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Surviving Crypto Volatility With Derivatives Contracts

Surviving Crypto Volatility With Derivatives Contracts

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Different forms of derivatives trading could become the next step toward crypto mass adoption and give investors more transparency.

Volatility has been the dominant theme in financial markets lately. As uncertainty around COVID-19 and its impact on the economy deepens, markets have been swinging wildly. We’ve seen the S&P 500 falling off a cliff as well as risk assets across the board taking a beating. Cryptocurrency markets have been no different and have exhibited extreme volatility. Amid the pessimism, Bitcoin (BTC) broke below the $4,000 mark on Black Thursday and fell nearly 50% from recent highs. 

It’s been over a month since the crash, and though we have seen prices bouncing back sharply, the sentiment has not improved. There is still a fair amount of fear among traders, and they continue to stay hawkish. Such sharp moves hurt market confidence, and it will take some time before traders get comfortable carrying overnight risk again.

It is hard to say how long it will take for the markets to recover and for the true impact of the current crisis to be visible. Some estimates suggest that it will take as long as 12–18 months for the world economy and markets to fully overcome this shock. Given the backdrop, it’s fair to say that markets should remain choppy for some time and that the volatility is here to stay.

Volatile markets increase directional risk

Extreme volatility in the markets spells trouble for traders caught on the wrong side of price swings. On March 12, the price of Bitcoin dropped by over 40% and subsequently recovered 16% the next day. Over $750 million worth of positions went into liquidation amid these swings. 

Bitcoin volatility spiked to 250% per annum in March, and though it has cooled down to about 70%, it still remains quite rich. Carrying directional trades in such volatile market conditions is very risky. In fact, the higher the volatility, the higher the directional risk for traders. If traders don’t maintain enough margin in their positions, there is a chance of getting caught on a price whipsaw and getting liquidated. Violent price swings have been a regular feature since Black Thursday. This has made directional trading difficult not only for new traders but also for veterans. 

Isolating directional risk from volatility risk 

In calm market conditions, traders look to profit by catching the momentum of the market direction. If they predict the market direction correctly, they register a profit. Similarly, if the market moves against them, there will be losses. The amount by which a trader’s portfolio is going to get impacted per unit movement in price is called “delta” — a measure of directional risk. There is another risk to a trader’s portfolio, something that most traders tend to ignore during calm market conditions: the risk of price swinging up and down while it drifts in a particular direction. This risk to a trader’s portfolio is called “vega” and measures the risk against change in volatility.

Just as traders use futures contracts to position themselves for directional risk, options are useful for protecting against rising or falling market volatility. Traders can also use options to remove directional risk from their portfolios, partially or completely, and bet on market volatility alone. 

Some exchanges are at the forefront of innovation here and are offering products that allow traders to trade the volatility risk without taking any directional risk. Hence, should a trader believe that the market is going to stay volatile, they can buy volatility without exposing themselves to the effects of which direction the market moves in.

Growth in crypto options segment

As crypto derivatives markets mature, we are seeing more and more traders participate in options markets and trading volatility. In traditional markets such as equities, the volumes on options contracts can be multifold of those on futures contracts. Though crypto options markets have existed for a few years now, the volumes have been slow to pick up. 

Most crypto traders find options trading difficult to understand and intimidating. There is a need to package options in a way so that traders can easily understand the payoff profile without diving into the nitty-gritty. This would help reduce the friction and increase the demand for crypto options trading. A MOVE contract is one such product. Herein, a trader holds a straddle: a multilegged options position that will benefit from higher market volatility irrespective of market direction. 

The straddle strategy, simplified

One of the ways to own volatility is to buy a straddle. A straddle is nothing but a call and a put option combined together. Hence, one can create a long straddle position by buying a call option and a put option that have the same strike price and maturity. If the market rises, the call option becomes profitable; should the market fall, the put option starts to payoff. Building a straddle position by oneself can be complex for traders. Not only do they need to find liquidity in both the call and put options, but they must also execute both the legs of the trade simultaneously. 

MOVE contracts are nothing but a packaged straddle position. Thus, when a trader is buying a MOVE contract, they are essentially buying a call and a put option with the same strike and in equal amount. 

The crypto equivalent of trading the VIX

Cboe has an index called the Volatility Index, or VIX, which is also known as the fear index. The reason the VIX is called a fear index is because its value rises when market uncertainty or fear is high and falls when the market is calm. Investors can’t directly invest in the VIX, but they can bet on the VIX going up or down by trading futures on the VIX or by purchasing VIX-related products such as VIX futures exchange-traded funds. In cryptocurrency markets, trading MOVE contracts is the equivalent of trading VIX products, as it gives investors pure exposure to the volatility of crypto.

