How Bitcoin’s own arbitrage trade helped crypto evolve to survive Japan’s

The cryptocurrency space has evolved significantly over the past decade, evolving from a niche market to an arena attracting significant institutional interest.

On the way up, there was a juicy, well-documented so-called “widow maker” trade. Arbitrageurs piled into Grayscale’s bitcoin trust and were able to make a premium. The trade pulled in billions of dollars and kept working — until it didn’t. In a way, it illustrated the incredible need for market infrastructure and the perverse reality that many institutional players had to overpay to gain exposure to crypto through a locked trust before Bitcoin ETFs even existed.

This week, another popular trade—the so-called Japanese carry trade—also illustrated the impact a crowded trade can have on the market until it works. That creates a rush by referees to sort things out and avoid being the last one caught in a losing position.

In a recent discussion, Scott Melker, host of The Wolf of All Streets Podcast, and John Divine, head of OTC trading at BlockFills, discussed how Bitcoin and the cryptocurrency markets have come since the end of “widowmaker” trading and how this has attracted institutional players to crypto.

John Divine provided a historical perspective by tracing the market’s evolution from its inception in 2009 with the bitcoin protocol. He explained how the market transitioned from peer-to-peer transactions to the establishment of centralized exchanges such as Kraken and Coinbase. This shift facilitated the use of bitcoin as collateral for dollar borrowing, leading to the creation of a futures market and eventually the introduction of perpetual swaps and futures contracts.

Divine detailed a “cash and carry trade,” a strategy in which investors buy bitcoin spot and sell it forward in a contango market structure. Once yielding 25% to 30% annually, the trade has attracted institutional capital familiar with similar strategies in traditional markets like gold and oil. While yields have plateaued at around 10% annually, the trade remains a major draw for institutional investors.

The conversation also discussed approval of bitcoin ETFs and the potential for options on those ETFs. Divine expressed surprise that the ethereum ETF was quickly approved ahead of bitcoin ETF options. These options could reduce bitcoin’s volatility and make the market more attractive to institutional investors.

Melker and Divine discussed the broader implications of bitcoin’s growing acceptance among institutional investors. Melker noted that institutional participation could lead to reduced volatility, citing the reduced declines in recent cycles compared to previous cycles. Divine emphasized the benefits of increased market participation, arguing that this would help spread bitcoin’s message and its potential as a decentralized, sound money alternative to fiat currencies.