Jack – BitMEX Blog https://blog.bitmex.com The official blog of BitMEX, the Bitcoin Mercantile Exchange. Sun, 25 Feb 2018 18:22:02 +0000 en-US hourly 1 https://wordpress.org/?v=4.9.4 https://blog.bitmex.com/wp-content/uploads/2015/03/favicon-128x128.png Jack – BitMEX Blog https://blog.bitmex.com 32 32 78374597 When I dip, you dip, we dip https://blog.bitmex.com/when-i-dip-you-dip-we-dip/ Tue, 20 Feb 2018 08:37:23 +0000 https://blog.bitmex.com/?p=9044

BTFD was the rallying cry of crypto traders throughout 2017. The beginning of 2018 will test even the most stalwart HODLers. When is the right time to back up the truck? It surely wasn’t at $15,000, $10,000, or $8,000.

Trading both ways is intellectually challenging. The gains one made by faithfully adhering to one very profitable strategy can evaporate in days. Things change, and so should your trading strategy and mindset if you are actively punting crypto.

Because the financial media always needs a reason why crypto gyrates the way it does, they descend upon their trusted sources and hound them for any explanation at all. I will go through some of the reasons routinely put forward.

The CME and CBOE effects

The day the CME Bitcoin futures contract launched marked the top of this bull run. The BitMEX Bitcoin Index (.BXBT) flirted with $20,000 on that fateful morning. The following two months proved that it was an amazing top at which to short Bitcoin.

Now that large financial institutions could short Bitcoin by only posting USD, the thinking was/is that they will use their financial might to short Bitcoin into the ground. The first thing most financial reporters fail to understand is that on a futures exchange, there is a long for every short. By definition, a futures exchange has no net impact.

If the shorters at the margin are willing to accept lower prices than buyers at the margin, the contract will trade at a discount. At that point, market makers will be net buyers, and then sell or short-sell Bitcoin on the spot markets. If the open interest is sufficient large, then this backwardation can negatively affect the price.

The above is a graph of the open interest in XBTUSD since January 2018. It is relatively small. The maximum open interest over the period is $164 million.

Assume that all market makers are net long, which means they must short-sell Bitcoin spot to remain price neutral. That means that $164 million of Bitcoin must be sold. That is not a per-day flow but a stock of short Bitcoin positions. The spot market on exchange trades exceeds $1 billion per day. The OTC volume is unknown, but it is not insignificant.

The short pressure at its logical maximum emanating from the CME and CBOE contract holders is meaningless. Therefore, the effect on the broader market in actual flows is negligible. The contracts mainly bolster traders’ bullish sentiment.

In terms of trading volume, BitMEX continues to blow both of these contracts out of the water. In the year to date, the BitMEX XBTUSD, XBTH18, and XBTM18 products traded a combined $53.14 billion versus CME and CBOE combined Bitcoin futures volume of $4.48 billion. BitMEX is 12x more liquid.

Wall Street is shorting Bitcoin spot

The evil bankers can’t stand a coterie of misfits becoming millionaires and billionaires, so they crashed the party by aggressively shorting Bitcoin in the spot markets.

The large financial institutions do not own Bitcoin in large quantities, if at all. They are hamstrung by KYC/AML concerns surrounding Bitcoin. That means that if they wanted to sell Bitcoin, they would need to borrow it from a credible counterparty. Hey, Cumberland Mining, can we borrow $100 million of Bitcoin?

Assuming banks borrowed Bitcoin with the intention of shorting it, they would need to sell it on an exchange. Given the skittishness that inhibits counterparties globally from placing large amounts of capital on an exchange, I highly doubt any compliance department at a bulge-bracket bank would approve opening an account.

Let’s suspend reality and assume they allowed trading desks to open accounts on the largest Bitcoin spot exchanges. The maximum the desk could make is 100% if Bitcoin went to zero. But, if the market instead face-ripped them by 50% on a $100-million position, that loss would reach the global head of trading and of the investment bank.

If you were the line executive that green-lit that trade, you would lose your job. You shorted Bitcoin, and lost a huge sum of money. That would make it into the financial press; you and your bank would be ridiculed.

The career and operational risk of trading Bitcoin and then shorting it would dissuade any bank from acting.

