Hendrik: 0:00

This is just a golden opportunity for trading crypto, and that's also a great moment for people to actually embrace options.

Joeri: 0:08

Hello everyone and welcome to the Web3 CMO Stories podcast. My name is Joeri BilLast and I'm your podcast host, and today I'm excited to be joined by another Belgian. Hello Hendrik, how are you? Hello Joeri, how are you? I'm good, hendrik. How are you?

Hendrik: 0:24

Hello Joeri, how are you?

Joeri: 0:26

I'm ood Hendrik, I'm excited you're the third Belgian now on the podcast, actually, after 200 episodes without one. It's funny. And so, guys, I met Hendrik in Barcelona and if you don't know, Hendrik. Ghys, as a Belgian, I know how to pronounce his name. He's a co-founder of Thalex, which is a derivative exchange offering crypto options, futures and perpetuals. Now, Hendrik, to start with, I always love to hear a founder's story. So, yeah, how did you get into crypto? And maybe, yeah, how did you get to found Thalex?

Hendrik: 1:02

Yeah, well, thanks. Thanks for having me, Joeri. So my background story is probably a little bit different than most. So I've been working in finance my whole life and most of my career I was actually working at what's called a family office, so it's an investment fund for an individual, an entrepreneur, in my case, a Korean entrepreneur who made billions in the gaming space, and then he set up an office in Brussels called NXMH, with essentially the most open-ended, high degrees of freedom kind of investment that you could think about, which is just invest in everything that makes sense, but just do it different. Right, he wanted an entrepreneurial style of deploying his money, and that led us to invest in luxury and consumer goods and things like pet food and things like food tech as well like Impossible Foods and Beyond Meat, but at some point in 2016, sort of crypto was something that got on his radar as this thing that he thought would go away and didn't, and so, on that basis, he basically tasked the team in Brussels, including me, to explore the opportunity set, because if it's not going away, it's probably going up and we should invest.

Hendrik: 2:13

And, logically, the first thing we did is we started buying some coins and then we just started figuring out and looking for which exchanges we should buy these coins, and there were new ones popping up all the time. But there was at this moment of saying these exchanges right, they seem to be making money already today, not in some distant future. They're actually also benefiting from volatility and, most importantly, they're not about like betting on a single coin or ecosystem. Right, they can. They just basically are the most universal, generalized bets on growth of crypto in general, and so we started actually talking to various exchanges and see whether there was interest on their side to take investment. And so in 2016, it was generally like too early stage, but in 2017, when, basically, crypto started to explode on the back of Bitcoin, it went from I think it was around 1000 at the start of the year to 20 at the end of 2017.

Hendrik: 3:09

These entrepreneurs that were very cash strapped and were struggling to survive the year before, all of a sudden, on paper, they were worth hundreds of millions, and so there was interest there to take some money off the table, but there was no functioning capital market yet, there was no private equity buyers, there was nobody actually willing to make a big investment in crypto companies, and that's where we came in, and so we started.

Hendrik: 3:34

We did actually the first acquisition of a crypto exchange ever in late 2016 in Korea called Corbett, and in 2017, we got started talking to Bitstamp and ultimately we closed that deal in 2008. And that's really how I also went from being crypto curious to full time. After we bought some coins, and especially after we bought Bitstamp, it became a pretty big portfolio. It was around half a billion dollars deployed in crypto at that point and somebody needed to manage that, and so I raised my hand and I'll even move to Ljubljana for a little while to help be on the ground with Bitstamp and help organize things and that's really how I got into crypto right. I got sort of sold on the whole industry during my due diligence and then I just looked at it as this very sort of asymmetric opportunity for me personally as well.

Joeri: 4:25

Wow, that's a nice story, and I just looked at it as this very sort of asymmetric opportunity for me personally as well. Wow, that's a nice story. I always love to hear where it all started. But now today you have Talix and I'm curious how did that start? And maybe, yeah, what are these challenges or what do you want to solve with Talix actually?

