The Crypto Repo

One of the hallmarks of a liquid market is the ability to short.  Unlike most people, I don’t see shorting as bad or good.  It’s a function of a market and can bring a lot of discipline to a marketplace.  I remember when the Chinese banned shorting in their stock market.  That is a signal that a market is rigged.  Shorting is a valuable economic function to markets if there are transparent rules around shorting.

Despite the hullabaloo, crypto is an infant market that isn’t liquid.  Futures at the CBOE and CME are a great development because they allow holders to hedge.  They also allow for transparent shorts.  Except, it’s only for Bitcoin.  There are thousands of other cryptocurrencies out there.  Each of them has risk associated with it and each of them needs market discipline.

Many of the people that are trading crypto are unsophisticated.  By this, I mean that they are familiar with buy and hold strategies, but not familiar with other strategies they can use to manage their risk of holding.

Various people are thinking about how to develop more depth in the crypto marketplace.  No doubt, one day we will see crypto bonds with an interest rate attached to them.  No doubt we will see products designed to hedge the risk of those bonds, and a derivative swaps market that looks similar to the US Treasury swap market.  Crypto will eventually have an options market with calls, puts and all the strategies that allow you to manage risk and create edge in that kind of market.  In the short term though shorting is hard.

I read about this effort by Alex Grebnev.  He has developed a platform called Oxygen to try and create a Repo market around crypto.  A Repo market allows holders of an asset to lend it out and earn a rate of return, while the entity that borrows it shorts the asset.

The thing about repos is everyone has to assume counterparty risk.  There is the threat that the other side won’t perform.  That is a “cost” to the transaction.  Traditionally, banks act as custodians and intermediaries for repos.  They charge for it.  In Oxygen’s system the platform extracts a fee.  In order to participate, you have to own their cryptocurrency, Oxygen.

I don’t think this will be the only crypto repo platform out there.  In the Treasury market there are plenty of them.  However, I find it interesting that they are starting to be built.  It’s good for the crypto ecosystem and it will be interesting to see if they are successful or not.