WBD384 Audio Transcription
A Quant Trader’s View on Bitcoin with Sam Trabucco
Interview date: Wednesday 11th August
Note: the following is a transcription of my interview with Sam Trabucco. I have reviewed the transcription but if you find any mistakes, please feel free to email me. You can listen to the original recording here.
In this interview, I talk to Sam Trabucco, Co-CEO and Quant Trader at Alameda Research. We discuss the role of a market maker, sentiment & momentum in Bitcoin and if there is too much leverage in the system.
“Long term, yes bitcoin’s price is moving, in general it’s moving up...the short term moves where sometimes it goes up 20% then down 20% the next week, that’s driven by the leverage I think more than anything.”
— Sam Trabucco
Interview Transcription
Peter McCormack: Hi, Sam. Nice to meet you, finally. Congratulations on all the work you've been doing. How are you?
Sam Trabucco: I'm good. Crypto's been busy again; trading's been taking up a lot of my time again, but always fun when this happens, so I don't mind.
Peter McCormack: Well, one of my producers, Danny, is a huge fan of yours. Usually, I pick all the guests, but he's been nagging me for a while, saying, "We need to get Sam on; you need to get Sam on", so we've got to thank Danny for this.
Sam Trabucco: Well, yeah, thank you, Danny!
Peter McCormack: All right. Listen, I've got a lot I want to ask you about. I'm not a trader, just for context, because I'm shit at it. I will buy spot and I do hold, and maybe three or four times during this bull market, I've gone out and bought because I felt like it's been a good buying time, but I'm not a trader.
I have plenty of traders who listen to the show, both successful and terrible traders, because they email me, so I've got a lot of questions to work through with you. But, just as a starting point, it's always good to intro new guests who haven't been on the show before. Do you just want to tell people a little bit about yourself and what it is you do now?
Sam Trabucco: Yeah. So, growing up, I was always one of those maths kids who did maths competitions and stuff, so I was doing that over at high school and then went to college for maths and computer science. Sam Bankman-Fried, the founder of Alameda and FTX, and I went to the same maths camp during high school, and then we also went to MIT at the same time, so that's how I know him.
Then, after graduating, at this point I'm still not into crypto, but after graduating, I did a trading internship during college at a quant trading firm called Susquehanna in the US, and just went back after graduating; I was doing quant trading there in more traditional assets like bond ETF arbitrage, things like that, and I was also working on their sports stuff, like sports betting.
A few years in, I started realising these things about the crypto market which looked insane from the perspective of someone from a quant trading background; it's 2017 or so. You would see things like Bitcoin's trading 1% or 2% apart on the two biggest spot exchanges in the US. It turns out it's not just a data error, you could actually buy on the cheap one and send it to rich one and just lock that in; it was shocking to me.
So, I left and worked on my personal trading for a while and I moved to San Francisco, just because I wanted to, which is where Sam Bankman-Fried was working on Alameda at the time. I got to talking to him at some point and I just joined and, yeah, have been at Alameda ever since.
Alameda's, at this point, basically the biggest quant trading firm in the space. We're trading every liquid market on every real exchange, I guess. We're a 24/7 operation, market making on most of the exchanges as well for various projects and for various reasons. All of our trading's basically 100% automated, like touch exchange websites, so we're only using the API in our internal tool.
My personal focus, I recently became the co-CEO; I focus a lot on risk management and stuff and broader strategy development, but when trading's quite busy, I'll be in the trenches with everyone else.
Peter McCormack: So, tell me about maths camp; is that like football camp but for maths? Is it exactly what I imagine it would be?
Sam Trabucco: Kind of. Yeah, you do eight hours of maths a day. It's basically intended to introduce high school kids to college level maths, so you'll do things like linear algebra, analysis, things you typically only start seeing during a maths undergrad, you'll get a taste of during high school.
Peter McCormack: Nice one. Okay, so quant trading is not something I completely understand; it's been explained to me a few times by my friend, Travis Kling, over at Ikigai, and I still don't understand it. So, can you explain quant trading for me and the people who are listening?
Sam Trabucco: Yeah, sure. So, normal trading, or what most people will be doing if they're doing any trading, is picking a time that they want to buy something they want to buy, like maybe you decide you want to buy Bitcoin if it gets below X price and so you do it, and you'll maybe do at most like four or five big trades per month or something like that.
In quant trading, generally, we're doing millions of trades every single day. The impetuses for those trades obviously have to have a much lower bar; we can't have a million great reasons to want to do a trade every day.
So, what we're really doing on some level is we're saving a bunch of data; every time every coin moves, we save the price, we save the timestamp, we save all these things for every product in the world, basically, and we run these sometimes fairly intense studies on, "Okay, if we always bought Bitcoin every time this small thing happens, every time the premium of this future got above the premium of this other future, what would happen?"
Most of the time, these studies will yield, "Oh, you'll probably lose money", but sometimes the studies will tell us, "Oh, yes; this actually does make sense on average. If you do this every single time it happens; if it happens 1,000 times a day, if you do it every single time, then on average you will make money". That's the kind of thing we're always looking for. We're looking for these strategies that we can automate to make money with all the time. That's an example of one class of things we're doing.
We're also doing other things, like for various exchanges and for various projects in the past that we've made agreements to market make, which means that we agree with them about size and width and, once we've agreed on those, we are always making markets of that size, at that width, on various order books.
