The Deutsche Bank Connection

Bankers are flocking to the cryptocurrency industry as both principals and employees of related companies, fund managers, and as individual traders. Amid the rush towards this decade’s green financial pastures, one office of one bank stands out, Deutsche Bank Hong Kong.

Deutsche Bank’s foray into investment banking began with its acquisition of Bankers Trust. The firm then proceeded to ditch its conservative German roots, and import the biggest swingers in the industry. A clique of Merrill Lynch bankers were brought in. Their ring leader was Anshu Jain.

The culture was cowboy. My Hong Kong summer internship interviews in 2007 illustrates this point.

The first round of interviews was in Philadelphia. In my second 2-on-1 interview I met the man who’s team I would intern on that summer. I had just returned from my semester abroad in Hong Kong. He asked me why I loved Hong Kong, and I said I loved clubbing. I then rattled of a list of my favourite establishments. He would later tell me, that’s what sealed the deal for me in his mind.

That night I took the whole Deutsche contingent to my favorite dingy Philly late night EDM club. It got messy.

In 2007, financiers thought they were gods. Hong Kong has never regained the energy I felt that summer. I interned on the Equity Derivatives sales desk. HR nicknamed this desk the Snake Pit, because of the aggressive personalities that worked there.

The 2008 graduate training program in London featured similar aggressiveness. Deutsche offered an all expense paid trip to London for three months for all incoming graduates. The Japanese grads were the most intense. One grad got so drunk, and vomited so hard, he was hospitalised with a broken rib.

That is a taste of how the youngins were trained at Deutsche. The firm fostered an aggressive culture focused on partying hard, and making money. Unlike more demure banks, no one at Deutsche was shy as to why they were in the game. Making money was the goal, and no one was censured for being too flashy.

As the financial services industry entered a secular decline after the 2008 GFC, Deutsche people scattered to the wind. Deutsche lied to the German regulators about the value of its assets in an effort to avoid becoming recapitalised by the taxpayers. In hind side, that was the dumbest move ever. Their competing American banks gladly took TARP funds, paid huge bonus, and repaired their balance sheets. Deutsche limped along, and is one of the worst performing banks since the crisis.

The Deutsche Hong Kong reunion was ignited by Bitcoin. For some reason, this particular office is very well represented in the Bitcoin industry. The individuals I will list all went through the graduate training program, and our Deutsche stints all overlapped.

Arthur Hayes, CEO of BitMEX, member of the 2008 graduate class. I worked in Absolute Strategies Group, and then Global Prime Finance as a delta one ETF, futures, and swaps trader.

Greg Dwyer, Head of Business Development at BitMEX, member of the 2009 graduate class. He worked on the commodity structuring desk in Singapore, and then worked with me on the delta one ETF market making desk.

Nick Andrianov, Risk Management at BitMEX, member of the 2007 graduate class. He worked on the Flow and Exotic Index Volatility trading desk.

Andrew Rizkalla, Trading Lead at Paycase, member of the 2008 graduate class. He worked on the Program Trading and Facilitation desks.

Kayvon Pirestani, Director of Institutional Sales at Coinbase, member of the 2005 graduate class. He worked on the Equity Derivatives Sales desk.

Gavin Yeung, CEO of Cryptomover, member of the 2010 graduate class. He worked on the Program Trading and Facilitation desk.

Neelabh Dixit, co-founder of Cryptomover, member of the 2013 graduate class. He worked on the Portfolio Trading desk.

Donald Day, CTO Bletchy Park Asset Management, member of the 2009 graduate class. He worked as a quant strategist for the Absolute Strategy Group.

The are two other Deutsche Bank HK former employees who did not wish to be mentioned.

All Hail The CME

Due to overbearing and counterproductive financial regulations, innovation is often rewarded with heavy fines and loss of licenses. An institution with billions of dollars of revenue at stake cannot take the regulatory and reputational risk dealing with Bitcoin unless someone else does it first.

Enter, LedgerX. For over four years, the firm pestered the CFTC to allow them to clear Bitcoin settled futures and options. The hard work paid off this fall when their markets launched. Less than two weeks later, the CME announced they too would join the club. The CBOE technically was the first legacy exchange to announce the impending launch of a USD settled Bitcoin futures contract; however, the CBOE will go live 2Q2018 and the CME plans to launch theirs by year end.

The only reason why some large financial institutions (FI) participate in the digital currency ecosystem is they cannot ignore an asset class that went from $0 to almost $200 billion in value in under a decade. Large FIs are severely constrained in their ability to deploy large amounts of capital due to counterparty risk on exchanges not compliant with their specific jurisdictional overseers. An exchange who they can already trade with, the CME, that offers Bitcoin trading products is exactly what they need to seriously get involved.

Custody Risk

A USD-settled Bitcoin futures contract is perfect for large traders who cannot or will not custody Bitcoin. This futures contract gives them exactly what they desire, a product that pays them fiat currency to speculate on a crypto currency.

From the CME’s perspective, they also absolve themselves of the risk of losing customer Bitcoin. This product requires almost zero technical innovation on their part.


The BitMEX XBTUSD swap is the most liquid Bitcoin / USD trading product globally. XBTUSD trades 5x – 10x more volume than the underlying index constituents, GDAX and Bitstamp, combined. XBTUSD’s daily trading turnover routinely exceeds $1 billion, and approaches $2 billion.

The CME index will include itbit and Kraken as well. For market makers who must hedge flow on the underlying exchanges, two seriously liquid derivative contracts will increase the volatility in the spot markets. It will also place immense strain on the spot exchanges’ infrastructure. Can these four exchanges stand up to the likes of Citadel submitting, amending, and cancelling thousands of orders per minute? Time will tell, but the CME is about to get a crash course in Bitcoin.

These issues probably influenced the way in which their index was constructed. The index methodology is overly complex in an attempt to deal with the forecasted liquidity and technological issues the leading spot exchanges face.

BitMEX takes a more laissez-faire attitude about the Bitcoin markets than the CME can afford. Every financial reporter will be watching for any misstep, and the headlines will come hard and fast highlighting any issues.

Market Fragmentation

The Bitcoin markets are highly fragmented due to different regulatory regimes and cultural differences between traders from different domiciles. The type of trader who can trade with the CME cannot trade with many of the exchanges where the reference pricing occurs.

This presents a trading opportunity of a lifetime for arbitrage funds who can straddle the regulated and unregulated exchanges, and who can trade across multiple jurisdictions. The divergences will become more acute as large positions are placed on CME and CBOE products.

Will the regulated derivatives follow or lead vs. the cowboy trading occurring in North Asia? From a market microstructure perspective, this will be a very interesting experiment.

ETF Anyone?

In the disapproval of the Winklevoss ETF COIN, the SEC stated that the absence of a liquid regulated derivatives market concerned them. If the CME doesn’t face plant, this will pave the way for the ETF. The SEC dances to the beat of large FIs. If the CME is reaping immense profits from a derivative, asset managers will want in on the racket via a listed ETF.

