As the record-breaking crypto rally marches on, Wall Street is drawing on tried-and-true trading strategies – from price arbitrage to futures trading and options writing – to profit from the burgeoning popularity of virtual currency.
And firms big and small are bringing home the digital bacon in the now-$2.5 trillion crypto market.
New Market, Old Tricks
Last Wednesday, the price of Ethereum Classic soared over $100 on Coinbase, while priced at a far more palatable $80 on other exchanges. Even though the variance lasted just a few minutes, it provided a significant arbitrage opportunity for trading firms to buy from one venue and sell to another.
It’s an example of how traditional investing strategies can offer heaping returns in crypto, as low rates and crowded markets sully returns in stocks, bonds, and other currencies. But it’s far from the only example:
- There’s the crypto basis trade, by which an investor goes long the spot rate and short the futures. At Bitcoin’s recent mid-April peak, December futures were nearly 4% higher than August, which were about 2% higher than the spot rate. That gave speculators an opportunity to bet big on rising prices.
- And firms like Fasanara Digital are trading on statistical arbitrage, gambling that gaps between tokens will eventually close – like when Ethereum skyrockets but Bitcoin doesn’t.
There’s even the “kimchi premium,” by which Bitcoin tends to trade higher on South Korean exchanges than elsewhere. The premium, caused by searing crypto demand and few high-return investment options in South Korea, has steadily risen since late 2017, reaching upwards of 50% at times.
Bring On The Whales
It’s not just the boutiques capitalizing. Goldman Sachs is back on the crypto bandwagon, thanks to growing demand from institutional clients. Despite issuing anti-crypto warnings in prior years, the Wall Street heavyweight was actually one of the first banks to set up a crypto desk in 2018 – which it quietly abandoned after bitcoin’s spectacular price crash that year.
But last week, the bank formalized the set-up of a reimagined bitcoin desk, executing the first trades of its new crypto operation.
Simply going long crypto over the past year has been one of the most profitable (and simple) ways to tap into the boom. And for those opting for advanced trading strategies…competition is heating up.