Recent changes in market structures suggest a new wave of leverage is emerging within the crypto ecosystem, driven by evolving arbitrage strategies and prime brokerage activities, potentially leading to new systemic risks. Raoul Pal, Co-founder of Real Vision and a Global Macro Investor, along with Mauricio Di Bartolomeo, Chief Sales Officer at Ledn , have provided insights into these trends, focusing on how hedge funds, intricate trading strategies, and links to traditional finance might influence future developments.
Raoul Pal has expressed concerns about the onset of another significant leverage cycle, emphasizing, "I’m seeing the signs of a gigantic leverage cycle about to happen again. And it’s not so much their leverage, it’s about all the people doing the arbitrage." He highlighted various tactics traders are using, from pairing ETFs with futures to shorting MicroStrategy and delving into the convertible securities market. "You've got implicit leverage that goes on," he noted, explaining how these strategies inherently amplify risk.
He further elaborated on the MicroStrategy situation, stating, "We are seeing the exact same in MicroStrategy and people are forgetting that that arbitrage is what built all of the leverage. All of the borrowing, all of the funding markets, everything came from one trade." Pal drew parallels with the Grayscale Bitcoin Trust's past, where its premium led to excessive leverage, saying, "It wasn't Three Arrows Capital that blew up the world. It was one vehicle that created gigantic leverage, and that was the Grayscale Bitcoin Trust."
Ledn's Di Bartolomeo raised the question of whether this is primarily a traditional finance (TradFi) issue rather than one specific to crypto. Pal concurred, suggesting that the leverage could indeed impact prime brokerage operations, particularly if major hedge funds like Millennium suffer significant losses. However, he noted that these institutions are typically better at managing risk.
Pal warned that these dynamics could precipitate a credit market shock as the market grapples with increasing complexity and new trading strategies. "It’s early days," he remarked, indicating uncertainty about the extent of involvement from major borrowers and lenders. He referenced a recent announcement of a new $42 billion, suggesting the potential for this capital to be recycled within the system, potentially amplifying risks.