Removing settlement currency risk

Another important aspect of any derivatives product is the settlement currency — i.e., the currency in which the final profit or loss is realized. The default settlement currency for most crypto derivatives products is Bitcoin. This is understandable, given that when the crypto derivatives ecosystem was starting, stablecoins were still not commonplace. Thus, products that allowed payoff in Bitcoin or other cryptos were innovated. This was also partly driven by customer demand, as traders focused on increasing their count of Bitcoin. Things have changed a lot in the last 12 months, and we’ve seen a strong demand for stablecoin settlement in the crypto derivatives segment. 

Gold futures, stablecoin futures and the growing demand for stable assets

Other ways to combat a volatile market include switching to low-risk assets such as gold.  Futures contracts on gold-backed coins have provided crypto traders with a way to protect their portfolio value in times of widespread uncertainty. These derivatives have also opened a new sector of trading that allows crypto traders access to physical gold. They have been in high demand on many derivatives exchanges because of the recent gold price spike in the backdrop of the coronavirus scare and global markets sell-off.

Futures contracts on stablecoins are also getting popular, as there are arbitrage opportunities for traders to earn profit in a stable token’s value while taking minimal risk. Overall, the industry has seen a surging demand for a stable digital currency amid fears of an economic recession and will continue to rely on stablecoins as a safe haven.

Final thoughts

Derivatives provide a way for traders to hedge in times of high market uncertainty, isolate and protect against different kinds of risks, and aid in true price discovery. In the long run, a healthy derivatives market helps to reduce the long-term volatility of an asset class.

The crypto derivatives segment has seen huge growth in the last two years, but we’ve only scratched the surface as of yet. For mature asset classes, derivatives markets are four to five times the size of spot markets. Currently, Bitcoin perpetual swaps make for the lion’s share of the crypto derivatives segment. As crypto derivatives markets grow, we will see increased demand to trade futures on other coins beyond Bitcoin and for options, as they provide a way for traders to manage volatility risk.

The views, thoughts and opinions expressed here are the author’s alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.

This article does not contain investment advice or recommendations. Every investment and trading move involves risk, you should conduct your own research when making a decision.

Pankaj Balani is the CEO and founder of Delta Exchange. With over eight years of experience as a business leader and derivatives trader, Pankaj has dedicated the last two years to building Delta Exchange, a next-generation derivatives exchange where traditional financial instruments and cryptocurrency trading intersect. Pankaj has extensive experience in quantitative finance, derivatives and global capital markets through his positions at UBS Investment Bank, Edelweiss Asset Management and Elara Capital. He also led product and growth for Purplle.com, an e-commerce business that was recently funded by Goldman Sachs. He graduated from the Indian Institute of Technology in Delhi with a degree in engineering physics and obtained a master of business administration from the Indian School of Business.

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Glimpse Of Sanity: Dartmouth Returns Standardized Testing For Admission After Failed Experiment

Glimpse Of Sanity: Dartmouth Returns Standardized Testing For Admission After Failed Experiment

In response to the virus pandemic and nationwide…

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Glimpse Of Sanity: Dartmouth Returns Standardized Testing For Admission After Failed Experiment

In response to the virus pandemic and nationwide Black Lives Matter riots in the summer of 2020, some elite colleges and universities shredded testing requirements for admission. Several years later, the test-optional admission has yet to produce the promising results for racial and class-based equity that many woke academic institutions wished.

The failure of test-optional admission policies has forced Dartmouth College to reinstate standardized test scores for admission starting next year. This should never have been eliminated, as merit will always prevail. 

"Nearly four years later, having studied the role of testing in our admissions process as well as its value as a predictor of student success at Dartmouth, we are removing the extended pause and reactivating the standardized testing requirement for undergraduate admission, effective with the Class of 2029," Dartmouth wrote in a press release Monday morning. 

"For Dartmouth, the evidence supporting our reactivation of a required testing policy is clear. Our bottom line is simple: we believe a standardized testing requirement will improve—not detract from—our ability to bring the most promising and diverse students to our campus," the elite college said. 

Who would've thought eliminating standardized tests for admission because a fringe minority said they were instruments of racism and a biased system was ever a good idea? 

Also, it doesn't take a rocket scientist to figure this out. More from Dartmouth, who commissioned the research: 

They also found that test scores represent an especially valuable tool to identify high-achieving applicants from low and middle-income backgrounds; who are first-generation college-bound; as well as students from urban and rural backgrounds.

All the colleges and universities that quickly adopted test-optional admissions in 2020 experienced a surge in applications. Perhaps the push for test-optional was under the guise of woke equality but was nothing more than protecting the bottom line for these institutions. 

A glimpse of sanity returns to woke schools: Admit qualified kids. Next up is corporate America and all tiers of the US government. 