Korea trading ban

After the Chinese passed the crypto trading baton to South Korea, all policy actions emanating from South Korean territory were closely watched. When a South Korean Department of Justice official proclaimed that they would attempt to ban crypto trading in Korea, the market crashed.

However, unlike China, there is legal due process in South Korea. Also unlike China, South Korea’s economy is open. When the dust settled, the legislators clarified that they merely wished to have more visibility into who was trading what. Korean punters must now use real-name accounts; minors and foreigners are prohibited from trading. This is hardly draconian or a ban on trading.

The South Korean government is captured by crypto. The country’s National Pension Fund even holds equity investments in many of the largest trading venues. Korea’s most successful technology startup, Kakao, owns the largest exchange by trading volume, Upbit. Is the government really going to torpedo an industry that millions of voters love, and an industry that is creating high-paying jobs? No. Your average Kim will keep the faith, and continue to trade crypto.

The exchanges were halted from accepting new accounts. That measure will be lifted sometime in February. With more new blood in the market, expect the negative sentiment to wane.

China bans crypto again

I don’t know why markets continue to react to negative policy announcements from China. The regulators instructed all financial institutions to do a self-assessment and ban any payments connected with crypto trading. This was in response to the rampant OTC trading occurring after they shut down public trading of crypto on the large exchanges.

While the on-ramp into crypto is more cluttered, Chinese punters will find ways to obtain any financial exposure they wish. If people can find a way to build illegal power plants in China, they can surely figure out how to buy and sell crypto against Beijing’s wishes.

Tether big-bang theory

Like many religions, the prelate deems us laypeople unworthy of speaking the their language of the gods. As such, the majority of the crypto world, myself included, has no idea how Tether works.

The CFTC subpoena relating to Bitfinex and Tether spooked the markets. However, I don’t believe this is a net negative event.

If Tether were in serious trouble, FinCEN and the US Treasury would be the agencies inquiring into its inner workings. If they wanted to shut it down, the first action would be a cease-and-desist order. Given that it was the CFTC that issued the subpoena and that Tethers continue to be created, what the agency is after most likely is not fatal to the currency.

Even if a cease-and-desist order were issued, that would cause a market spike in the value of most large-cap cryptos instead of a plunge. Traders who wished to receive any real value at all would sell Tether and buy any crypto they could.

The price of Bitcoin/Tether would spike, and this would drag the Bitcoin/USD value higher as well. This is similar to what happened when the banking issues on Bitfinex drove people to sell USD IOUs on Bitfinex and purchase Bitcoin, and then withdraw it. Bitfinex led the market higher, and the rest of the exchanges followed.

If you believe there is actually trouble in the Tether Hotel California, then go long on Bitcoin. But the market action suggests that the latest legal issues are benign.

What has fundamentally changed?

The prices of the entire crypto complex crumpled. However, on a year-over-year basis, Bitcoin is up multiple hundreds of percent. Maybe your favourite shitcoin isn’t, but that’s just the game. Don’t let CNBC fool you into buying tops and selling bottoms.

If the publicity surrounding this asset class diminishes, that could elongate the bear market. However, the financial presstitutes, as Nassim Nicholas Taleb calls them, are hooked on crypto. There is real pathos in this industry. The most-read financial stories will continue to be about this space and people therefore will continue to wonder what all the fuss is about. That will continue to drive new money into the system.

For short-term traders, the amount of new fiat entering the system is the most pressing concern. If you believe the correction results in no new blood entering, then as weak hands cash out they will drive prices lower on the margin. However crypto traders are volatility junkies. Once you trade crypto, even when the equity market “crashes” 5%, you merely brush it off your shoulders.

For long-term “investors”, nothing has changed about the technological merits of Bitcoin or your favourite shitcoin. Either the coin or token will be useful or it won’t. The market gyrations are irrelevant.

The only certainty is that price volatility will rise as the crypto complex is chopped into bits. For us crypto traders, this is going to be an amazing first quarter.