Much like LedgerX, the Winklevii might be bested by a large ETF manager like Blackrock or Vanguard, who now has the regulatory cover to apply for their own Bitcoin ETF. Blackrock vs. the Winklevii; who has more capacity to provide push jobs for ex-SEC staffers?

While futures will allow wealthy individual traders and large FIs to comfortably trade Bitcoin, an ETF that appeals to retail investors globally will completely change the paradigm. Starting next year, expect more noise about an ETF approval emanating from the SEC.

Slow then Fast

I did not expect institutional take-up of Bitcoin to grow this quickly. There is too much money being made by startups in the space for large FIs not to get involved. As more and more of the regulatory and repetitional risk is removed, institutions will continue to increase their involvement and exposure.

The Miner Short Squeeze

Positioning has begun in earnest. In the last newsletter, I highlighted BitMEX futures trading strategies centered around the SegWit2x hardfork. Three weeks hence, the futures basis indicates aggressive positioning by traders heading into the hard fork. In this post, I will examine advanced trading considerations and unwind strategies.

XBTZ17 In Context

Bitcoin is up over 7x since January this year. Given this aggressive bull market, futures should trade in contango. Longs must pay a substantial amount of interest to entice shorts to position themselves against the trend.

The below charts list the annualised % premium for the XBTM17 (June), XBTU17 (September), and XBTZ17 (December) Bitcoin / USD futures contracts.

Each quarterly contract existed during a price rally. However, the Bitcoin Cash and upcoming SegWit2x fork dampened the premium for XBTU17 and XBTZ17 respectively.

Max % Premium PA Max % Outright Discount
XBTM17 122.30% -2.28%
XBTU17 32.38% -5.62%
XBTZ17 42.47% -7.17%

The above chart illustrates that XBTM17, which experienced no hard fork during its existence, had the highest premium and discount. XBTU17 experienced its max discount during the Bitcoin Cash hard fork.

XBTZ17 is already pricing in the SegWit2x hard fork. If the max discount has already exceeded XBTU17’s, then we can expect a substantially larger discount directly preceding the SegWit2x hard fork.

The discount is a combination reflecting traders’ fears of a disorderly hard fork, and traders selling XBTZ17 vs. buying spot to create SegWit2x coins with no Bitcoin price risk. Due to the heightened risk and publicity surrounding the SegWit2x hard fork, the discount could reach up to 15% pre-fork.

The Unwind

This time around most savvy traders are short XBTZ17 basis. Basis = Future Price – Spot Price. Any time the basis trades flat to positive, they increase their short position. However, once the fork is over large percentage of the XBTZ17 open interest must close their positions.

Many traders might close their XBTZ17 short at a mega discount pre-fork, then switch to long basis to play the relief rally. But if everyone is the same way, many will give up profits during the unwind. Additionally, bullish speculators will jump in pre-fork to take naked longs anticipating a sharp rally after the fork occurs.


During my time at Deutsche Bank there was a certain French options trader that emitted a high pitched squeaky yell of “Short Squeeze” any time the market gapped higher into the close. The XBTZ17 market is primed for a short squeeze, and I believe profit maximising miners could initiate an even sharper rally higher.

The miners signed the New York Agreement (NYA) in an effort to save face and acquiesce to activating SegWit, while at the same time securing larger blocks in the future. The NYA headed off a chain split due to UASF, but Bitcoin Cash was launched as a direct result.

Bitcoin Cash has an 8MB block size without SegWit. As it stands now, there is no need for SegWit2x Bitcoin. However, the majority of miners continue to signal for the NYA.

Signaling for the NYA costs them nothing, and it does not mean they actually will support the hard fork with hash power.

What would happen to the market if at the last minute all the large miners stopped signalling for NYA and the hard fork didn’t happen? You know the answer, Pump City. The other consequence is a violent resetting of XBTZ17 basis. All those who went short basis to collect the B2X dividend would rush to unwind their trades at the same time.

BitMEX will not credit B2X coins. Therefore, XBTZ17 shorts will remove margin from BitMEX the day before the fork and deposit on an exchange that will credit B2X. That means the leveraged used by shorts will increase further putting their positions at risk of liquidation during a short squeeze.

If I were a profit maximising miner here is what I would do:

  1. Buy Bitcoin Spot
  2. Buy XBTZ17 futures at a large discount.
  3. Shortly before the hard fork deadline, stop signalling for NYA.
  4. Bask in the glory of the annihilation of shorts on margin and futures.

If you believe this thought experiment might become reality here is what you should do:

  1. If you are short basis (short XBTZ17 vs. long spot), unwind that trade at a profit.
  2. Go long basis while it is negative (long XBTZ17 vs. short spot).
  3. If your risk appetite is large, go naked long XBTZ17 at a negative basis.

SegWit2x Bitcoin Is Not a Dividend

B2X is different than BCH in that B2X supporters do not want their coin to be an altcoin. It will either become Bitcoin or nothing.That is why they refuse to implement replay protection which allows exchanges to safely support B2X.

In the event exchanges delay the listing of the B2X by even a day, by the time you theoretically could sell B2X, it might be worthless because it failed at supplanting legacy Bitcoin.

If you went short XBTZ17 basis at a flat to positive level, you are in the money. Closing the trade early and earning the expected dividend is prudent due to the fundamental differences between B2X and BCH.

Smell That?

The putrid smell of Bitcoin shorts’ carcasses just became more pungent. The Bitcoin price pump from below $3,000 to almost $6,000 in under one month is truly astounding.

In that span of time China shut down three of the world’s largest exchanges. The New York Agreement signatories proceeded further with the scheduled SegWit2x hard fork. And heads of large banking institutions called Bitcoin a fraud.

Where to from here? How high can Bitcoin go? Is this just a flash of greatness to be followed by a century of misery?

The clues to the future of Bitcoin lie in the global currency and debt markets. The money printing orgy that allows central banks to monetise the debt of governments and large corporates created the environment for Bitcoin to thrive. Therefore, an examination of the total stock of money and government debt could give clues to the future price of Bitcoin.

From Investopedia:

M2 is a measure of the money supply that includes all elements of M1 as well as “near money.” M1 includes cash and checking deposits, while near money refers to savings deposits, money market securities, mutual funds and other time deposits.

The government debt statistics are in USD billions were obtained from a Bank of International Settlements report. The data is as of 30 June 2017.

Money is not just M2, but in our financialised world, sovereign-credit acts as a very important monetary instrument. It is why many economists label the currency system a debt-based monetary system.

Other debt instruments such as corporate debt, provincial or municipal debt also function as money. Each country is different in the ways in which other types of debt function as money. To remain consistent I only considered government issued debt.

Gold (XAU) is the analogue “I don’t trust the government” monetary instrument. Bitcoin (XBT) appears to be the digital version. For gold and Bitcoin I used the current value of the total supply of each currency as its M2 value. For government debt, each has a value of 0.