It's fairly well-known at this point that we're a primary market maker for FTX; every time FTX lists a new market, we're providing liquidity there and also their old markets. We're able to do that, because part of what we've built in becoming such a big quant trading firm is the infrastructure that allows us to be making 24/7 quotes, like updating them very quickly in response to changes in prices very quickly. That goes hand in hand with the market making business which we've also been able to build out.
Peter McCormack: Right. I'm going to come back to market making, because I want to ask about that separately. But on the quant side, you're really looking for patterns, profitable patterns to take advantage of? How much of that is automated versus decisions being made by humans?
Sam Trabucco: Right. Yeah, so crypto, it's been around for a while; it's gotten more mature I think on some level and trading, in some ways, has gotten fairly predictable. Something I talk about on Twitter a lot is our trading around liquidations and the ways in which that's gotten predictable.
So first, some brief background. The crypto trading world has more liquidations, especially public liquidations, than you'll see literally anywhere else in the world. That's enabled because of the way crypto's margin structures work, where exchanges let you get really high leverage and then their means of calling you on that leverage if your position goes against you; it's just by sending a market order into the market. This can cause all kinds of short-term price movements that you wouldn't otherwise expect.
The exchanges tell you about it; they tell you, "Oh, this is a liquidation order", or some of them do, a lot of them do, but you can really do pretty cool things around this. For a while, this was something we did quite manually. We would get alerts, like, "100 liquidations are starting", and I would watch the order books and be able to tell when they were going to be over.
It turns out that, because the liquidations are very aggressive because they're sending market orders into the order book, you always want to trade against them. So, when there'd be a bunch of short positions getting liquidated, it would always cause a big peak that would go right back down. So, you want to sell to the peak and vice versa.
For a while, yeah, that's something I was doing manually. It's gotten predictable enough that we've been able to automate it, and that's the pattern that always happens with our best trading strategies. We have a team of traders who's always watching the markets. We feel that we start to understand things that we are trading manually and then, once they happen often enough and we're able to automate it, then that's what we do.
Peter McCormack: Yeah. So, SBF talked about this recently; he put out a tweet thread talking about leverage in the system. Also, I've talked to one of trader friends, Willy Woo, who you probably know very well, but he talks about, most of the time, he's not trading anything beyond 1.5 up to max 3 leverage, depending on market conditions, yet a lot of these exchanges are offering, 10, 25, 100, I even think, did Binance offer 125 at one point and maybe still does?
It's something also that I think, where I'm in the UK that the FCA have cracked down upon. What's your view on this? Do you think there shouldn't be any moral authority over how much leverage there is, or do you think there is some responsibility around that?
Sam Trabucco: So, as an experiment, imagine that you're going to put on 100X leverage long position, and this isn't quite right just because the calculation's a little bit off, because there are initial margin conditions that you have to think about, but let's pretend that that means that if your position goes 1% against you, then you get liquidated; that's not quite right but it's very close.
So, if you look at any cryptograph, look at Bitcoin's graph today, it always moves 1%; there aren't days where it doesn't move 1% in at least one of the directions, usually both. So, if you're putting on this 100X long position, you have to be really sure that it's not going to go down 1% before it does anything else.
It turns out that, no, it's impossible to be that short. I think that I have been that confident about a trade, a crypto trade, maybe 2% of the time, ever. Crypto's just so volatile, Bitcoin is so volatile that you're just going to see these 1% moves in either direction way too often for this 100X levered long position to make sense. If we think it's CoinFlips but you're buying, so obviously you think it's good to buy, so it's not like we're sure we're going to go down, but when it does go down, you get liquidated.
Liquidations are way worse than anything because they market order you into the order book without any regard to price, and that's just going to cost you way too much money when it happens for this trade to make sense on average.
So, yeah, sometimes it'll never go down and it'll go up and it will feel like you'll 100X to what you would have made if you hadn't levered up, but the times when it does go down just cost you so much that if you do this trade 100 times, you're just going lose way too much average because of the cost of liquidations.
So, it's not like I think there's a moral reason that this shouldn't be allowed, but no one should do this; if you're trying to make money, it's just a bad idea to the extent that people do do it anyway. Yeah, it's plausible someone has some responsibility to be regulating it, but personally I think it should be regulated by the people who don't want to lose money.
Peter McCormack: Yeah, that's fair. I know you work for Alameda Research, but you do have the relationship with FTX; do you know what maximum leverage they offer?
Sam Trabucco: Yeah, they just recently reduced their maximum leverage, I believe, to 20X from 100X, just in keeping with this idea that this doesn't actually make sense for anyone.
Peter McCormack: But that's quite a good thing for them to do, because that's them considering their users?
Sam Trabucco: Yeah, that's right.
Peter McCormack: That's putting their users ahead of themselves.
Sam Trabucco: Yeah, on some level. I'm not super privy to the decision-making thinking or whatever, but yeah, I think that it makes a lot of sense. Obviously, to first order, it benefits users because it stops them from getting liquidated when they might have otherwise; but, to second order, let's say that persists for a while and other exchanges have more liquidations than FTX does and their users start getting upset at them, it's pretty plausibly good for the exchange as well, I think.
Peter McCormack: Yeah, okay. Let's talk about market making as well because this is something that people ask a lot about as well and also find quite difficult to understand. Sometimes, it feels like a little bit of a murky place, but again, it's one of these things that's been explained to me a bunch of times but I don't really understand it.
Can you explain how it works, what the role of a market maker is? I've also seen it before, if a new coin comes to the market, someone will offer to market make on behalf of that coin, but sometimes there's a payment or a premium to support that, but I don't fully understand it?
