Sam: We met at the event the other day in Moscow. I was wondering if you could tell us a little bit about yourself and how you came into the Deribit project.
Marius: Well, before Deribit, I came into the Crypto space so to speak. I think like most people I came into the space by buying some bitcoins. I first heard about it in 2013 through some guy I knew talking about some magical internet money. Back in the day, Bitcoin was on $10, and I was quite impressed by something that was not controlled by anyone so decentralised. But to be honest, we were drinking that night, and the next day I forgot about it a little bit.
A couple of months later, it was in the news, and it caught my attention again. Also my brother and I sent some funds to Mt. Gox, the exchange, like everyone else, buying some bitcoin and doing some manual trades as well. On my birthday, I said to a buddy of mine I am buying some bitcoins at the same time just for fun and making some money, and he said you are doing arbitrage. I said I don’t know. He said I can make a bot for that; this was back in the day when it was on exchanges like OK coin and 796.com. But also doing some spot and altcoins (people prefer to call is shitcoins these days), and I was doing that for quite a while, but I also had my other business which was selling wooden houses. Something not related to the bitcoin space, but the trading went pretty well.
In the meantime, my brother was working on the exchange; he has options background trading on the Amsterdam stock exchange. He knew to play the game, but he did not have the personality for fighting in the pits, as this was before automated trading. Nowadays it is totally different. He understood the game though so he was interested in derivatives and financial instruments and then came bitcoin. He felt like I can built a bitcoin exchange for options and he was surprised that there was no one building this. There were one or two futures exchanges like the ones I just talked about, but then he built the exchange. The further he got into development the more I got attached to the project. So then at the end, when we launched, we founded the company together. This is how we got into it, and then I stopped trading and focused on Deribit.
Sam: So I have talked with some other family businesses, Elron – one of my previous podcasts, I spoke to one of the brothers. How is it running a business? How do you and your brother deal with conflict resolution, typically I guess he is titled the CEO, does that mean he has final say at the end of the day? How do you handle difficult questions when they come up between you and your brother?
Marius: Well, actually, I think it is very easy because there is a lot of trust. We both know our role. What I sometimes hear is that there is some fight going on with brothers, some jealousy, but that is not the case here. So I know my role he knows his role, of course, it was his idea, so he started it. He gets the final call, and I am fine with that. There is a lot of respect, and things are going very well together, and we make decisions together. If for example he wants A and I want B, and he really thinks it should be A then it’s just going to be A, and we will see afterwards who was right. I think it is a very thing to do, business with family because there is already certain trust and respect because we know each other for our whole lives. We can build on each other.
Sam: How would you describe the personality differences between you and your brother, and how do you guys complement each other?
Marius: I think John can be a little bit more introverted, so to speak. I am more extroverted. I think we complement each other in other ways. I have done a bit more business development. Also, I am a bit more hands-on with things he finds a bit annoying but still needs a lot of trust to do. I think there we complement each other. John is more like a product guy – he likes to build something really cool and innovate. I also like building, but I like to do the other things around the company which are needed, and he doesn’t like to do those, so I think that is a perfect fit for this.
Sam: Does that mean that you are more on the management side as COO? Or more on the business development side going out and meeting clients, you are here in Moscow, trying to onboard clients onto the exchange. But what sort of roles do you take on as COO?
Marius: Look, it’s just a title. I do many things. I have done business development for last couple of years. Right now we hired Luke recently who is taking over the business development stuff so what I do is management, business development and I talk to the developers. I am not a typical COO; it’s just a title. But we are team of 25-30 people. It is not a company of 100 or 200 people, and we don’t want to be. I don’t think it’s needed. We would like to keep things efficient.
Sam: How has it been going, the company has been going now for 3 years, is this your first real Start-up company working with? Or had you worked with other start-ups, pre-product launch pre-funding projects? You funded everything yourself. Was this your first from zero start-up or had you worked with other small companies before?
Marius: Well, I had another business before. This was the first time we did something like this. When we started, it did not feel like a start-up. John just built something he loved, and I thought he built something really great, let’s help him. He’s a really smart guy. I think the word start-up only came after about a year or two when people talk to you about what you do. It did not feel like that before, but then we thought maybe we do run a startup.
Sam: What have been some of the challenges going from a couple employees at the beginning to 25 people now? To be in that growth phase? You are still a small functioning company of under 100 people. You probably still know everybody’s name. It is a family-like environment. What are some of the challenges from zero to a well functioning business?