The above chart depicts the relative size of M2 + Government Debt for the four most important fiat currencies (USD, EUR, JPY, and CNY), Gold, and Bitcoin. The first salient observation is that Bitcoin’s market value barely registers on the graph vs. these larger currencies.

Debt must be paid back at some point with base money, M2. Therefore the more debt a country has vs. it’s base money, the more leveraged their financial system. Governments usually don’t worry about how debt will be repaid because they can continue to issue new debt to pay off old.

However, when the market refuses to roll over debt an affordable interest rate, debt must be extinguished. One theory of how overly indebted governments could reduce the Debt / M2 leverage ratio is to tender debt-backed money at higher and higher prices for real money such as gold. Paul Brodsky in Apropos of Everything I, II, and III lays out an excellent argument for why central banks would extinguish debt-money vs. gold. I don’t believe it is likely that central banks will add Bitcoin to their pool of assets. The more likely scenario is that inflation sensitive investors will tender their debt-money for a relatively cheap real digital monetary instrument such as Bitcoin.

The only reason Bitcoin deserves treatment in is this thought experiment is that against all odds, it is still here after 9 years. The price after falling 80% from 2013 highs to 2015 lows, is now almost 5x higher than the previous 2013 all time high. The other positive aspect is that after years of ignoring Bitcoin, many financial institutions are investigating how they can play the game.

The aggregate amount of government debt outstanding for the four fiat currencies listed is $38,334 billion. At current prices, gold and Bitcoin are worth 20% and 0.25% of the aggregate government debt respectively.

If Bitcoin is digital gold, than theoretically it could reach the same ratio as gold relative to aggregate government debt. That implies a Bitcoin price of $461,333 or an 80x increase in price.

Modesty is a virtue. Assume that Bitcoin achieves a 1% valuation relative to aggregate government debt. That results in a price of $23,065 or a 4x return from current levels.

The battle for $10,000 is one of perception. Bitcoin is still not very useful as a pure monetary transaction instrument given its price volatility. However as a store of value, if savers view it as a hard form of digital money, they will diversify out of debt-money into Bitcoin. This psychological transformation is underway. The longer the price stays at these levels, the more people will believe Bitcoin will exist decades in the future.

Trading ShitCoin2x

The underlying index for BitMEX futures and swaps contracts on Bitcoin / USD and Bitcoin / JPY will not include the SegWit2x coin (B2X). Theoretically the futures and swaps should trade at a discount to reflect the B2X dividend received by all holders of Bitcoin on the ex-date. My trading thesis is that similar to the Bitcoin Cash hard fork, the futures and swaps will behave as expected.

Savvy and unemotional traders made significant profits without taking any price risk by taking advantage of the market dislocations. The following trade ideas will focus on the XBT/USD spot market, the XBTUSD swap, and the XBTZ17 futures contract.

Trades Pre-Fork

Given the market knows that BitMEX will not adjust the underlying indices, XBTZ17’s basis will trade lower to reflect the implied value of B2X. Thankfully due the current bull market, XBTZ17 trades at a positive basis. This is a perfect entry point for the following trade.

Sell XBTZ17 vs. Buy spot Bitcoin

A few exchanges (Coinbase & Bitfinex) have already announced that they will disperse B2X to all holders of Bitcoin on the ex-date in a 1:1 ratio. Therefore, once the spread is put on, the physical Bitcoin purchased as a hedge should be sent to any exchange that will split the coins for you. This allows you to sell any B2X received immediately. He who sells first, sells best.

On the ex-date (expected to be on or around November 20th), you will receive B2X in a 1:1 ratio. These B2X coins should be immediately sold for USD. At the same time, the futures should trade at a discount or negative basis. The short futures position must covered, and the physical Bitcoin hedge sold as well for USD.

Initial Trade:

Short XBTZ17
Long XBT

At Fork Time:

Receive B2X

Trade Unwind Proceedure:

Close XBTZ17, by buying
Sell XBT
Sell B2X

Trade Profit and Loss

Because you were able to enter the futures vs. spot trade at a positive basis, the B2X you sold is pure profit. Also, because you were able to cover the futures contracts at negative basis you will pick up additional basis related profit.

If the futures are trading at a discount when you entered the spread, then you must predict whether the percentage discount is less than the expected B2X / Bitcoin ratio. Or you must have a longer term positive view on the value of B2X.

What Can Go Wrong

If you entered the futures vs. spot trade at a positive basis and the fork does not occur, you will still profit. However, you will be required to hold the spread until expiry in late December. Depending on your hurdle rate, this opportunity cost may outweigh the basis profit received.

If you entered the futures vs. spot trade at a negative basis and the fork does not occur, you will post a loss in the amount of the negative basis.

When you unwind the futures vs. spot spread, the futures contract might trade at a large positive basis. If this happens, you must hold the spread until expiry. The only thing you lose is opportunity cost on the capital tied up in the position.

Right Before and During the Fork Trades

In the hours preceding the Bitcoin Cash fork, the XBTUSD swap traded at a large discount, and the funding was negative. A negative funding rate means that shorts pay longs. This discount is due to traders selling XBTUSD vs. buying Bitcoin spot right before the ex-date so they can “create” B2X without any price risk.

Or traders fearful of negative consequences for Bitcoin due the hard fork are locking in the USD value of their physical coins. The XBTZ17 futures contract will also be sold such that it exhibits a negative basis as well.

Traders may earn the B2X USD value synthetically by taking these countertrades.

Buy XBTUSD vs. Short Bitcoin spot

Profit is earned two ways. Firstly, XBTUSD’s basis will swing from negative to flat in the hours after the fork. Your are long the basis, therefore you profit. Secondly, the funding rate is negative. You will earn Bitcoin interest ever 8 hours while the rate is negative.

Buy XBTZ17 vs. Short Bitcoin spot

XBTZ17 should trade with a negative basis as well. Traders can purchase the futures contract, and sell it hours after the ex-date once the basis rebounds.

The one wrinkle to these trades is where to short Bitcoin spot. This is a very important consideration. If the exchange where you short Bitcoin forces shorts to deliver B2X, then the trade should not be put on. Additionally, borrow rates for Bitcoin will spike shortly before the ex-date. It is entirely possible that borrow fees eclipse the basis and funding profit earned on the long XBTUSD position.

Most exchanges that offer margin trading will not force shorts to deliver or cover B2X. Forcing a large number of shorts to cover in the illiquid B2X spot market could be disastrous. Therefore, most exchanges will not credit Bitcoin lenders with B2X or force Bitcoin shorts to deliver B2X.

Policy on Bitcoin Hardforks (Update) and SegWit2x (B2X)

Anyone can create a chain fork of Bitcoin at any time. The possibility of a SegWit2x hardfork (B2X) in November 2017 requires that we, once again, clarify our position on any and all potential hardforks.


