The Casino Enters "Peak Complexity"
Options on Bitcoin Futures? That's...serious leverage
Finance hasn’t been simple for a long time. Starting more or less in the 1980s, traditional instruments like stocks and bonds were joined by futures, options, private equity, junk bonds, and bespoke derivatives like credit default swaps.
“Quants” now build “black box” trading algorithms to arbitrage the relationships between these things, and clients place bets on the results without knowing how the numbers are crunched. Very little of this has anything to do with value creation in the real world, and calling today’s financial markets a “casino” is not hyperbole.
But we haven’t seen anything yet. The invention of cryptocurrencies, distributed ledgers (i.e., blockchains), and tokenization has opened the floodgates to a whole universe of new instruments and strategies that few investors over the age of 50 can ever realistically hope to understand. Some examples:
Options on Bitcoin futures to begin trading Feb. 24
(CryptoSlate) - CME Group announced on Jan. 29 that it would introduce options on its Bitcoin (BTC) Friday futures. The new contracts will launch on Feb. 24.
According to the announcement, the contracts are CME’s first financially settled crypto options product, although they are still pending regulatory approval.
Giovanni Vicioso, CME Group Global Head of Cryptocurrency Products, stated that the product aims to provide traders with tools to manage short-term Bitcoin price risk. He added:
“Building on the success of our Bitcoin Friday futures, the smaller size of these contracts, along with daily expiries, offer market participants a capital-efficient toolset to effectively adjust their bitcoin exposure.”
Unlike traditional weekly options, these contracts will feature expiries every business day, Monday through Friday, allowing for more precise risk management.
The announcement also highlighted that the new options’ financial settlement adds convenience for traders seeking to hedge Bitcoin price movements without the complexities of physical settlement.
New ETFs that combine bitcoin exposure and options are coming in 2025
(CNBC) - Bitcoin ETFs were a hit with investors in 2024, and now asset management firms are starting to build out ways to combine crypto and derivatives in exchange-traded packages.
New products are set to roll out this month. Asset manager Calamos announced Monday that it will launch a structured protection ETF that aims to give investors a way to capture some of bitcoin’s upside with 100% downside protection.
The fund will combine options exposure on the Cboe Bitcoin U.S. ETF Index with Treasury holdings and is designed to be held for 12 months. The exact upside cap will be determined Jan. 22, based on options pricing. It will be traded under the ticker CBOJ.
“For folks looking to access [the bitcoin] space, they want to do so in a risk-managed framework, or something that makes a little more sense for their portfolio,” Kaufman said. He also thinks investors will hold the Calamos fund in conjunction with the pure-play bitcoin ETFs.
Tokenized Everything
Tokenization is a broad trend in which pretty much everything from equities to farmland is put on blockchains to be sliced, diced, and traded. Here’s an AI-generated overview:
Tokenized financial assets leverage blockchain technology to digitize and streamline the issuance, trading, and management of various assets. Here are some key points about tokenized financial assets:
Equity: Companies can tokenize their equity, allowing for fractional ownership and easy transferability. This democratizes investment by enabling smaller investors to participate in what were previously high-barrier markets.
Funds: Tokenized funds offer similar benefits to tokenized equity, providing liquidity and accessibility to investment funds that might otherwise be illiquid.
Debt: Tokenized debt securities can be issued and traded more efficiently, reducing the time and cost associated with traditional debt issuance processes.
Real Estate: Real estate assets can be tokenized, allowing investors to buy and sell fractional ownership of properties. This increases liquidity in a traditionally illiquid market.
Intellectual Property: Patents and other forms of intellectual property can be tokenized, facilitating easier trading and monetization of these assets.
Tokenization is gaining momentum at an institutional and governmental level, with major financial institutions and organizations like the World Bank and Euroclear actively developing and implementing tokenization technologies. This trend is expected to continue, with projections suggesting that tokenized assets could reach up to $16 trillion in market size by 2030, according to some estimates.
