Interview, Podcast
From the Copper Pits to Crypto Derivatives: How Trading Edge Evolves · Sam Gaer
- Sam Gare transitioned from traditional open outcry floor trading to crypto derivatives in late 2023/early 2024, driven by two converging thesis points:
- A demographic observation that his adult children and their generation are native to virtual payments and have never known a world without cryptocurrency.
- A political conviction that regardless of the election outcome, Bitcoin would benefit, with the administration's next 5–10 years likely to be led by the current younger generation.
- To facilitate this pivot, Gare executed a "Cortez moment" strategy:
- He sold his high-frequency software firm to a Chicago-based entity in early 2024.
- He formally adopted a "burn the boats" approach, refusing to look back at his previous successful career in traditional finance.
- Gare's career evolution involved a consistent application of technology to market inefficiencies:
- Early Career (1980s): Started as a teenage runner on the COMEX floor during the gold boom; transitioned to trading copper in the pits at age 19.
- Technological Edge: Used self-taught programming on Apple II+ computers to price spreads and identify arbitrage in the copper pit (e.g., pricing "strips" and backwardation/contango anomalies) while traditional traders relied on gut feel.
- Corporate Leadership: Served as CIO of NYMEX, leading a technology rebuild of the exchange's legacy systems after the Enron crisis.
- Acquisition: Sold his exchange technology firm (Trading Gear) to NYMEX for $9 billion; the acquired system became the ClearPort platform which solved post-Enron liquidity crises.
- Gare identifies specific structural shifts in the crypto market that create trading opportunities:
- Convexity Opportunities: He targets "right tail convexity" by buying out-of-the-money options with high gamma, which provide non-linear leverage during sharp price moves in both directions.
- Volatility Mispricing: He notes that crypto options often misprice the "fat right tail" of Bitcoin's distribution, making upside call options historically cheap compared to traditional models.
- Institutional Gap: Traditional crypto hedge funds have significantly underperformed spot Bitcoin (e.g., up 230% vs. 400% since 2018) due to volatile return profiles, prompting Gare to build an institutional-grade product with consistent returns.
- Recent market dynamics (post-election 2024) have been influenced by a "cloud of uncertainty" rather than fundamental weakness:
- Deleveraging Events: A $20 billion liquidation event on October 10th (10x the FTX daily liquidation volume) decimated order book liquidity.
- Legislative Delay: Institutions are withholding capital due to the delayed passage of the "Clarity Act," which is viewed as critical for defining regulatory jurisdiction (SEC vs. CFTC) for derivatives.
- Basis Trade Collapse: The cash-and-carry arbitrage trade between spot ETFs (IBIT) and CME futures collapsed from ~17% to ~5% yield, exacerbating downward price pressure.
- Forced Selling: Unwinds of leveraged positions (e.g., Hong Kong hedge funds funded by the Japanese Yen carry trade) and cascading redemptions contributed to the recent drawdown.
- Despite recent price declines, Gare cites several contrary indicators suggesting a market bottom is near:
- Low Open Interest: Derivatives open interest has dropped to multi-year lows, indicating reduced speculative leverage.
- Positive Funding Rates: Funding rates on perpetual exchanges remain positive, signaling a lack of extreme short-side aggression.
- Institutional Resilience: Bitcoin ETF open interest (IBIT) remains higher than crypto-native exchange (Deribit) open interest, with new institutional capital entering rather than old capital leaving.
- Bernstein Forecast: Bernstein Research identifies the current bear market as the "weakest ever" due to the absence of structural collapses or hidden leverage cascades.
- Gare offers a contrasting view on Digital Asset Treasuries (DATs) and tokenized real-world assets:
- DAT Critique: Early "DAT 1.0" vehicles (trading at multiples of 2x–4x NAV) failed because they relied on perpetual market appreciation; many now trade below net asset value due to lack of corporate governance and "debt 2.0" management strategies.
- Gold vs. Bitcoin: While tokenized gold solves portability, Gare argues Bitcoin remains the superior asset over the last 5–10 years due to its fixed supply, whereas gold supply remains elastic as producers always find more to sell.
- Forward-looking statements and price targets:
- Bernstein Prediction: Bernstein maintains a $150,000 Bitcoin price target by the end of 2033.
- Gare's Prediction: Gare believes Bitcoin will exceed $100,000 by the end of the current year, far outpacing the 2033 timeline.
- Technology: Monarch Asset Management is transitioning from off-the-shelf AI tools to building in-house Large Language Models (LLMs) to process the overwhelming volume of market data and institutional signals.
- Core trading philosophy remains unchanged after 35 years:
- The market can remain irrational longer than a trader can remain solvent.
- The primary struggle in modern crypto is not strategy, but the sheer volume of information processing required to interpret conflicting signals.