The cryptocurrency landscape has dramatically evolved over the past decade, transforming from a niche market to an arena attracting significant institutional interest.

On the way up, it was a juicy so-called "widowmaker" trade that has been well-documented. Arbitragers piled into Grayscale's bitcoin trust and were able to earn a premium. The trade attracted billions of dollars and continued to work — up until it didn't. In a way, it revealed an incredible need for market infrastructure and the upside down fact that many institutional players had to overpay for exposure to crypto via a locked trust before Bitcoin ETFs existed.

This week, another popular trade — the so-called Japan carry trade — also laid bare the market ramification of a crowded trade working until it doesn't. It creates a rush for arbitragers to unwind things and avoid being the last person caught in a losing position.

In a recent discussion, Scott Melker, host of The Wolf of All Streets Podcast, and John Divine, head of OTC trading at BlockFills, reflected on how far the Bitcoin and crypto markets have come since the end of the "widowmaker" trade — and how it attracted institutional players to crypto.

John Divine provided a historical perspective, tracing the market's development from its inception in 2009 with the bitcoin protocol. He explained how the market transitioned from peer-to-peer transactions to the establishment of centralized exchanges like Kraken and Coinbase. This shift facilitated the use of bitcoin as collateral for borrowing dollars, leading to the creation of a forward market and eventually the introduction of perpetual swaps and futures contracts.

Divine elaborated on the "cash and carry trade," a strategy where investors buy spot bitcoin and sell it forward in a contango market structure. This trade, once yielding 25-30% annualized returns, attracted institutional capital familiar with similar strategies in traditional markets like gold and oil. Although the returns have stabilized to around 10% annualized, the trade remains a significant draw for institutional investors.

The conversation also touched on the approval of bitcoin ETFs and the potential for options on these ETFs. Divine expressed surprise at the rapid approval of ethereum ETF before bitcoin ETF options. These options could dampen bitcoin's volatility, making the market more attractive to institutional investors.

Melker and Divine discussed the broader implications of bitcoin's growing acceptance among institutional investors. Melker noted that institutional involvement could lead to reduced volatility, citing the decreased drawdowns in recent cycles compared to previous ones. Divine emphasized the benefits of increased market participation, arguing that it would help spread the message of bitcoin and its potential as a decentralized, sound money alternative to fiat currencies.