Sam Trabucco: Sure. Yeah, so the actual mechanics of it are basically, Alameda has these bots that can be putting out orders all the time, 24/7, with whatever specifications that we want. Some of those specifications are we can say, "Oh, we want 5 Bitcoins out within 20 bips of the best bid and offer, we want 15 Bitcoins out within 1% of the best bid and offer". Whenever the market moves, we move those orders as well.
The main reasoning behind wanting it is generally bootstrapping liquidity on new markets or for new projects. So, this might be something that an exchange wants, for instance, because of the value add that an exchange might have versus competitors with this guaranteed liquidity all time. They can make claims like, "Oh, if you want liquidity, you can always get it here in this entire class of products". So, that's the one set reason that this might make sense. Another reason it might make sense is for the projects themselves.
So, yeah, a lot like you just mentioned, when new coins pop up, they might secure an exchange listing, but generally, being a successful crypto project and having a token that's getting listed on some exchange doesn't really correlate with having the capacity to have orders out all the time; it's quite a specialised skill.
So often, they'll go to a firm like Alameda, that has market making capacity and gives them some incentive to be market making all the time. In general, the incentives, at least the ones that we tend to want, are not really like a cash payment or anything like that. We'll basically just want to be allowed in on their most recent investing around, or something like that. It aligns incentives a lot better just because we'd much rather just want their project to succeed at the same time that we're helping it to succeed by market making, so just getting on their project makes a lot of sense.
It's also necessary on some level, because let's say that we're market making token X. That means we're placing bids and offers out. In general, if there are net buyers, we'll end up net selling, and at some point, we'll have to deliver tokens when the buyer withdraws. So, it generally helps for us to have bought them beforehand in order to be allowed to sell, in essence.
But, yes, that's the gist of the entire business, I think. We're just levering our capacity to have orders out all the time versus various people who have incentives to want orders out all the time.
Peter McCormack: Can a market maker ever end up in the situation where they're essentially holding the bag themselves?
Sam Trabucco: Not if they've done it correctly, because in general, I think most exchanges are not going to let you place out offers for coins that you didn't deposit yourself or buy or borrow from a margin-lending platform on their exchange itself. So, it's generally not going to be super possible for you to have sold tokens that you didn't have.
There's one thing that I have at least heard of are marketing agreements where the projects, instead of selling the tokens to the market maker, loan them to them, and that is a situation where, yeah, the market maker might end up screwed if they have to buy them back after selling them, because presumably the price has then gone up, so they're a bit screwed. But that would constitute a large mistake on the market maker's behalf, and an experienced market maker wouldn't end up in that spot, I don't think.
Peter McCormack: What's the risk then to market makers, or is it a no-risk business if you know what you're doing?
Sam Trabucco: It's kind of risk, yeah; you can certainly make it riskier if you feel like it. So, Alameda has entered into agreements, like the one I just described with the loans, with one important change, which is that we also had options on the tokens as the price went up.
So, the problem with the structure I described is that the price goes up, we've net sold so now we have to buy back to profit withdrawals or pay back a loan or something; so, we sold at lower prices and had to buy at higher ones. If we have options the entire way up, then yes, we've net sold as the price went up, but we also had options to buy as the price went up from the project and are able to just buy that and pay the loans back with that.
That is a slightly riskier situation, just because there could be momentary price movements that are out of line that make us sell too much at low price level or something like that, but we'll still make money on average doing this, so we're okay with it. In general, it's quite riskless though, especially the simpler structures that I described where you're just getting paid to make orders that your bot can do for free anyway.
Peter McCormack: Can market makers push price around at all; can they push price up, push price down?
Sam Trabucco: Anyone who owns enough tokens relative to liquidity, just in general, can do that if they feel like it. This is another thing where, if Alameda were consistently doing something like that, like, "We have a bunch of these tokens, let's remove all of our offers a couple of times a day", that forces the price up because there's no one to sell anymore. So, yes, we could do that; we never would.
We've found our market making agreements to be pretty profitable for us. If we got a reputation for doing that, we would lose all future flow. So, yeah, we might make a little bit of money once, but no project would ever want to use us again and that would be pretty costly for us in the long run. So, I guess the answer's yes, market makers can do that, but in general, they don't have incentive to.
Peter McCormack: Right, because again, not fully understanding market making, I just wonder if there's ever a conflict of interest owning tokens, or having an interest in a project, but also market making for it. Can you push the price around and increase the net value of the tokens you hold? You might not do it, but maybe other slightly more nefarious market makers might be able to do such a thing.
Sam Trabucco: It's possible; I'm not going to say it's not possible, but yeah, that's true for anyone who owns a bunch of the token or even a bunch of money. If I have a bunch of money and I feel like shooting in the price of some low-market cap coin up, I can. I agree that, what you describe with owning a bunch of the token gives you the incentive, so it's not like this is impossible from when you imagine but, like I said, Alameda has no incentive to do this so we wouldn't.
Peter McCormack: It's funny, listening to you talk about this, you're obviously very passionate about it and you moved on from Susquehanna, who are one of the biggest firms there is. What was the incentive to move on; was it just the excitement of the crypto market, or was it more because you recognised so much opportunity, like you mentioned earlier with the arbitrage?