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系统开发概要: 2018 年 2 月 2 日 https://blog.bitmex.com/zh_cn-development-notes-feb-2-2018/ Tue, 06 Feb 2018 01:00:20 +0000 https://blog.bitmex.com/?p=8868 在今天北京时间 21:00 , BitMEX 平台的交易量和实时注册量都创下了记录。此流量导致我们云伺服器上的代理网络流量堵塞,导致数据被迫进行备份。这些数据流太大最终导致一连串的网站用户请求新的数据映像,这么大的流量最后令网站一度瘫痪。

我们通过暂时停止交易,重置了受影响的平台服务及交易功能。之后几个小时的表现仍然不佳,但是我们成功解决了导致网速慢的两个主要系统之一。在撰写本文时,我们的读数显示网络延迟远远低于 24 小时平均值。

第二个系统将很快迁移,并将缓解这个问题。即便作出上述容量扩充,我们仍然面临引擎层面速度缓慢的情况,导致许多用户收到吓人的“过载”信息。我们了解客户正面临着这个问题,我们的团队也在积极解决该问题。解决方案涉及重新构建 BitMEX 操作系统,因此我们正在进行大量的规划和测试。一旦该项工作完成,我们会告知您。



Bitcoin ain’t a stock https://blog.bitmex.com/bitcoin-aint-a-stock/ Mon, 22 Jan 2018 10:06:53 +0000 https://blog.bitmex.com/?p=8116

The most common criticism of Bitcoin is that it has no intrinsic value. That is entirely true, but neither does the US dollar or a bar of gold. These same critics then begin to buttress their argument by comparing Bitcoin’s market cap against the equity value of some large blue-chip companies. Surely Bitcoin is in a bubble if it is worth $250 billion and company X is worth slightly less.

A share of stock in a company is the net present value of all future dividends, which implies that stocks have intrinsic value. It is intellectually lazy to compare Bitcoin, which possesses no income stream, against a stock that does.

This leads me to believe that most financial journalists do not fundamentally understand any of the financial assets they write about daily. The mischaracterisation of Bitcoin and its value proposition further illustrates their ignorance.

The second facet of Bitcoin in the market that pains me is that many people don’t understand exchange rates. If Bitcoin has no intrinsic value, its value comes from the market’s perception of its moneyness — which means that Bitcoin has a price only versus another asset, crypto coin, or fiat currency. Therefore, either Bitcoin can be in a bubble now or the asset it is valued against was previously.

Take the above weekly log graph of the Bitstamp USD/Bitcoin price since 2012. Viewing this chart would lead you to believe that the dollar was in a bubble, which then burst. Hard-money folks have been labelled modern-day Cassandras because the hyperinflationary fiat doomsday collapse has yet to manifest itself. The inflation, which government statistics expertly conceal, rears its ugly head through crypto-coin pumps and Hong Kong cage homes worth millions of USD.

My pet peeves do not prove that Bitcoin deserves its current market-clearing price against fiat currencies. Rather, if one wants to dismiss Bitcoin as a fad for the young’uns and financially stupid, the arguments used must make financial sense.

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BTFD! https://blog.bitmex.com/btfd/ Mon, 22 Jan 2018 10:06:25 +0000 https://blog.bitmex.com/?p=8117


January historically has been a great month to pick up cheap Bitcoin. Over the past five years, Bitcoin has turned bearish during this month and has, eventually, recovered from its drop (although it took a little longer in 2014 and 2015).

Creative traders who believe that Bitcoin will indeed again recover from this current market slump can look at ways to increase their alpha while holding Bitcoin using BitMEX products.

At the time of writing, XBTH18 and XBTM18 are trading at $100 and $800 premiums over a spot price of $10,950, which translate to 4.6% and 16.5% annualised premiums, respectively.

Historically, the basis on the fixed-date products trade on average around 25% to 30% annualised basis levels and thus these trades could be an extremely cheap way to pick up cheap Bitcoin.

For example, consider if the basis reverts back to its historical average immediately at the current price levels: we should see a premium on XBTH18 and XBTM18 of $640 and $1,450 respectively.

Hence, a trader looking to BTFD on Bitcoin, who believes that the basis should revert to its historical average, could then see additional gains of $540 to $650 on the fixed-date products. Happy trading!

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XBT/USD curve structure https://blog.bitmex.com/xbt-usd-curve-structure/ Mon, 22 Jan 2018 09:54:52 +0000 https://blog.bitmex.com/?p=8114

Due to the increased liquidity on BitMEX’s Bitcoin/USD contracts, a six-month fixed-date contract can finally be listed! This new contract is XBTM18, and it expires 29 June 2018. Now we have the beginnings of a Bitcoin/USD contract-interest-rate term structure. Valuable insights can be gleaned into the market’s perception of the future value of Bitcoin from the premium or discount of these contracts.