Tyler Durden Mon, 02/05/2024 - 17:20

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Four burning questions about the future of the $16.5B Novo-Catalent deal

To build or to buy? That’s a classic question for pharma boardrooms, and Novo Nordisk is going with both.
Beyond spending billions of dollars to expand…

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To build or to buy? That’s a classic question for pharma boardrooms, and Novo Nordisk is going with both.

Beyond spending billions of dollars to expand its own production capacity for its weight loss drugs, the Danish drugmaker said Monday it will pay $11 billion to acquire three manufacturing plants from Catalent. It’s part of a broader $16.5 billion deal with Novo Holdings, the investment arm of the pharma’s parent group, which agreed to acquire the contract manufacturer and take it private.

It’s a big deal for all parties, with potential ripple effects across the biotech ecosystem. Here’s a look at some of the most pressing questions to watch after Monday’s announcement.

Why did Novo do this?

Novo Holdings isn’t the most obvious buyer for Catalent, particularly after last year’s on-and-off M&A interest from the serial acquirer Danaher. But the deal could benefit both Novo Holdings and Novo Nordisk.

Novo Nordisk’s biggest challenge has been simply making enough of the weight loss drug Wegovy and diabetes therapy Ozempic. On last week’s earnings call, Novo Nordisk CEO Lars Fruergaard Jørgensen said the company isn’t constrained by capital in its efforts to boost manufacturing. Rather, the main challenge is the limited amount of capabilities out there, he said.

“Most pharmaceutical companies in the world would be shopping among the same manufacturers,” he said. “There’s not an unlimited amount of machinery and people to build it.”

While Novo was already one of Catalent’s major customers, the manufacturer has been hamstrung by its own balance sheet. With roughly $5 billion in debt on its books, it’s had to juggle paying down debt with sufficiently investing in its facilities. That’s been particularly challenging in keeping pace with soaring demand for GLP-1 drugs.

Novo, on the other hand, has the balance sheet to funnel as much money as needed into the plants in Italy, Belgium, and Indiana. It’s also struggled to make enough of its popular GLP-1 drugs to meet their soaring demand, with documented shortages of both Ozempic and Wegovy.

The impact won’t be immediate. The parties expect the deal to close near the end of 2024. Novo Nordisk said it expects the three new sites to “gradually increase Novo Nordisk’s filling capacity from 2026 and onwards.”

As for the rest of Catalent — nearly 50 other sites employing thousands of workers — Novo Holdings will take control. The group previously acquired Altasciences in 2021 and Ritedose in 2022, so the Catalent deal builds on a core investing interest in biopharma services, Novo Holdings CEO Kasim Kutay told Endpoints News.

Kasim Kutay

When asked about possible site closures or layoffs, Kutay said the team hasn’t thought about that.

“That’s not our track record. Our track record is to invest in quality businesses and help them grow,” he said. “There’s always stuff to do with any asset you own, but we haven’t bought this company to do some of the stuff you’re talking about.”

What does it mean for Catalent’s customers? 

Until the deal closes, Catalent will operate as a standalone business. After it closes, Novo Nordisk said it will honor its customer obligations at the three sites, a spokesperson said. But they didn’t answer a question about what happens when those contracts expire.

The wrinkle is the long-term future of the three plants that Novo Nordisk is paying for. Those sites don’t exclusively pump out Wegovy, but that could be the logical long-term aim for the Danish drugmaker.

The ideal scenario is that pricing and timelines remain the same for customers, said Nicole Paulk, CEO of the gene therapy startup Siren Biotechnology.

Nicole Paulk

“The name of the group that you’re going to send your check to is now going to be Novo Holdings instead of Catalent, but otherwise everything remains the same,” Paulk told Endpoints. “That’s the best-case scenario.”

In a worst case, Paulk said she feared the new owners could wind up closing sites or laying off Catalent groups. That could create some uncertainty for customers looking for a long-term manufacturing partner.

Are shareholders and regulators happy? 

The pandemic was a wild ride for Catalent’s stock, with shares surging from about $40 to $140 and then crashing back to earth. The $63.50 share price for the takeover is a happy ending depending on the investor.

On that point, the investing giant Elliott Investment Management is satisfied. Marc Steinberg, a partner at Elliott, called the agreement “an outstanding outcome” that “clearly maximizes value for Catalent stockholders” in a statement.

Elliott helped kick off a strategic review last August that culminated in the sale agreement. Compared to Catalent’s stock price before that review started, the deal pays a nearly 40% premium.

Alessandro Maselli

But this is hardly a victory lap for CEO Alessandro Maselli, who took over in July 2022 when Catalent’s stock price was north of $100. Novo’s takeover is a tacit acknowledgment that Maselli could never fully right the ship, as operational problems plagued the company throughout 2023 while it was limited by its debt.