Sam Trabucco: Yeah, if I'm being honest, it was all opportunities to make money. I think I was probably not long Bitcoin for an embarrassingly long time, even after I was focusing full time on Bitcoin. I didn't really have any strong opinions of all the technology, or whether crypto made sense or was the future or anything like that; I acquired that along the way, but I didn't have that for a long time. I really was just noticing arbitrages and finding it irresponsible not to be focusing on it when I could be making more money doing than anything else I was aware of.
Peter McCormack: So, you spotted your crypto money printer? I mean, I would have done the same if I had the same skills as you. So, has your view changed then on Bitcoin; are you more into the technology and what it brings and what maybe some of the maxis debate about on Twitter?
Sam Trabucco: It definitely has started feeling more plausible to me that crypto, in various forms, and Bitcoin, will form a lot of the future of finance, I guess. But this isn't something I'm an expert on at all; I don't really understand a lot of the technology beyond what people think about it. From the perspective of a trader, it matters a lot more what people think than what is actually going on, and so I understand that stuff. But yeah, I don't exactly understand the technology.
Like I said, I do believe that this has a huge chance of being a big part of the future, and I think that's been reflected in how excited people have gotten about it; the large institutions that have become much more interested in crypto and Bitcoin. Yeah, I think we'll begin to be seeing that, but it's exciting to see the world deciding its opinion about these things. Even as we speak, the senators talking about this though, it is really cool.
Peter McCormack: Yeah. We'll you've obviously got a lot of experience with traditional markets as well, and you've talked about Bitcoin itself, even amongst a sea of crypto projects, being highly volatile and lots of opportunity there. Do you see a scenario where Bitcoin becomes less volatile; does more liquidity change things? I know a lot of bitcoiners defend the volatility, we're bootstrapping a brand new monetary technology from zero to we hit a $1 trillion market cap at one point. Is there a time where we get more stability or do you think this is just the way it is?
Sam Trabucco: Yes, I think we've already seen this start happening, the market becoming more stable. To use the most recent example of a hugely unstable event; 12 March 2020 saw the market crash below $4,000 from starting around $8,000 or $9,000 or something like that. The crash itself made a lot of sense; it was in direct response to the stock market crashing, because of people deciding COVID was actually happening. But Bitcoin fell way more than the stock market did.
The biggest reason that happened, there are a few reasons why it happened but the biggest reason is the effect that was I just talking about earlier with liquidations. So, because so many people were allowed to be really levered up and levered long in particular on that day, when the market started crashing, a lot of these positions started going bankrupt. The biggest place it was happening on that day was BitMEX so we'll talk about that.
A lot of people were levered long on BitMEX, and Bitcoin fell from $9,000 to $7,000, and maybe that was the organic part, maybe that the was part that was actually mirroring the stock market, but that's a 20% drop. So, anyone who was buy-backs levered or more is getting liquidated now. Like I mentioned, the way that's mechaniced is the exchange, BitMEX in this case, sends market sales into the order book for all of those positions that went bankrupt, and that drives the price down even more. So, maybe that drove the price from $7,000 to $6,000, and that's another 10%; that liquidates a bunch more people, sending even more market sales in the order book. This keeps happening and happening.
With a big enough move, which is what we had on 12 March, this can actually just go infinite on some level, because if every liquidation order triggers more liquidations than the size of that order, this actually will keep going forever until everyone's liquidated; that's what we would have seen. Bitcoin fell below $4,000 which is a super inorganic level; no one wanted to sell that low but they were forced to. BitMEX then went down for 45 minutes and wasn't allowed to process any more liquidations and then it came back up and Bitcoin was at $5,000 or something, and now they didn't need to.
So, yeah, on some level, if that hadn't happened, Bitcoin might have printed at zero on BitMEX; we'll never know. But, yeah, this is kind of effect that produces the instability that you're talking about, the high leverage and low liquidity relative to the open interests of the contracts that are being opened up. So, I definitely think that we're moving to a place where this is less likely, exchanges taking steps like FTX did where higher leverage is less allowed; the market itself is starting to understand this a bit.
Over the past year or something, we've seen large shifts in open interest of derivatives contracts to open interest in levered spot on exchanges that offer spot margin. This, in itself, that's not a huge thing, but it happens that spot margin in general sees much lower leverage than derivatives does, and any move to lower leverage is going to decrease this short-term instability that we see in Bitcoin's price.
It's worth noting, the short-term instability is really what matters. Long term, I guess Bitcoin's price is moving, but in general it's moving up for the most part, or at least it has been historically. The short-term moves were like sometimes it goes up 20%, then down 20% the next week, and that's driven by the leverage, I think, more than anything; that's the thing that I think people are talking about when they mention that Bitcoin's price instability is negative or bad, and that is the kind of thing I think we'll see less.
Peter McCormack: So, that's really useful to understand, and I guess there are only so many times that people can get liquidated, right? It has to naturally evolve to a place where -- if you're a retail investor and you keep getting liquidated, essentially you're really a gambler and there's only so long you can gamble, and even if you're a big institution, you get liquidated. So, does the market naturally react?
I guess, the question I'll be asking is, and I'm going to come back to your $29,000 call, but we've moved up quite nicely from $29,000 to about $46,000; are you seeing a massive load up of leverage or are you seeing something slightly different this time?
Sam Trabucco: Right, so yeah, I'll address that in two pieces. So, another big effect here is that, over time, like you said, the high leverage traders are, in effect, gamblers. I mentioned earlier that the person who's doing the 100X leverage thing 100 times, eventually they're going to have lost so much money from doing that.
