Hey Trader,

Kevin Warsh gave his first Jackson Hole keynote as Fed chair on Friday, and traders spent the weekend arguing about how hawkish it was.

The bigger story was the theme for the whole symposium: "Financial Innovation: Implications for Payments and Policy."

That means stablecoins, tokenized assets, and a decision about who gets to run the payment rails for the next 20 years.

Central bankers, the IMF and the BIS spent three days working through it while everyone else stressed the rate odds.

Mark Sebastian hosted a special Option Pit Live session yesterday afternoon to figure out what that decision is worth. He brought in Garrett Baldwin and Greg Magadini, who traded crypto options and volatility for more than a decade.

Mark was upfront about why: "I am an expert on none of that, but I do recognize when important discussions are happening and when the tide is changing in the marketplace."

The hour ended with nine plays between them.

They also landed on the same hedge for the entire transition, and Garrett's case for it comes down to five things no other asset does.

Start with the setup, because the names only make sense once you see what they're built on.

You can watch the video here or read on below for a wrap up

Where the Money Actually Lives

Greg opened with Japan, which surprised me for a crypto conversation.

His numbers put US debt to GDP near 125 percent against roughly 250 percent for Japan. Japan invented QE and yield curve control, and Greg thinks we're running their playbook a couple of decades behind.

His model says that when debt markets get shaky, issuance rolls down to shorter maturities and the curve steepens. He put the US front end around 415 basis points against a long end near 525, roughly a point of spread. Japan's version of that same spread runs about two and a half points.

That's where the crypto move comes from. "When we start to see Bessent talk about some sort of yield curve control, I think the market and crypto specifically woke up to discounting potential future currency debasement."

Garrett picked it up from the Treasury side. By his count about 22 percent of US debt is now in bills under one year, up from roughly 11 percent when the Tax Cuts and Jobs Act launched in 2017, and people who track this for a living think it can reach 30 percent.

Bills have to roll over constantly. That keeps liquidity circulating at the front end, and Garrett's argument is that the same liquidity feeds the digital cash layer underneath Bitcoin and Ethereum. He clocked the recent moves at roughly 30 percent for Bitcoin and about 50 percent for Ethereum.

"A lot of it has to do with the plumbing of the system and less to do with the assets themselves."

Garrett's framing of the whole symposium came next. "It really was who controls the next version of money."

The incumbents won that argument, in his read. He turned it into a rejection letter aimed at the people who spent a decade building an escape hatch from central banking. Thank you for the proposal to eliminate central banks and middlemen. We've decided to keep the banks, keep the government, and keep central bank money at the center. We'll adopt your plumbing where it's useful, and we'll run it on weekends.

Greg added the economics pulling retail into that new plumbing. Checking deposits pay something like 15 basis points. Stablecoins yield 3 to 3.5 percent. Under the GENIUS Act those coins have to be fully funded, so any bank that enters the business gives up the efficiency of fractional reserve lending.

Garrett said the banks want in anyway because of what they'd lose. Every card swipe inside a bank's ecosystem sharpens your credit profile, and that visibility goes dark the moment the money leaves.

The Part That Can Break

Both of them spent real time on what goes wrong, which is what you get from putting a risk manager and a vol trader on the same call.

Greg's worry lives at the exchange level. On-chain markets aren't really levered, and spot crypto is mostly unlevered too. The venues where customer funds are custodied run products levered as much as 100 to one, and last October's liquidation showed what that does.

Order books vanished. Prices diverged between exchanges because there's no central clearing, and traders got force-sold into books that weren't there.

He also flagged the piece that matters for anyone hedging. Market makers who thought they were flat delta didn't get paid on their hedges when counterparties went under.

Garrett's worry is settlement. Traditional netting lets three parties who each owe each other the same amount square up at zero. Atomic settlement removes the waiting period, so the cash has to be there today instead of tomorrow.

He thinks the system will need buffers, new facilities, and probably a Fed backstop before it works.

"They're building the plane, and they're stapling wings on it, and it's taking off at the exact same time."

Mark pushed on the obvious hole. During the 2010 flash crash, when it was clear the tape was broken, exchanges simply canceled trades. He asked whether you can cancel a trade on-chain, and nobody on the call thought you could.

His other contribution was a volatility observation. Crypto used to trade with what he called speculative skew, calls bid over puts, because there were more gamblers than owners. Now puts are getting bid over calls, the same shape equities have carried for decades.

That shift means owners are hedging positions they actually hold. Mark reads it as the asset class growing up.

The Names

Garrett stayed bullish on CME Group (CME), which runs crypto futures and options around the clock. He called it a sell-the-shovels business and a reasonable hedge against direct crypto exposure.

He'd rather own the execution layer than anything else here. Broadridge Financial Solutions (BR) and Bank of New York Mellon (BK) are already deep in this business, and BNY is in the middle of tri-party repo. His favorite is Tradeweb Markets (TW), which has already settled tokenized Treasuries against tokenized cash and has sold off into the low hundreds. He also flagged State Street (STT) on the custody side.

For a single idea, Garrett said buy the US banking system through JPMorgan Chase (JPM). The Bank for International Settlements has pushed tokenized deposits over stablecoins, and if the BIS view wins, the largest banks collect. Building a coin means building know-your-customer infrastructure and cybersecurity at scale, which no regional bank is going to pull off.

That leaves the regionals with a deposit problem. Garrett screens for banks trading below tangible book value in markets where population is either growing fast or shrinking fast, because deposits are the asset and buying a bank beats building one.

His hedge on the whole thing is Bitcoin, on the grounds that it absorbs size, sits outside consumer price indices, never stresses a bank balance sheet, has supply that ignores demand, and works globally without permission. If the dollar pile has to expand in a crisis, he wants that exposure.

Greg's pick was Solana through Bitwise Solana Staking ETF (BSOL), which builds the staking yield in at a little under six percent. He likes the vol there too, calling it a 70 vol asset with room to sell covered calls, and he sees market share moving from Ethereum toward Solana as layer-2 chains hollowed out Ethereum's fee burn.

He also pointed at the simpler route for anyone who doesn't want a wallet. iShares Bitcoin Trust (IBIT) and the staked Ethereum ETFs are regulated and centrally cleared, and the covered-call selling into those products has cheapened the call wing relative to puts. For options traders, he thinks that supply makes a case for owning calls instead of selling them.

Garrett's parting advice was to stop reading the first 15 minutes of any event.

"There's a lot of opportunity out there. It's just that you have to look a lot deeper than traditional headlines."

You can catch Garrett live every morning at 9:20 AM ET on I’d Trade That by tapping this link.

• Option Pit Team