Arthur Hayes: Market Impact and Arbitrage Opportunities of Spot Bitcoin ETFs

This article discusses health care and the impact of the global economic crisis on life, pointing outBitcoinThe importance of being an escape valve. Bitcoin is predicted to be tested in 2022, and the Federal Reserve's tightening of the financial environment caused the Bank of America to go out of business.BlackRockThe application for a Bitcoin ETF has sparked controversy. By using the exchange's CF Benchmark weight and the daily closing market in the dollar name, arbitrage trading can be carried out. ETF options trading volume will dominate the global flow of Bitcoin options. Centralized lending platforms can use Bitcoin as collateral to borrow fiat money to solve the problem of maintaining control over Bitcoin. Bitcoin can be used as an asset class unrelated to stocks and bonds to help fund managers cope with an environment of continued inflation.

Original title: ETF Wif Hat

Original author:Arthur Hayes

Source of original text:medium

Edited by Kate

Image source: X user@CryptoTubeYT, I've added the text.

From a healthcare perspective, the last moments of life are the most expensive. We are willing to spend unlimited money on any advertised treatment to prevent the inevitable from happening. Similarly, the elites responsible for “Pax Americana” (Pax Americana) and its vassals are willing to maintain the current world order at any cost, because they benefit most from the existence of such an order. However, since 2008, “Peace Under American Rule” (Pax Americana) has been dying. At the time, bad mortgages issued to bankrupt Americans triggered a global economic crisis severe enough to recall the Great Depression (Great Depression) of the 1930s. Under the blind leadership of Ben Bernanke (Ben Bernanke), what medicine did the Neo-Keynesian barber of the Middle Ages prescribe? The same basic treatment as in a dying empire is always the same... money printer, let's go.

The vassals, strategic rivals, and allies of the US, Europe, China, and Japan print money to address the different symptoms of the same problem. The problem is a grossly unbalanced global economic and political architecture. Under the leadership of the Federal Reserve (Fed), the US prints money and buys US government bonds and mortgages. Europe, led by the European Central Bank (ECB), prints money and buys government bonds of Eurozone member states to maintain the existence of a flawed monetary union (not a fiscal union). Under the leadership of the People's Bank of China (PBOC), China requires the banking system to issue loans to industrial enterprises that overbuild apartments, steel mills, and other large-scale infrastructure projects. China has built up so much useless production capacity that it created the “Belt and Road” initiative to export these products to developing countries in desperate need of capital investment. Under the leadership of the Bank of Japan (BOJ), Japan continues to print money in an attempt to create the illusory inflation that disappeared after the 1989 real estate crash.

As a result of the reckless printing of money, the ratio of global debt to GDP is rising at an accelerated pace. Global interest rates have fallen to their lowest level in 5,000 years. The highest yield on corporate bonds and government bonds of nearly $20 trillion was negative. Since interest is compensation for the time value of money, if interest is negative, do we say time is no longer valuable?

thankfulQuill IntelligenceChart provided by Danielle DiMartino Booth. As you can see, in response to the 2008 global financial crisis (GFC), interest rates were pushed to their lowest point in 5,000 years.

This is a Bloomberg index of the total amount of negative yield debt worldwide. From nothing before the 2008 global financial crisis to reaching a high of $17.76 trillion in 2020. This is thanks to central banks around the world cutting interest rates to 0% and below.

Most people in the world don't have enough financial assets to benefit from this depreciation of global fiat currencies. All kinds of commodities around the world are experiencing inflation. Remember the 2011 Arab Spring? Remember that in major financial centers around the world, an avocado toast costs less than $20? Remember how a median-income family could afford a median-priced house without having to resort to their parents' bank grants?

The only way out is to have a little gold. However, it is impractical to physically hold gold. Massive debts are heavy, and it is difficult to escape a greedy government. As a result, people had to bow down so that the elite could continue to revel in Davos like they did in 2007.

But like a lotus blooming in a cesspool, while publishing the Bitcoin white paper, Satoshi Nakamoto sank into an empire that was morally, politically, and economically bankrupt. The white paper proposes a system where people can use internet-connected machines and cryptographic proofs to separate funds from countries in a globally scalable way for the first time in human history. I say “globally scalable” because Bitcoin has no weight. Whether you hold 1 Satoshi Nakamoto or 1 million bitcoins, the weight is the same. Additionally, you can protect your bitcoins by memorizing the mnemonic words for unlocking a Bitcoin wallet. Bitcoin provides everyone with a completely complete financial system, an internet-connected device that is not tied to ancient regimes.