A larger version of that effect is that the people who keep doing this do just have to stop trading at some point, or at the very least, they have to stop doing that, because they're just going to lose all their money at some point or just become so disillusioned with the entire idea that they had better stop. So, that's definitely an effect we have seen. The market has shifted away from people like that towards people who are using lower leverage or no leverage at all; that's a more organic effect.
In addition, over the past year, one of the prevailing narratives has been Bitcoin is seeing institutional adoption, like banks are getting in, Elon's getting in, whatever, all these people who are predominately going to be buying spot Bitcoin and not derivatives, have been ending the market. So, that's been another effect in the same direction, where the high leverage contracts are becoming less important and the lower leverage, or spot contracts, are becoming more important in terms of actual long-term net flow that's driving the price of Bitcoin longer term. So, yeah, I definitely think that that's been going on.
In terms of the recent move, it's just been a part of the same kind of longer-term trend where we're seeing inflows, not on the Bitcoin perpetuals anymore or the Binance perpetuals, we are still seeing that, of course, and the Binance perpetuals are quite important; but this move, I think, had less of that than previous moves; I think that's the trend we're going to keep seeing.
Peter McCormack: Right, let's talk about your call, your $29,000 call ten minutes before it started pumping up!
Sam Trabucco: That was cool!
Peter McCormack: Yeah. So, Danny sent me the tweet and he was like, "Yeah, you've got to ask him about this". Did you just get lucky on the moment or did you have a real gut feel; did you know it was coming that soon?
Sam Trabucco: I certainly did not know it was coming within ten minutes! The trade I was talking about there was like a day's long thing that I was thinking. So, when Bitcoin fell to $30,000, or $29,000, or whatever, there were a few reasons why it seemed fairly likely to revert on some timescale, the main reasoning being we sort of still are in a paradigm where I think the market reacts super strongly to news where news can mean a variety of different things.
News can be a tweet from Elon Musk thing that he is buying Bitcoin or it's like now he's on Doge because Bitcoin sucks, or a few weeks later, "Oh, no, Bitcoin's fine again as long as it fixes these two things"; so that can be news. But there could be other news. China has a lot of news come out pretty routinely; a few weeks ago, we were seeing various stories about, "Oh, now China's banning Bitcoin again", and then it's like, "Oh, never mind, it's only restricting leverage on a few platforms". There's still a lack of clarity coming out of China, but this constitutes news as well, and the US has news.
The market reacts to all kinds of things these days, but in my opinion, and the maths bears this out, the market overreacts to news most times. The way you can see that is that the market will move in a certain direction, generally the predictable direction; if news reads is obviously good, it will go up. But, in general, over the hours after the market reacts to news like that, it will go the opposite direction for some fraction of the move.
So, if Bitcoin goes down because of bad China news, it will generally go down X% and then go back up over 2% or something like. So, it always reverts part of its moves, and the dip to $29,000 was part of that pattern. There had been a barrage of things the market obviously viewed as bad, whether or not they actually were bad, again I'm not really the guy to tell you; I can tell you what people think, but not really much about the fundamentals. But, yeah, the market dipped to $29,000 off the back of this.
Another exacerbating thing was this liquidation effect again. On the way down, there were a lot of levered longs getting liquidated, and on 12 March, we saw the dip to below $4,000 revert quite fast because, like I said, nobody wanted to sell below $4,000. The second it got below $4,000 and people were able to start buying, they were really excited to.
I figured something similar was going to happen to a $29,000, much less extreme. There were organic sellers because of the news, maybe down to $33,000 or $34,000, but there were a lot of liquidations that drove it down to $29,000. It just seemed like so much of the net outflows were either inorganic because of liquidations or ready to revert because of news that I'd seen over a million times before. So, it seemed quite likely that $29,000 was too low and it was going to revert. I did not think it was going to happen within ten minutes; I was thinking more six hours or a day or something but, yeah, no complaints. It certainly made me look smart!
Peter McCormack: It was quite the call! I've got a couple of questions on news and sentiment as well because it feels to me, as somebody following the price, that sentiment or news seems to attract two momentums. So, during the dip from $64,000 to $29,000, we had the news of El Salvador coming out, which was quite bullish news of a country accepting Bitcoin as legal tender, and there was very little movement in the price. Whereas, I think if this had come out maybe at $62,000, we might have seen another leg up. So, it seems to me like there's a certain correlation between news and momentum.
Another thing I did notice is, back to what you were saying, I remember when Elon Musk announced that Tesla would be accepting Bitcoin as a payment and it shot up $3,000 or $4,000, and probably within two hours, it came back down; it was a real kind of Bart Simpson pattern. So, I guess as a quant trader, this would be useful for short-term trades, but really people should not overreact too much to news?
Sam Trabucco: Yeah. I think, in general, it's looking into what sort of impact of news in the past has been; not the immediate impact, it's really important to look at what the net impact over the next day was from these big news items that you'll sometimes see. Yeah, for the initial couple of Elon Musk tweets, it was hard because we hadn't seen anything exactly like that before, but sort of a sanity check, like, "Should Bitcoin have moved up $4,000 off of this one piece of info from Elon Musk?" Like, "Yes, it was an update, but was it this big of an update?" I just think applying a sanity check like that is generally a good idea.
