some of the things that you look at, whether uh whether it's magazine articles or in the options trading? We collect a lot of data at Monarch. I publish a daily market call every day. We use a lot of AI as well. And um what I will say is this. So as crypto is still a young market, uh young a young asset, a young asset class, um, and Bitcoin is

Also young. It's been defined by these quote unquote four-year cycles. But what's been more defining have been these kind of um existential and I say existential with air quotes, these existential events that have happened over crypto's lifetime, notably FTX, Luna, um I we you know, we we can go on. And in each one of them, there seems to be a a similar pattern that's that's emerging that we're seeing right now happening.

Uh and and that is, as you mentioned, fear and greed index, absolute craters. Everybody predicts the end of Bitcoin. Um, how many articles are out there right now talking about Bitcoin going to zero? There are a lot. Uh we look at open interest. Open interest is at some of the lowest levels on in terms of derivatives right now, at some of the lowest levels we've seen. And yet still. Still, the IBIT ETF is still one of the most uh six is the most successful uh ETF launch in history.

Um I I already mentioned I already mentioned uh fear and greed. You can also look at what we call funding rates on the perpetual exchanges. Funding rates are positive right now. They're positive. So that that that's telling that basically telling you that um the the market is relatively healthy. There aren't as many sellers as you think there are because they're you're essentially a positive funding rate pays short pays people to be short. A negative funding rate pays people to be long.

But wouldn't the the other people would counter and say, oh, well, because the funding rate is positive, that shows there's still excess um uh leverage in the system and we have to really wash all of that out. and flush on all those traders to finally get to the final bottom. What are your thoughts on that? And my yeah, my response to that is I think we've seen a quite a bit of flushing out of leverage happening over the past couple of months.

We're still seeing it happen. The market is going sideways. It's really trying to find uh its footing. I think it's interesting. uh that Bernstein came out and had a and and published a note, which I also included in my uh Bitcoin crash note, about this being the weakest bear market case ever for Bitcoin. And the key points there were

Number one, there are no structural triggers here, right? So unlike past bear markets, uh, there are no systematic collapses, hidden leverage unwinds, or cascading bankruptcies, right? None. There's there's there's nothing in there about that. Two, um, the gold divergence that we spoke about is is driven more by by liquidity and not failure.

Three, institutional alignment is intact, as I mentioned before. Uh forced selling is risk contained. So there's also kind of um this this narrative that's floating around about forced selling coming out of uh stocks like uh MicroStrategy or Bitminer.

And that that's actually a false narrative. And Michael Saylor has gone through extraordinary lengths to prove that that they'll be okay. Uh even if Bitcoin hits eight thousand dollars, they'll be okay. There's plenty of cash on hand. They put cash aside. Uh they've got uh plenty of capital to pay off their uh their their um

uh their their preferred paym their preferred uh stock obligations, right? And and finally, you know with all with all this being said, we're still sitting at sixty six thousand dollars above previous records. And uh they're maintaining, Bernstein's maintaining, and I would agree with their$150,000 Bitcoin forecast.

Oh, by uh by when? When when is that forecast? By what end of what year? Uh by uh twenty uh uh what did they say? Twenty they they say twenty thirty three. I'm saying it's gonna come way quicker than that.

Oh, okay. Well that's a that's many years from now. Uh that is man that is many years. But I I'm I I may I maintain, I still believe by the end of this year you'll see north of a hundred thousand dollars. Oh, wow. Okay. Um, so uh I've heard uh people talk about uh DATS, otherwise called uh digital assets. Treasuries, what are DATs and why should an investor even consider them instead of just buying the Bitcoin ETF?

So dats were a really, really great idea. DAT is a digital asset treasury vehicle. And uh the idea was that uh you'd uh these companies come in and they would buy a shell company or merge with another company. and uh raise capital from investors and then buy a token, uh Bitcoin, Ethereum, Solana, others. uh buy a token and put it into the corporate treasury and then use that token to generate yield or generate income and also get appreciation uh from that from that token.

And the initial, what we called DAT 1.0 thesis was kind of following loosely what Mike, what Michael Saylor was doing at uh MicroStrategy, which was this, what they called the flywheel. Like this. Um, we have a s we we we have what's called an ATM secondary at the money secondary shelf shelf registration, which is active and ready to go. Uh as uh the underlying token Bitcoin goes higher than the net asset value. of uh you know, of of our uh of the Bitcoin that we hold is gonna go higher.