There is finally a way for people to escape the global fiat currency devaluation frenzy. However, after the 2008 financial crisis, Bitcoin was too mature to provide believers with a reliable escape valve. Bitcoin, and the entire crypto market, must increase the number of users and prove that they can withstand serious crises.

Those of us faithful believers were severely tested in 2022. Following most central banks around the world, the Federal Reserve began tightening the financial environment at the fastest pace since the 1980s. The banking system and bond market under the US cannot withstand the impact of the Federal Reserve. In March 2023, three US banks (Silvergate, Silicon Valley Bank (Silicon Valley Bank), and Signature Bank) went out of business within two weeks. If their holdings of US Treasury bonds and mortgage-backed securities were valued at market value, then the US banking system was and still is insolvent. As a result, US Treasury Secretary Yellen created the Bank Term Financing Plan (BTFP) to save the entire US banking system in a covert way.

Cryptocurrency is also not immune to high interest rates and rising interest rates.BlockFi、Celsius和GenesisCentralized lenders have all gone bankrupt sinceThree Arrows CapitalLoans provided by over-leveraged trading companies such as (Three Arrows Capital) have come to an end. Terra Luna, a stablecoin pegged to the US dollar, also went bankrupt due to a drop in the price of its governance token Luna. The incident evaporated over $40 billion worth of fugazi in two days. Then centralized exchanges began to go out of business, of whichFTXIt's the biggest. FTX, run by Sam Bankman-Fried (Sam Bankman-Fried), the “right” American peaceful white boy, stole more than $100 million worth of customer funds, and his scam came to light as crypto asset prices plummeted.

Bitcoin,Ethereum和DeFiProject (such asUniswap、Compound、Aave、GMX、dYdXetc.) What happened? Have they wavered? Did they call home and get bailouts from the cryptocurrency central bank? Definitely not. Overly leveraged positions are closed. Prices fell. People lost a lot of money. Centralized companies no longer exist. However, Bitcoin blocks are still generated every 10 minutes on average. The DeFi platform itself isn't bankrupt. Simply put, there is no bailout because cryptocurrencies can't be rescued. We have experienced setbacks, but we have continued to move forward.

Amid the ruins of 2023, it is clear that peace under US rule and its vassals cannot continue to tighten monetary policy. Doing so would bankrupt the entire system because leverage and debt were piled up too high. As long-term US Treasury yields began to rise in a step-wise manner, a strange thing happened. Bitcoin and cryptocurrency prices rose while bond prices fell.

Bitcoin (white) vs US 10-year Treasury yield (yellow)

As you can see in the chart above, when interest rates rise, Bitcoin, like all other long-term assets, falls.

After BTFP, this relationship was reversed. Bitcoin increased along with yield. Rising yields, particularly those rising in the form of a steeper bear market, indicate that investors do not believe in this “system.” In response, they are selling off America's safest government bonds — US Treasury bonds. These funds mainly went to seven major AI technology stocks (Apple, Alphabet, Microsoft, Amazon, Meta, Tesla, Nvidia), and a small amount went to cryptocurrencies. Nearly 15 years later, Bitcoin has finally revealed its true character as “people's currency,” not just another risky asset derivative of an empire. This poses a very difficult problem for TradFi.

Capital must remain in the system to eliminate mountains of unproductive debt through inflation. Outside of the system, Bitcoin now has zero or slightly negative correlation with bonds (remember, bond prices fall when yields rise). If bond security guards express their disappointment with government bonds by selling them and buying bitcoin and other cryptocurrencies, the global financial system will collapse. The reason for its collapse was that inherent losses within the financial system were eventually recognized, and large financial companies and governments would have to reduce their size drastically.

To avoid this liquidation, the elite must financialize Bitcoin by creating highly liquid exchange-traded funds (ETFs). This is the same trick they played in the gold market. In 2004, the US Securities and Exchange Commission (SEC) approved ETFs such as SPDR GLD, which allegedly hold gold bars in treasury around the world. If all the capital hoping to escape the collapse of the global government bond market buys a Bitcoin ETF managed by a large TradFi company like Blackrock (Blackrock), then that capital remains safe in the system.

It's clear that in order to protect the global bond market, the Federal Reserve and all other major central banks must once again switch to printing money, so BlackRock officially applied for a Bitcoin ETF in June 2023. BlackRock is one of many companies hoping to get Bitcoin spot ETF approval in the US. However, in 2023, the US SEC seems to have finally accepted such an application. I'm presenting the following to highlight the oddities surrounding the current events surrounding the ETF approval process. The Winklevoss twins applied for a spot Bitcoin ETF in 2013, but the SEC rejected their application for over a decade. BlackRock filed an application and was approved within six months. Things that make you “uh-huh.”