The above chart illustrates the annualised percentage premium of XBTH18 (March 2018) and XBTM18 (June 2018) on 4 January 2018 and 16 January 2018.

Looking at the 4 January observations, I am immediately struck by how flat the curve is. Given the explosive Bitcoin price volatility in December, I would expect XBTM18 to trade significantly lower or higher than XBTH18 in annualised percentage terms.

If we time travel back to 4 January, I would advise one of two strategies:

Bullish: Sell XBTH18 vs. Buy XBTM18

If you believe that the price of Bitcoin will rise, this is a price-neutral way to express that view. Why not just go naked long? If your prognosis is incorrect, your absolute losses will be much less using a 3m versus 6m basis trade.

If the spot price were to continue upwards over the next few weeks, XBTM18 would outperform XBTH18. That is due to traders purchasing the long end of the curve in anticipation of much higher prices come June. This outperformance manifests itself by the XBTM18 annualised premium rising much higher than XBTH18’s.

Bearish: Buy XBTH18 vs. Sell XBTM18

If you believe the price of Bitcoin will fall, this is a price-neutral way to express that view. Again, in case you are wrong, you want to limit the absolute losses via a basis trade.

If the spot price were to continue downwards over the next few weeks, XBTM18 would underperform XBTH18. That is due to traders selling the long end of the curve in anticipation of much lower prices come June.

What Actually Happened

Spot prices fell, and the curve parallel-shifted lower. In addition, XBTM18 underperformed XBTH18 over the 12-day time period.

In annualised percentage terms on 4 January and 16 January, XBTM18 was 0.59% and 1.92% cheaper than XBTH18, respectively. The change in average spot price between both days was down 8.19%. The XBTM18 basis held up quite well, all things considered.

That indicates that there is a strong bid under XBTM18. The market does not expect the Bitcoin spot armageddon to continue into the summer. Or, said another way, hope springs eternal. And hope plus 100x leverage is a strong cocktail.

Trade Idea: Sell XBTH18 vs. Buy XBTM18

This bout of weaker prices allows an excellent entry point into this trade. If you believe the price will soon test $10,000 and maybe $8,000, wait for the dip. During the despair, traders will short the bottom and push the whole curve close to flat premium. If the market is super bearish, XBTM18 might even trade at a discount. Then you back up the truck, and go all in.

Otherwise, the current curve structure still affords an excellent entry point. My base case is that the curve will parallel-shift upwards to an annualised 40%, and XBTM18 will move to flat vs. XBTH18. In the bullish case, XBTM18’s premium will continue to outperform and hit 50% to 60% annualised.

Daily Theta

Theta is the daily income earned or lost due to the passage of time.

Theta = (outright % premium) / (days until expiry)

For the trade described above, you earn theta by being short XBTH18 and pay theta by being long XBTM18. This is because both contracts trade at a premium. Currently the net theta is +0.0053% per day. A positive theta means the trade pays for itself. Said another way, the trade has positive carry.

One caveat: your positive XBTH18 theta position evaporates in 73 days once it expires. The clock is ticking. The trade must move into your favour before XBTH18 expires. If you roll into another 3m versus 6m calendar spread in late March, the levels may not be attractive and/or you may lock in a loss.

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Ode to speculators https://blog.bitmex.com/ode-to-speculators/ Mon, 22 Jan 2018 09:52:34 +0000 https://blog.bitmex.com/?p=8111

As a good friend of mine says, “Everyone hates bankers until it’s time to pay the bill.”

The same can be said for crypto speculators. The common rejoinder amongst those who wish they were crypto rich, but who are too scared or lazy to jump in, is that crypto won’t last because the only use case is speculation.

It is true that the number-one use case for crypto is speculation. However, without these unwashed speculators, would anyone outside of a few technologists really care a fig about this industry?

Building infrastructure

What makes a coin valuable? At a fundamental level, most coins need some sort of usage. A coin with a dedicated community is able to attract users and talented developers to improve the protocol. The technology ideally will be useful, but that depends on the quality of work produced.

But if you are a developer, how do you decide which project to devote your time to? If you are a user, how do you first hear about a new coin or project?

Forums, IRC, Twitter, and eventually traditional technology-focused media outlets are the first to pick up on new trends. It is difficult to find a worthy project while wading through the Internet sewer of questionable content. The eureka moment occurs not when just one person discovers something new and useful, but when a group of like-minded folks are moving in the same direction on the path to enlightenment.

