The problem is the snake is now eating its tail through the cryptoization of equity markets both in spirit and actual cryptoization. As a Bank of America report from last May detailed, zero days to expiry options (0DTE) have become a far bigger part of notional trading volumes, which averaged $760 billion a day to that date last year, up 36 percent from 2023. Lest you think this trend peaked under Biden, 0DTE options in May of this year comprised over 61 percent of S&P 500 options volume. The notion that “the VIX is broken” and that these options have been artificially suppressing volatility in the market has been floating around since 2023.
These are a big deal, and they don’t get anywhere near the coverage they should because options are so complicated that I still barely understand them even though I have a degree that says I allegedly do. Anyone who knows the phrase “zero day” from the hacker world is probably getting the heebie jeebies hearing this in the financial realm, and while it means something different, it can create a zero day-style financial meltdown in what Ruffer’s investment chief Henry Maxis said could be “toxic combinatorial chemistry,” something that savvy crypto perp traders are well aware of every time they look at funding rates. Last year, Maxis warned that “if liquidity, correlation and volatility become an amplified feedback loop and this disrupts price trends, enormous selling flows can be unleashed. And today flows seem to matter more than fundamentals.”
A 0DTE option is what it sounds like. It’s still an option you purchase that gives you the ability to buy or sell an asset at a certain price by a certain expiry, and the zero means the expiry is today. Like all options, they can be used as liquidity tools by experts who understand them as a very effective way to hedge financial risk, but like most options, are used by noobs trying to reach the moon. The Chicago Board Options Exchange noted that the 61 percent rise in May 0DTE options jumped on a “retail resurgence.” Personally, I would love to take a look at the Venn Diagram of retail traders buying 0DTEs and retail traders trading Bitcoin perps and see whether it’s a circle or not.
The way the math a lot of my brain has already forgotten works is that the value of the option decays rapidly on the last day it expires, so experienced traders have learned how to step in and take advantage of what essentially is a time arbitrage opportunity. However, a lot can change in a day, and the short time frame means you are exposed to volatility over a very tight range and if you don’t understand the market you thought you were arbitraging, you can be left holding the bag. It is the kind of trade that in an uptrending market, a lot of idiots can take advantage of, but when the market gets choppy or volatile, well, this is why the finance gods created the terms smart money and stupid money.
And stupid money is taking over all markets everywhere. Crypto is the dumbest money around, but not only is its desire for short term options speculation infecting the equity market, but crypto itself has made its way to the stock market. And not just in the form of Bitcoin ETFs like IBIT which purchase Bitcoin and then sell it to their clients with a premium attached.
Speaking of American idiots, Michael Saylor’s MicroStrategy is the poster child for the Bitcoin treasury business model I alluded to above. His company that doesn’t make much money decided that the way it was going to survive in an uncertain future was to just buy Bitcoin and tie MicroStrategy’s valuation to it. While this gambit has worked to some degree, it has potentially reached a point of diminishing returns, as MSTR stock out-performed Bitcoin on just 22 days in the past year. That is not what you want to see from what Michael Saylor agrees is a “levered bet on Bitcoin.” If it was just this one kooky guy’s equity Bitcoin treasury model seemingly slowing down, this would not be as big of a story, but alas, this is where we turn to a Financial Times report this week about a new “tactic [that] is ‘probably the death rattle’ for some as crypto treasury business model shows signs of unraveling.”
Remember Vivek Ramaswamy? The former sketchy health care executive who somehow was the only one with the sense in the GOP to see what a budding disaster DOGE was going to be? Saylor is not the only player on Wall Street who has bet their company on crypto, as the FT reports that “At least seven companies have [made share buybacks] in recent weeks — five of which have a market value that has sunk below the value of their crypto holdings,” and Vivek’s Strive Asset Management is coming in to bail one of them out. They bought Semler Scientific on Monday, which was a healthcare technology company who decided that a Bitcoin treasury was a better business model than giving people healthcare, and FT says this purchase “highlights how treasury companies trading below the value of the tokens they hold are becoming ripe targets for acquisition.” 180 Life Sciences, another crypto treasury, is valued at $416 million, while the Ethereum it holds is worth $460 million. It may be a bad situation for a company looking like it is trending towards bankruptcy, but it’s a pretty good deal for the Vivek’s of the world who know that their worst-case scenario is selling off all company assets and walking away with $44 million.
The president of the United States even runs a Bitcoin treasury company called World Liberty Financial. In August, it set up a $1.5 billion backed crypto treasury with Las Vegas-based blockchain company ALT5 Sigma Corporation, a publicly traded company. Let’s check in and see how Trump’s crypto coin WLF (in purple), the stock ALT5 (in pink) and Bitcoin (in white) have all traded since Trump set up this totally above board and not at all sketchy business last month.
Both WLF and ALT5 have under-performed BTC so much that I had to commit a cardinal finance sin and put not one but two separate y-axes on the chart because plotting them on the same percentage basis only leaves Bitcoin and a little bit of WLF visible. A lot of companies have quite literally just bet on crypto carrying their valuations to new heights, but the problem in a world where anyone can sign up for Coinbase or Robinhood or any of the million other trading apps that sell crypto is: why the hell would anyone buy your bank shot to Bitcoin over just buying Bitcoin? MicroStrategy at least made sense in a pre-IBIT world where Saylor was the only 401k Bitcoin exposure in town, but now he’s out here doing what Sinclair and Nexstar are doing, which is the equivalent of selling physical newspapers in 1997.
So the natural question as Bitcoin sits about eight a half percent below its all-time high is, what happens to companies like MicroStrategy that are already slowing down if crypto does what crypto always does and crashes?
The reason crypto crashes so hard is because of the leverage that inflates the bubble, and I worry the stock market may be going through something similar. People make more money because they buy crypto, and like some of these companies and myself, take out debt on the value of crypto they own to buy more crypto. The problem is that when the value of your crypto goes down, your debt in dollar terms does not, and this is the short story of why Warren Buffett warned people who run businesses to stay away from the three L’s: liquor, ladies, and leverage. It’s too bad the stock market in its increasing obsession with crypto and zero-day expiry options didn’t listen to one of the 20th century’s greatest investors and now is addicted to short-term sugar highs and leveraged positions. The titular photo of this article came from a well-known crypto trader hawking the supposed genius of S&P6900 on Twitter, a coin that would be a perfect parody of the current unhinged and valueless stock market if the coin itself weren’t such an obvious and oblivious exercise in self-parody.
The financial world is inherently based on leverage — taking in deposits and loaning people and businesses money they don’t have yet is the basic business model of a bank — and it is not necessarily a bad thing to surround your business with options or derivatives if you fully understand the risks you’re trying to hedge. However, our FOMO-based world is increasingly built on risk-taking kinds of leverage, and on the way up, it can look harmless and even beneficial, but should markets face any kind of sustained pullback, their capacity to withstand the volatility unleashed by a new wave of options will be tested to a degree never seen before. If the most obviously over-valued stock market in human history ever takes a serious and sustained turn for the worse, it will eventually reach the real economy thanks to its wealth effect helping to sustain rich people’s consumer spending in our vastly inequal economy increasingly dependent on crypto-style stock market narratives like AI.
