How to Execute 2 Types of Crypto Trading, Per Billionaire Bankman-Fried
- Sam Bankman-Fried traded lucrative arbitrage opportunities in crypto and became a billionaire by 29.
- The FTX CEO told Insider about the 2 types of trading opportunities in the $2 trillion market today.
- He also shared why he is “a huge fanboy of Solana” amid the rise of decentralized finance.
In just four years, Sam Bankman-Fried has become the richest person in crypto with a net worth of $16.2 billion and an empire that encompasses a crypto hedge fund, centralized and decentralized exchanges, as well as high-profile sports and esports sponsorships.
In 2017, Bankman-Fried, a former trader on the international ETF desk of Jane Street, launched a crypto-trading firm called Alameda Research, which now manages over $1 billion in digital assets. In 2019, he co-founded FTX, a crypto exchange that was last valued at $18 billion after a $900 million funding round in July.
The majority of his wealth is tied up in FTX’s equity and tokens (FTT), according to Fintech Zoom, but the rapid ascent of the 29-year-old billionaire also has had a lot to do with his million-dollar trades that generated 10% or $20 million daily returns in 2017.
Back then, there was no
in crypto but massive excitement and attention enveloped the market as bitcoin’s price surged amid a raging bull cycle, Bankman-Fried recalled.
“For the first time, there’s absolutely massive volume and flow in crypto. People were buying and selling a lot of tokens, but there were no liquidity providers or very few of them,” he told Insider in an interview at the SALT NY Conference.
The lack of liquidity helped enable lucrative arbitrage opportunities that exploit bitcoin’s so-called kimchi premium, Japan premium, and even price divergences on two different US exchanges.
“You just see a lot of retail coming in and buying on one platform, the price would go up there, and liquidity providers could not handle it,” he said. “That market, which has diverged completely from other markets, created a big trading opportunity, big arbitrage that ultimately means customers were not able to get good prices on their trades.”
The crypto market has become substantially more liquid today as crypto-native liquidity providers like Alameda and other multi-asset class liquidity providers such as high-frequency and quant trading firms have jumped in to trade crypto over the last four years.
“Collectively, the capital at play to keep markets in line has been able to get closer to the capital being deployed into crypto so that markets have fewer dislocations, less arbitrage, less good trading, but more fair prices and more volume,” he said.
The 2 types of trading opportunities in crypto today
As the crypto market becomes more liquid, trades that generate 10% daily returns are no longer available to even the most resourceful traders. But as trading volumes go up, making millions per day is still the reality for many crypto whales.
Bankman-Fried observed that arbitrage traders are more likely to see a 10 basis-point divergence, or one-tenth of a percent, instead of a 10% return when there are heavy inflows into a particular crypto platform.
He added that when markets get really stressed, divergence will come back now and then. For example, during the crypto crash a week ago, bitcoin fell below $40,000 on the crypto exchange Huobi while it bottomed out at around $42,830 on Coinbase.
“Any day when you see a 25% move in crypto markets, there’s going to have been some times during that day on some platforms where things were really out of line,” he said. “But I think that we have moved past the era where this was a regular occurrence.”
However, there are still two types of trading opportunities in the market today, according to Bankman-Fried.
One type of trading is quantitative strategies, or statistically trained models looking for arbitrages to trade in the markets.
Another type of trading, which has grown enormously big over the last year, usually takes the form of staking and yielding.
“It’s a weird type of trading, instead of actively doing arbitrages or being a market maker and provide liquidity, there are a lot of places in crypto where you can just click a button and earn 20% per year,” he said. “And those can scale up to billions of dollars.”
The opportunity to generate these fixed or semi-fixed returns derives from a huge demand for dollars in crypto. Because there’s more buying demand than capital available to buy crypto, the second-order effect is that investors are willing to pay 20% per year in order to get those dollars, he explained.
On top of that, banks, which are traditionally the biggest sources of capital and loans, have been slow to move into crypto, therefore worsening the dollar shortage situation.
“What you’ll see as a reflection is that on borrow lending platforms, like on FTX’s borrow lending order books, you’ll often see somewhere between 5% and 30% per year interest rates being basically bid up by those players and then supplied by other players,” he said. “You’ll see quant firms just supplying capital and passively earning however much on those dollars.”
Scaling on Solana amid the rise of DeFi
Bankman-Fried views decentralized finance as an area with enormous potential despite being a niche corner of the crypto market today.
He believes that the “enormous upside” of the borrow lending protocols in DeFi will lie in its ability to “create a lot more efficiency in what has historically been a behind-the-scenes, inefficient, and sometimes predatory area of traditional finance,” he said.
“They are the bespoke borrow lending desks that will loan out stocks and charge whatever they want to charge, there’s no open market, there’s no efficiency there,” he added. “And you have to have the right relationships to have those. That’s not how you create an efficient market, that’s how you create a gated market.”
The ability to scale is just as important as efficiency in DeFi, and that’s why Bankman-Fried is impressed with what the layer-one protocol Solana (SOL) has built.
“I’m a huge fanboy of Solana,” he said. “The vision to be able to scale to the point that will be necessary is just a big thing a lot of projects miss. Your goal isn’t to build a product that will be usable for the next two years, especially given how nascent DeFi is today. Your goal is to build a product that, 10 years from now, will be usable.”
Solana, which is known for its cheap and fast transactions, crashed on Tuesday because of a surge in network activity. Its transaction load peaked at 400,000 transactions per second, which is 10 times as many transactions as any network has ever supported, according to Bankman-Fried.
He likened the episode to a “stress test” for the protocol that illustrated “what happens if you jack things up to ridiculous levels.”
“It’s not good that it happens but you would rather find out now,” he said, “that in order to scale up to another 10x in capacity, there needs to be a fork, an upgrade in the network rather than learn that in three years when continuous demand gets there, and then you have to start from scratch.”
Read here about Ethereum price.
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