That is the slow approach. The faster and more popular approach is to use some objective measure to determine whether a group of people believe in a new coin or project a priori. The best objective measure is a market-determined price. One of the best facets of this industry is that most projects possess a tradable asset. The price, traded volume, and market cap reflect the market’s judgement of the value of a project.

When a price goes up and to the right, that validates those already working on the project. It also creates a desire for others to join the revolution for fear of missing out. This positive feedback loop lays a solid foundation for a project to scale and possibly realise its vision.

Fake news

Think back to how you first heard about Bitcoin. For me, it was a Zero Hedge article about how the price had shot up, to a then all-time high of $250 in April 2013. The sharp price rise intrigued me and prompted my further investigation. Only then did I read Satoshi’s white paper and become a believer.

I imagine that most readers have a similar story. The mainstream media’s most popular stories usually deal with someone making a lot of money in a short period of time. In our hyper-competitive and fast-paced world, everyone is trying to spot the next thing. They too want to discover the next Netscape, Google, Amazon, and Facebook. You too can sell books, give TED talks, go to Burning Man, and wear a puffy vest that shows off your mega biceps in your 50s.

Most people learned about Bitcoin through the media. Back in 2013, any major news outlet writing a story about Bitcoin could send the price up or down, depending on the content. Developers and punters use media outlets to determine what new skills to learn, and which new assets to HODL.

The media needs a constant stream of volatility for them to continue to write about an asset class. That is why you rarely see articles about the intricacies of the bond markets. It is boring because the volatility is low. Equities, however, are sexy. They have stories, and their prices at times move violently on new developments.

The media now loves crypto because the coins move. There is a constant flow of news. There are outrageous personalities who lead projects and own large stashes of coins. The crypto industry appeals to the emotions and greed of the public, and a new euphoria is palpable — a euphoria that central banks and regulators destroyed in the traditional asset markets.

Ode to speculators

Developers, users, and investors all depend on a horde of uncouth speculators to create a liquid market for crypto coins. I say uncouth, because many financial outlets regard retail investors as stupid. Retail investors don’t work at white-shoe investment banks, wear formal business costume, or read The Economist for pleasure on the weekend. Yet, the craze is led by these hooligans.

A new class of millionaires and billionaires were created from a stock of undesirables. The memes, language, and behaviour of many of the leading figures have no place at large banks and technology firms. But these people speculated that crypto could change the world.

Of course, the financial media and vaunted figures such as Jamie Dimon would pooh-pooh crypto as a cesspool filled with retail speculators. It would be unimaginable for them to endorse a market they don’t understand. However, there is also a disturbing trend of disdain toward said speculators even among even those who grew famous within the industry because they contributed to an asset class that has grown by hundreds of billions of dollars in one year.

Rather than complaining about the wild gyrations of the crypto markets, a more appropriate response is to express gratitude that crypto isn’t as boring as the S&P 500.

But what are they used for?

Bitcoin is the most mature crypto coin, and it is less than a decade old. Many of the coins that people love to hate are less than one year old. In another decade, it might be appropriate to ask, “Where’s the beef?”

Right now as a trader or HODL’er. you want as much volatility as possible. That drives more smart engineers into the industry, more users to interact with the technology, more crypto media articles, and liquidity from new retail punters.

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Bitcoin Basis Volatility https://blog.bitmex.com/bitcoin-basis-volatility/ Tue, 18 Jul 2017 15:01:34 +0000 https://blog.bitmex.com/?p=5217

Cash and carry arbitrage is a staple strategy for traders seeking high risk adjusted returns. Because Bitcoin can go to infinity but only fall to zero, speculators at the margin are buyers. Add in 100x leverage, and bullish speculators are willing to pay very high per annum interest rates to go long Bitcoin for short periods of time.

Cash and Carry Step by Step:

  1. Buy $1,000 worth of Bitcoin at $2,000
  2. Sell 1,000 BitMEX futures contracts, e.g. XBTM17, at $2,500
  3. Wait until expiry, and collect $500 of profit

Given the current rally, the BitMEX Bitcoin / USD 30 June 2017 futures contract, XBTM17, has traded at a premium (or a positive basis) for almost the entire length of the contract. Traders who sell futures and buy Bitcoin essentially earn a fixed rate of return until expiry to lend long speculators synthetic USD.

