Crypto Trader Digest – May 9

ETHXBT Swaps Live

This past Friday, we launched our first swap product, ETHXBT. Traders can go long or short the Ether / Bitcoin exchange rate with up to 33x leverage, and fund their position with Bitcoin. ETHXBT trades like spot and does not expire.

We recently increased the leverage from 25x to 33x. ETHXBT is the only product globally offering leverage over 5x.

Please read Swaps 101 to learn exactly how the this product works.

We are very happy with how the product is trading. Traders appreciate the high leverage and the fact that ETHXBT does not expire. Our next goal is to launch XBTUSD.

XBTUSD will be a swap product for the Bitcoin / USD exchange rate. Each swap will be worth $1 of Bitcoin at any price. Buyers will pay the Bitfinex USD lending rate and receive the Bitcoin lending rate. Sellers will receive the Bitfinex USD rate and pay the Bitcoin rate. XBTUSD is already live on BitMEX Testnet.

When XBTUSD is launched, XBT24H, XBT48H, XBT7D, and XBU7D will be delisted as they expire. XBTM16 and XBTU16 will continue trading until expiration. We have not decided whether we will list additional longer dated quanto futures contracts once these expire. We appreciate your feedback on the matter.

Litecoin Returns

Many traders badgered us to relist a Litecoin futures contract. We listened, and LTCXBT is now live. LTCXBT is a swap product similar to ETHXBT.

LTCXBT allows traders to go long or short the Bitfinex Litecoin / Bitcoin exchange rate with up to 25x leverage. Traders must fund their position with Bitcoin. Buyers pay the Bitfinex Bitcoin lending rate, and receive the Litecoin rate. Sellers receive the Bitcoin rate and pay the Litecoin rate. Just like ETHXBT, LTCXBT does not expire.

500 Euro Note Gets Dodo’d

The ECB decreed that by the end of 2018, issuance of the 500 Euro note will cease. [ZH] Earlier this year, the ECB expressed its displeasure with the ability of plebes to store wealth outside the Euro banking cartel. This is the first step towards steeply lower negative rates.

This is a significant development in the war on cash. If the ECB can persuade the SNB (Swiss National Bank) to eliminate the 1,000 CHF note, then total domination of Europe’s monetary supply can begin.

Europeans slowly are realising how the monetary priests of Europe mean to fleece them of the privilege to save. Converting electronic bank credits into physical large denomination notes won’t save you. After issuance has ceased, the ECB will pressure banks to enact large fees to change large denomination notes into smaller ones. Imagine paying a few percentage points for the privilege of converting a 500 Euro note into five 100 Euro notes.

The smart savers will slowly convert electronic bank credits into a form of non-governmentally aligned electronic money. Bitcoin is the most liquid form of e-gold.

Europe and Japan lead the developed world in the push for larger negative rates. Super Mario recently launched QE for the world, and Kuroda-san will bring the bazooka out once more lest the market take USDJPY below 100.

Gold used to be a great way to protect your wealth from idiotic monetary policy, but x-ray’s and other advanced search techniques will make hoarding gold a fool’s errand. With an internet connection, a mobile phone, and a Bitcoin wallet, you can save and spend your wealth when you please, without permission from a bank.

HK Trade Invoicing Fraud Escape Hatch Closing

China’s capital controls historically have been as loose as Hester Prynne. The easiest way to move large sums into and out of China was via trade invoice fraud in Hong Kong.

The fraud is simple: A Chinese company submits a receipt importing $100 worth of goods from Hong Kong. The PBOC allows the company to FX CNY into USD. Now the company has $100 to pay for the goods. However, the value of the goods is vastly lower than $100. The company pockets the difference in USD and has escaped a depreciating Yuan.

Reuters reports that: “Hong Kong is conducting a multi-pronged customs, shipping and financial sector crackdown against so-called fake trade invoicing that allows billions of dollars of capital to leave China illegally.”

Beijing obviously called up their stooge CY Leung (the unelected CEO of Hong Kong) and told him to shut it down. This is by far the and most important channel of money out of China.