Marius: As an exchange, you ask about employees. We need clients. It is always a chicken x story. Liquidity attracts liquidity. The first one and half years we were 4 and half guys: john, me and 2.5 developers. Deribit had continuous relaxed growth. We did not explode or something. The team gradually expanded on the development side and then in management.
Sam: What have been some of the specific things which you’ve had to learn or develop as COO in your role as management at a crypto exchange?
Marius: Actually, I don’t have any financial background so everything I learned I learned from my brother or Investopedia. I am kidding. On the internet. I think it is common sense. Maybe you need to be a little streetwise. I don’t think it is a hard thing to do. I just follow my gut feeling so to speak. And then we run the company with gut feelings. I don’t know the right word. I feel it is common sense. Of course in the last three years you learn a lot about many different topics. I think I am still the same guy from three years ago making decisions, but maybe now I make different decisions. Maybe I dare to take more risks right now. On the other hand, common sense and gut feelings can help you a lot.
Sam: You talk about taking more risk now. What exactly does that mean? Does that mean working harder to engage with new clients or developing new products? What specifically are you talking about there?
Marius: Maybe Risk is not the right word there. I have always been a guy who is not afraid of taking risk in business. I was not afraid to borrow money and invest it; like that. Taking risk is like what kind of products do you want to launch, what kinds of approach are you going to take, and also expanding the company. In the beginning, when we were small we weren’t making a lot of money right so then you need to expand, and we founded the company ourselves, funded by ourselves. Where do we get the funds from? So we invested our own money. The further into the project, we see what we built, and we got very good feedback, so it is easy for us to take more risk and invest in people and more development.
Sam: You guys have had three years of not having a competitor in any options provided for cryptocurrencies, and it looks like another year before the CME, or anyone rolls out a competing regulated product? That is a long time to be able to develop iterate and design what you are building out. Are you guys taking into account the new products coming out by CME and other regulated groups or do you think it will only enhance the business you already have as it will drive more interest towards options and other derivatives? How do you see the next few years playing out? You guys must have a strategy already in place. What are you doing specifically in the company to drive growth to become a dominant force in the industry?
Marius: You also asked about how we see CME coming up with options. Maybe I should start with them. Look when the CME started with futures, everyone thought, well not everyone, but you hear people saying that all the volume will go there. And I think that it didn’t happen. I think the same thing will apply to the options. I think we could even benefit from it; it is hard to tell what exactly is going to happen. What I do believe is that the natural flow of bitcoin is on the bitcoin exchanges, not so much on the CME and the traditional exchanges. I think we are closer to the natural flow being a bitcoin exchange. So, I expect the majority of volume will still remain, and I am confident that we are closer to the natural flow and because of that, we will keep up with our volume. If we keep growing like this, it is going to be very interesting.
If you imagine…. if you compare traditional markets with the bitcoin markets, the daily cash volumes on options is almost the same. If you compare this to the bitcoin space, it is only around 4-5% so we could grow 10 to 20x in terms of options volume and this is also answering your second questions, where do you see the future of the company? We want to be the dominant options platform of course but don’t forget we have a perpetual contract which is unique compared to other contracts, which work with an eight hour funding period or a four hour funding period and then there is some kind of kickback every four hours, for us the funding is real-time. This is also answering the question how we see ourselves growing.
We see ourselves innovating and do things differently. We always focus on our technology. For some retail clients, this has been somewhat annoying for them because they want to see different order types and see us being added on Tradeview. But maybe they don’t understand that we are running an options exchange with market makers who quote hundreds of strikes, hundreds of order books at one time, so if the market moves they have to be able to service a number of requests per second to update their quotes. We always have to have the most advanced technology available, and there is nothing available; so we are building it ourselves. There is always a struggle or a fight to serve what retail clients want or to keep building the technology to keep winning. I think that is what sets us apart. We are very focussed on the better the exchange works technically, the better the quotes the market makers and high-frequency traders can give because they can rely on the exchange. We believe if we continue working on what we do right now, we can see a big improvement in our latencies in the next few months to further drive liquidity and the exchange to grow. We are focussed on our tech, and we want to grow from there.
Sam: You are here in Moscow meeting with a small number of market makers who drive a lot of the volume on Deribit. How would you describe the difference in attitudes between Europe and the Americas versus Eastern Europe and Asia? There is a clear difference in how these communities are approaching Bitcoin and other cryptocurrencies. We talked about CME before is a US-niche regulated product for US investors who want a US regulated product that is tradeable on US brokerages and exchanges but then you have a company like yours who can cater to Asian clients, Eastern European clients and pretty much anywhere else in the world and they have a different set of requirements. How do you see the differences in trader mentalities between the two?