For what's it's worth, on some level, that doesn't exactly matter really, really short term. So, one strategy Alameda now uses is, we have a bot that's always looking for Elon's tweets, and if we believe that we've caught something within five seconds, we will be willing to bet pretty big on it. Even if Bitcoin's already moved a little bit, we'll still be willing to keep going in the same direction if we think that we've beaten a high enough fraction of the market to knowing about it.
So, really short term it doesn't matter, but if we put on a trade like that, we will try and exit it pretty quickly just in general. The Elon effect has really changed a lot in that there is a big move right away, but it reverts within a minute these days.
Peter McCormack: That's interesting because, if you're reacting within five seconds, you always have to make a decision, whether that's positive or negative news as well.
Sam Trabucco: Yeah. We try to run a bot to do that, but it turns out sentiment analysis, like computers, it's still not exactly perfect, especially when Elon's tweets are not always text even; they're sometimes just like a picture of a dog on a spaceship and you have to decide if that's good or not for whatever!
Peter McCormack: So, is there a person who's literally sat there waiting for the alert, then they're ready to click and, within five seconds, make a decision?
Sam Trabucco: It's a Slack channel, but our traders will be watching it.
Peter McCormack: That's amazing. Okay, another thing I wanted to ask you about was sometimes you see Bitcoin paint a $2,000, $3,000, $4,000 candle pretty quickly, but my understanding is if somebody's going into the market to buy a large amount of Bitcoin, they'll usually go through an OTC desk and they will be trying to buy in small, little increments for a couple of reasons: one, to get the best price; but also, especially if you're buying $1 billion worth, you don't want to signal to market you're buying $1 billon worth, you want to be quite clever.
So, when we do see these big candles painted, what is going on here? I know there's probably a much more complicated answer, but I don't understand, therefore is that somebody who is fat-fingering a $100 million, $200 million buy or is there something else going on?
Sam Trabucco: Yeah. There are a few things that can be going on, and I don't exactly know, because Alameda has never done this, so I'm not exactly sure about what people's reasoning is when they're doing this. But, yeah, you'll sometimes see things like that in the wake of news, where maybe someone thinks they only have a minute to respond to this and they think there are going to be big impacts, so they have to send what amounts to a market order just to buy a lot or whatever. So, that's one possible explanation sometime. But you see it all the time; this isn't the only thing going on.
One thing that can be going on is it can be one of the liquidation market buys or sales that I talked to you about before, where it's not exactly the person doing it but it's the exchange doing it; that's something that we see sometimes and it looks identical to what you described. Sometimes, it's going be someone who doesn't really understand trading very well or who doesn't have access to the kind of liquidity that you're talking about, and who also doesn't write bots to do this in a more intelligent way.
But, yeah, I don't have very a satisfying answer to this as far as I agree that's it's crazy thing that no one should ever do, but I agree that people do it.
Peter McCormack: But also, I guess, one of those that can paint up and paint down very quickly, could that also be a scenario like you guys, you've seen an Elon tweet, you've reacted, you've done the buy and then maybe you've reconsidered and thought, "Actually, we should get out of this one"; could it be that kind of scenario as well?
Sam Trabucco: It could. So, that's not going to be what we do in general. So, if I see the Elon tweet and I want to buy, the way that our automated bots work is a little more complex I think, insofar as I don't tell the bot, "Hey, go buy a ton of Bitcoin on Binance"; I tell the bot, "I want to get long Bitcoin", and the bot splits the order up for me across every Bitcoin market in order to get better pricing. But, yeah, the kind of thing you're describing is definitely possible more globally.
Peter McCormack: Okay. So, went down to $29,000; that was the first time I bought, myself, since I think $37,000. So, when we were up near $64,000, I didn't; but when we went down at $29,000 -- I didn't buy exactly at $29,000, I actually bought when we were up to about $32,000. It was the first one I'd done in ages and one of the reasons I bought is because there was so much negative sentiment.
It felt like $30,000 was being defended quite well as a price yet there was so much negative sentiment calling for $29,000; it felt like a drop down $29,000 would have been a unique scenario mid-bull market. So me, and this is really just gut feel, like in the air, "Fuck it, let's go with it", it felt like a bullish time, because everyone was so negative. Do you ever find that, when the market's super negative, actually that is a time to be bullish?
Sam Trabucco: The sort of thing that you're talking about is definitely a real thing I think where, especially with round numbers, there can be this very distinctive behaviour around round numbers in crypto. So, as a way earlier example of sometime similar, last winter, when Bitcoin hadn't cracked $29,000 yet, but it kept getting up to $20,000 over and over again and going right back down, a little bit at least, the thing going on was that there was a ton of resistance to Bitcoin getting above $20,000.
There were a ton of people who were like, "Oh, Bitcoin's never going to get above $20,000; I've been around for three years and it hasn't". They're selling Bitcoin at $20,000 because they believe that it's not going to get above $20,000. But Bitcoin stayed right under $20,000 forever, and it kept testing it to see who will stay.
Peter McCormack: I remember.
Sam Trabucco: But it never got above $20,000. The fact that it didn't get much below $20,000, even though there was obviously so much resistance below $20,000, was a pretty strong signal that if it ever does get above $20,000, it's going to go way above $20,000, because all these resistance sales are happening exactly at $20,000. If it gets above it, if it gets to $21,000, it's probably going to go to $25,000 very quickly, which is actually exactly what happened.
The reason that I think that this effect is not what ended up happening around $30,000 is that, the lead up to $20,000 was the thing going on for years. There were a ton of people who were super excited to be buying; the sentiment was obviously a lot stronger, I think, at least on the buying side than it was on the selling side most recently, getting below $30,000.
