Anybody can buy cryptocurrency and hope it goes up. What’s unique about this trade is you can capitalize on an arbitrage opportunity that enables an investor to reap a high reward if the trade thesis materializes, but lose basically nothing if it doesn’t.
The trade is short Bitcoin on-chain via futures, while simultaneously being long real Bitcoin Lightning layer 2 to profit from rising fees rapidly snowballing and diverging these prices. While it seems wild at first, by the end of this article, you’ll understand why our catalyst for this trade is Donald Trump’s removal from the ballot in Colorado and Maine. We’re going to walk you through why this opportunity exists, what will trigger it, and exactly how to implement it.
The sources for this article can be found here.
Our core thesis fundamentally rests on two pillars.
First, that a failure to allow democratic voting will trigger instability and potentially mass violence, if not outright civil war. Furthermore, we point to historical records showing these types of periods of instability are statistically proven to cause forex volatility and devalue a country’s currency.
And second, that layer-2 Bitcoin Lightning and on-chain Bitcoin should NOT trade at the same price. We argue that in the future, Lightning will likely rise in price in comparison to on-chain Bitcoin.
On-chain vs Lightning:
Most people don’t understand Lightning. There’s propaganda that self-custody Bitcoin Lightning is hard to use. This is not true, its fairly simple, and it’s gotten much easier recently with technology advances. What is true, is that to convert Bitcoin on-chain to Lightning requires paying twice the fees.
Two fees:
1. First a transaction fee has to be paid by the sender to receive the on-chain funds (Which is you that’s paying, if you’re withdrawing from an exchange or sending from a different wallet).
2. Then you have to pay AGAIN another transaction fee to open the “channel”.
Because the primary purpose of Lightning is to avoid these massive fees to begin with, it’s then a real burden to get lightning, and you’d be motivated to either earn lightning directly or use an exchange.
Exchanges
An exchange is a 2nd method to get self-custody lightning; for example FixedFloat is one. With FixedFloat or others like it, you pay 0.5% in conversions fees similar to swapping two different cryptocurrencies. If it’s swapped this way, then its up to the exchanges and market makers what the price differential between these two should be.
If Bitcoin’s price rises and on-chain fees spike due to real world use, then Lightning is more desirable for it’s real world utility (speed, privacy, and cost). As Nostr user mister_monster points out, as Bitcoin rises in price, some on-chain wallets will literally be unable to even afford the transaction fees to send their funds. If everyone wants lightning, and it’s real expensive in fees to get, then we see no reason that market makers and exchanges can’t charge different rates on the conversion, depending on which direction you take. (BTC→Lightning v.s. Lightning→Bitcoin).
Remember that the market maker has to balance their supply of both to facilitate liquidity. And if everyone outside Bitcoin (such as say Monero), does XMR→Lightning conversions because it’s cheaper. Then Lightning has become it’s own currency. This would cause on-chain and lightning to trade at different prices which would widen based on the on-chain transaction fee to arbitrage. To say this is impossible is saying that Bitcoin fees will never rise.
Skeptical haters
Haters will respond:
“Simplified Privacy is a bunch of idiots. Lightning can only rise by the Bitcoin fee itself, otherwise it will get arbitraged away”.
This is not true. First of all, its the fee BOTH WAYS to arbitrage it, because you’re assuming market makers will be happy owning a fluctuating asset that’s rapidly becoming more risky. The whole point of algorithmic arbitrage is they exit the trade once the price differential is captured. By your logic, they’d be stuck still with on-chain Bitcoin. While as if they had lightning, they could convert to stablecoins or other assets for negligible cost. And if they keep a hedge Bitcoin short with futures on to eliminate price risk, then not only is that tying up massive capital, but even worse, the fees can rise above the amount in the market maker’s on-chain wallet. So as Bitcoin becomes more popular, it becomes more and more risky to hold it on-chain for arbitrage. But it gets even worse once you understand this catalyst…
Trump catalyst
Our core thesis is that a ruling from the Supreme Court that Donald Trump can not be on the ballot would be a good catalyst to trigger this Bitcoin/Lightning price differential. This is because political instability causes harsh downside volatility in a country’s currency, and Bitcoin is the most likely candidate to be used by the majority of the population that would be using cryptocurrency for the first time.
A poll from the New York Post in 2021 found that Americans were more divided than ever before, and a large amount of Trump’s voters favored leaving the Union. Quote:
“More than half of all voters who backed Donald Trump in last year’s presidential election say they “somewhat agree” with the proposition that red states should break away from the US, while, 41 percent of Biden voters “somewhat agree” with the idea of blue states doing the same thing, according to a new poll” [1]
If more than half of Trump voters think red states should break away when he was ON the ballot, how would they react when he’s taken OFF of it?
