Can we talk crypto ETFs & ETF-derivatives: do crypto elements like fixed supply present concerns?

[d0rian]

Market-making 101: MM writes a Call, then goes out and buys a hedging amount of the underlying (and adjusts position over time to remain delta-neutral.) It's worked just fine for decades, but I've been wondering lately whether those traditional mechanics will map as neatly onto the crypto ecosystem as the MM's and regulators hope.

Two related areas of concern (and probably others I'm not even thinking of):

1. The crypto coin ecosystem moves much slower than for public shares: waiting for coins to move, block confirmations, getting coins to/from cold storage, etc. Compare:
   • Buy a bunch of TSLA Calls, and MM can instantly put on the necessary hedge with TSLA shares from open market; vs
   • Buy Calls in one of the BTC ETFs >> MM scoops up a bunch of the ETF shares, but what then? The ETF is presumably required to go out and buy actual BTC, but market is uber-volatile and spreads are wide. Submitting any type of market order of size is probably a non-starter. And how exactly does the ETF requirement to keep their funds' coins in offline cold storage come into play here?
2. The second, and potentially bigger question I have: does BTC's fixed 21M coin supply throw a monkey wrench into this at all? Public companies of course have a limited # of outstanding shares too, but in their case, there's at least a mechanism that exists to issue more shares: e.g. if a glut of MM buying sends the underlying to the moon, great everyone gets rich, but the company will probably do a secondary or otherwise avail itself of the market mechanisms that keep stock prices somewhat tethered to the underlying business fundamentals. All of that's absent with BTC, and its fixed supply.

Maybe none of this is actually worrisome at all, and crypto ETFs + derivatives will work out just fine. But I can't shake a nagging suspicion that the limitations built into the cryptographic protocol may form the basis for a black swan type of event that we may not even be thinking about yet. Thoughts?

 

[Pekelo]

that the limitations built into the cryptographic protocol may form the basis for a black swan type of event that we may not even be thinking about yet. Thoughts?

That should be your last thing to worry about as causing a black swan event. Other, more likely scenarios:

-Elon tweeting about crypto
-China banning crypto mining
-hackers pissing of the US government and the US banning cryptos
-Tether holders trying to cash out
-general exit scam collapsing a brokerage
-etc.etc.

Some of these happen so often you can't even call them black swan anymore. Maybe white swan.

 

[MrMuppet]

1. The crypto coin ecosystem moves much slower than for public shares: waiting for coins to move, block confirmations, getting coins to/from cold storage, etc. Compare:

Are you sure you understand the mechanics correctly?
I can send 9 figures to any place in the world within 10 minutes for BTC and much faster when using stablecoins.
I also can use a third party clearer to give me a short term loan on the coins I have in cold storage.
Ever tried to send 8 figures to IB and trade right away? It takes 3 days until the money is on account and then it's blocked for another 5 days for "safety reasons" until you can actually use it to trade.

Traditional finance is a dumbster fire of chaining middle men and t+x clearing which is completly left in the dust by how fast things work in crypto space

 

[Sig]

Are you sure you understand the mechanics correctly?
I can send 9 figures to any place in the world within 10 minutes for BTC and much faster when using stablecoins.
I also can use a third party clearer to give me a short term loan on the coins I have in cold storage.
Ever tried to send 8 figures to IB and trade right away? It takes 3 days until the money is on account and then it's blocked for another 5 days for "safety reasons" until you can actually use it to trade.

Traditional finance is a dumbster fire of chaining middle men and t+x clearing which is completly left in the dust by how fast things work in crypto space

For sure multi-day waits for instantaneous wire transfers are a huge problem in the retail world. But the MMs and hedge funds who are the one's generally ensuring a no-arb condition because they will jump on any arb opportunity in literally a microsecond don't suffer from those limitations. And for folks who spend tens of millions to gain a few microseconds, 10 minutes is a geological epoch!

 

[MrMuppet]

For sure multi-day waits for instantaneous wire transfers are a huge problem in the retail world. But the MMs and hedge funds who are the one's generally ensuring a no-arb condition because they will jump on any arb opportunity in literally a microsecond don't suffer from those limitations. And for folks who spend tens of millions to gain a few microseconds, 10 minutes is a geological epoch!

That's just incorrect. There is no instantanious wire transfer for hedgefunds. If you want to get your hands on a big chunk of money within a seconds notice, you have to setup a credit line in advance. Also retail can do this...it's called margin trading.

You can do the same in crypto land.

 

[Sig]

That's just incorrect. There is no instantanious wire transfer for hedgefunds. If you want to get your hands on a big chunk of money within a seconds notice, you have to setup a credit line in advance. Also retail can do this...it's called margin trading.

You can do the same in crypto land.

I don't do microsecond wires but I certainly routinely do wires that clear in the time it takes me to refresh the account on the receiving end. That said, in order to avoid a tangential food fight over wire times which isn't really relevant to the underlying question....the actual point is that using whatever funding methods available to them hedge funds and MMs can arb away any arb opportunity in microseconds for non-crypto products while it can take 10 minutes to do so in crypto which takes away the "risk free" part of the risk-free arb. As I've maintained in other threads, the majority of what appear on first blush to be persistent "risk free" arbs in crypto actually have risk that the person calling it "risk free" just isn't aware of or won't acknowledge, and the apparent "arb" is just the market is pricing that risk in.