As I wrote in my previous post “ExpressionAs described in”, a spot Bitcoin ETF is a trading product. You buy it with fiat to earn more fiat. It's not Bitcoin. It's not a path to financial freedom. It's not outside of the TradFi system. If you want to escape, you have to buy Bitcoin, remove it from the exchange, and keep it for yourself.

I wrote such a long foreword explaining “Why now?” Why was a spot Bitcoin ETF finally approved at a critical time for this empire and its financial system? I hope you understand the importance of this development. The global bond market is estimated at $133 trillion. Imagine if bond prices continue to fall, even if the Federal Reserve may start cutting interest rates in March, Bitcoin ETFs will flow in. If inflation bottoms out and returns higher, bond prices are likely to continue to fall. Just remember that war causes inflation, and the empire's periphery is definitely at war.

Also, don't forget that China will launch ETFs exactly like those listed in the US on the Hong Kong financial market to attract capital flows from mainland China and the Asia-Pacific region. “Peace under American rule” is leading the way, and her friends and enemies will follow.

The rest of this article will discuss the market impact of spot Bitcoin ETFs. I'll just focus on BlackRock ETFs because BlackRock is the world's largest asset management company. They have the best ETF distribution platform in the world. They can sell products to family offices, retail financial consulting firms, retirement and pension plans, sovereign wealth funds, and even central banks. All other companies will do their best, but BlackRock ETF will be the undisputed winner in terms of asset management scale (AUM). Whether this prediction is correct or not, the following strategies will work if any issuer's ETF is trading a lot.

This article will discuss the following and how the inner workings of ETFs will create amazing trading opportunities for those who can trade on TradFi and the crypto market:

- Creation and redemption process

- Spot trading arbitrage and trading time series analysis

- ETF derivatives, such as listed options

- The impact of ETF financing transactions

Having this all figured out, let's make some damn money!

Cash dominates everything around me

The matter has been settled. The inflow (creation) and outflow (redemption) of funds can only be made in cash. The most worrying aspect of this ETF is that it allows people to buy ETFs with fiat money and choose to redeem Bitcoin in physical form. The focus of this product is to store fiat currency rather than providing an easy way to buy physical bitcoins with your retirement account.

founding

In order to create shares in an ETF, authorized participants (APs) must send the dollar value of the created basket (that is, a certain amount of ETF shares) to the fund at a specific time each day.

AP is a large TradFi company. Tradfi's Who Who's Who of Vampires has signed up to be an AP issued by various ETFs. CEOs of companies like JP Morgan CEO Jamie Dimon (Jamie Dimon) are calling on the government to ban cryptocurrencies, and these companies will get involved. I was amazed.

Examples:

Each share of this ETF is worth 0.001 bitcoin. The basket created was 10,000 shares, and at 4 p.m. EST, these bitcoins were worth $1 million. AP must remit this money to the fund. The fund will then instruct its counterparties to buy 10 bitcoins. Once Bitcoin is purchased, the fund credits the ETF share to the AP.

1 basket = 0.001 BTC * 10,000 shares = 10 BTC

10 BTC* $100,000 BTC/ USD = $1,000,000

redemptions

To redeem ETF units, AP must send ETF shares to the fund before 4 p.m. ET, then the fund will instruct its counterparty to sell 10 bitcoins. Once the bitcoin is sold, the fund will pay the AP $1 million.

1 basket = 0.001 BTC * 10,000 shares = 10 BTC

10 BTC* $100,000 BTC/ USD = $1,000,000

For us traders, what we want to know is where Bitcoin must be traded. Of course, counterparties that help the fund buy and sell Bitcoin can do so anywhere they like, but to reduce slippage, they must match the fund's net asset value (NAV).

The fund's net asset value is based on the BTC/USD price at 4 p.m. EST on CF Benchmark. CF Benchmark receives prices from Bitstamp, Coinbase, ItBit, Kraken, Gemini, and LMax between 3-4 p.m. EST. Any trader looking to perfectly match their net worth by minimising execution risk can trade directly on all of these exchanges.

Bitcoin is a global marketplace, and price discovery mostly happened on Binance (headquartered in Abu Dhabi, I guess). Another major Asian exchange excluded from the CF Benchmark Index is OKX. For the first time in a long time, the Bitcoin market will have predictable and long-lasting arbitrage opportunities. What is promising is that in an hour's time, billions of dollars of traffic will be concentrated on exchanges with lower liquidity and prices that follow their larger Eastern rivals. I expect great spot arbitrage opportunities.