Next on the list is corporate M&A. Ever wonder why Chinese corporates are scrambling to buy foreign firms in completely different industries? Well if you buy a company abroad, you can legally convert CNY to USD or Euros to complete the transaction.

CLSA recently reported that Foreign Direct Investment has been eclipsed by Outward Direct Investment. It is plainly clear what Chinese corporates are doing, it is now up to Beijing to shut down yet another avenue for CNY to leave the Middle Kingdom.

As the larger and more popular avenues to skirt capital controls are closed, it will put pressure on those methods still remaining. Selling CNY and buying Bitcoin isLEGAL in China. While the liquidity is certainly too low to handle Billions of CNY, even a modest uptick in flows from CNY to Bitcoin will rerate the whole digital currency sector higher.

Using LTCXBT To Play The Next LTC Pump ‘n Dump

The following strategy is aimed at holders of Bitcoin that want to create a positive carry strategy with the optionality to profit from the next Litecoin pump and dump.

Trade Mechanics:

  1. Sell Bitcoin and buy physical Litecoin. This must be done without borrowing Bitcoin on margin. Assume you purchased 10,000 LTC.
  2. Sell 10,000 LTCXBT swaps on BitMEX.
  3. Loan out your 10,000 LTC on Bitfinex, and earn the LTC rate.
  4. You will pay the LTC rate on your short LTCXBT position.
  5. You will earn the XBT rate on your LTCXBT short position.

This trade is a positive carry trade because you earn the XBT lending rate on Bitfinex through the LTCXBT swap. Your earnings from lending out LTC are negated because you must pay the LTC rate through your LTCXBT position.

Now you wait. Preceding the pump, the operators will reserve all the available LTC in the lending market. This eliminates the ability for traders to short LTC on margin, and it forces those who are short on margin to cover or be margin called when their LTC loans expire.

This strategy allows Bitcoin holders to build Litecoin inventory and get paid at the same time, with no risk. When the pump arrives (you will know because LTC lending rates begin to rise quickly), do the following to unwind the trade:

Buy back your short LTCXBT swaps. Now you are left naked long LTC. Before you liquidate your physical LTC, continue lending at the existing rate. The LTCXBT swap’s LTC funding rate will adjust only after 24 hours, which means that you will pay a lower rate via the swap than you currently receive on your physical LTC.

When the time is right, liquidate your long LTC position for Bitcoin. Sit back like Scrooge McDuck on your pile of Bitcoin.

Bitcoin: Still Alive

Bitcoin rallied last week with a high on Bitfinex just over $470, and China finally breaking 3,000, before a sharp rejection down to $435 (and 2,800). We have since recovered and trading in a $450 range. Interestingly Coinbase is now trading at a 1.2% premium to Bitfinex and the other major exchanges, leading the pack for once. Only time will tell whether there is increased purchasing going on in the US, or Bitfinex is taking a breather.

On that point, the USD borrow rates have come back down to ‘normalized’ 15%pa levels on Bitfinex since the dump. Prior to the this we were seeing transactions at 30%pa – indicating that demand for that FOMO has dropped.

Looking at technicals, it appears that we are heading towards the closure of an upper-triangle, with the cross expected to happen towards the end of May at a price of $465. One may point to a similarity to the price action late Dec ’15 – Jan ’16 whereby we had a push up to $470, rejected to low $400 levels and back up to $470 again only to have a strong reaction to the downside to $350. However, this rise up has been different, more stable with less intrusive green candles and I feel we may then make a clear push onwards to levels closer to $1000 than to $0.

If we do break the upper triangle, and with the clock ticking closer to the halving, we are going to experience some much-welcomed volatility that is more likely to be priced for the upside. If I am correct, then the current June and September contracts traded on BitMEX are currently underpriced. Both are pricing around 65%pa basis, and since FOMO typically occurs towards the front end more so than the back end, a good hedged trade to take would be to long the June contract and short the September. BitMEX offers 25x leverage on both contracts, and as always, Happy Trading!

Risk Disclaimer

BitMEX is not a licensed financial advisor. The information presented in this newsletter is an opinion, and is not purported to be fact. Bitcoin is a volatile instrument and can move quickly in any direction. BitMEX is not responsible for any trading loss incurred by following this advice.