The process of tokenization involves creating digital tokens that represent ownership or rights to real-world assets on a blockchain. These tokens can be traded on various exchanges, providing increased liquidity and accessibility to a wide range of investors.
Here’s an example of tokenization:
Ondo Finance introduces Tokenized US Treasurys on XRP ledger
(The Street) - Ondo Finance partners with XRP Ledger to introduce tokenized U.S. Treasury debt products, enabling 24/7 minting and redemption via Ripple USD (RLUSD).
This morning, Ondo Finance announced an expansion of its offerings with the launch of tokenized U.S. Treasury products on the XRP Ledger (XRPL). They've introduced the Ondo Short-Term U.S. Government Treasuries (OUSG), backed by assets from the BlackRock USD Institutional Digital Liquidity Fund (BUIDL), marking a significant step towards integrating traditional finance with blockchain technology.
The move allows institutional investors to mint and redeem assets around the clock using Ripple USD (RLUSD), a stablecoin pegged to the U.S. dollar. It also highlights a broader market trend this year of tokenizing Real World Assets (RWAs) on blockchain platforms, where traditional financial instruments are converted into digital tokens.
“Real-World Assets”
Notice how “real-world assets” (RWEs) have become just another asset class. Also notice the emphasis on “risk management.” This is a standard sales pitch for hypercomplex instruments that seems to work on traditional money managers who assume that if they can’t understand what a mathematician is telling them, it must be true.
An infamous example of this is Fed chair Alan Greenspan trying to justify derivatives in 2005, just before the biggest derivatives bust in history:
The use of a growing array of derivatives and the related application of more sophisticated approaches to measuring and managing risk are key factors underpinning the greater resilience of our largest financial institutions... Derivatives have permitted the unbundling of financial risks.
What we have found over the years in the marketplace is that derivatives have been an extraordinarily useful vehicle to transfer risk from those who shouldn't be taking it to those who are willing to and are capable of doing so.
This Is Not a Criticism of Cryptos or Blockchains
It’s a criticism of hyper-complexity and our weakness for smart-but-unwise people offering higher returns and/or lower risks if we just trust them. The derivatives bust of 2008 nearly wiped out the global financial system. And compared to the “peak complexity” world that’s clearly coming, those were much simpler (read: less-risky) days.
This is stunningly stupid. Thanks for pointing it out. Wow!
“cryptocurrencies…has opened the floodgates to a whole universe of new instruments and strategies that few investors over the age of 50 can ever realistically hope to understand.”
Well, if that’s true then “we” better hope the regulators are young’uns, right?
After all you don’t want products that don’t work, right?
Unfortunately, that ship has already sailed. Bitcoin, to say the least, is already misunderstood - especially by young people - so doubling down on it is going to be a disaster. (Old) news flash: Bitcoin can’t work practically. It works on paper and it can sort of work slowly, but not at scale and in real time. It’s still in the “tulip” or “beanie baby” bubble stage: The vast majority are simply “held” offline (i.e., not used in transactions) so the limits of the networking system haven’t revealed themselves - yet. So, the myth and delusion continues. As Jeanine Piero of Fox News says, “I bought some bitcoin and it just simply goes up, like magic!” She doesn’t use it, and nor do the majority of other “hodlers”. But as long as that dynamic holds, BC can continue to rise just on a supply-demand basis, supply actually decreasing as the ETFs collect more and more of them making them unavailable for sale (unless their investors sell), but more importantly, unavailable for transactions.
I actually think more quinquagenarians understand that than their kids but time will tell.
And so will the consequences of leveraging fantastic things. It could actually quicken the revelatory process. Bitcoin is already not what it was intended and making it a casino chip is the ultimate mockery.
Remember “Satoshi Nakamoto’s” white paper and “his” first email about it? It was about simplicity and privacy and decentralization. A technological antidote to human nature, fiat and central banking. Privacy was the first to go, and if these leveraging products are introduced then simplicity will die as well.
Beware of Nakamoto’s revenge!