As the Maine Wire as reported, the Maine Democratic Secretary of State Shenna who removed Trump from the ballot, got immediate death threats, and angry constituents made fake police swat team phone calls. Quote from Shenna:
“dehumanizing images and threatening communications directed at me and people I love are dangerous. We should be able to agree to disagree on important issues without threats and violence.” [2]
Colorado Democratic Secretary of State Jena Griswold who removed Trump from the ballot tweeted:
“Within three weeks of the lawsuit being filed, I received 64 death threats. I stopped counting after that. I will not be intimidated.” [3]
In a HuffPost article, the same Colorado secretary who made the decision further elaborated on the thousands of threats:
“I’ve been concerned about violence and threats of violence since Donald Trump incited the insurrection,” said Griswold, who has been Colorado’s secretary of state since 2019. “I’ve received hundreds if not thousands of threats at this point.” [4]
Disputes over the legitimacy of elections has historically been among humanity’s biggest catalysts for violence and currency devaluations. Look no further than the failed US coups of Venezuela’s election with Nicolas Maduro or Syria’s election with Bashar Assad, which both saw hyperinflationary currency declines.
Some readers will roll their eyes with these examples, but all these backwards “banana republics” have constitutions. The only difference between them and the US is the public perception of the government’s role, power, and faith in elections. And I’m disputing that Americans are united on those issues.
Axios news covered a Gallup poll that surveyed 1000 Americans over a 20-year period and found that at no point have Americans been further apart on nearly every issue than now, especially the core ones:
“The role of government power is one of the biggest issues where Democrats and Republicans are drifting further and further apart, according to new Gallup polling.” [5]
We can even look at US history to see how these power disagreements affect a currency. The United States Civil War in 1861 saw a departure from gold and silver towards “greenbacks”, which were just paper promises of nothing that were forced to be accepted. During the war, the value of these fluctuated wildly depending on the chances of success. According to Encyclopedia.com, at one point after a partial defeat, the value of the greenbacks collapsed temporarily to 35 cents on the dollar. [6] Although recovering later, the dollar went on to lose massive value in the coming years.
If Trump is taken off the ballot, we argue that political instability, violence, and global rampant central bank easing, will make cryptocurrency the default choice for transactions. However, because of this “new found success” Bitcoin’s price will rise, and therefore it will struggle with scaling issues to the point that on-chain layer-1 transactions will become obsolete except for only the largest centralized whales. Furthermore, we make the case that during economic hardship, everyday peasants will be even more concerned with fees.
Bitcoin transaction fees could spike to $500, a thousand dollars, or even more. This is not unrealistic given the previous ordinal spikes, where Binance suspended BTC withdrawals, and FixedFloat ceased BTC trading. Our haters think lightning and on-chain can just be quickly arbitraged away, but they don’t count the risk and cost of capital for market makers. On top of raw on-chain transaction fees, on top of the risk of fees becoming larger than wallet balances, if the underlying assets are fluctuating wildly, then you’d need significant capital to not only do arbitrage trading, but to setup the automated infrastructure to do it. It’s very logical to think that these market makers will then charge a mark-up ABOVE the pure conversion cost for all of this work.
Our Trade arbitrage:
Because Lightning and On-chain trade at the same price at the time of this article’s release, we argue that there’s low risk in attempting to arbitrage this trade. Therefore, we recommend doing the Long Lightning/Short Bitcoin trade BEFORE the ruling, and then removing the Short On-chain BTC hedge AFTER a ruling that favors the outcome of the Supreme Court allowing Colorado (and other states) to remove Trump from the ballot.
Literally how do you do you put this trade on?
Well it depends on what country you live in. We are engaged in free speech for those in international waters. But commenting on the planet earth in general, anyone can observe that US residents are forbidden from doing leverage on most pure crypto exchanges, but they can access it via the CME micro futures. Other areas such as the EU or Asia can short sell using perpetual Bitcoin futures from a crypto-native exchange.
Let’s say I want to do an arbitrage trade of 10k USD.
I’d buy 10k lightning layer 2 of “real crypto” in a self-custody wallet.
Then take around 3-4k as collateral, and use that to leverage a 10k total short Bitcoin position with futures. The leverage amount on the collateral is not relevant beyond your personal liquidity. The main issue is matching the amounts to be price neutral.
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The sources for this article can be found here.