Hendrik: 4:40

Yeah, so Talix is a derivatives exchange, but really the focus is on options, and I think options is this universal product that emerges, forms a new asset class, develops a certain amount of maturity. Maybe it's actually good to go into the history of options for a second there, if you don't mind. What are really derivatives about? Right, if you take a step back, it's about solving for the problem of facilitating trades without the inventory needing to be present, and that's something that really became a necessity in the 16th century, when, essentially, ships were ship, technology allowed for ships to sail around the world and trade emerged from that. And then the problem is you have goods coming on a boat from India. Now there is people in Antwerp or Amsterdam that want to lock in the price for that future delivery, and there's probably people who own that cargo who don't mind getting paid much, much quicker in advance, and so really it's all about facilitating trades on paper, based on the promise of a future delivery, rather than all of these things having to be present in the here and now and as soon as you have. So what I've just described is futures, by the way, and as soon as you have future trades, options grow out of that, because people are usually asymmetrically interested in hedging a price in the future. The problem with the future is we locked it in and usually there's at some point a buyer who says, well, I would really love to just buy futures to protect against the price rise, but if the price turns out to be lower in the spot markets let's say three months from now I would actually love to be able to buy it at that cheaper price. And so options actually grew out of people saying, hey, if I buy the future with a little premium to get the right to not have to take a delivery, what do we say? And so that became actually the birth of options and this very natural sort of emergence out of futures. And so now you fast forward to a market like crypto today. That demand for asymmetrical price exposure existed in crypto, just as it did for every commodity before it. And what happened in the last sort of five years really is that derivatives trading took off really on the back of perpetual trading. Currently, there's 100 to 150 billion of volume in crypto traded daily. 95% of that is actually in perpetualsuals right, which is a special kind of future that doesn't expire. They're really unique to crypto, but it's a product that's really loved by retail. But the problem with Perpetuals is that, yeah, it's a symmetrical price exposure, right, and the problem with it is you'll hear the stories time and time again BitMEX in particular was famous for it Like people basically take too much leverage and then they get stopped out, and that's the issue with future trading really is that kind of short volatility.

Hendrik: 7:41

You're taking these levered bets, but as soon as the market starts to move, maybe you're right on direction, but usually you get shaken out by volatility, and that's where actually, options are much more natural fit for trading, when you think volatility will actually decrease, or when volatility is elevated, and so I think naturally as well, options will become big in crypto, and then the question is why are they not bigger yet? Well, to some degree, I think it's still the mild constraint from the perspective that you need to educate people. Like, what I just told you is something that probably most people don't know yet, and they see options as being difficult to trade. But I always like to say that options trading it's a little bit like writing code right, you don't need to know everything of the language, right, you don't need to know, you don't need to push the limits of every possibility. You just need to learn a few trades that work for you and then, in many ways, the option trade will be simpler than the perpetual trade. So I think, over the demand side, it's really still about educating retail the ones that are trading perpetuals and educating them. Not that perpetuals are bad, but just that. Look, options are a complementary tool for the trade and they should consider it. There's trades and situations where perpetual is a more elegant tool to use, but especially going into, for instance, an election, like we've seen the last few days, a call option is a much more elegant way to trade. So that's on the demand side for retail.

Hendrik: 9:06

On the institutional side, the main drawback has been that there's only one really big crypto options exchange and that's Deribit, and Deribit is a good exchange.

Hendrik: 9:17

It's also a solid team, but there's only one, and that involves a lot of risk for institutions, and so there the demand constraint is more on the supply side is that they need more venues to be able to offset risk and not to have one dependency or one exchange and then your au options business dies, and that's really the gap in the market for something like Daleks.