Marius: Well, what my feeling is when I talk to European trading companies they are leaning more toward regulated side. They ask about regulation and if I talk to guys in Moscow. They just want to trade, and they want to keep it simple. They prefer unregulated exchanges. That is my feeling. They want to keep things easy, not easy, but not complicated. They want to keep things simple. There is a different mindset between eastern European trader and trading companies than in Europe or Asia. For the rest, I don’t think there is a big mentality difference. There are smart guys everywhere in the world. Companies are international, having offices in Russia, Singapore, in many locations. When talking to some guys, they want to keep it simple. Western companies are leaning toward regulation. They are usually bigger, so they lean toward that. This is something I have experienced.
Sam: Where is your volume-based, mostly Asia or Europe? And where are you planning to grow into?
Marius: We are an international exchange. The volume is quite spread out across the world; there is not much coming from Africa, for example. If even something comes from Africa, I don’t know. But mostly it comes from Europe, Asia and South America as well. It is quite nicely spread out.
Sam: What are some of the plans for growth for the company? What specifically do you want to bring about for your clients? You mentioned technology before. Is it just this one product or do you have other spheres or different verticals that you want to move into?
Marius: Technology will always be our number one thing. But we also have to offer more products. I think in the end a derivative exchanges should also have spot, and I think all the spot exchanges should also have derivatives in the end. If you want to become a big player. If you just want to be a gateway for bitcoin, euro and fiat in a certain country, then it is not needed. For an Exchange, then it is not necessary to take on derivatives. I guess Deribit as an exchange should offer the whole package, and it is the meaning of spot. With spot trading, we could start just with Altcoins versus bitcoin or USD, for example, to not touch fiat. But maybe in the next couple years. Long term we need to have spot. It is not something we want to do in the next year.
Maybe we might add Ethereum and Bitcoin markets – so users can convert their bitcoin easily into Ethereum which we currently offer bitcoin future/options and Ethereum future/options – this is something we could add. What we want to add in the next six months in AltCoin futures or maybe AltCoin perpetual contracts in USD, but settled in Bitcoin. So every day at 8 o’clock we calculate your P/L in settlement and transfer the funds to your account in Bitcoin. So users can trade only with Bitcoin any asset on our exchange right now in a cleaner way than it is done right now on all other exchanges. But first we want to focus on our technology, and there are some very exciting bits coming up for the exchange which could really set up apart.
I think we are really ahead of the curve compared to other exchanges. This update should give us two or three steps, and I am really looking forward to that. Also, we are very agile. Maybe in another three months we want to change again and add another product, we can do that. Of course we have a vision for the next two or three years, but you also have to be agile and change in these markets. The market is changing every day in the crypto space. It is amazing.
Sam: So what do you see long term for particularly the products you have for Bitcoin and Ethereum since 2012? I have seen these big narrative shifts happening over this same time period. I bought my first bitcoin in 2011. It was different back then. I wasn’t accumulating or investing back then. I was just using it to make payments back then to buy other things, different markets. But it really has come a long way. The two narratives that Bitcoin has shifted into are Bitcoin is now digital gold, that everybody speaks about and Ethereum is becoming the platform for decentralised finance or DeFi. Are you guys influenced in anyway by these trends in either of the coins or is it something that as an exchange you stay agnostic about?
Marius: The latter. I mean, of course, we have our vision for Bitcoin, for Ethereum not so much. We as an exchange try not to put our opinion out too much. I do think that Bitcoin as digital gold, I am not sure about that. Bitcoin is for speculation right now, and people are speculating on the fact that Bitcoin is going to be used in the future, not so much because it is digital gold. It is a nice narrative. I think Bitcoin should work better; we are waiting for the lightning network to really work. I think it works for small transactions, but for everyday use I am not sure it is there yet. We are waiting for that. Whether it is going to be lightning or even other things, I don’t care. I just want Bitcoin to be user-friendly for everyone, so my mother can use it. My father uses it, but I still have to explain him a little bit how to use it on the phone. Then it works. It should be more user-friendly.
Then I think even the things which are possible on Ethereum should also be possible on Bitcoin network. I am not sure we would not have thousands of different coins. Although I see, for example, if you want special use cases, you could have optimised chains for that use case. In the case of Bitcoin and Ethereum, I think they will become competitors again. But as of now I don’t see Bitcoin as digital gold or Ethereum as a different chain. That is my opinion, not Deribit’s opinion.
Sam: I think one of the big pushes now versus at the beginning is much more on-chain analysis now. Governments are taking a much keener eye into insuring that all AML and procedures are met and that the money is not going to terrorist financing or any criminal activities. Have you gotten any enquiries from any government organisations dropping in and saying hello? Have you guys had to deal with any questions asked by police forces or criminal activity going through the exchange?