So, that's what I think is the big difference between these two situations, but yeah, thinking really hard about the actual effects and what people are doing around round numbers is more important than it maybe ought to be, and more important than it is in traditional markets. Crypto and the Bitcoin markets are so much more immature, I guess, and these level one analyses of, "What are people thinking around $30,000?" These actually do matter quite a bit.
Peter McCormack: Well, $100,000, what are you thinking around it? I keep thinking in my head, "$100,000, it's going to be a massive number, a bit like $1,000 was, a bit like $10,000 was", although as I remember, at $10,0000, we shot straight through. But $100,000, I'm thinking, "That is a massive number; that's going to be a number a lot of people are going to be thinking about, so perhaps people are going to try to be one step ahead and be selling at $95,000. Well, if people are thinking about that, perhaps it'll be $90,000". I'm in this psychological game in my head thinking about how people will play it. Is it something you're -- well, I guess you are thinking about it?
Sam Trabucco: Yeah. One thing I would say is that I think that most times I've tried to play psychological games like that in crypto trading have gone badly I guess, insofar as I often find that the level one explanation ends up just being the correct one. An example might be, it's pretty well known that, or not well known, but a common mantra in crypto trading worlds is to buy the rumour and sell the news.
The Bitcoin halving, for instance, is a good example where people are talking about the halving a lot and the conventional wisdom for all these events is always like, "Oh, it's going to rally going into it". If you think about it, if I know that, if I'm a trader who knows that every time there's any event, you're supposed to buy into it and then sell the event itself, I should just buy before that; I should maybe buy two months before the event, because everyone knew when it was going to happen.
But it still happened! The rally into the event still did happen, and it happened again with the ETH London fork. If you level yourself with these things, you're going to buy way before the event and not in the weeks leading up, but you still are to supposed to buy in the weeks leading up because the level one explanation is still right. So, I would advise against levelling yourself on the like, "Oh, maybe I'll sell $90,000 because the market's going to try and do that"; levelling doesn't work in crypto.
Peter McCormack: Well, that's one of the things I thought maybe happened during this bull market, because I think we got up to $60,000 and everyone was so bullish and people saying, "Now it's going to go to $70,000 and then we'll go to $100,000"; people are saying, "We're going to go to $300,000 with this bull market", and people were all looking at the charts from 2017. It was very similar, "A few 30% dips but we're definitely not going to see a 50% dip, because that didn't happen in 2017".
Was that what happened; was it too many people leveraged up, too many people thinking the same's going to happen and add in a little bit of negative news and we get the rug pulled from us essentially?
Sam Trabucco: Yeah. The rally up to the most recent peaks, in the $60,000s, we saw a lot of leverage leading the way there. So, it's not guaranteed, in general, that a move that's lead by a lot of leverage is going to revert or anything, but the effect that does happen is that, let's say a ton of leverage, there is a lot of leverage the entire way up, and let's say $65,000; let's say that I put on a huge levered position at every point basically; so, I did that at $50,000, did that at $55,000, at $60,000.
So, if the market never dips, great; I just made money all across the board and nothing bad will ever happen to me. I have just made a bunch of money and I close the positions when I feel like it. If the market does dip at all, let's say the market dips down $60,000 for a bit, and again I'm using really high leverage, so my positions are going to get liquidated now.
This is sort of just what ended up happening; the market dipped a little bit and then the market had to dip a lot, because so many people had gotten so much leverage at high levels. I think that's a lot of what ended up happening.
Peter McCormack: So, people panicked and sold and therefore, it created that cascading effect; some got out, some didn't?
Sam Trabucco: Yeah. I'm not going to claim why the initial dip happened but, yes, I think that is basically what happened once the initial dip happened.
Peter McCormack: Wow. So, looking at now, $29,000, certainly for people who are new to Bitcoin, was quite scary having been up so high at $64,000. Somebody who's been through a couple of bull markets, seen this before, I was still a bit like, "Meh, this is fine, whatever", but we are now back up, I just had a look, I think we just hit about $46,500.
Sam Trabucco: Oh, really?
Peter McCormack: Yeah, I think $46,600 maybe when I'm talking.
Sam Trabucco: You miss a lot in an hour!
Peter McCormack: I know, man. It's wild! I had it once when I was on a plane and I bought a watch before I got on the plane in 2017 feeling confident because the market was great and we 30% dipped, and that was pre-Wi-Fi British Airways. So, I get off the plane and we've 30% dipped and I've lost the cost of my watch! But it feels like this move up again, it feels like it's quite a strong move up. What's your sentiment about where we are? Are you super bullish; are you guarded bullish?
Sam Trabucco: Yeah, so I agree it's been a strong move-up sentiment on some level insofar as, again, the leverage has been lowered; of the new contracts that are being opened, a lot more of it is in the spot markets. We've seen the open interest of various spot borrowing platforms, the amount being borrowed of USD has gone up a lot in the past month or few weeks or something.
So, yeah, that suggests more of the buying that's happening right now is happening on these markets that are less likely to get liquidated if there's a small dip. So, yeah, in that sense, I agree that the buying right now is stronger or less likely to get completely undone than what sent us above $60,000 last time.
In terms of what I'm expecting short term, yeah, it's hard to say right now. I think that the spotlight that has been on crypto in the US, for instance, over the past few days with the amendments to this bill that had been pretty heavily discussed, I think it's easy to miss the forest for the trees in thinking about that. Yes, the specifics of which of these amendments is going to pass is going to be like which set of coins is this going to be terrible for, whatever? Yes, these matter, but I think the important thing here is the US Government is talking about crypto in a way that is actually just dominating the news on some level.