BitMEX Hardfork Policies

At BitMEX, our top priority is protecting the assets of our customers. In order for us to effectively do this, we insist that any Bitcoin hardfork includes the following:

  • Strong two way transaction replay protection, enabled by default, such that transactions on each chain are invalid on the other chain.
  • A clean break, such that the new chain cannot be “wiped out” by the original chain.
  • A modification to the block header, such that all wallets (including light clients) are required to upgrade to follow the hardforked chain.
  • A change in address format, to prevent people inadvertently sending coins to an address on the wrong chain.
  • New P2P network magic, to ensure a functioning and reliable node network for both coins.

Strong replay protection and wipeout protection, in particular, are considered absolutely crucial.  Should a hardfork not follow these policies, we will not support the new coin. To be clear, we do not intend to access or keep these coins. The administrative overhead of distributing any and all hardforked coins (including Bitcoin-based distributions like Byteball/Lumens) is prohibitive and BitMEX will not monitor or maintain balances of hard-forked coins.

Additionally, support of any forked currency is solely at the discretion of BitMEX. While we may snap users’ margin balances at the time of the fork in case we decide to distribute, there is no guarantee that it will be safe, desirable, or practical to do so. If this concerns you, you should withdraw your funds before any given fork and handle the split on your own.


SegWit2x (B2X) – BitMEX Policy

The SegWit2x (B2X) proposal is aimed at increasing the blocksize. It is scheduled to take place in November 2017. This change is incompatible with the current Bitcoin ruleset and therefore a new coin may be created.  

Proponents of this new coin hope it becomes known as Bitcoin, however which coin is known as Bitcoin is not up to the proponents of the new token. Investors and traders may decide which coin has the highest value.  In order for this process to work smoothly, strong two way  transaction replay protection is necessary.

It is our understanding that the SegWit2x proposal does not include two way transaction replay protection, enabled by default. Therefore BitMEX will not be able to support SegWit2x.

As such, BitMEX will not support the distribution of B2X, nor will BitMEX be liable for any B2X sent to us.  This policy applies even if the SegWit2x chain has the majority hashrate. Therefore, it is up to our users to withdraw their Bitcoin’s from BitMEX prior to the fork if they wish to access B2X.

BitMEX considers any and all contentious hardfork tokens as altcoins. The .BXBT and .BXBTJPY indices will remain unchanged and will not include B2X.

XBTUSD Funding Mean Reversion Strategy


After over a year in existence, it is time to analyse the predictive properties of the XBTUSD funding rate. The XBTUSD 100x leveraged contract is a Bitcoin / USD total return swap that has no expiry date. To anchor the price of the swap back to the spot market, an interest payment (we call this funding) is exchanged between longs and shorts. The interest rate by and large is determined by the previously observed 8-hour time weighted average premium of the swap vs. the spot price.

The funding rate is published with an 8-hour grace period before it is charged. That allows traders who do not wish to pay or receive funding to exit their positions before the funding timestamp. The question is, can you predict the future price of Bitcoin by the published funding rate?

I have analysed data from March 2017 until now. My data series consists of the funding rate every 8 hours, and the log return of the XBTUSD swap over the next 8 hours.

T0: Now
T1: 8 hours in the future

X-axis: Funding Rate published T0 to be charged at T1
Y-axis: Log(XBTUSD P1 / XBTUSD P0)

Simple Regression

The above chart is a XY scatter plot of the data. The chart clearly illustrates the funding rate contains no significant predictive power.

Digging Deeper

When the funding is extremely positive or negative, this could signal a reversal in the market’s direction i.e. mean reversion. Using an extreme funding rate as the signal, we can take the counter trend position.


If the published funding is at the maximum +0.375%, does that predict with greater accuracy whether the return of XBTUSD in the next 8 hours will be negative?

To further analyse this hypothesis, I calculated the sample mean and standard deviation of the funding rate in basis points (bps).

1bps = 0.01%
Mean: 1.66bps
Standard Deviation: 17.13bps

I constructed one and two sigma bands. I then conducted mean reversion tests.

1 Sigma = 1 Standard Deviation


A large negative funding rate predicts a positive return for the next 8 hour period. A large positive funding rate predicts a negative return for the next 8 hour period.

The magnitude of the funding rate tested depends on the number of sigmas away from the mean.

The following table lists the results.

Sigmas Funding Rate Sample Size % Success Cumulative Funding Cumulative XBTUSD Return Cumulative Return % of Total Observations
-2 -32.61 21 47.62% -7.71% 3.36% 11.07% 4.01%
-1 -15.47 62 53.23% -16.76% -18.15% -1.38% 11.83%
1 18.80 81 45.68% 25.10% -14.77% 10.33% 15.46%
2 35.93 36 44.44% 13.49% 6.90% 20.39% 6.87%

Sample Size – Out of 524 funding periods, this is the number of times that the funding rate was less than or equal to the sigma adjusted test (assuming a negative funding rate).

% Success – Out of the sample size, this is the number of times where the funding rate was negative and the next period return was positive or vice versa.

Cumulative Return – This is the net return, including funding, of both success and failure situations. If the funding rate is negative, you go long, and you receive funding because the rate is negative. If the funding rate is positive, you go short, and you receive funding because the rate is positive.

% of Total Observations – Sample Size / 524 (Total Number of Funding Periods)


The data clearly illustrates that traders may use an extreme funding rate as a signal to take the counter trend position. The added benefit of receiving funding for bucking the trend is what provides a significant majority of this strategy’s returns.

A simple trading algo can be constructed to capture this alpha. At each funding timestamp, if the funding rate is above or below your limit, place the counter trend trade. Immediately after the next funding timestamp, close your XBTUSD position.

The one caveat is the sample size is still relatively small. I will revisit this study early next year to observe if the results change.


The Big Bad Wolf

This week the PBOC decreed that its plebes may not invest or trade Initial Coin Offerings (ICOs). However when one engages in critical thought, it appears this ban has more bark than bite. Examining the way in which the ban was presented to the public, and the actions that were not taken, leads me to believe that this ban is for publicity only.

What Is Banned

ICOs are considered an illegal form of financing by the PBOC. Exchanges must stop supporting any trading of the tokens. Almost immediately most of the Chinese ICO trading platforms shut down. Over the past few days, many exchanges delisted any tokens from their platform. As you can imagine, without the cannon fodder of retail punters, token prices initially collapsed.

Projects that raised money from Chinese nationals must refund them their Bitcoin or Ether. Since in practice, this is impossible to accomplish, the PBOC now has a nice excuse to shut down any exchange it wishes for violating the law.

Token exchange owners must take their butt finessing with a smile on their face. They must bend over again when asked, or the PBOC will find them in violation of a law that is impossible to abide by.

Similar to the large exchanges that deal with RMB to Bitcoin or Ether trading, the PBOC now has token trading platforms firmly under their control. That is the primary reason for these new regulations.

