Market inefficiencies and mispricing of TRX bittorrent airdrop

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Legacy markets have been trading for years by now and we have built considerable trading infrastructure for them. There are many complicated products that allow laser precision when it comes adjusting your long/short exposure. However, cryptocurrency markets are still in their infancy, they lack liquidity, they lack complicated products that allow traders to take short positions. As a result, we end up with many market inefficiencies in existing products. One recent example of these problems in the market is the TRXH19’s absurd discount we have seen in the last few days.

TRXH19 is a futures contract that settles at Binance trx/btc price on march. Usually futures contracts have a premium/discount attached to them that fluctuates throughout the contract’s life span. Historically this difference on bitmex contracts have ranged between +4% to -4%. Moreover, market makers and arbitrage traders are supposed to keep this difference in check by using other exchanges by going long on one side and going short on the other side.

Tron has recently announced that they will be airdropping bittorent tokens. Keep in mind, that these tokens will only be airdropped to spot holders and not futures traders. As you expect, this airdrop should be showing itself as a discount on the futures prices. Basically you can look at what the market is pricing these tokens just by looking at the price difference.

But what happens if you disagree with the pricing? You can’t short TRX on any other exchange besides bitmex. You can’t do anything about the spot price if you don’t already hold TRX.

Now let’s check what the market has been pricing these tokens at. At one point the contracts were trading at a 15% discount. TRX market cap is currently around $1.6B. The acquisition price for bittorent was $160m. So the market was pricing these airdrop tokens at $240m, higher than the value of Bittorent itself!! The reason for this absurd valuation of course comes from the fact that only trx holders can sell spot and long futures. No arbitrage traders like myself can do anything about it.

But what if you had TRX coins sitting on Binance? Then you could have sold them at their spot price and then go long on bitmex futures at 15% cheaper. And the cool thing? Bitmex futures will settle at Binance price on march which turns the trade into an arbitrage with no risk. But that’s not all, after 2 days you could have closed the bitmex long when the discount went to 5% and grabbed your risk free 10%.

Here’s the historical premium/discount on TRXH19

Derivatives markets for cryptocurrencies are still at their infancy. Opportunities like this come and go frequently. Lack of a trustworthy registered derivatives exchange keeps large arbitrage funds to take advantage of these pricing inefficiencies and allows smart retail traders to flourish. This obviously won’t last forever but so far cryptocurrency markets have been the dream of the retail trader.

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