To earn the full premium, you must keep the trade on until expiry. However, while arbitrageurs are making good money from this strategy, they are leaving food on the table.

The above chart plots the hourly annualised premium of XBTM17. It is immediately apparent that the premium itself is very volatile. The premium takes the stairs up, and the elevator down.

For traders already comfortable with cash and carry arbitrage, it is time to add a mean reversion strategy to your toolkit. Below are the relevant statistics for the data sample:

Min: -27.31%
Max: +122.30%
Mean: +17.87%
Median: +8.95%
Stdev: 24.68%

While you can’t pick the lows and highs, in general terms you can put on positive carry trades during times of extreme stress and close out when the premium normalises. That allows you to increase your returns during the contract period.

Recently the XBTM17 premium traded over 100% p.a., then a few days later traded at a discount. Instead of waiting another 20 days until expiry, arbitrageurs actively trading the basis could realise the entire 100% return in under 24 hours.

A simple yet effective strategy is what I call the Stair Step Cash and Carry Arbitrage. Assume that a normal range for the premium for a quarterly contract is 0% to 60% p.a. As the premium rises, at each 10% interval I will sell 10,000 XBTM17 contracts and buy $10,000 worth of Bitcoin. If the premium hits 60%, my expected return on $60,000 should I hold until expiry is 35% p.a.

If the premium falls from 60% to 0%, I will buy back 30,000 XBTM17 contracts and sell $30,000 worth of Bitcoin at every 30% increment. The key point is that at all times I have a portfolio with positive carry, and I benefit from volatility in the premium.

You can get very sophisticated about how you choose your increments and sizing of trades. The more granular your steps, the more profit you can harvest from the volatile premium.

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Don’t Get High On Your Own Supply https://blog.bitmex.com/dont-get-high-on-your-own-supply/ Tue, 18 Jul 2017 08:40:43 +0000 https://blog.bitmex.com/?p=5207

The DAO’s world record crowdsale was eclipsed one year later by the recent Bancor ICO. Bancor raised close to 400,000 ETH valued at $152 million. ICO mania is upon us and the number of projects raising in excess of $10 million is mind blowing.

The common theme amongst the ICOs is that the tokens are created using the Ethereum protocol. Additionally to subscribe, most ICOs require punters to tender Ether and only Ether.

The killer app so far for Ethereum are ICOs. The rampant FOMO induced greed means that newbies and old hands alike must obtain Ether. They either sell a fiat currency or Bitcoin to obtain the mana from Big Daddy Vitalik.

The rapid price appreciation of Ether is due, in large part, to the demand by speculators to buy ICOs. The price remains high after the ICO ends because most teams to date have not cashed out of their loot.

Most teams will not be able to return to the market again begging for more money if they misallocate their capital. The question for teams is how to protect the value of all the Ether raised. Failure to cash out or properly hedge, could mean a rapid evaporation of the paper wealth they now enjoy.

While they do hold physical ETH, salaries and expenses must be paid in domestic fiat currencies. Ethereum raised $18 million of Bitcoin in 2014, then failed to hedge that and thus to pay expenses was forced to liquidate some holdings at a 50% loss. The development roadmap also was altered due to lack of funds.

The current crop of ICO cool kids witnessed the hardships placed on the Ethereum development team by lack of hedging. At the first sign of Ether weakness, they will rush to the exit. The team who sells first, sells at the best prices. When it is known that ICO teams are cashing out, the stampede and its induced casualties will have everyone singing Hakuna Matata.

If I were an ICO team, I would apply a 50% haircut to the value of any ETH raised. Even if I wanted to sell it, I know I couldn’t because the liquidity would disappear long before I could liquidate my entire stack. All the buyers at the margin bought Ether to invest in the ICO, they won’t be around to catch falling knives during the correction.

Some in the community believe it is irresponsible for development teams to raise such god like sums of money. They protest that a few million dollars worth of crypto should suffice any project. Additionally, if all other teams do yuge ICOs, the liquidity won’t be there when you need to sell even if you raise a “responsible” amount of money. Game theory has thus set in and it is now in your best interest to follow the herd and raise as much as you can, expecting that you will only be able to spend a fraction of that amount.

