ETF wif hat -- Arthur Hayes

Jan 17, 2024

The spot BTC ETF was approved a week ago.

Arthur thinks its ridiculous that the Winklevoss twins applied for a spot ETF in 2013 and the SEC continuously denied them for over a decade.

But now that the ETF has been approved, Arthur goes over a series of arbitrage ideas that will likely exist as a result of the ETF:

Then Arthur talks about his general views on the price action post ETF approval, along with his longer term views.

To create shares of the ETF, money is sent to buy BTC, and that BTC is converted into the equivalent number of shares of the ETF
Redemption is the opposite process
Redemption / creation is batched after US market close (4PM EST)
Since the buying/selling of BTC will likely only be done on select exchanges, there should be a price discrepancy across the select exchanges and all other exchanges
If there is more selling than buying, an arb exists to sell BTC on expensive exchange and buy it on the cheaper one (vice versa if more buying than selling)

Arthur believes the implicit funding on options will be higher than on perpetual and/or regular futures (generally)
- Use options to construct a synthetic forward (short ATM put, long ATM call)
- Short the regular or perpetual future
- You make the difference between the synthetic forward funding minus the perps/futures funding)
This arb won’t always exist, but when it does, this is the way to make the spread
- In a bull market, this arb should exist as folks pay to get long BTC equivalents

BTC ETF options vs. spot BTC options with the same maturity and strike prices may be trading at different implied volatilities (aka price)
The volatility surface (shape made up by plotting across maturities + strikes) may also differ — this lends itself to some exotic options spreads to close the gap

ETF redemption / creation is done on US market close (4PM EST)
Especially as more spot ETF derivatives come into the pictures, we will get more hedging aka trading volumes close to the market close + open
With a good data set and the compute infra to process + execute, there should be plenty of price discrepancies and other arb opportunities to take advantage of

It’s much easier to use the ETF as collateral to borrow or lend
In the case where the synthetic forwards funding is greater than the risk free rate, a desk can profit by:
- Borrow cash at the risk free rate
- Use the cash for ETF share creation
- Construct a synthetic short forward (short ATM call, long ATM put)
- Synthetic short offsets the spot ETF to create a delta neutral position
- Lender makes the synthetic futures funding rate minus the risk free rate
The double dipping opportunity is to further lend out the ETF for a period that expires before the synthetic forward’s expiry
- Someone with BTC who doesn’t want to sell it but needs $$ may be interested in swapping for the ETF for a period

BTC is so uncorrelated with other assets, this is great for PMs as they look for uncorrelated assets to optimize portfolios
The ETF listing was underwhelming but Arthur thinks its very unlikely this was anywhere near the top since money printers are going to go brr imminently
Arthur is not adding more crypto risk until we are past the middle of march and the fed rate decisions are behind us
- We might have some turbulence, but BTC should be at or above the prior ATH before EOY

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