The markets are bracing for a busy stretch. The Federal Reserve will announce its rate decision on Wednesday. Fresh reads on the economy and inflation come Thursday. And Americans head to the polls for the midterms next week. Throw in oil above $100 and new questions about the AI boom — and it is no surprise investors are looking for ways to protect themselves. A lot of that is showing up in the options market. Joining us is Jeff Anderson, Head of US at STS Digital. Jeff, thanks for being with us today.
Thank you. It is a pleasure to be here.
It is a huge week. Fed, economy, inflation, midterms. Which one are investors watching most closely?
A lot of the market has looked through the Fed decision this week — rate hike expectations are below 10%. It is really about the inflation data coming out Thursday and what happens in December. The majority of the variance in the options market is actually around the midterms next week. There is quite a bit of event risk in that — whether it is a Democratic sweep or Republicans retain the Senate.
You spent years on Wall Street trading currencies and gold before moving into crypto. What does STS Digital do and why did you make the switch?
We are a principal desk — clients trade into us for hedging, yield enhancement, and real money exposure to crypto options. The parallel between FX and crypto is very similar — two assets against each other with an interest rate story. Crypto is a nascent industry with a lot going on. FX volatility runs at 6 or 7. Bitcoin right now is mid-30s but can go all the way to 200. It is an incredible industry to be part of — very inefficient market, incredible talent and builders.
Bitcoin and Ethereum seem to be rising and falling with stocks. Why?
There is a strong beta and correlation to general risk assets. Right now there is really only one trade in the world — AI. If concerns around an AI debt bust materialise, that is going to influence risk in general. But we have seen that correlation break down a little and we expect it to break down further. Within crypto there is wide dispersion — similar to US equities where AI stocks go one way and the rest of the market struggles. A lot of people group crypto together as one thing when in reality there are very interesting idiosyncratic projects.
Why are more investors using options to trade crypto?
Options just make sense as a product in an asset class where volatility is over 100. You can use options to express views in a loss-limited way. There are crypto names that can gap 15 to 20% on the open. Options let you speculate or hedge in a loss-limited way. Foundations with very large balance sheets concentrated in one asset can hedge while still maintaining their business model.
Investors seem to be picking winners — coins linked to AI or that generate real revenue are being bought while others are sold. Why?
There is an incredible amount of token inflation — new tokens can be created very easily. You need to be a stock picker in crypto. Focus on projects linked to AI and on projects that actually make money and accrue revenue back to the token — something like Hype, something like Syrup which is an on-chain loan market. These provide real value to investors. That is where to focus right now.
Should investors be worried about how much companies are borrowing to fund AI?
Absolutely. The current AI trade is difficult to call the top on — but people recognise it is unsustainable. We have seen a slowing in the last month. Some hyperscalers are raising more debt at 100 basis points higher than six months ago. If these taps dry up, we will see consolidation and fewer startups. AI is incredible and has already changed the world meaningfully — but it is something we watch very closely for signs of slowing.
What could rattle markets from here?
Getting through the midterms and understanding how the AI debt situation plays out. We are still very optimistic and constructive for Q4, very positive on risk. But it is about surviving some near-term concerns and whippy markets in the short run. Crypto has a bad reputation sometimes — but there is an incredible amount of talent and builders and very real products, as we are seeing with the global tokenisation of everything coming on-chain. We remain very optimistic.
Jeff, thank you so much for joining us.
Thank you.
