GCR

GCR sat down with Charles Yang, head of trading at Genesis Block to talk about why he thinks Bitcoin is high during mining season and the recent happenings in Hong Kong.

Genesis Block is an OTC desk as well as a community space in Hong Kong. We recently mentioned Genesis Block in our Asia guide book as one of the community hubs in Hong Kong where many cryptocurrency events have been held. Check out the “The Small Handbook to Asia Crypto: On Local Ecosystems, Trends and Regulations.”

About Genesis Block:

Genesis Block is an Over the Counter (OTC) trading center of digital assets in Hong Kong founded by Wincent Hung and Clement Ip. It is backed by an experienced team of financial professionals and deep liquidity pools. The origin of Genesis Block can be traced back to its mining roots that began in 2012. Today, Genesis Block operates OTC platforms in both China and Hong Kong, and the founders run over 40 commercial-scale mining farms throughout the Asia Pacific.  

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About Genesis Block and its customer base

Global Coin Research (GCR for short): Thanks for joining us Charles, so what is Genesis Block’s business model?

Charles: We have 2 major business arms; the first is the crypto ATMs which are machines where you can buy and sell crypto. We have about 40 ATMs across Hong Kong right now, and a couple in Japan and Taiwan. Secondly, we run an OTC Desk where we act as a broker for our clients, while also trading our own capital. But the reason this business has done well so far is from our events; 2-3 meetups every week, working closely with Bitcoin Association in Hong Kong and just trying to get not only our company name out there, but the Bitcoin brand and fix this incorrect view on cryptocurrencies. At the end of the day, if you’re going to give a start-up millions of dollars, it all starts with trust. So I think that’s why we’ve been successful. We’re also trying to expand; we launched a desk in Korea, we’ve been doing trades out of Japan, Thailand, and we’re continuing to look at various markets. 

GCR: Genesis Block does a lot of OTC volume and trading. Can you talk about your customer base and the kind of flow trends that you’re seeing in the market? 

Charles: Being on an OTC Desk, you have the privilege of seeing trends. Obviously the market sentiment changes very quickly in crypto, but we benefit from doing a lot of flow out of China. Back in 2015, I think China used to account for 90% of crypto volume. Now it’s obviously not that level, but people underestimate the amount of OTC trades that are still occurring there. Take RMB to BTC for instance; this is not a natural pair on an exchange. I’m sure everyone’s heard of China banning Bitcoin, China banning mining. They’ve done this several times over the last few years, but actually a lot of deals get done on WeChat, a lot of deals get done face to face, cash deals. If you go to Huobi and OKEx which are the two largest crypto exchanges, they have something called C2C. It stands for Consumer to Consumer, and basically a platform like Local Bitcoins where you can trade peer-to-peer. The beauty is they don’t charge any fees, and because it’s not a revenue driver for them, they actually don’t even track the volume. We’ve been trading actively on these platforms. These counter parties or ‘merchants’ are making markets in China. They’re all on WeChat in these large group-chats where we can ping for quotes and it gives us a lot of opportunities to do arbitrage. 

GCR: How much of your volume comes from China?

Charles: I would say over 80% of our total volume comes out of China. Arbitrage opportunities happen regularly in China. So why does China trade at a premium so often? Most of the time it’s due to macro uncertainty. For instance the US-China trade war. When people expect RMB to weaken further, there’s demand to exit RMB. Traditional methods are limiting so they can resort to buying crypto. Most Chinese people don’t understand Bitcoin, they don’t like the volatility, so naturally they look to buy USDT. You can kind of work out what happens after. 

GCR: Can you tell us more about your customer base?

Charles: I think we have one of the widest ranges in terms of clients, because our minimums are very low. We’re happy to do a $10,000 trade. We onboard retail clients, high net worth individuals, family offices; we also work with ICOs who sit on sizable capital. 

To share more on our positioning, we don’t consider ourselves a tier one OTC. The bigger desks like DRW, Galaxy, OSL, Circle, sit on probably over $100m in assets and can take higher risk positions. We often rely on these guys to offload big positions. But the space has shifted in our favor as these desks are fighting for market share and tightening spreads. If we consider this as a cost base, it means our margins have improved.