What Is Not Banned

The PBOC might have banned the issuance and trading of ICOs in China; however, they did not outlaw the way in which ICOs are funded. The revolutionary aspect of ICOs is that the money raised is in the form of a non-governmentally aligned currency. Usually that is Bitcoin or Ether.

If Chinese punters can still convert RMB into Bitcoin or Ether legally, and withdraw their digital currency from the exchange, they can still subscribe for any ICO they wish. Once the trader’s assets are purely in the crypto space, it is very difficult for the PBOC to control where that money goes.

The PBOC isn’t stupid. They are very informed on how money flows into and out of ICOs. Therefore, this was a deliberate omission from the new ICO regulations. What the PBOC did is construct a beautiful piece of PR.

The PBOC demonstrated that it cares about the wellbeing of retail investors. The PBOC has prevented investors from losing money in this risky and volatile new asset class. If the PBOC really cared about the financial health of China it would stop propping up the property market by continuing to allow banks to issue credit. But that will never happen, so another industry was targeted to prove their good intentions.

By allowing the big three exchanges to continue business as usual, the PBOC is allowing the ICO market to limp along in China. The high priests recognise that a vibrant ICO market in China is valuable. It helps promote entrepreneurs to create the next wave of useful technological applications that could propel China forward.

The National Congress

The 19th National Congress of the Communist Party begins in October. Every aspect of life in China is affected by this pow-wow. Xi Jinping must present a country that is chugging along towards greatness. No outward crack in the veneer of harmony and prosperity is allowed.

The once vibrant ICO industry in China was a liability. The amounts of money raised grew and grew, and the risk of a high profile project absconding with hundreds of millions of dollars could not be ignored. The last thing Beijing needs before the all-important National Congress is a horde of destitute punters protesting about losing their money in one or more shitcoins.

One day after the ban, CCTV ran a piece about the cessation of ICO trading in China. They claimed that 60 ICOs raised 2.616bn CNY, across 47 platforms, involving 105,000 investors. The highly coordinated nature of the announcement and than a prime time television piece about the new regulations is good theatre. Insecure governments will create good theatre in advance of important jamborees. The plebes must feel the love.

The Future, BTFD!

The crypto market does not respect the PBOC like it once did. Bitcoin and Ether declined 15% and 20% respectively immediately following the ban. However, both have almost paired Monday’s losses. To many traders, this ban presented a perfect opportunity to increase their exposure to the asset class.

While the PBOC banned ICOs, it did not address the root cause of why Chinese investors are desperate to hand their savings to teams with slick websites. The property market is still too expensive for most traders, and after the 2015 carnage, many traders avoid the A-share market. The PBOC continues to allow domestic banks to expand the money supply through aggressive lending. This unabashed money printing creates a fear amongst comrades of a massive upcoming devaluation of the RMB. Any asset or scheme that can generate inflation beating returns excites desperate Chinese savers.

After experiencing a modicum of freedom over the investment of their savings, Chinese investors will chafe under these new regulations. The forbidden fruit tastes sweeter. By banning ICOs, the PBOC just created the industry’s best marketing tool.

The ICO asset class is still very niche. But now that CCTV is educating everyone in China about what they are. More people will attempt to purchase this taboo asset. Far from negative, this is one of the best things that could happen to any alternative asset.

ICO fundraising in China will move underground. After the National Congress, the restrictions on ICO fundraising will loosen. Remember the “crackdown” on the big three exchanges earlier this year. After a few months, the PBOC relented and allowed trading and withdrawals to function normally again.

Savvy offshore trading platforms will profit from the gap in the market caused by the closure of the leading onshore Chinese trading platforms. While overt fundraising through WeChat and QQ groups will cease for now, motivated ICO promoters will create innovative ways to access the insatiable demand for alternative savings products from Chinese investors.

Push It

The hard fork came, went, and now we are much better for it. Depending on who you ask, Bitcoin Cash is a roaring success or failure. Traders are neutral beings only concerned with generating profit. The fear, greed, and widely different policies enacted by exchanges offered juicy arbitrage opportunities.

Bitcoin Cash was not the first altcoin to enter existence through a hard fork of Bitcoin. However, it was the first to be widely publicised. Even the New York Times wrote decent articles explaining what Bitcoin Cash was, and what it could mean for Bitcoin.

Even though SegWit is activated, the scaling debate is not finished. Later this fall, it is extremely likely that Bitcoin will hard fork again. A version of Bitcoin with SegWit and a 2MB block size (SegWit2x) will begin trading. Therefore, traders should learn about how to make money using derivatives before, during, and after a hard fork.


I will use the example of Bitcoin (XBT) and Bitcoin Cash (BCH) in this theoretical example.

A hard fork of any digital currency is akin to a stock dividend. There is a finite amount of network hash power at any time. Miners will decide which version of a coin to mine based on the price ratio. The difficulty will then adjust to bring the ratio of hash power and price into equilibrium. Price leads difficulty adjustments.

1 August 13:17 UTC was the record date for BCH distribution. If you held XBT on that date, you theoretically were entitled to BCH in a 1:1 ratio. If you purchased Bitcoin after the record date, you did not receive BCH.

After the record date, a stock goes ex-dividend. The stock price will drop by the dividend that is paid. If we believe that hard forks act like dividends, then XBT went ex-div on August 1st. XBT should have dropped by the value of BCH.

In practice, because price leads difficulty adjustment, it isn’t necessarily true that XBT will or should drop immediately by the value of BCH. Additionally, unlike stock dividends which are a discrete amount of cash, BCH is a tradable currency and its value fluctuates.

Holders of long futures contract do not receive dividends. Therefore a futures contract should trade at a discount relative to the expected dividend payment. If it doesn’t, arbitrageurs will buy a stock and sell the future. They will receive the dividend payment from their long stock position, and if that is greater than the futures discount, they make money.

The same phenomenon should occur in the Bitcoin futures markets. BitMEX decided that our XBTUSD and XBTU17 products underlying index would not include the value of BCH. Traders who wished to create BCH without any XBT price risk bought XBT, then sold the USD equivalent number of swap or futures contracts, and then receive BCH. Note, they would not receive any BCH for XBT margin held on BitMEX.

XBTUSD and XBTU17 theoretically should trade at a discount relative to the value the market places on BCH. The big difference with BCH is that the future price is unknown.

Pre-Fork XBTUSD and XBTU17 Behaviour

The above chart is the outright % discount of XBTU17 from July 30th to August 3rd. The chart illustrates that traders attempting to create BCH without market risk drove the futures into extreme backwardation. The discount reached almost 5% hours before the record date.

The above chart is the outright % premium or discount of XBTUSD during the same time period. Traders also sold XBTUSD to create BCH. The swap was backwardated, which resulted in shorts paying longs funding. Over this time period shorts paid 3.51% of funding. Remarkably the swap reached an outright 3.52% discount hours before the record date.

