Over the past decade, the cryptocurrency market has undergone a dramatic transformation, evolving from a niche sector into a major financial arena attracting substantial institutional interest.
One notable development was the so-called “widowmaker” trade involving Grayscale’s Bitcoin Trust. This strategy allowed arbitragers to capitalize on premiums by investing in the trust, drawing billions of dollars into the crypto space. However, the trade’s eventual downfall underscored a critical gap in market infrastructure. Many institutional investors found themselves overpaying for crypto exposure via the trust before Bitcoin ETFs became available.
In recent developments, another significant trading strategy, the “Japan carry trade,” has illustrated the market consequences of overcrowded trades. This scenario creates a rush among arbitragers to exit positions before being caught in unprofitable trades.
Scott Melker, host of The Wolf of All Streets Podcast, and John Divine, head of OTC trading at BlockFills, recently discussed the evolution of Bitcoin and the broader crypto market since the decline of the “widowmaker” trade and its role in attracting institutional players.
Divine provided a historical overview, tracing Bitcoin’s journey from its 2009 inception to the emergence of centralized exchanges like Kraken and Coinbase. This evolution enabled Bitcoin to be used as collateral for dollar borrowing, paving the way for forward markets, perpetual swaps, and futures contracts.
He detailed the “cash and carry trade,” a strategy where investors buy spot Bitcoin and sell it forward in a contango market structure. Initially yielding 25-30% annualized returns, this strategy drew significant institutional interest, though returns have since stabilized around 10%. Despite this, the trade remains appealing to institutional investors familiar with similar approaches in traditional commodities like gold and oil.
The discussion also covered recent developments such as the approval of Bitcoin ETFs and the anticipated options on these ETFs. Divine expressed surprise at the swift approval of Ethereum ETFs before Bitcoin ETF options. The introduction of such options could potentially reduce Bitcoin’s volatility, enhancing its appeal to institutional investors.
Melker and Divine explored the broader implications of institutional involvement in Bitcoin, noting that increased participation could lead to reduced volatility. Melker observed that recent market cycles have seen diminished drawdowns compared to previous periods. Divine emphasized that increased institutional participation would further legitimize Bitcoin as a decentralized alternative to fiat currencies, broadening its acceptance and potential impact.