Obviously, if the ETF is hugely successful, price discovery could shift from the East to the West. But don't forget Hong Kong and its copycat ETF products. Hong Kong will only allow its listed ETFs to be traded on Hong Kong's regulated exchanges. Binance and OKX are likely to serve this market. However, a new exchange will come into being to service China's southbound traffic.

No matter what happens in New York and Hong Kong, these two cities won't allow fund managers to trade Bitcoin at the best price, but they'll probably only trade on “selected” exchanges. This unnatural state of competition will only create more inefficient markets, which we, as arbitrators, can profit from.

Here's a simple arbitrage example:

Average Daily Trading Volume (ADV) = (CF Benchmark Weight on Exchanges*Daily Close Market (MOC) in USD)/CF Benchmark Exchange's USD Daily Average Trading Volume (ADV)

Choose the exchange with the least liquidity in CF Benchmark, that is, the exchange with the highest number of ADV days. If the pressure is on the buyers, the price of Bitcoin on the CF Benchmark exchange will be higher than Binance. If the pressure is on sellers, the price of Bitcoin on the CF Benchmark exchange will be lower than Binance. You then sell Bitcoin on an expensive exchange and buy it on a cheap exchange. You can estimate the direction of creation/redemption traffic using the premium or discount on ETF transactions and their intraday net asset value (INAV). If ETFs are premium, there will be a stream of creativity. AP shorted ETFs at high prices to create ETFs with lower net asset values. If the ETF is discounted, there will be a redemption stream. AP buys ETFs at a lower price in the secondary market and then redeems them at a higher net asset value.

In order to trade in a price-neutral manner, you need to place USD and Bitcoin on the CF Benchmark exchange and Binance. However, as a risk-neutral arbitrage trader, your Bitcoin needs to be hedged. To do this, buy Bitcoin with dollars and go shortBitMEX Bitcoin/USD Bitcoin Margin Reverse Permanent Swap Contract. Place some Bitcoin security deposit on BitMEX, and the remaining Bitcoin can be split on relevant exchanges.

ETF options

To actually make an ETF casino work, we need leveraged derivatives. The zero-date rights (0DTE) market has exploded in the US. Options that expire in one day are similar to lottery tickets, especially if you buy them with cash (OTM). The 0DTE option is currently the most traded option instrument in the US. Uh, Mofos loves to gamble.

After the ETF has been listed for a while, listed options will begin to appear on American exchanges. Now the real fun begins.

It's hard to get 100x leverage at TradFi. They don't have a place like BitMEX that fits their needs. However, the premium for short-term OTM options is very low, which results in a high leverage ratio. To understand why, brush up on the theory of options pricing by studying Black-Scholes (Black-Scholes).

Degen traders with brokerage accounts that can trade on the US Options Exchange will now have a liquid way to place highly leveraged bets on the price of Bitcoin. The subject of these options will be ETFs.

Here's a simple example.

ETF = 0.001 Bitcoin per share

BTC/USD = $100,000

ETF share price = $100

You think Bitcoin's price will rise 25% by the end of this week, so you bought a $125 call option. Options are OTM because the current ETF price is 25% lower than the current execution price. The volatility is high, but not extremely high, so the premium is relatively low at $1. You can only lose up to $1. If the price of the option rises quickly (over $125), you can make more money from the change in the option premium, and if you just trade the ETF stock itself, you can make 25%. This is a very rough way to explain how leverage works.

Degen from the US capital market is a group of serious people. With these new highly leveraged ETF options products, they're going to screw things up in terms of Bitcoin's implied volatility and forward structure.

Forward arbitrage

Call option — put option = long forward

As lottery buyers cause ETF options to rise in price, the price of parity (ATM) forward contracts will also increase. This provides an opportunity to arbitrage between Bitcoin/USD perpetual contracts on exchanges such as BitMEX and ATM forward contracts derived from ETF option prices.

Futures base price = futures price - spot price

I expect ETF ATM forward base trading to be more expensive than BitMEX futures basic trading. Here's how you trade.

Short ETF ATM forward options by selling ATM call options and buying ATM put options.

Go long on BitMEX Bitcoin/USD fixed expiration date futures contracts with similar expiration dates.

Wait for the price to converge as it nears expiration. This won't be a perfect arbitrage because BitMEX and ETF use different exchange prices to construct Bitcoin's spot index price.

