Crypto Trader Digest – Nov 9

$300 has stood the test of a weekly candle. That hasn’t happened since January of this year. Mining has become sexy again. After suffering through a long period of sub $300 prices, did miners discover the religion of hedging? I think so, miners are beginning to ask me about how to forward hedge Bitcoin based on new machinery they plan to buy.

BitMEX currently is focusing on our high leveraged speculative Bitcoin / USD futures contracts. However, we still aim to provide hedging services for commercial clients. While we may not have a liquid hedging futures contract yet, we can help miners construct and execute over the counter (OTC) forwards. We have relationships with many of the large Bitcoin trading desks globally. Depending on where miners are located, BitMEX can help structure, price, execute, margin, and custody for Bitcoin OTC forwards.

Before contacting us, a miner should ask themselves these questions. The answers will determine the structure of the forward contract:

1. Maturity – For how long would you like to be hedged?
2. Deliverable or Cash Settled – Do you want to deliver Bitcoin to the counterparty in exchange for fiat cash, or receive the difference between the price today price in the future?
3. Margin Currency – In which currency would you like to post margin?
4. PNL Currency – In which currency would you like to your profit and loss denominated?
5. Initial Margin – How much leverage do you require?
6. Settlement Index – On which exchange(s) would you like the settlement price based?

Before gearing up your mining operation, it is essential to construct a proper hedging program. Please email support@bitmex.com to contact me so that I may help.

In my spare time, I like to read about economic history. My recent favorite books are Ron Chernow’s Alexander Hamilton, The House of Morgan, and Niall Ferguson’s The House of Rothschild. Over the past 200 to 300 years there have been three distinct phases of banking.

Phase One (late 18th to early 20th century) was characterised by government’s subservience to private bankers for financing. Governments as usual borrowed for wars and public spending, but they were on a tight leash. Private bankers underwrote debt issuances, and it was their name and reputation on the line as much as the sovereign. As such, they tended to favor hard money policies and fiscal restraint. It was only the wealthy who had large enough savings to lend to the government and they were rewarded coupons in excess of inflation.

Phase Two (early 20th to late 20th century) was the period of public banks and mass market finance. These banks had large deposit bases and obtained capital by issuing stock. The large joint-stock banks could trade on a more global scale and service a wider swath of the populace. The middle class began their ascendance and combined they had a large base of capital that banks required. Due to better modes of communication, Governments could directly bid for the savings of their populace and didn’t require the services of private banks like the Rothschilds or Morgans any longer.

Phase Three (late 20th to early 21st century) is the period of the central bank. The gold standard was ditched by Nixon in the 1970’s, and the age of the central bank began. Freed from the restraints of hard money, Central banks globally could engage in all sorts of monetary sophistry without consequence. In the past 40 years, human civilisation has witnessed the greatest financialization in history. Governments need not its people or its banks’ capital for financing. They can just turn to another arm of the government and print the money they require. Banks don’t need the plebes’ cash either, they can borrow at 0% from their local central bank. Up until recently, global productivity surged on the back of the IT revolution and cheap labor from the emerging world. These two trends kept inflation low, and allowed central bankers to revel in their genius.

Phase Three is reaching near its end due to slowing global trade and credit growth. Central bankers must do whatever necessary to generate nominal growth to extinguish the vast horde of debt its member banks hold. Negative interest rates and aggressive money printing are now commonplace. The problem is when faced with negative deposit rates, depositors request physical banknotes, and there aren’t enough to go around. Slowly governments and banks are introducing measures to curb or eliminate the use of cash. Electronic money is being experimented with globally, and it is only a matter of time before governments trial banning cash for specific purposes like paying taxes. In the emerging world where the vast majority of the populace is unbanked, mobile money is the preferred method of payment. A striking example is Kenya’s mPesa system, which 25% of annual GDP flows through. Western nations are taking notes, and similar programs will become more common in developed nations. Once the populace is conditioned not to use physical banknotes, their ban altogether becomes easier.

Gresham’s law dictates that physical banknotes will be hoarded and electronic ones shunned. With a negative interest rate on electronic fiat, depositors will rush to convert electronic fiat into stores of value with zero or positive interest rates. Bitcoin traded on the major exchanges is an obvious choice. Exchanges like Bitfinex, Bitstamp, and Coinbase accept electronic fiat, not physical cash. The reversal of the current relationship, where Bitcoin purchased with cash trades at a premium to Bitcoin purchased on an exchange, will flip. High quality positive yielding assets will be hoarded in the near future. Bitcoin is a perfect means to protect oneself from the NIRP that is here to stay.

The ascent to $500 was truly amazing. Each hour Bitcoin moved higher, and shorts were eviscerated. Shorters of leveraged futures contracts were quivering with each dollar the price moved higher. On the daily 100x leveraged futures contract, this culminated in an astonishing 15.5% outright premium on XBT24H over spot. This is pure FOMO and greed. Buyers at these levels would need to price to rise 15.5% before they broke even in 24 hours.

Because XBT24H is a quanto contract, the basis represents a combination of interest rate and USD gamma / convexity risk. The USD gamma is correlated to the expectation of future price volatility. Assume it cost you 1% per day to borrow USD to buy Bitcoin. Then you sold XBT24H vs. bought physical Bitcoin. The price would have to close below $361 or above $759 within the next 24 hours for this trade to lose money. That is a 2,105% annualised volatility. Predictably the price crashed shortly after, and took the premium down with it.

The premium of XBT24H to spot is an accurate indicator of FOMO. Those who can control their greed or fear can profit handsomely through spot vs. future arbitrage.

Up down, round and round. For those who bought Bitcoin below $300 and rode it to $500 congratulations. For those who bought at $500, hang in there the party ain’t over yet.

Bitcoin finally managed to close a weekly candle above $300. The $200 to $300 purgatory is over. Day traders will flood back into the market as the intraday volatility increases. This week the market will breathe and consolidate. $350 is support, and it will be retested.

Trade Recommendation:

Sell the daily 100x leveraged Bitcoin future, XBT24H, while spot is $380 to $385 with a 24 hour price target of $375.

Sell the weekly 50x leveraged Bitcoin future, XBT7D, while spot is $380 to $385 with a price target of $360.

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.