 

[MrMuppet]

I don't do microsecond wires but I certainly routinely do wires that clear in the time it takes me to refresh the account on the receiving end. That said, in order to avoid a tangential food fight over wire times which isn't really relevant to the underlying question....the actual point is that using whatever funding methods available to them hedge funds and MMs can arb away any arb opportunity in microseconds for non-crypto products while it can take 10 minutes to do so in crypto which takes away the "risk free" part of the risk-free arb. As I've maintained in other threads, the majority of what appear on first blush to be persistent "risk free" arbs in crypto actually have risk that the person calling it "risk free" just isn't aware of or won't acknowledge, and the apparent "arb" is just the market is pricing that risk in.

That's not how cross exchange arb works. You don't need to buy on one exchange wire it to the other, wait 10 minutes until it arrives and then sell it.

The arb is done between futures and index constituents or if you want to do spot for spot, you use a clearer that has credit lines with both exchanges. The money transfer is just an internal booking.

FYI, what you describe as instant wires is not instant settlement. Your payment provider gives you a credit over the amount while he settles with your bank in the background.

Technically any crypto ETF is easily doable and the creadtion/redemption process is way more efficient in crypto than in traditional finance. There are already enough ETFs to prove that.

 

[Sig]

That's not how cross exchange arb works. You don't need to buy on one exchange wire it to the other, wait 10 minutes until it arrives and then sell it.

The arb is done between futures and index constituents or if you want to do spot for spot, you use a clearer that has credit lines with both exchanges. The money transfer is just an internal booking.

FYI, what you describe as instant wires is not instant settlement. Your payment provider gives you a credit over the amount while he settles with your bank in the background.

Technically any crypto ETF is easily doable and the creadtion/redemption process is way more efficient in crypto than in traditional finance. There are already enough ETFs to prove that.

I run a non trading business that involves making a very large number of wire transfers every month. They happen more or less instantaneously from the sending bank account to the receiving bank account at a different bank and it's settled funds which I in some cases then split up and transfer to multiple other bank accounts immediately (I know, I sounds like I'm laundering money but really I'm taking payment from a few big payers and distributing to a bunch of small payees for electric utilities).

Again though that's irrelevant to my point. With crypto if you're arbing the actual crypto coin it takes up to 10 minutes to complete the transaction. That's assuming I can cross collateralize with the instrument I'm arbing the crypto against. If I'm arbing a stock on one exchange vs it's option on another it's microseconds, rinse, and repeat. Very different world.

 

[MrMuppet]

Again though that's irrelevant to my point. With crypto if you're arbing the actual crypto coin it takes up to 10 minutes to complete the transaction.

That's just plain wrong XD

Your assumption won't be suddenly correct if you just repeat it a couple of times.
And there is nothing in it for me that incentivises me to convince you. Don't even talk about explaining remittance business

 

[Sprout]

Market-making 101: MM writes a Call, then goes out and buys a hedging amount of the underlying (and adjusts position over time to remain delta-neutral.) It's worked just fine for decades, but I've been wondering lately whether those traditional mechanics will map as neatly onto the crypto ecosystem as the MM's and regulators hope.

Two related areas of concern (and probably others I'm not even thinking of):

1. The crypto coin ecosystem moves much slower than for public shares: waiting for coins to move, block confirmations, getting coins to/from cold storage, etc. Compare:
   • Buy a bunch of TSLA Calls, and MM can instantly put on the necessary hedge with TSLA shares from open market; vs
   • Buy Calls in one of the BTC ETFs >> MM scoops up a bunch of the ETF shares, but what then? The ETF is presumably required to go out and buy actual BTC, but market is uber-volatile and spreads are wide. Submitting any type of market order of size is probably a non-starter. And how exactly does the ETF requirement to keep their funds' coins in offline cold storage come into play here?
2. The second, and potentially bigger question I have: does BTC's fixed 21M coin supply throw a monkey wrench into this at all? Public companies of course have a limited # of outstanding shares too, but in their case, there's at least a mechanism that exists to issue more shares: e.g. if a glut of MM buying sends the underlying to the moon, great everyone gets rich, but the company will probably do a secondary or otherwise avail itself of the market mechanisms that keep stock prices somewhat tethered to the underlying business fundamentals. All of that's absent with BTC, and its fixed supply.

Maybe none of this is actually worrisome at all, and crypto ETFs + derivatives will work out just fine. But I can't shake a nagging suspicion that the limitations built into the cryptographic protocol may form the basis for a black swan type of event that we may not even be thinking about yet. Thoughts?

Crypto moves fast and DeFi is attracting the sharpest minds in financial markets rn. The innovation that results from the sharing and building upon open-source tech is quite the challenge. Mix that with memes, viral social media, shit posting, psyops, scams, rugpulls, tribalism, etc. it’s just wild.

1 BTC is 100mil satoshi’s. BTC supply is 2quadrillion, 1 trillion Satoshi’s. A Satoshi is roughly $0.00049 usd rn. It can also be ‘wrapped’ in a smart contract that can create further fractionalization.

Crypto is the wealth transfer mechanism from boomers and wall st to millennials and gen z. They’ve grown up immersed in internet culture and are embracing value transfer over a communication channel. The rise of digital assets is serving to reduce the wealth gap not increase it like the current system facilitates.