Volatility (Vol) Arbitrage

To a large extent, when you trade options, you're trading volume. The types of ETF options traders and their preferences for expiration dates and enforcement rights are different from those currently trading Bitcoin options on non-US cryptocurrency exchanges. I predict that ETF options trading volume will dominate the global flow of Bitcoin options. Since US and non-US dollar traders cannot interact on the same exchange, arbitrage opportunities will arise.

Direct arbitrage opportunities exist for options with the same term but different execution prices. There will also be more general volatile arbitrage opportunities. There is a significant difference between the volatility of some ETF options and the volatility of Bitcoin outside the US. Discovering and taking advantage of these opportunities requires more trading experience, but I know there will be plenty of French degens licking their lips and wanting to profit from these markets.

MOC process

Since this ETF will cause a surge in the trading volume of ETF derivatives listed in the US, the CF Benchmark Index released at 4 p.m., will become very important. Derivatives derive their value from the underlying asset. Compared to the closing price of ETFs, billions of nominal options and futures expire every day, so matching net asset values is critical.

This will result in statistically significant trading behavior around 4 p.m. EST, not the rest of the trading day. Those who are good at data sets and have excellent trading robots will make huge profits from the inefficiency of these markets.

ETF financing (create a loan)

Centralized lending platforms like Blockfi, Celsius, and Genesis are very popular among Bitcoin holders who want to use Bitcoin as collateral to borrow fiat money. Unfortunately, the dream of an end-to-end Bitcoin economy has yet to be realized. Believers still need to use dirty money to pay for necessities of life.

All of the centralized lenders I just mentioned have gone out of business along with many others. Using Bitcoin as collateral to borrow fiat money is more difficult and expensive. TradFi is very used to taking loans secured by liquid ETFs. Now, as long as you pledge Bitcoin ETF shares, it's possible to get large fiat loans at competitive prices. For those who believe in financial freedom, the problem is to maintain control over Bitcoin and utilize this cheaper capital.

The solution to this problem is to exchange Bitcoin for ETFs. Here's how it works.

APs that can borrow on the interbank market will create ETF shares and hedge against the price risk of BTC/USD. This is a “create-borrow” business. In delta-1 terms, it is the repurchase value of ETF shares.

Here's the process:

1. Borrow dollars in the interbank market and exchange them for shares in ETFs.

2. Sell the ETF's ATM call option and buy the ETF's ATM put option to create a short synthetic forward.

3 The act of creating an ETF unit will generate a positive spread, that is, forward basis > interbank dollar interest rate.

4. Lend out ETF shares in exchange for Bitcoin collateral.

Let's bring Chad in and talk about what he needs to do with his bitcoin.

Chad is a holder of 10 bitcoins, and he needs to pay his American Express card bill in dollars. That bottle of champagne in the club was insanely expensive. Chad found his son Jerome (Jerome), a cunning Frenchman at Société Générale (SocGen). He used to be a puppet of a major financial center, engaged in aggressive futures trading for a while, but then came back (you can't fire anyone in France) and is now in charge of the cryptocurrency trading department. Chad asked Jerome for a 30-day Bitcoin exchange with an ETF. Jerome quotes him -0.1%. This means that Chad will exchange 10 bitcoins for 10,000 shares of the ETF. Assuming that each share is worth 0.001 bitcoin, Chad will take back 9.99 bitcoins after 30 days.

For 30 days, when Chad owned 10,000 shares of the ETF instead of 10 BTC, he borrowed dollars from his TradFi stock broker at a very low interest rate.

Everyone was so happy. Chad can continue to play at the club without selling his bitcoins. Jerome made a financing spread.

The ETF financing business will become extremely important and affect Bitcoin interest rates. As this market evolves, I'll focus on attractive ETF, physical Bitcoin, and Bitcoin derivatives financing deals.

Your size is my size

In order for these trading opportunities to last a long time and allow arbitrators to execute them on a sufficient scale, the Bitcoin spot ETF complex must trade billions of dollars worth of stocks every day. On Friday, January 12, the total daily volume reached US$3.1 billion. This is very encouraging, and trading volume will only increase as various fund managers begin activating their vast global distribution networks. By trading the financial version of Bitcoin through a flow method within the TradFi system, fund managers will be able to get rid of the terrible rewards that bonds bring in the current global inflationary environment.

We are in the early stages of this shift to continued global inflation. While there is a lot of noise, managers who manage the correlation between stocks and bonds will clearly realize that the situation has changed over time. When interest rates are zero, bonds no longer play a role in the portfolio, especially in the face of ongoing inflation. The market will slowly realize this, and a hasty exit from the more than $100 trillion bond market would destroy the country. These fund managers must then find another asset class that has no significant correlation with stocks or any TradFi asset class. Bitcoin has done that.