Marius: We never had any issue with this. Keep in mind Deribit does a lot of volume, but the user base is not very big. We have a lot of institutional traders doing a lot of volume, so maybe because of this we never had these questions. I am not sure.
But we are going to some Chain Analysis from 2020, and we will have to do KYC from 2020, and these are something that will be needed to operate in the Netherlands. I think this is totally fine. It makes a lot of sense to do this, so it is not a bad thing.
Sam: As you have gotten bigger, the company is bound to run into regulatory issues being able to operate in the Netherlands. Have you gotten involved in being more political, outreach to governments, to different politicians about cryptocurrency in general, or about Deribit to promote your company, so you have a clear regulatory path to operate under?
Marius: Well, since we are in talks with regulators, I can’t say too much about that. Of course we are talking with them in the Netherlands but also with other countries. It could be that we will leave the Netherlands in the next one to two years. We are an international company, and we could be operating from anywhere. We are talking to other regulators and we will make a decision about how we run the business from there. But I cannot say too much about it.
Sam: Does Deribit have any not-for-profit activities it is involved in? Do you take a portion of your profits and donate to charitable causes or any activities outside of the crypto space?
Marius: No, not really. Of course we did some charity things, small things like this.
Sam: Has it been something you have thought about or spoke to your brother about? Choosing projects that closely align with your beliefs and giving money to them each year?
Marius: As of today, we have not. We are too busy running the exchange to think about doing side projects or investing in them. We have not been approached either, to be honest. But maybe this is something we could be doing in the future. There is one other cryptocurrency product that we have invested in because we really believe in it. It is called A Trace, which is affiliate marketing. We invested in it personally and through our company in this project. But it is not a charity. We don’t do too many charity things.
Sam: This is your first trip to Moscow. What are some of your impressions of traders and funds working out of Russia? Anna, who organised the event we attended, said that 20-25% of all the volume in the derivatives space come from the market makers who attended. What do you specifically like about Russia and the Russian people?
Marius: I think they are very humble. If you go more to the western people, they like to exaggerate more, especially in Europe, maybe even Americans even more. I really like the humbleness. We have a small firm we only do around $50 million a day. That’s not too small I think. Someone else would say we have a big firm we do $50 million a day. Very relaxed and very kind. They are interested in our products and ask really interesting questions, so it has been a great experience to be here so far.
Sam: Specifically for derivatives, the strategies are a whole step above buying and selling trading. So when you are speaking with people who are in the derivatives space their knowledge of what they are doing is much more broad than your average punters who are going and trying to leverage up by buying and selling bitcoin at 100x, which I can do at your exchange. There are more sophisticated strategies you can employ using options and futures. I think that is why your client base a bit more sophisticated, institutional clients who need a more sophisticated product. Buying and selling options is very sophisticated as they are very risky.
Marius: Options are very dangerous and risky – it is just how you approach it. If you trade something you do not understand, you can make or lose money. With options, you can actually build a portfolio that is really flat. But like you say you have to know the product. I think retail traders are not comfortable with trading options. I totally get that. But the more institutional traders are our clients and trading companies.
Sam: How do you cater for more institutional traders as that is the client your business is built around?
Marius: What we want to offer is direct contact with John, Luke, the guys from our team and me for the institutional traders so they can pick up the phone and talk to us directly. We still offer this, and as we grow we hope to maintain this. This is something we cannot offer to retail clients; for them we have telegram group which is very active 24/7. I don’t offer personal support to retail. I think that is super important to offer personal support to institutional clients and trading companies.
Sam: I think it is super important to have someone who is doing a lot of volume on an exchange to have a number they can call 24/7 for large volume and during operating hours for smaller volume. Catering for that top 5% of your clients who generate the volume on the exchange is important.
Marius: The 80/20 rule or 99/1 rule applies to our exchange. Most of the volume on our exchange comes from a select group of clients on the exchange.
Sam: What will you do when Bitcoin gets to a million dollars? Do you have any plans?
Marius: I hope I still have some Bitcoin by then. I am going to cry. I don’t know. I think if Bitcoin is going to pick up then we are going to see a better world and that is really interesting. I think more opportunities for the poor in the world if we can use Bitcoin as a currency. That is what got me into Bitcoin. I am quite liberal – I was interested because Bitcoin is not controlled by any government. I think this can still change the world. This technology will change the world like the internet. Personally for me when Bitcoin goes up, It is not important. I think it is more interesting how it will change the world.