Pop Goes the Weasel

The Bancor ICO set a new benchmark. The $500 million mark is my mental goal post for the height of insanity and that will be the day that Icarus will burn in the noon day sun. Tezos and or Eos are positioned to meet or eclipse that number.

My second mental goal post is if Ether reaches parity with Bitcoin in terms of market cap. The profit taking at that level could cause the ripple that forces a calamitous unwind of the 2017 ICO bubble.

The correction in Ether and the secondary market prices of ICO tokens, will be disorderly. However, even if you do agree with my views, don’t let your haterade preclude you from making money during this glorious bull market.

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Why Don’t Banks Own Bitcoin Exchanges? https://blog.bitmex.com/why-dont-banks-own-bitcoin-exchanges/ Tue, 18 Jul 2017 08:16:14 +0000 https://blog.bitmex.com/?p=5202

Fiat government money is one of the biggest profit centres for banks globally. Even though we are all human, to trade and interact with each other requires the exchange of different coins, paper, and electronic credits. Each one of these transactions benefits banks who move money globally for a fee.

At the most simplistic level, the trading of crypto currencies and or digital tokens is just a standard foreign exchange transaction. If banks love foreign exchange, why then do they have an aversion to Bitcoin and other digital currencies?

A Close Second

Banks claim to care about optics, and say they abhor risk to their reputation. Yet – time and time again they’ve shown that they will gladly launder money for dictators, arms dealers, and drug lords. Why the aversion to conducting standard FX transactions involving digital currencies?

Banks also are not scared of breaking laws – but only so long as every other bank is doing it too. When it comes to a new business line that might be controversial to regulators, it is better to be a close second than the first. If meaningful punishment meted out to the first mover is lacking, the rest of the banks will follow headlong like lemmings.

Too Much Money to Ignore

Digital currency trading on-exchange volumes are too big to ignore. Given the level of fees charged to eager traders and speculators, the leading exchanges post revenue figures that value them in the billions of dollars using standard exchange revenue multiples.

The funny part is that a bank is necessary to operate a fiat to digital currency exchange. The on-ramp into the digital currency space requires the exchange to hold client fiat money with a bank. While the bank makes transaction fees on the movement of fiat, they miss out on the very profitable churn generated by digital currency exchange clients.

Hundreds of millions of dollars in fees will be made this year by the leading exchanges. The board of any bank that banks a digital currency exchange should be ashamed of themselves for not expanding their operations and offering, at a minimum, Bitcoin to fiat exchange services.

Trust a Banker

Throughout history, bankers have been held in low esteem. The handling of money is viewed as unclean, while rentier landholders are given the trappings of aristocracy. However the plebes, patricians, and governments still trust banks with their money.

Bank offices exude confidence, grandeur, and – most importantly – security. Contrast that to a slick and minimal website of a digital currency startup. Their airy San Fran, New York, or London offices don’t produce the same effect on potential customers.

The lack of trust between users and exchanges due to hacks, thefts, and a lack of business acumen is one of the largest reasons people don’t take the first step to acquiring some Bitcoin. Through generations of social conditioning, people believe a bank is the best place to store wealth. If your friendly neighbourhood bank offered the ability to buy, sell, and store Bitcoin directly, trust – and therefore trading volumes – would be much higher.

Figure It Out

Senior bankers appear to be catching on. A Barclays executive recently asked the FCA in London to figure out how a bank can join the party. [CNBC]

A wink and a nod from the appropriate alphabet letter agencies will set off a stampede for banks to open their own exchanges. The next question will be: buy or build?

Banks fail miserably at cyber security. Bitcoin, in many cases, does not require physical proximity to where it is stored in order to steal it. In the long run, the real differentiating feature in the exchange landscape is security. Banks that don’t want to “learn” how to conduct proper cyber security should buy the leading exchanges to whom they currently extend banking services – if they can find a trustworthy one.

The conversation between a bank and exchange will be very simple. Either the bank can buy out the exchange at a very generous multiple, or the bank will close the exchange’s accounts, and make it very difficult for the exchange to obtain an account with another organisation in a particular domicile.

As banks slowly come around to the revenue generating potential that a fiat to digital currency exchange offers, traders will abandon exchanges not explicitly owned by a bank. Banks already have millions of hungry financially repressed customers to whom they can immediately offer digital currency trading. The liquidity will immediately shift to bank-backed exchanges.