Hendrik: 9:38

When we started Daleks, it was in the chat group with a couple of founders in a code name Dairy Better. That's not meant in an arrogant way, it was just like okay, what are ways we can improve versus Dairybit. I think, as I look at it right now, it's also much more just solving that problem of okay, you need different alternatives there a bit for this whole option space to be able to grow. And that's the cool thing about options. It's actually much less about competing with the very few players that actually are options exchanges right now. It's much more competing with, let's say, non-consumption and it's actually almost working together to educate people and to take some share away from what's currently the perpetual trading.

Joeri: 10:19

Well, thank you for explaining all of that. Actually, I had an investment club, so for me, notions like an option and so on it's logic, but it's not for everyone so obvious. So when you can explain it in an easy way, it's really helpful. Once you get it, like you say, it should not be so difficult, so complex. Now, with Tadex, if I'm not mistaken, you're focusing on stable coins, right? Can you explain?

Hendrik: 10:44

On stable coins?

Joeri: 10:45

yeah. Why the choice for stable coins over other crypto assets?

Hendrik: 10:52

I think the thing with options is you need to derive it from where the demand is for perpetuals, and the demand for perpetuals is very clearly in stablecoin-settled offshore venues. Binance, bybit, okex, like most of the liquidity on centralized exchanges, happens in derivatives that are settled in stablecoin and most specifically in Tether, and so our bet on stablecoin settlement was just let's follow where current demand for the market is, and I think it's interesting I see a lot of startups now trying to compete with Tether because they made 6 billion profits and the obvious play seems to be like okay, we're going to try to disrupt that dominant position and maybe find ways to share the yield on lowest friction way to move essentially stable value in crypto between different venues and different trading opportunities, and so our bet on that whole ecosystem is to bet on that part of that settlement layer basically to be the dominant form in the next few years.

Joeri: 13:22

Okay, makes sense, hendrik. Form in the next few years. Okay, makes sense, hendrik. I also would like to hear a bit more about the different partnerships that you have with Daleks, because of course, that's also important to make a difference or to grow. Yeah, I know you mentioned already Bitstamp, but I think there's also Bitfinex. So, yeah, talk to me about that.

Hendrik: 13:43

Yeah. So once I was sold as a founder on this idea of the world needs another crypto auctions exchange, then the big question became how are we going to bootstrap the customer base, how are we going to bootstrap liquidity? And there I basically wanted to apply a few things that I learned from Bitstamp. So Bitstamp for reference one of the oldest crypto reference, one of the oldest crypto exchanges, one of the first exchanges that got regulated back in 2015, I believe and one of the largest actually exchanges, especially in the 2017 cycle, to essentially convert a dollar or a euro into Bitcoin, and that's how it really built its customer base and got to prominence. But then really, what we saw in 2018, 19, 20 was this acceleration of demand towards derivative, where Bitstamp was only offering spot trading, and you saw that the nature of how people use Bitstamp was drastically changing. So more and more people wouldn't trade the Bitcoin USD order book anymore. They would trade it, but only trade it once I go from USD into Bitcoin, and then they would deposit it on somewhere else on Binance or BitMEX or Deribit. And so I noticed that and I call this like a pattern of silent churn is that those customers are still active. Right, they're actually still trading, but they're only using you for that on or off-ramp from fiat and then really they're spending most of their trades in the commission on these crypto natives exchanges that are unregulated. They can move a lot faster, they can be much more aggressive on derivatives and therefore offer a more compelling trading experience. And at the board I then said look, we got to find partners in derivatives because probably derivatives we could at that time like four or six X or revenue, and even if you would share half of that, that's still two or three X and you retain the customers. So at that point Bitstamp did look for exchange partners, but it was very hard.

Hendrik: 15:42

At that point. Most of these other exchanges they thought interesting idea but hard to turn into practice. It was also just a fundamental incentive issue of perpetuals or futures trading being too competitive, perhaps with Spalt and most of these other people also competing with Bitstamp in a more direct manner then, and so the strategy basically never materialized. It was just like an interesting idea, but they couldn't make it work. And then, when I joined Thalix, I immediately realized this is actually the perfect setting to try this strategy again, because most exchanges they won't actually build options themselves. It's too hard. It's too small of an opportunity today, but it could be a massive market a few years from now. And so we decided one of the best ways we can try to bootstrap our customer base is just go to other exchanges that have existing customers and offer with a revenue share that we get access to their customer base and they get access to our product, and so.

