Benzinga - “The Black Swan” author Nassim Nicholas Taleb has criticized former Coinbase (NASDAQ:COIN) CTO Balaji Srinivasan's Bitcoin (CRYPTO: BTC) trade, which the latter structured based on the belief that the cryptocurrency’s price could surge up to $1 million in 90 days due to the rapid devaluation of the dollar.
What Happened: Taleb raised a question on Twitter asking how the trade could be used as an arbitrage opportunity.
"Technical Quiz. Show it is arbitrageable: Sell him the forward & buy x btc to lock-in a profit. What is the optimal x?" Taleb questioned and later said the "answer is only 1 if Btc has no volatility."
The sad part is that when I was shown @balajis' trade, I was not surprised. It's called "trading against himself", something lunatics do under the influence.Technical Quiz. Show it is arbitrageable: Sell him the forward & buy x btc to lock-in a profit.
What is the optimal x? https://t.co/WEyWmGUUTD
— Nassim Nicholas Taleb (@nntaleb) March 19, 2023
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The Bet: In belief that Bitcoin will hit $1 million in value in 90 days due to rapid devaluation of the dollar, Srinivasan has asked his counter-party to buy one Bitcoin while he will send $1 million. If Bitcoin stays below $1 million in 90 days, the counterparty gets to keep both the Bitcoin they bought as well as the $1 million worth of USD Coin (CRYPTO: USDC) that Srinivasan bet. If Bitcoin surpasses $1 million in 90 days, Srinivasan gets to keep the Bitcoin bought by the counterparty and the $1 million worth USD Coin bet by him.
Yes. Just moving money for the bet. We can do it via smart contract, but for simplicity old-fashioned escrow may work.The escrow person would need one BTC address and one ETH address (for the USDC). The assets would sit on chain for 90 days.
If BTC
— Balaji (@balajis) March 18, 2023
Author’s Take: It is unclear how exactly Taleb would have structured the trade.
Here's one potential way to take on Srinivasan's bet without the possibility of a loss. It is noteworthy that a Twitter user named “Noise Trader” first proposed this idea.
Of course, there are many ways to construct the trade and certain caveats like possibilities of counterparty default, brokerage costs and funding costs are discounted in this one.
To structure the trade, the counterparty could buy two Bitcoins at the current price of $27,000.
Scenario 1: Let's consider Bitcoin hits $1.1 million in value at the end of 90 days. In this case, Srinivasan's counterparty has to deliver one unit since they entered the bet. The counterparty, however, also makes a profit on the additional token they held as hedge. As a result, the total profit made in this scenario stands at $1.046 million, which is the difference between the current price of one Bitcoin and the original acquisition cost of two tokens.
Scenario 2: Let's consider Bitcoin fails to surpass $1 million in value and stays, for example, at the current price of $27,000 by the end of the proposed 90 days. The counterparty will profit from $1 million worth of USD coins bet by Srinivasan that they get to keep while both the Bitcoins acquired originally could be sold at the current value to pare the initial cost.
Most disturbing finance error: many like the lunatic Balaji mistake the forward for the expectation of future spot. It's not and we've known since 1923 that Forward-Spot is simply a mechanistic cash and carry arbitrage relationship.You learn that in undergrad finance 101.
— Nassim Nicholas Taleb (@nntaleb) March 19, 2023
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