“The Black Swan” author Nassim Nicholas Taleb have criticized in the past Coin base (NASDAQ:COIN) CTO Balaji Srinivasan‘s Bitcoin (CRYPTO: BTC) trade, which the latter structured based on the belief that the cryptocurrency’s price could rise to $1 million in 90 days due to the rapid devaluation of the dollar.
What happened: Taleb asked a question about Twitter ask how the trade can be used as an arbitrage opportunity.
“Tech quiz. Show it’s arbitrary: Sell him the forward and buy x btc to lock in a profit. What’s the optimal x?” Taleb asked and later said that “the answer is only 1 if Btc has no volatility.”
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The bet: Believing that Bitcoin will reach $1 million in value in 90 days due to the rapid devaluation of the dollar, Srinivasan has asked his counterparty to buy a Bitcoin while he will send $1 million. If Bitcoin stays below $1 million within 90 days, the counterparty gets to keep both the Bitcoin they bought and $1 million of USD coin (CRYPTO: USDC) that Srinivasan staked. If Bitcoin surpasses $1 million in 90 days, Srinivasan gets to keep the Bitcoin bought by the counterparty and the $1 million worth of USD Coin bet by him.
Author’s view: It is unclear how exactly Taleb would have structured the trade.
Here’s a potential way to take on Srinivasan’s bet with no chance of 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 such as the possibility of counterparty default, brokerage costs and financing 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 that Bitcoin reaches $1.1 million in value at the end of 90 days. In this case, Srinivasan’s counterpart must deliver one unit since they entered the bet. However, the counterparty also profits from the extra token they had as collateral. As a result, the total profit in this scenario is $1.046 million, which is the difference between the current price of one Bitcoin and the initial acquisition cost of two tokens.
Scenario 2: Let’s consider that Bitcoin fails to surpass $1 million in value and remains, for example, at the current price of $27,000 at the end of the proposed 90 days. The counterparty will profit from the $1 million worth of USD coins staked by Srinivasan which they get to keep while both Bitcoins originally acquired could be sold at current value to reduce the original cost.
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