Crypto conspiracy theories abound, but prop traders are just doing their job

Alameda Analysis is a cryptocurrency buying and selling agency and liquidity supplier based by crypto billionaire Sam Bankman-Fried (SBF). Earlier than founding his agency in 2017, SBF spent three years as a dealer on the quantitative proprietary buying and selling large Jane Avenue Capital, which makes a speciality of fairness and bonds.

In 2019, SBF based the crypto derivatives and trade FTX, which has rapidly grown to develop into the fifth-largest by open curiosity. The Bahamas-based trade raised $400 million in January 2022 and was valued at $32 billion.

FTX’s international derivatives trade enterprise is separate from FTX US, one other entity managed by SBF, which raised one other $400 million from traders together with the Ontario Academics Pension and SoftBank.

The self-made billionaire has massive goals, like buying finance giants like Goldman Sachs, and in July 2021, he beforehand talked about that “M&A [mergers and acquisitions] goes to be the most definitely use of the funds,” raised from traders.

On June 18, crypto brokerage Voyager Digital introduced that Alameda Analysis had agreed to provide the corporate a 200 million USD Coin (USDC) mortgage and a “revolving line of credit score” of 15,000 Bitcoin (BTC) value $319.5 million at present costs.

Throughout an interview with NPR on June 19, SBF said that Alameda Analysis and FTX “have a duty to significantly take into account stepping in, even whether it is at a loss to ourselves, to stem contagion.”

Within the interview, SBF famous that his corporations had finished this “quite a lot of occasions previously,” together with a $120 million mortgage to the then financially-troubled Japanese crypto trade Liquid.

This information raises some fascinating questions, however extra importantly, merchants ought to perceive what a proprietary buying and selling agency is and the way market makers work within the crypto business.

What’s a proprietary buying and selling agency?

Proprietary buying and selling means the funding agency or automobile makes use of their very own cash as an alternative of in search of commissions from shoppers’ buying and selling. Banks and monetary establishments use this buying and selling technique to make income, carving danger from their steadiness sheet.

By making use of subtle modeling and buying and selling software program, quantitative corporations resort to various methods to discover a aggressive benefit over common merchants and traders, together with arbitrage, derivatives and high-frequency market entry.

Also referred to as “prop buying and selling,” this exercise is a well-liked idea in conventional finance, bonds, shares, commodities and debt devices.

What’s liquidity provision?

Entities that present liquidity facilitate buying and selling in monetary devices by providing their very own assets in order that patrons and sellers can simply commerce. Liquidity is the power to transform an asset into money, so, primarily, “liquidity offering” means market-making.

Market makers are regulated entities in conventional finance. Their job is to maintain a minimal bid and ask for quotes always in order that traders discover the mandatory liquidity when coming into or exiting a market.

This course of is often dealt with by specialised buying and selling corporations, however the exercise may also be carried out independently. Official market markets have entry to decrease buying and selling charges and funding, however anybody can run arbitrage trades at their very own expense and danger.

What’s Alameda Analysis’s involvement with crypto?

Alameda Analysis, Soar Buying and selling and DRW Cumberland, are a number of the main prop buying and selling corporations that present liquidity for centralized exchanges and decentralized finance (DeFi) utilization.

These companies goal to generate revenue for his or her respective shareholders, however generally this implies creating direct publicity to crypto property and intermediaries. In a nutshell, they tackle danger for a possible longer-term acquire — danger is a key a part of the liquidity-providing enterprise.

The views and opinions expressed listed below are solely these of the author and don’t essentially mirror the views of Cointelegraph. Each funding and buying and selling transfer includes danger. It is best to conduct your individual analysis when making a choice.