I'm very tuned in to crypto news; when something like this happens, I always hear about it. But I look at it like a regular new source and it is actually what people are talking about right now, and it's not in any especially negative way. The work being done in Washington has seemed, to me, to be actually looking for solutions on some level in a way that Washington isn't always and in a way that I guess I wasn't naïvely expecting this to go.
So, yeah, I think that it's been pretty exciting; crypto's actually gaining traction in the world. Obviously, we knew that; it's been the narrative for the past few years, but this was revelatory for me. So, yeah, it wouldn't surprise me to see things like that keep happening, and, if things like that do keep happening, I think we'll see the price start to reflect that in a way that I think has happened over the past few days; I think this is a lot of why Bitcoin's up right now. If things like this keep happening, we'll probably keep seeing that.
Peter McCormack: Well, something Willy said to me when I spoke to him a couple of weeks ago, obviously I don't know what your views are on on-chain analysis; I think it's a tool, but I don't think it's a crystal ball, but I think it's a tool and can be a useful tool amongst a massive armoury of things that you can use as a trader. But he said, one of the interesting things is that, what he considers retail buyers to be a bit of a hockey stick at the moment, still going up.
So, despite everything else, retail buyers are coming in and still buying and still buying, and he says to me, "Retail buyers drive bull markets as well". I don't know if you have any opinion on what he says there.
Sam Trabucco: Sure. Basically, any effect that can create net buying or selling will tend to drive the market. To the extent that it is true that retail buying is mostly going up; that will drive the market. The retail market can be a fairly big net amount of what's going on. So, I definitely think that that's probably a piece of what's going on, just given that the market has been going up.
In terms of the on-chain methods, like you said, I think that people tend to read into this quite a bit more than they ought to. Something that I see on Twitter a lot is, "Oh, look at all these Bitcoins that net went into exchange X", like, "This is terrible, Bitcoin's going to go down, because probably that means people are going to sell it".
Almost every time I've looked into a claim like this, it has been the exchange moving between two wallets and one of the wallets was not labelled correctly; this is almost always what's going on. But what if someone's moving Bitcoin onto the exchange to use as leverage for a long position? You don't know. So, I think it can be a tool, but it's a very weak signal. Though, yeah, I agree like there are rare cases where these things are worth knowing about.
Peter McCormack: Right, listen, I've got two final questions of you, and thanks again for coming on, I really appreciate this, and Danny will be happy. One question you're going to hate, but basically I'm going to ask it anyway, is how far do you think we can go in this cycle, because it must be something you're considering; how far do we go? But, and almost a more important question is, and something I hope, I kind of want us to break out of these four-year cycles that we're having.
I don't know if the four-year cycle is real, it's the reflection of this S2F model or it's just a self-fulfilling prophecy because everyone expects it; I hope we break out of it. I'd like to see the market to mature beyond having those four-year cycles because I don't like the 60%, 70% drawdowns; I don't think they're good for everyone. They're good for people who understand how to trade it, but I don't think they're good for everyone. So, yeah, how far do you think we can go and do you think we can break out of these four-year cycles?
Sam Trabucco: In terms of how far it could go, it wouldn't surprise me at all for Bitcoin to start getting into the $100,000 range; I'm not claiming that I think it is, to be clear, but it wouldn't surprise me at all. I think part of the reason why is that while we are getting away from this high leverage regime, we're not fully away from the high leverage regime. Supposing that Bitcoin gets to $70,000 or $75,000, that's a level that we've never seen before and there's a bunch of longer-term short positions that have never had a chance to get liquidated before that could get liquidated if we hit that level.
So, if we start hitting these new high levels, people who have been short for a while, or who are really short or whatever, are just going to have new chances to get liquidated up. So, there's all this in addition to organic buying. There might be a bunch of inorganic buying that shoots us up there more quickly than we would otherwise. So, that's something I wouldn't be surprised to see.
I think that, if we do start getting around $100,000, we will see a similar thing to what we saw around $20,000 the first time with a lot of resistance, like you mentioned, and it would take something, at least a priori that's surprising to me to get above $100,000, because there will be resistance there; it's impossible to imagine there won't be. Yeah, if we start testing, then it wouldn't surprise me.
In terms of the four-year cycle thing, I think that there have not been a ton of four-year periods from which to draw the conclusion that that's actually what's going on, I guess; it's fairly narrative. Crypto's been a popular thing for not very many years, so I think that claims that every four years this sort of thing is going to keep happening are not especially data-driven in my opinion.
Peter McCormack: All right, man. Well, look, this was great. Love chatting to you. Yeah, awesome. I think Danny, he's over in Australia, but he'll be up and it's the first thing he's going to listen to, so thanks to Danny for pushing me to this. But, also, congratulations on everything Alameda and your new role there; that's very cool. Hopefully, sometime, we'll get to do this again; I really enjoyed it. If people want to follow you, do you want to tell them where's the best place to find you?
Sam Trabucco: Yeah. My twitter is @alamedatrabucco.
Peter McCormack: Great. I'll stick it in the show notes.
Sam Trabucco: Cool. Thank you.
Peter McCormack: Thank you, man. Take care, and I will see you soon.
Sam Trabucco: Yeah, bye. Great talking to you.
