Shorting the Western Union / Bitcoin asset pair

Moving (eventually) beyond USD denomination

I was listening to a recent episode of the What Bitcoin Did podcast with Greg Foss and Andy Edstrom on the topic of systemic credit risk. Late in the conversation they discussed El Salvador’s new Bitcoin infrastructure which offers near zero-cost remittance through the Lightning Network. Many believe this will be a major disruptor to Western Union’s business model. I thought their discussion around shorting Western Union was a great example of a financial product problem statement:

Greg: Andy, as a former hedge fund manager, I’m not sure if you ever worked in the hedge fund business but I did.. what would be a core short of yours?

Andy: A core short, like, at the moment?

Greg: Yeah a core short, here I’ll just set it up for you: Western Union. The two largest owners of Western Union are Vanguard and Blackrock ETF, passive ETF get your weighting in exposure to the S&P 500 because thats how much it is in S&P points… my god, c’mon. Western Union should be on every hedge fund manager’s core short position — it has a dividend yield, big deal, it hasn’t moved in three years. And the two largest owners are passive ETFs that are just easy to borrow from meaning you gotta borrow the shares, um and they’re stupid money.

Andy: I like it, I like that. Best short idea I’ve heard in a while. I’ll be honest with you Foss, I don’t personally short anything anymore because y’know the Fed keeps printing, all dips are bought, y’know its near impossible to make any money. It used to be, by the way, when you shorted you got paid and now you have to pay to borrow so I’m out of the shorting business but you put it on my friend, I hope you got a position on.

Greg: I don’t have it on, it was in my old life. Lets just say this guys: there are still so many opportunities for capital markets to actually become efficient, theres too much stupid money out there or the pressure of money but over time Bitcoin will be the benchmark for proper capital allocation and everything else will pay the popper. Western Union? I’m sorry guys but your business is going the way of the horse and buggy and thats just the way things are.

Shorting or even buying long-term expiry PUT options for Western Union sounds interesting but I ultimately have the same conundrum as Andy: how can you reasonably target a lower strike price (or really any price) when USD debasement will inevitably continue, and do so at an unpredictable rate? The stock price could drop in ‘real’ purchasing power adjusted terms despite Number Go Up™. In other words, you could be right but your trade blows up!

Herein lies the problem: you can’t really trade your hypothesis (ie Bitcoin/lightning winning market share from Western Union) because the derivatives offered by the market are denominated in a currency with unpredictable supply. The profitability of your trade has an implicit dependency on US monetary policy. You could simply buy bitcoin if you expect for its relative purchasing power to grow more quickly, but that is a less precise mechanism.

Lets talk about BTC denominated trading pairs…

Crypto exchanges already provide crypto/crypto pairs such as BTC/ETH on Coinbase via orderbook. This disintermediates the overall crypto market compared to fiat, and instead allows for a more direct marketshare comparison. You can trade your conjecture around digital gold vs. the smart contract platform in a much more narrow sense, worrying less about larger macro trends.

So back to Western Union. Wouldn’t it be cool to be able to trade WU/BTC instead of WU/USD? The big caveat here is that bitcoin is still undergoing its volatile price discovery phase…so this is more of an idea post-hyperbitcoinization. But still, its useful to explore how this could be optimal:

  1. A denominator asset with a fixed and predictable monetary policy means that you could actually have confidence in your price signal months or years down the line. This is hugely important for something like Options where you’re targeting a specific strike price.

  2. Given your hypothesis is around Western Union and Bitcoin shifting market share, trading those two assets directly seems more straightforward.

The ability to trade stock/crypto and eventually stock/stock pairs could be quite powerful. Obviously there are some pretty major regulatory hurdles to be overcome here, not even including the derivatives portion which are more complex. Some exchanges (such as FTX) have started offering a limited number of tokenized stocks, though they are USD denominated. In other words, we’re still a ways off probably.

Other ‘marketshare’ type asset pairs

There is a combinatorial explosion when going from USD denominated to crypto and stock denominated. Surely exchanges could start with more ‘straightforward’ pairs to be able to get decent liquidity: Western Union/BTC or Twitter/Facebook for social media market dominance. Other interesting ideas might be to look at Airbnb/Marriot in hospitality, Amazon/Shopify for e-commerce, Netflix/Google over their video products… the possibilities are endless.

One interesting side effect would be the inefficiencies in these new markets as they start up. Stock/stock and stock/crypto product offerings would create a slew of arbitrage opportunities for market makers. The key question for longterm product viability however would be whether traders find utility in the exotic pairs, or whether they prefer to intermediate through a smaller number of ‘stable’ assets. I don’t know the answer to that question (not really a trader), but I’m sure that our future crypto and derivatives products will blow us away regardless.

Anyway, thanks for reading!