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Regulators can better track money movements with Bitcoin

GCR: Got it. Yeah, it sounds like the regulators haven’t cracked down yet, given that we see historically money moving out of China as well, and now we have this new medium callled Bitcoin or cryptocurrencies that folks are doing it with. So it just seems like an alternative to the existing trends. 

Charles: Let me clarify a bit on why this is better. In Hong Kong and China, money exchanges are a massive business. They have books on both sides, and rarely actually move the money across the border. This has been a business in Hong Kong for decades. If you walk around Hong Kong you’ll see plenty of money exchanges that help you remit in China. So it’s a grey area and could be seen as a risk for individuals.

On the other hand, it is clearly not illegal for somebody to buy cryptocurrency in China. The Chinese government hasn’t figured out how to regulate it, and even harder to enforce rules later on. It’s blatantly obvious that everyone is trading and I think they’re letting it continue because it’s a good way for them to track high profile people; for instance, politicians and people from wealthy families. 

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Market dynamics and trends

GCR: Who do you see as kind of gaining market share in the space in the last few years where you mentioned all these large competitors? 

Charles: Saw some negative news around Circle but I think the rest of them are still hanging in there. Galaxy is a late player in the OTC space that has been impressive; large book and aggressive pricing. 

GCR: Can you share some color on what you’re seeing in terms of the OTC volume amongst the projects lately? A lot of people have been talking about Algorand for example, right?

Charles: 2018 was all about the projects which raised in ETH. Some of them sold early, some of them did not manage treasury at all. So by fourth quarter of 2018, those flows pretty much dried up. However, there are projects that are still healthy and building. Lockups are ending and expenses are paid by selling their native tokens. So we offer best execution services without putting pressure on prices. This requires a lot of trust so once that relationship is made, they rarely move elsewhere.

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Exchanges Going into OTC

GCR: who do you trade with in terms of exchanges? 

Charles: As I mentioned, our liquidity providers are extremely competitive, even if you compare them to exchanges. Let me take an example; we trade on Binance and have a great relationship with them. We pay between 5~7 bps on those trades, but if you think about 20 BTC, 50 BTC sizes; trying to do that on an exchange is very risky. Other features that exchanges cannot offer are things like post-trade settlement and credit lines. 

In terms of pricing, there are guys like Alameda Research who maintain 10bp spreads up to 50 BTC. If I use an exchange, cost-wise I’m already at a disadvantage. At the same time, it doesn’t make sense for an exchange to match these terms when we aren’t trading billions. 

So it makes sense to work with liquidity providers who get the absolute best fees and best terms from the exchanges and we piggyback off of that. 

GCR: I see. So even if say the exchanges are all now setting up their own OTC Desks, it’s probably better to go through folks like Alameda or those guys who already have locked in the prices with exchanges. 

Charles: So when exchanges do their own OTC, a lot of times it’s not a proper OTC desk, it’s just a platform where they try to find buyers and sellers. Binance works in this way but has a very strong edge because of client data. As the #1 exchange, they know who the VIPs are, and they know who’s looking for what. So if I take any sh*tcoin and I ask them for a quote, they do a great job with coming back very quickly on pricing, and I don’t think any other desk can do this from my experience. Exchanges like Kraken, their OTC desk is legitimate but they’re trying to challenge Tier 1s, and I think that’s a tough strategy.

You’re jumping into a space that’s already saturated, you need to stick with what you’re good at. I think Binance is probably doing the best job because they’re not going after the standard pairs like BTC/USD; they’re going after flows that other desks won’t have.

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On Bitmain and Matrixport’s OTC Desk

GCR: Yeah. So I’m curious, what do you think about Bitmain’s new company or Jihan’s new company Matrix Port also looking to do OTC in China? 

Charles: Their office is in the building right next to us. We’ve spoken with them pretty often. We’re actually going to try their custody solution. From an OTC perspective, they’ll obviously see different flows, because Matrixport was designed to provide financial services for miners. So I expect they’ll be skewed towards lending and flows that interest miners.

GCR: So you think they are taking miners? Like previously whoever the miners have dealt and traded with, they are probably taking most of that share. At least for Bitmain’s business and pool and other previously pools. 