The following trades assume you have no view on the viability of BCH. BCH may or may not be successful, but the trades I will describe yielded predictable positive returns. The trades described also have no Bitcoin / USD price risk.

Trade 1: Buy XBTU17 vs. Short XBT Spot

Predictably interest rates to borrow Bitcoin spiked during this period. Borrowing Bitcoin during the eye of the storm is not advisable. Prudent traders should have credit lines in place well in advance of the event. That allows them to lock in much cheaper rates.

Using the above chart as a guide, putting this trade on hours before the fork yields the best returns. That is when traders are the most irrational. The best part is that the basis will mean revert quickly, and it did, after the fork. Therefore you limit the amount of time you pay to borrow Bitcoin.

Assume you paid an egregious 1% per day to borrow Bitcoin. XBTU17’s discount went from 5% to 1% in 24 hours. Therefore, you could have earned 3% in one day on this trade.

Trade 2: Buy XBTUSD vs. Short XBT Spot

Again the best time to put this trade on is hours before the fork. The beauty of funding is that for the rate to go from negative to positive, the swap must go from trading at a discount to a premium. Therefore you get paid twice.

You capture the full discount, plus when you exit, the swap will be at a premium. While the swap basis mean reverts, you also get paid interest every 8 hours for being short. Once the published rate is positive, you close you long at a premium. After August 1st, it took a subsequent ten funding periods before the rate was positive again.

Post-Fork XBTUSD and XBTU17 Behaviour

The fork is over. The community breathes a sigh of relieve and hedges must be unwound. Any trader that created their BCH now has it, and must close short derivative positions. The problem is that if Bitcoin rallies alongside the unwind, basis will rise, and hedgers will be forced to cover at much higher premiums.

A priori we know the short squeeze will be violent. Therefore it is prudent to go long basis after the record date.

The above chart is the XBTU17 outright % premium from August 3rd to 8th. The massive jump in premium occurred as the price broke $3,000. Remarkably traders were given an opportunity for days following the fork to buy XBTU17 at a discount. Those that did are test driving Lambos while you ride the bus.

The above chart is the XBTUSD outright % premium over the same time period. The spike in premium occurred as the price broke $3,000. During that same time period, the funding went from negative to positive. In total, shorts received 1.76% of funding.

Trade: Buy XBTU17 vs. Short XBTUSD

The aim of this trade is to play the mean reversion of XBTU17 basis. Hedgers on the margin will choose to short the future to create BCH because the interest rate they pay via the discount pre-fork is fixed. As opposed to XBTUSD which has a variable interest rate, and cannot be known a priori.

Therefore XBTU17 basis will go from negative to positive. As the XBTU17 basis mean reverts, XBTUSD’s funding will shift from negative to positive. You benefit from a rising XBTU17 basis, plus your short XBTUSD hedge also receives interest income every 8 hours. Booyakasha!

SegWit2x Hard Fork

Bitcoin Cash was a warm up for the main event later this year. Both the big blockers and SegWit disciples believe their cause was vindicated by the recent hard fork. Big blockers point to the non-zero value of BCH as proof the market values their scaling solution. SegWit folks point to the high and rising price of Bitcoin as proof that the market values their scaling solution.

Neither side will back down before the SegWit2x hard fork put forward in the New York Agreement. The Fear Uncertainty and Doubt (FUD) surrounding the SegWit2x hard fork will be deafening.

This FUD will put a lid on the Bitcoin price. $5,000 will not be broken until after the hard fork occurs. This sets up an exact replica of the Bitcoin Cash hard fork with more money on the line. The trades and scenarios described above will remain relevant in a few months time.

I Ain’t Yo Daddy

This July the BitMEX team absconded to Milwaukee, Wisconsin for a team offsite. Milwaukee in the summer is beautiful. I thoroughly enjoyed morning runs on the banks of lakes and rivers in clean, crisp, and dry air. I’m currently training for Winter squash season in Hong Kong. Anything that makes keeping to my cardio schedule easier is appreciated.

One day at lunch Ben and his wife wanted to eat oysters. They left the table and returned shortly afterwards. Ben recounted how they attempted to purchase oysters, but due to a silly regulation, they had to be seated, served, and supervised while eating them. There was a long line for table service so they were unable to consume anything.

The nanny state is alive and well. Two adults cannot be trusted to put a shell to their mouth and slurp a morsel of food. Instead, they must be supervised by another human, and pay tips and tax for that privilege.

The infantilization of the global population shows no signs of abating. The government injects itself into every aspect of our lives, and in most cases we are worse off for it. Bitcoin in some respects is a reaction against this trend.

Bitcoin and the digital currency industry empowers adults to take control of their financial well being. This is liberating, but it comes with costs. Adults are expected to make informed decisions by ingesting all available information. Adults make their own good and bad choices. There is no CEO of Bitcoin to tell adults how to behave, where to trade, protect them if they lose their password, or police trading venues.

Some Bitcoin traders live by this ethos of personal responsibility. However, many of these same traders express concern that Bitcoin markets do not operate like other regulated asset classes. In a recent Medium article entitled “Meet ‘Spoofy’. How a Single entity dominates the price of Bitcoin.”, the author rants and raves about how a trader or group of traders are spoofing and distorting the market. The author does present interesting allegations about Tether; however, that rabbit hole is best addressed in another newsletter.

I wholeheartedly do not wish Bitcoin to trade like traditional assets. Traders should be free to, well trade. I will detail certain market practices, and why I believe they pose no threat to the integrity of the Bitcoin markets.

Insider Trading

The job of a trader is to have better information than the market. That is the textbook definition of insider trading. Traders who do not use inside information will not make money.

Insider trading is most policed in the equity markets. The reason why there are discontinuous jumps in the price of stocks is that information is held back from the market. If all available information could be traded upon at any time, trading patterns would be smoother.

American regulators are the most aggressive prosecutors of insider traders. The irony is that US congressmen and women are allowed to insider trade on companies which they essentially regulate. That creates an interesting love triangle.

Companies lobby (aka bribe) lawmakers about regulations. The lawmakers know that certain decisions they make will positively or negatively impact the stock price once made public. These same lawmakers then trade on this information and earn above average returns.

Excessive regulation and legalese provide a defensive moat for large companies against small ones. The cycle perpetuates itself because only large and well heeled companies can afford the cost of continuous bribery. This bribery presents a much better return on investment than improving their underlying product.

Lawmakers receive cash on both sides of the equation. Their reelection campaigns are funded by big business, and they get to trade the stock ahead of important regulatory changes. A variant of this triangle is present in most heavily bureaucratic governments.

Bitcoin trading occurs across a set of unaffiliated exchanges and various jurisdictions. The notion of what could constitute inside information is difficult to discern. Given the lack of a generally accepted theory on the fundamental value of Bitcoin, a piece of market news has positive or negative implications depending on who you ask.

In the ICO and altcoin markets, knowledge about potential partnerships, software bugs, or completion of certain development milestones before the general public can provide immense profits. The traders who invest the time speaking with the developers and are active in the community, are the traders who make the most money.