Additional regulatory filings in the next few weeks could give insight into just how competitive the sale process was. William Blair analysts said they don’t expect a competing bidder “given the organic investments already being pursued at other leading CDMOs and the breadth and scale of Catalent’s operations.”

The Blair analysts also noted the companies likely “expect to spend some time educating relevant government agencies” about the deal, given the lengthy closing timeline. Given Novo Nordisk’s ascent — it’s now one of Europe’s most valuable companies — paired with the limited number of large contract manufacturers, antitrust regulators could be interested in taking a close look.

Are Catalent’s problems finally a thing of the past?

Catalent ran into a mix of financial and operational problems over the past year that played no small part in attracting the interest of an activist like Elliott.

Now with a deal in place, how quickly can Novo rectify those problems? Some of the challenges were driven by the demands of being a publicly traded company, like failing to meet investors’ revenue expectations or even filing earnings reports on time.

But Catalent also struggled with its business at times, with a range of manufacturing delays, inspection reports and occasionally writing down acquisitions that didn’t pan out. Novo’s deep pockets will go a long way to a turnaround, but only the future will tell if all these issues are fixed.

Kutay said his team is excited by the opportunity and was satisfied with the due diligence it did on the company.

“We believe we’re buying a strong company with a good management team and good prospects,” Kutay said. “If that wasn’t the case, I don’t think we’d be here.”

Amber Tong and Reynald Castañeda contributed reporting.

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Petrina Kamya, Ph.D., Head of AI Platforms at Insilico Medicine, presents at BIO CEO & Investor Conference

Petrina Kamya, PhD, Head of AI Platforms and President of Insilico Medicine Canada, will present at the BIO CEO & Investor Conference happening Feb….

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Petrina Kamya, PhD, Head of AI Platforms and President of Insilico Medicine Canada, will present at the BIO CEO & Investor Conference happening Feb. 26-27 at the New York Marriott Marquis in New York City. Dr. Kamya will speak as part of the panel “AI within Biopharma: Separating Value from Hype,” on Feb. 27, 1pm ET along with Michael Nally, CEO of Generate: Biomedicines and Liz Schwarzbach, PhD, CBO of BigHat Biosciences.

Credit: Insilico Medicine

Petrina Kamya, PhD, Head of AI Platforms and President of Insilico Medicine Canada, will present at the BIO CEO & Investor Conference happening Feb. 26-27 at the New York Marriott Marquis in New York City. Dr. Kamya will speak as part of the panel “AI within Biopharma: Separating Value from Hype,” on Feb. 27, 1pm ET along with Michael Nally, CEO of Generate: Biomedicines and Liz Schwarzbach, PhD, CBO of BigHat Biosciences.

The session will look at how the latest artificial intelligence (AI) tools – including generative AI and large language models – are currently being used to advance the discovery and design of new drugs, and which technologies are still in development. 

The BIO CEO & Investor Conference brings together over 1,000 attendees and more than 700 companies across industry and institutional investment to discuss the future investment landscape of biotechnology. Sessions focus on topics such as therapeutic advancements, market outlook, and policy priorities.

Insilico Medicine is a leading, clinical stage AI-driven drug discovery company that has raised over $400m in investments since it was founded in 2014. Dr. Kamya leads the development of the Company’s end-to-end generative AI platform, Pharma.AI from Insilico’s AI R&D Center in Montreal. Using modern machine learning techniques in the context of chemistry and biology, the platform has driven the discovery and design of 30+ new therapies, with five in clinical stages – for cancer, fibrosis, inflammatory bowel disease (IBD), and COVID-19. The Company’s lead drug, for the chronic, rare lung condition idiopathic pulmonary fibrosis, is the first AI-designed drug for an AI-discovered target to reach Phase II clinical trials with patients. Nine of the top 20 pharmaceutical companies have used Insilico’s AI platform to advance their programs, and the Company has a number of major strategic licensing deals around its AI-designed therapeutic assets, including with Sanofi, Exelixis and Menarini. 

 

About Insilico Medicine

Insilico Medicine, a global clinical stage biotechnology company powered by generative AI, is connecting biology, chemistry, and clinical trials analysis using next-generation AI systems. The company has developed AI platforms that utilize deep generative models, reinforcement learning, transformers, and other modern machine learning techniques for novel target discovery and the generation of novel molecular structures with desired properties. Insilico Medicine is developing breakthrough solutions to discover and develop innovative drugs for cancer, fibrosis, immunity, central nervous system diseases, infectious diseases, autoimmune diseases, and aging-related diseases. www.insilico.com 


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