Crypto is fun for traders
A model that I often use for cryptocurrency is that it is rediscovering traditional finance: In its early days, crypto was a brand-new financial system, unsullied by the old evils of central banking, leverage, regulation, etc.; eventually people realized that some of those things were good, and started reinventing them. One way to reinvent finance is for idealistic crypto technologists to invent banking, leverage, regulation, etc., from first principles, with cursory or no knowledge of how the traditional financial system addressed these issues or why it rejected other solutions. You would expect this to lead to flawed but interesting results, whole new ways of doing things that might blow up horribly but that might instead point the way to a better future.
Another way to reinvent finance is for, like, Wall Street derivatives structurers or high-frequency traders or securities regulators to say “wait, I know this stuff, lemme go do crypto where it’s easy and no one else knows it.” Here is a very fun story from Bloomberg’s Justina Lee:
“All the fun that used to be had 30 years ago in the commodity markets and is no longer fun — that fun is now in crypto,” says [former Wall Street energy trader Trey Griggs,] the U.S. chief executive officer at GSR Markets in Houston.
Griggs is among crypto newcomers deploying systematic strategies that are tried-and-tested in conventional asset classes — price arbitrage, futures trading, options writing — in a booming new corner of finance. As more mainstream investors get behind Bitcoin, boutique firms are joining the likes of Mike Novogratz in an ever-broadening crypto rally that keeps breaking records. …
Take Mark Treinkman. After a career mostly at proprietary stock-trading shops like Chimera Securities, digital money is renewing his passion for quant trading.
“I’ve been going through some of my old strategies and things that wouldn’t have worked in equities in decades have an edge in crypto still,” he says.
I assume that a lot of these strategies involve very sophisticated intellectual property and instincts built up over decades in high finance, but others are just, like, you can simultaneously buy a coin at $80 and sell it for $100:
For a few minutes during trading on Wednesday, for example, the price of Ethereum Classic jumped well above $100 on the Coinbase exchange. The digital token was trading at less than $80 at other venues, offering an obvious opportunity for investors to make money simply by buying in one place and selling in another.
Or there is money lying around for anyone to claim as long as they can confidently use the word “contango”:
And the opportunities pop up everywhere. For instance, when longer-dated futures in pretty much any asset class trade higher than the spot price — known as contango — the former almost always converges to the latter as the contracts mature.
That’s popularized the crypto basis trade, where an investor goes long the spot rate and shorts the futures.
When Bitcoin last peaked in mid-April, the December contracts were nearly 4% higher than August which were in turn about 2% higher than the spot reference rate, as speculators unleashed bets on rising prices.
Obviously one aspect of this story is that if you are a futures trader or electronic market maker or derivatives structurer in traditional finance, you work very hard to scratch out a few basis points in a competitive industry. If you move to the much shaggier crypto industry, there is less competition — in the relevant senses of well-capitalized players with good technology and access to leverage and pricing models — and you can potentially make a lot more money a lot more easily. If you work on Wall Street, you probably like money, so moving to a place that gives you more money is pretty tempting.
But another aspect of it is that if…