And as the net asset value goes higher, the stock goes higher, we'll sell stock with the ATM and then buy more Bitcoin, and it keeps on going higher, and we keep on doing that. And this is all predicated on you getting a multiple. A mo what they call m Nav, a multiple of nav. And at the time A lot of these uh treasury vehicles came out with MNAVs of two, three, four. And it was really plain to me as a former as an arbitrage trader that that was just, you know, that's just arbitrage bait, right?

Wait, let me let me get this straight. You're trading at three times your net asset value. Let me think about that for a second. Um and and the issue really, Ian, is that these companies were launched very hastily.

And they were launched um by people and and run by people who'd never run a publicly traded company before. Their business plan was essentially the market keeps going up. So we keep will keep selling stock and buying more tokens. And as we both know, markets go down. So right now Uh a lot of these uh a lot of these stocks are trading far below their net.

Why? Because they didn't think about they didn't think about what I call debt two point oh. Debt two point oh is actually running a publicly traded company. like a publicly traded company with some experience. And your sole metric is not an MNAV. Your sole metric is how you want to increase the number of tokens per share. So how do you do that? Well, we do that a couple of ways. We can either have cash on hand and Tom Lee at Bitmine uh actually uh articulates articulates this very well.

We can have cash on hand to buy shares back if people want to sell them below nav. And at the same time, if the if we go above nav, if the market gives us more than nav, that's when we'll sell stock to raise cash. and buy and and buy more tokens. Now, in the meantime, we're going to take our tokens and we're going to earn yield on them, put them to work and make sure that we just keep on increasing the number of tokens.

that we have in the Treasury and keeping our share count under control as well. So the result has been Most of these uh naves are trading far below net asset m navs. Most of these dates, sorry, most of these dats are trading far below their net asset value, some as low as tw Seven, point eight, point nine, but most of them trade far. Can you give us uh one example of a public publicly traded uh dat uh trading below NAV?

Um yeah, I can't. I'm I'm probably not supposed to. So sorry. Because we're investors and Falcon X is investors. So sorry. Oh okay. Great. So in closing reflections, um, what would you say, what hasn't changed in your 35 years uh in the markets? Excuse the last interruption here. This is Tessa. We hope you're enjoying this episode so far. If you love the podcast,

Please give Chatwith Traders the best review you can on whatever platform you're listening from. This will help us to keep the episodes coming. Also, if you haven't subscribed to our email list, please hop on to chatwithraders.com and click on subscribe. So we can keep you posted of information that may be of importance. Thank you. Now back to the chat with our guests.

What hasn't changed is this, is that um the market can remain irrational longer than you can remain solvent. And people seem to forget that. Mm-hmm. Yep. Good words of wisdom. Uh so to wrap things up, uh w what do you struggle with most as someone who trades or manages the fund? Uh I think what I struggle what I really struggle with most, um specifically in in crypto is just the sheer amount of information. that you need to harvest and process.

Uh and even with AI, it's still a just a ton of information to process and ultimately, even if your machines are making decisions for you, you still have to be there. You're still responsible at the helm. So Uh I I I think that's that's one thing that I really that that I really grapple with every day is as I mentioned to you, we have all these different indicators that we're looking at. And how do you interpret all of this?

Uh and what I will say is this, uh the AIs that we're working on are making that a lot easier. uh by being able to kind of download your the way that you think into an AI and the way that you you think about markets and value markets, uh what it's doing is it's expanding our ability to process this information.

Oh wow. Uh so are are you creating your own kind of custom in house LLM or or are you using off the shelf? Oh, okay. Yes. I mean we've gone from off the shelf and we're creating our own in-house as well. Um it's uh it it it's it's really astounding just from a on a month to month basis what the improvements are. Great. Well, Sam, I'd like to thank you for coming on Chat with Traders.

Well, thank you so much for having me in and uh uh I look forward to another one. Yeah, and how can our listeners reach it? Sure, you can reach me uh either uh email is Sam at monarchmour dash a m dot com. And you can also reach us uh via our website or um ir at monarch.com as well. Fantastic. Thanks for coming on the show. Thanks so much. You've reached the end of this episode of Chat with Traders, but rest assured there are more episodes. love it if you leave a