What a thought, if you put more effort into your craft, you make more money.


Spoofing is illegal on most regulated exchanges. Spoofing is the act of posting a order you do not have the intention of honoring. Spoofing is bluffing.

I find it incredible that this is illegal in certain markets. If you wanted to buy $1 billion worth of Bitcoin right now, would you tell the market? No. A smart trader would bluff that they wished to sell $1 billion worth of Bitcoin, and then if the market believes him and trades lower, buy at a lower price.

If a trader has the collateral needed to place an order, he or she should be allowed to place that order. Whether or not he intends to get filled is irrelevant. The big problem, however, is if the exchange violates price -> time priority in order to let the spoofer get off the hook, if a legitimate trade occurs based on their price.

Rather than focus on the flashing of large orders on Bitcoin exchanges, the author of the above mentioned article should focus on whether price -> time order matching priority was violated.

Speaking for BitMEX, price -> time priority is sacrosanct. We have never, and will never violate this essential law of order matching.

Many point and click traders believe that the mythical market makers on most Bitcoin exchanges are allowed to violate price -> time priority. The human trader sees a price, they think about it, then place a manual order. The order they thought would be instantly filled is not. Now the market has moved away from them. They cry foul. They believe their order should have been filled, and somehow the market maker was able to get out of a valid trade.

At BitMEX order matching is done atomically. If your order submission creates a match, there is no way a market maker can pull their quote before being filled. I reiterate, price -> time priority always holds at BitMEX.

Point and click traders must recognise that the human eye to brain to motor function loop is extremely slow when compared to a trading robot. You are slow, but the exchange in most cases is not at fault.

If you cannot accept your inferiority as a human, either trade with a robot, or trade using a higher time frame.


The most successful Bitcoin exchanges have the most pristine reputations. There is no deposit insurance or global Bitcoin trading cop to run to. If you do not approve of the way an exchange operates or their business practices, you are free to leave the platform at any time.

In order to retain customers, exchange operators must cater to their users. Contrast that to traditional asset markets. Financial institutions fluff regulators rather than improve the experience of their paying customers.

Reputations take forever to build, and are tarnished instantly.

Regulatory agencies can be bought, and most are held captive to the industries they police. Most high level jobs at financial institutions are held by ex-regulators. There has to be a pot of gold at the end of the rainbow to entice capable individuals to accept government jobs that pay less than the private sector.

Adults trading digital currency markets have extreme power to shape the collective trading experience. A tweet or reddit post from a KOL greatly impacts the perceived safety and integrity of an exchange. Adults should use this power to create a trading environment that is conducive to safety and wealth generation.

The above mentioned Medium article is a great example. The mainstream financial press picked up on this and amplified the reach of the author’s views. These views are not kind on many of the exchanges mentioned in the post. This surely will drive business to other outfits who, rightly or wrongly, are deemed to be honest.

The court of public opinion is the best motivator.

Day Traders

If you cannot devote at least 12 hours per day in chat rooms, on message boards, and constantly monitoring your positions, do not day trade digital currencies. Trading with a less than 1 week time horizon is dangerous if you cannot devote yourself to being on call 24/7.

This is a market for adults. Be an adult, educate yourself, and in the process obtain true freedom.

Pay to Play

Chinese Miner: I would like to build a new mine in China.

Beijing: Well Sheeeeeeit. Partner, you’re gonna have to pay to play.

The recent actions by Chinese authorities to stymie the growth of Bitcoin reminded me of John D. Rockefeller’s quest to tame the infantile oil market. Rockefeller was able to exert god-like control over the oil industry because he eradicated wildcatters.

Wildcatters were small outfits that drilled oil wells wherever they could. They were not organised, and this chaotic drilling reduced the lifespan of oil patches and caused intense volatility in the price of oil. The ways in which Rockefeller culled the wildcatters earned him the title of a Robber Baron.

The Chinese government and Rockefeller have many things in common. The Chinese government wants to control every aspect of the economy. When a new sector emerges, they allow fierce competition. Once a few winners have emerged they decimate the small fish, and present the survives with an offer they can’t refuse. Pay to play, or die.

The payment can be in many forms. But essentially Beijing can tap dat ass whenever it likes, and you better smile during the session. The Bitcoin mining industry is no different.

Local governments all vie to post earth shattering growth numbers every quarter. They will do anything in their power to achieve growth. Success guarantees a seat at the table in Beijing, and riches for your family.

For this reason, as well as overinvestment in aluminum production capacity, many poor parts of north western China have an abundance of electrical generation capacity. The boom in Bitcoin mining meant that anyone with capital and some connections at the local government level could profitably mine Bitcoin. Read the BitMEX Research report titled Mining Incentives – Part 2 – Why Is China Dominant in Bitcoin Mining, for a more indepth discussion of this topic.

The Chinese mining industry is dominated by a few large pool operators and miners. However, there are scores of smaller mining outfits. Beijing has little visibility into many of the smaller outfits. That could not continue forever.

A recently leaked document outlines how Beijing may block the propagation of Bitcoin blocks via the Great Firewall (GFW). Many correctly pointed out that miners could easily evade these measures through the use of VPNs. I brought this up with a laowai mining friend of mine during the recent Bitkan conference. He said that the use of a VPN or other means to evade the GFW would slow down the broadcast of your successfully mined block to the point where someone else would beat you to the punch.

In his opinion, these actions will kill all small mining outfits. The big boys can afford direct lines that bypass the GFW. Beijing sells these lines to compliant comrades, and can monitor all traffic. The fees paid are akin to a bribe to the government to continue operation. Absent this, you will be too slow to compete internationally. Now Beijing has complete control over the success or failure of your business, and you will pay whatever they ask.

He further added:

For instance, Inner Mongolia has relatively low population and economic growth. No one wants to move there. A few years ago the local Inner Mongolian government offered Chinese companies large pieces of land if they moved operations from other provinces. Each company who moved there actually got two titles, one for building manufacturing facilities and the other for strip mining coal.

The companies could cheaply and easily mine the coal for sale or build their own smaller coal power plants to run their operations. This led to a staggering amount of coal power plants in Inner Mongolia, most of them fairly small, around 50 to 250 MW.

After these companies moved there they were hit by the global slowdown in the commodity industry. Almost everyone of these factories started mining Bitcoin on the side. They write off miners as an equipment expense, and use the higher electricity usage costs to lower corporate profit and tax. In return they get a consistent side revenue that is not taxed.

While Bitmain is certainly the biggest miner in China, it by no means dominates. The vast majority of factories in Inner Mongolia and neighboring provinces are all doing this and collectively represent a significant amount of hash power.

I think this is the most likely the reason for the mainland crackdown on mining as all these factories are avoiding tax and laundering profits. By shutting things down at a network level that will force a greater centralization, the large players will then get licensed, and the government can regulate and tax them. In my opinion I don’t believe mining will be dead in China, I think it will become a permissioned industry.