The Empire Strikes Back

Exchanges who have fought valiantly through the nuclear winter of 2014 and 2015 may not wish to sell out to the banks they loathe. Exchanges who can tap traditional VC funds or the ICO market should purchase struggling banks.

With a bank and its licenses as cover, existing exchanges can continue to innovate faster than an incumbent large bank.

This Time is Different

Yes, it’s likely we’re in a bubble. While the price of many digital currencies are likely to decline in the short-term, banks are now acutely aware of this new asset class. News stories about legacy banks “thinking” about how to offer digital currency trading to their clients will become more common.

I am extremely confident that by 2H2018 there will be a large storied bank that offers Bitcoin trading and storage to its customers. The stampede of Johnny-come-lately banks into the digital currency exchange space will be exciting to watch.

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Here Come The Bankers https://blog.bitmex.com/here-come-the-bankers/ Mon, 17 Jul 2017 18:09:22 +0000 https://blog.bitmex.com/?p=5194

Goldman Sachs and Morgan Stanley, after their clients pestered them long enough, recently released two widely read reports on where the Bitcoin price is headed. Even though both banks believe the current rally is a bubble, it is very positive that so many clients demanded research on the cryptocurrency.

If there is that much pent up demand, the next question for executives is whether or not the industry is big enough yet to support one or more full time employees market making and trading Bitcoin and other digital currencies. The following is a thought experiment on the cost benefit analysis for starting a digital currency trading desk for a bulge bracket bank.


Traders Are Expensive

Before a young man or woman begins blowing up your capital, the resources needed to get them started run close to a million dollars alone. Market data feeds like Bloomberg and Reuters can run in the tens of thousands of dollars per month. As an example, while I was an ETF trader at Deutsche Bank, my market data costs were $50,000 per month.

The next and bigger cost center is the number of support staff needed. Compliance, middle office, back office, and IT personnel are needed to help a trader effectively perform his or her duties.

The final and most important asset a trader needs is capital. From the bank’s perspective, this capital has a cost. Investors in investment and commercial banks demand a certain return on equity (ROE) for their investment. Goldman Sachs is the most profitable bank by a country mile, mainly because its management actually has a clue about how to use capital effectively.

Over the past 5 years Goldman averaged an ROE of 10%. I will use this as the benchmark for the following calculations.

The trader himself needs to get paid. Given the risk involved in trading Bitcoin, a bank would assign a mid-career trader to the desk. Assume this person’s annual total compensation is $500,000. For an equities’ banker this might be the MD’s take home pay, but for a good FICC trader it is average.

Trading Bitcoin requires a trading desk to have accounts on the leading Bitcoin exchanges. Exchanges, as we know, get hacked repeatedly. Insurance in the Bitcoin space, for good reason, does not exist. The desk needs to assign a probability of default on the exchange. Using the Bitfinex haircut as an example, let’s assume the yearly probability of default is 35%.


Cost Summary:

Trader Support: $1 million
Trader Pay: $500 thousand
ROE: 10%
Default Risk: 35%

The next consideration is how much capital to allocate to this trading operation. Even if the desk is able to achieve the ROE, making just a few million dollars won’t be worth the hassle. The approval for a Bitcoin trading desk would need to come from the CEO. Lloyd Blankfein doesn’t get out of bed for less than $10 million of profit. Let’s assume that the bank, at a minimum, must be able to deploy $100 million.

Given that 35% of the capital deployed will be spirited away, the returns must be achieved on $65 million. In order to make $1.5 million (Cost) + $10 million (Required ROE), the desk must make 17.70%.

A 17.70% annual return is very achievable. I routinely speak about arbitrage opportunities that yield in excess of 50% per annum. However, you cannot put $65 million into any trades I describe without tremendous market impact.

The trading desk will not have a mandate to just punt Bitcoin or Altcoins. They will search for pricing discrepancies between exchanges, or between spot and its derivative. When massive directional bets are removed as a strategy, it is very hard to put that much size into arbitrage trades.


Not Now, But Soon

With a market cap close to $100 billion, the entire crypto space is worth evaluating for a trading desk. However, the market still cannot support the volume needed for a trading desk to meet its hurdle rate.

When the top 5 most liquid Bitcoin / USD exchanges trade in excess of $1 billion per day on average, then we will see the first bank sponsored Bitcoin trading desks emerge. Given that yesterday $500 million was traded by the top 5 exchanges, we are not far away.

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