Hendrik: 16:46

On that pitch, we had Bitfinex and Bitstamp both invest in Tilex in the funding rounds two years ago, and then with Bitfinex, we also actually were able to build integration to carry out that vision in practice, and actually that's going to go live next week. It's already in beta. And so what then? The partnership model there is if you're a Bitfinex customer, you can onboard on TileX via a low friction onboarding path, because all this information that you already had to provide to Bitfinex to open an account there, it's just shared on the backend. Mainly, you're consenting to that data being shared between the doer changes, and so the onboarding is frictionless.

Hendrik: 17:24

Then we make the transfers of assets between a TileX account and a Bitfinex account.

Hendrik: 17:27

We make that free, and also the trading experience is integrated.

Hendrik: 17:29

Transfers of assets between a Thalex account and Bitfinex account we make that free, and also the trading experience is integrated and the Bitfinex people won't need like separate credentials.

Hendrik: 17:36

Their Bitfinex login basically, is good for also for Thalex, and so all of that combined at one integrated customer journey, even though it's very clearly two different exchanges, but it's a massive injection of trust and it's a massive removal of friction.

Hendrik: 17:52

And so the bet that we're making at Stalix is that after Bitfinex, danci, bitstamp and other exchanges, we will be the exchanges, exchange in some ways and partner with these different exchanges, get access to their customer base, have a revenue share in place to align the incentives, and then hopefully we can add multiple different exchanges, create one big pool of customers that want to essentially trade options, and then all their orders get executed in our order books, which makes it easy for us to centralize the market makers, make sure the liquidity is there and ultimately it's a distribution strategy that can scale very fast, and I think that's also necessary in options, because options is currently about maybe 1% of retail that actually trades it, and so if you would think about how do I target these customers, either I figure out a way to have massive conversion or I figure out a way to very easily talk to a very large number of players and then have a small conversion rate be enough. And so, very clearly, we've chosen the second strategy Interesting.

Joeri: 18:55

I was going to ask you this, but how did you do that? What I always like to ask to Hendrik is that, because obviously, as a founder, lots of things are happening. I've seen really your passion, but what are you now the most excited about at this moment with everything that's happening with your company and maybe in the market?

Hendrik: 19:16

Well, at the company level, I think the most exciting thing is just that you go from having 20, 30 problems you're worried about to less and less problems over time and really now our platform is ready, the exchange strategy is going to go live next week. We've got good access to funding. Also, luckily it's a bull market, so all of these external dependencies are aligning and we've solved many problems. So we can just focus now on actually executing our strategy and just focusing as well on that educational piece, on marketing, on content, on tools for trading.

Hendrik: 19:52

So I think the fun thing is just like this, getting out of this dead by a thousand cuts phase that you get into, not in the early parts of the exchange of building a startup, because then it's like you're selling a dream and that's great. It's more like when you're very close to go to market. That's the most, I would say, frustrating and difficult phase, because you're just constantly faced with all these final details that you need to put in place to actually be able to have product market fit, and so I'm excited about just finally being able to unleash this experiment. I think, yeah, what I'm excited about in the market is just the combination of price moving up into the right, like we just, in the wee hours of the night, made a new all-time high, and then also there's a lot of volatility. This is just a golden opportunity for trading crypto, and that's also a great moment for people to actually embrace options. So, yeah, I think I'm excited about simply that.

Joeri: 20:52

Yeah, I was going to ask you your advice. Yeah, now it's a good time, of course, with all the volatility, but if someone has experience in crypto, but not yet with options, what would you advise them? How to start?

Hendrik: 21:06

Yeah, I think what I said earlier right is that options are similar to a coding language.

