For such a commonly discussed concept, capital efficiency is poorly defined, particularly for trading purposes in cryptocurrency. Traditionally, capital efficiency is the ratio of how much revenue is being generated by a company’s spending. Let’s explore some approaches to measure it for our arbitrage trading friends. (although we appreciate the different schools of thought!)Let’s measure it.
We’ll subscribe to a measurement of capital efficiency across two metrics for now:A firm’s buying power, averaged over time, as a percentage of their AUM. A firm’s ability to rapidly respond to critical market events.
Both matter but arguably the second determines more about a firm’s outcomes for the year than the first. In this article, we explore the broken market structure of institutional cryptocurrency trading, why USDC built on Ethereum (USDCe) is useful but has limitations, and why we’re excited about USDC built on Algorand (USDCa).The problem
Cryptocurrency exchanges ordinarily custody the funds used to trade upon them, a critical difference between cryptocurrency markets and almost all other mature markets. While this alone doesn’t present a monumental obstacle (although not without its risks), it’s compounded by an inability to acquire credit, and a lack of interoperability between trading venues.
The end result — a firm’s buying power at any given point in time is a function of their assets under management divided by the number of venues they trade upon. Given the current liquidity levels of the exchanges, it’s practically guaranteed that a market maker, arbitrageur, or other sophisticated investor will find need to divide their assets across more than 5 exchanges in order to adequately fill their orders.
So here’s the question: If your portfolio is fragmented across 5–10 venues, what happens when you need to ...