Charles: Bitmain has its own mining operations. I think that’ll 100% flow through Matrixport. The mining community in China is huge, and word of mouth should bring growth for them. There could be cases where miners can’t get onboarded with overseas desks. This business would naturally come to Matrixport.  

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On What’s Going on In Hong Kong Right Now

GCR: And I think one of the ongoing discussions that people have talked about lately in Hong Kong is protests that are happening and you’re there physically. So can you share a little bit what’s going on the ground and how you are seeing this thing playing out? 

Charles: Our office is on Hennessy Road which goes through the main areas of Hong Kong Island. When the protests come through, we’ll arrange a bunch of water for participants. We even gave out black umbrellas with a Bitcoin logo on it. The violence has been disgusting; innocent people being attacked, including women. Mobs attacking protestors is not organic. China is playing a role behind the scenes and this triggers further anger to the HK people.

It really gives you goosebumps when you see >20% of the entire population come out to fight for their independence and freedom. Also amazing to see support from other countries like Taiwan. 

GCR: Yeah, for sure. And in relation to that, how are you seeing the trading flow change in response? Is there more volume flowing out of Hong Kong? There have been articles about Singapore being a potentially new safe haven. 

Charles: In reality, I’m not so sure that’s the case, Bitcoin is still a tiny market. It’s not anyone’s first priority. For example, if you’re a banker, you have very little reason to pay attention to Bitcoin. And even if you hear the use-cases as store of value, transfer of value, you’re not just going to put millions of dollars into it. The education required is a long process and that’s exactly why we are here. We do a lot of hand-holding for new clients; they want to learn how it works, how its secure. I think in the last few months, the hype has been around Facebook (Libra) and it’s funny to see FOMO re-emerge.

It’s ridiculous to see people sitting on the sidelines when Bitcoin was 3k and now they want to chase after a 3x rally. Regarding Libra, fundamentally speaking, it has no relationship to Bitcoin. But the spotlight has clearly been good marketing for the entire space. In July, things have calmed down; I think people have woken up and realized that Libra is not just going to launch and change the world immediately, not to mention the numerous regulatory hurdles.

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Miners will keep Bitcoin above 10k to boost up mining rig sales

GCR: With that, my last question is, do you think bitcoin prices will sustain above 10K for the rest of the year? 

Charles: I’m a big believer in manipulation, I don’t think it was a coincidence when Bitcoin started rallying April 1st and I don’t think it’s a coincidence that Bitcoin is at these levels now. I may be a bit biased but my theory is around the mining industry and what scenario benefits the whales.  

Summer is known to be a strong seasonality for mining in China. Heavy rain in areas like Sichuan drives electricity prices down. We saw news that contracts were locked in advance. We saw heavy demand for cheap second-hand rigs. We also know Bitmain and competitors were launching new rigs in the Summer. It would make sense for a few big players to come together and try to build some momentum or FOMO. Also worth noting the upcoming IPO plans for these mining companies.

The question is what happens after Summer? Can Bakkt or Fidelity Digital Assets be another catalyst? Seems like the market is well aware of these events already. You can never make real predictions because whales have so much influence. But I would expect a relatively quiet second half to the year.

GCR: And the whales are generally related to the miners or friends with the miners, or are just miners themselves. 

Charles: There are cases where big funds or desks try to screw each other. For example, Desk A hears that Desk B has a massive short position on Bitcoin right now; they could try and squeeze them; it happens in traditional markets too. 

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Advice from Charles: Question everything, accumulate Bitcoin

GCR: Yeah, and I guess for folks who want to learn more about trading in Asia, what can they do?

Charles: I think the first thing everyone needs to learn is to question information, including this interview. Always question the source and do other research to verify facts. For trading, I really don’t recommend the average person to day trade this stuff. Unless you are at a legitimate cryptofund with excellent connections and back-channels, it’s not going to be profitable in the long run. Even for myself, I try to focus on simply accumulating Bitcoin. IEOs have been great returns and Bitmex provides a great platform for taking extensive risk, but Bitcoin alone is already a high risk asset; why leverage it further?