The 21 million Bitcoin question is whether Beijing would use its new power to attempt to kill Bitcoin. Given that many local governments and senior members of the party profit from the continuation of mining racket, I believe the status quo suits Beijing.

Beijing’s treatment of the internet is an apt comparison for how I believe they will treat Bitcoin. Beijing tolerates the existence of VPNs, and sells private lines to bypass the GFW to certain organisations. Operation of a VPN seems cheap and easy to many readers; however, the vast majority of the Chinese masses are too poor to purchase a VPN, and more importantly have no desire. They are perfectly content with the China intranet, and have no desire to escape.

Beijing has no problem with the wealthy elite enjoying a few freedoms, as long as the mindset of the masses is not poisoned. A prime example is the job of a friend of mine in Shanghai. He re-taught elite Chinese students slated to study abroad the correct version of certain historical events. China has no problem with the masses being ignorant, but they don’t want their best and brightest to appear stupid vs. their international peers.

The recent closure of exchanges, banning of ICO fund raising, and the probable disruption of the Bitcoin network by poisoning block propagation, ensures that the masses may not enjoy the fruits of cryptocurrency, but the wealthy few can.

Time will tell whether Bitcoin and other cryptocurrencies present a real value proposition to the Chinese masses. If cryptocurrencies are like water, they will reach the lowest point given enough time. If they are not, then a small percentage of Chinese investors will continue to trade, invest, and use the technology.

Haters Gonna Hate

Why do we, as an industry, look for validation from the finance industry we are trying to disrupt? It’s difficult for most to ignore statements from two of the most powerful financiers of our age: Jamie Dimon of JP Morgan and Ray Dalio of Bridgewater.

Jamie felt the need to distract the crowd away from his bank’s disastrous quarterly trading revenue results by launching a diatribe on Bitcoin. He called it a fraud and said he would fire employees who traded it. Ray said that Bitcoin was in a bubble because it provided no utility; it is too volatile to be used as a currency in everyday commerce.

One of the most common criticisms of Bitcoin is that it is too volatile to be used as anything but a tool of speculators. Bitcoin cannot be a store of value like gold because its value fluctuates too wildly.

But why is gold put forward as the epitome of stability? Yes, it has over a thousand years of history as the symbol of wealth and international commerce. However, at one point in time using gold as a currency was revolutionary and possibly heresy.

A Gold Thought Experiment

Imagine yourself part of a early human civilisation thousands of years ago, before gold was accepted as money. Your tribe or village uses shells as money. The shells are sufficiently rare that they hold value. They are easily recognised and hard to counterfeit. However, it is hard to store the shells in vast quantities, and over time the shells degrade. Carrying a large quantity of shells is also quite difficult. Elon Musk hasn’t been born yet. Few of these shells are self-driving.

One day you discover specks of a yellow metal. Its lustre entices you to pick up a few small rocks and study them. Unlike many rocks and metals you deal with, gold is quite soft. Over a hot fire, you melt some of these gold nuggets together and find it is quite easy to work with this new metal.

The next day you tried to remember where you discovered the gold. After a few weeks of searching you were able to locate another few nuggets. Another thought: perhaps gold is rare.

As a civic-minded person, you arranged a meeting with the village leaders and showed them your new discovery. You asked if possibly gold could replace shells as the accepted currency. They laughed at you. A gold rock as money, how silly. Everyone knows that shells are money, and shells will always be money. You feel deflated but not defeated.

Yet – a woman at the meeting thought the gold would make good jewelry. It was very shiny and looked much better than the drab trinkets townspeople wore. She asked where you acquired the gold and if you could help her fashion it into jewelry.

You were able to find a location where if you dug, gold appeared fairly regularly. It was a hit. Everyone loved their new gold jewelry, it looked much better, and it held its form over time.

Given the primitive tools at your disposal, it was very difficult to find large quantities of gold. Gold jewelry began to function as a proto currency. Those who wore it were richer, as it required more and more shells each year to purchase a standard bauble.

At this point the village elders began to worry. Their wealth was stored in the form of shells. In the face of a better monetary instrument, gold, the shells depreciated in value every year. Even worse, because gold is rare, inert, impossible to counterfeit, and easy to transport, some merchants preferred to sell goods for gold rather than shells.

Because the village had a limited history handling gold, its value fluctuated wildly. No one know what it should be valued at vis-a-vis real goods and services so it still wasn’t as stable a monetary instrument as shells. The elders used this fear and price volatility to warn the plebes not to consider gold as money. Why should gold be money, it was just a shiny rock used for beautification purposes.

Overtime the village could not ignore that gold and metallic monetary instruments in general were technologically superior. Slowly then quickly, the value of gold vs. real goods and services skyrocketed. Those who had “invested” in gold, saw their purchasing power increase dramatically as the society switched to a better monetary technology.

Monetary Transition

From barter, to commodity money (gold), to paper fiat money, to cryptographic money, each one of these transitions features extreme volatility then stability. The new form of money at one point will not be able to purchase any goods and services, then all of a sudden its purchasing power increases quickly. The network effect ensures that the transition between different forms of money is chaotic.

A monetary instrument can only have value if a sufficient percentage of the network will price their goods and services in said instrument. However, no one wants to be first. The chicken and egg problem of monetary adoption ensures that once the switch happens it occurs quickly.

For savvy speculators, properly positioning oneself in front of a monetary shift is extremely profitable. Because money has no value without its network, it essentially goes from being worth nothing to something. Bitcoin is no different.

From Zero to Pizza

Bitcoin Pizza Day (May 20th 2009) is the first time Bitcoin was exchanged for a real good. Since then, as the network grew and people valued the characteristics that make Bitcoin a possible monetary instrument, its price vs. real goods and services increased dramatically.

If Bitcoin were not volatile then we would not be experiencing a monetary system transition. As traders, investors, and speculators participating in such a transition is the privilege that most humans will never experience given their infrequency.

Monetary transitions are zig zags not straight lines. Also these transitions take time. No monetary instrument completely replaced its predecessor in under a decade. Therefore it is foolish to pooh pooh Bitcoin because of volatility that is entirely due to a phase shift in monetary instrument preferences of a society.


Becoming the CEO of a multinational bank is incredibly difficult. CEOs like Jamie Dimon dedicated their lives to the organisations they lead and have made many personal sacrifices. Being human, it must irk them that youngins have become worth $100 million plus in a few years due to a belief in a different way of transferring value.

It also is annoys senior financiers that these same pups’ stated goal is to dismantle the monetary system that they sacrificed everything to lead. The smart financiers are busy buying crypto assets while they publicly deride them. The dumb ones double down on the supremacy of central bank printed fiat denominated assets.

The world is more connected than ever. A move from analog to digital cryptographic money will be chaotic and volatile. I consider myself lucky to be alive, and fortunate to be able to stake my personal fortune betting against the old and for the new.