Hendrik: 21:13

Right, there's very simple things you can do with them. There's very advanced things you can do with them. So where do you start? The first thing is you need to figure out whether you want to buy options or you want to sell options. Right, and that's because they're an asymmetrical instrument. There's asymmetric risk in selling options. So the easier answer to give is where you should definitely not start. And where you should definitely not start is by selling options naked or thinking you're thinking like selling options is like getting an interest rate. That's definitely the wrong starting point.

Hendrik: 21:44

Then, just simply buying options because they have an asymmetric risk profile you can only lose your premium potentially, you have unlimited upside is also not actually the best place to start, I'd say, because the problem is it's only a good idea if the price for these options is right and options are insurance right. Insurance in general costs money, Assurance in general costs money, and to think that you can simply buy options and get your volatility forecasts right or immediately have a good sense of when to buy them, or trying to time the buy basically that's also not a good idea. Then I come to what I think is a good idea and that's actually a combination of just being long Bitcoin but then selling some upsides via calls. That's called a covered call, and the advantage of that is that you sell some upside but it's essentially hedged by the fact that you're also long Bitcoin, and the analogy is a little bit like, let's say, you would take profits anyway at I don't know $80,000 on Bitcoin, so you could put a limit sell. If you have a Bitcoin, you could put a limit sell there, and then you could think of the covered call as like a limit sell, but you're also getting this premium for your willingness to sell that upside. Of course, it also then depends on how much you get paid, but currently, for instance, in the markets today where volatility is fairly high and I would say high volatility for Bitcoin is when it's at least 60% Last week we saw like 100% so those are moments where the volatility is expensive and where the covered call could actually make sense. So let's start with those simple sort of yield trades. This is also actually close to what pension funds do at scale on equities, Because again it comes back to asymmetric preference for where price moves, and so pension funds are usually long equities and they're long in massive size and they can't constantly position manage by buying and selling that and changing their position size is fault, because they would move the market.

Hendrik: 23:49

Their transaction costs would be huge. It's much more elegant for them to sell some upside calls and then they collect premium and with that premium they buy some puts for downside protection and that's called a collar and I think collars are actually a fairly elegant way to use options in a fairly conservative way to modulate the volatility exposure of simply buy and hold, and I would probably start there. And then you're looking at options usually a one month expiration and then you have to roll options because there's no perpetual options. So you do have to have a calendar in mind and you do need to make sure that if you want to stay the trade, that your contracts that are about to expire, that you roll them forward to a new expiry. Ultimately, it's not that hard. You just need to mainly have a calendar and remind yourself. But a very classical strategy would be to sell calls one month out, buy some puts in the same maturity and then, one week before they expire, you roll to the next month.

Joeri: 24:52

I love that and I think it's a good strategy. Like you said also, pension funds are doing stuff like that. It's a more conservative way in using options and it's maybe also where they are built for a kind of insurance security. How to do that? I think there is a lot of things to talk about when it comes to those markets. Uh, it's can. You can also go into real detailed strategies, but for now, I think people already learned a lot, but if they want to learn more of DNA, they want to know more about your story of Talix. Where would you like me to send them?

Hendrik: 25:27

Just talixcom. We have a few blogs there that actually explain the strategy I just laid out. Then there's also our Twitter, which is at Thalics Global, and you can follow, actually, me personally at a bit of a weird hand roll, which is a mad joke, at minus 112.

Joeri: 25:44

Okay, henrik, as people know, there are always show notes linked to this podcast episode. Your links will be in there. It was really fun and also really interesting to learn something new, which I didn't know. I know about your strategies, but now how you laid it out, I think this is really perfect way to start off people. So thanks so much for having been a guest on my show. Thank you, guys. What an amazing episode, the third Belgian, as I said. So, guys, if you think this episode is useful for people around you, be sure to share the episode with them. If you're not yet following my show, this is a really good moment to do this. If you haven't given me a review yet, this would really help me to reach even more people and, of course, I would like to see you back next time. Take care.