Bitfinex has the most robust Bitcoin margin trading platform globally. Their USD and Bitcoin borrow market is the secret sauce. Users desiring passive income deposit USD and Bitcoin. Traders who wish to go long or short with leverage borrow these funds.
The biggest risk for lenders is if Bitfinex steals their funds, or the auto-liquidation process does not work correctly and lenders suffer a loss of principal. Because of the deflationary nature of Bitcoin and the unlimited upside potential, USD rates are usually higher than Bitcoin ones.
What if there was a way to earn the high spread between USD and Bitcoin rates with minimal counterparty risk? The trading strategy below accomplishes this goal.
The BitMEX XBTUSD Swap
The key piece to this strategy is the BitMEX Bitcoin / USD swap product, XBTUSD. XBTUSD allows traders to go long or short the Bitcoin / USD rate with up to 100x leverage and does not expire. Each XBTUSD contract is worth $1 of Bitcoin. To learn more about the swap structure, please read Swaps 101. Henceforth I will assume readers understand the mechanics of XBTUSD.
If the USD rate is greater than the Bitcoin rate, sellers of XBTUSD will receive daily Bitcoin interest income. Going naked short XBTUSD to earn interest income exposes your portfolio to Bitcoin price risk. The solution is to hedge your short XBTUSD position with a long spot Bitcoin position.
- With $10,000, buy 20 Bitcoin at a price of $500.
- Transfer a minimum of 0.2 Bitcoin as margin to BitMEX, then sell 10,000 XBTUSD contracts at $500.
- Store the remaining Bitcoin securely in cold storage.
- Each day you will receive the USD Rate – Bitcoin Rate.
By leaving your money with Bitfinex, 100% of your capital is exposed to counterparty risk. By trading XBTUSD, you can reduce your BitMEX counterparty risk to 1% of your capital.
You don’t have to use the maximum 100x leverage. The less leverage you use, the less you need to monitor your XBTUSD position. If the price rises, you must deposit additional margin so that your position is not liquidated.
Bitcoin Price Risk
Each XBTUSD contract is worth $1 of Bitcoin. Selling 10,000 XBTUSD contracts at $500 locks in the value of 20 Bitcoin at $10,000. Whether the price goes up or down, you will have $10,000 worth of Bitcoin.
Your daily interest income will be paid in Bitcoin. You are free to withdraw the Bitcoin interest income at any time.
This strategy is perfect for those traders who do not have a view on the future price of Bitcoin, but want to capitalise on the high rates of interest charged for margin trading.