Bitcoin Derivatives – BitMEX Blog The official blog of BitMEX, the Bitcoin Mercantile Exchange. Mon, 26 Feb 2018 10:41:51 +0000 en-US hourly 1 Bitcoin Derivatives – BitMEX Blog 32 32 78374597 Swaps 101 Fri, 06 May 2016 12:05:07 +0000 http://FA277E63-94E4-406A-8ECD-F890EB4C5F7F  

I Want A Ferrari

I like cars. I would really like to experience the thrill of driving a Ferrari, but I really don’t want to own a car. People who own a Ferrari but don’t drive it often might want to earn some income by loaning out their car.

I would be willing to pay a rate of interest, to drive a stranger’s Ferrari for a short period of time. I am willing to swap an interest payment, for the use of a Ferrari.

Altcoins Are Like Ferraris

Traders love altcoins because they have extreme volatility on the up and downside. Savvy traders can earn substantial sums trading altcoins in a short period of time. However, most traders have no interest in holding or storing altcoins. They just want to participate in the price performance of the coin.

As a result, most altcoin traders prefer to trade on margin. To go long they pledge Bitcoin as collateral, borrow additional Bitcoin and buy the altcoin of their choice. To go short, they pledge Bitcoin as collateral, and borrow the altcoin to short it. In both cases, the traders must pay interest to the lender of Bitcoin or the altcoin.

Just like the Ferrari example above, traders swap interest payments for the performance of the altcoin. Traders have no interest in owning the coin, but they obtain the same economics through a swap.

BitMEX Swap Basics

BitMEX swaps mimic the exchange of cash flows and price performance inherent in trading any currency pair. Every currency pair consists of a base and quote currency. The base currency comes first then the quote currency in any currency pair code. For ETHXBT, ETH is the base currency and XBT is the quote currency.

Imagine you want to buy ETH. You first need to borrow XBT to exchange it for ETH. The person lending you XBT will charge you a rate. Once you have purchased ETH, you can lend it out to someone else.

In this example, as a buyer of ETHXBT, you pay the XBT (quote currency) rate and receive the ETH (base currency) rate. The opposite is true if you wished to sell ETHXBT.

To perfectly replicate the action of borrowing and lending the base and quote currency, buyers of BitMEX swaps must pay the quote currency rate and receive the base currency rate. Sellers of swaps must pay the base currency rate, and receive the quote currency rate.

BitMEX does not operate a lending market for either the base or quote currency, so the rates reference an external third party market.

Buyers and sellers swap interest rate payments for exposure to the underlying asset. Buyers of ETHXBT are long and profit from a rise in price; sellers of ETHXBT are short and profit from a decline in price.

The net of the base and quote interest rates is the Funding Rate. The Funding Rate is charged each day at the Funding Timestamp based on the value of the position. It’s just like a bond. If you hold the bond on the coupon date, you get a payment. If you do not, you get nothing. If you buy ETHXBT and sell it before the Funding Timestamp, you are not eligible to pay or receive the Funding Rate.

Swap Boxes And Arrows

BitMEX Swaps Flow

The diagram above shows the interest payments and performance obligations for buyers and sellers of ETHXBT.

How Are Swaps Valued?

BitMEX intends for swaps to mimic margin trading. Swaps are valued at the prevailing spot price of the underlying asset. For ETHXBT, that is the ETH/XBT exchange rate on Poloniex.

To ensure that the swap’s price does not deviate greatly from spot, each week unrealised profit will become realised at the prevailing spot price. That allows profitable traders to either withdraw their winnings, or either re-leverage them on additional contracts.

Is There Leverage?

Of course, this is BitMEX. Because no physical asset changes hands, BitMEX is able to offer very high leverage on swaps. If two traders wish to trade an ETHXBT swap worth 100 XBT, each side must post at least 4 XBT of margin. If the price declines or rises by more than 2%, the long or short trader will be liquidated. For more information, please refer to the Liquidation document.

How Long Do Swaps Last?

The beauty of BitMEX swap contracts is that there is no settlement date. As long as you can afford to pay the daily funding rate, and the spot price does not touch your liquidation price, you can keep your swap. If you wish to close your swap, trade out of your position in the open market. Buyers close their swaps by sell; sellers close their swaps by buying.

Let’s Trade

ETHXBT is BitMEX’s first swap product. It allows traders to trade the ETH/XBT exchange rate with up to 33x leverage. Traders do not need to own or borrow ETH to trade ETHXBT. Margin, profit and loss are all denominated in Bitcoin.

Trade ETHXBT Today!


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Crypto Trader Digest – Nov 3 Mon, 02 Nov 2015 16:23:03 +0000 http://14F446FF-B874-47A2-9DD9-1BBBE8A439E5 It’s China Stupid


As China goes, Bitcoin goes. This Halloween weekend, Bitoiners were either drinking in celebration, or fixated on their charts as China ripped and roared higher. XBTCNY reached a high of 2316 CNY or $364 this past Friday. I will devote the entirety of this week’s newsletter to questions surrounding China’s impact on Bitcoin.

Is China Using Bitcoin To Get USD?

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The PBOC is attempting to halt the hot money fleeing China. Since the 4% devaluation in late August, the authorities began actually enforcing capital controls. Bitcoin is legal in China, and individuals can wire RMB to one of several large Bitcoin exchanges to exchange RMB for Bitcoin. Once they have Bitcoin, they are free to transfer it anywhere in the world to buy goods or services, or convert into another fiat currency.

Further devaluation is forthcoming for the RMB. The Chinese citizens know this, and are searching for ways to protect their wealth. One popular theory is that through Bitcoin, Chinese households will get access to USD. The Bitcoin corridor is very narrow, and even a slight uptick in this sort of activity would cause trading volumes and the price to skyrocket.

The above chart shows the ratio of XBTCNY volume on, Huobi, and BTCC vs. XBTUSD volume on Bitfinex, Bitstamp, Coinbase, itBit, and Each was indexed at 100 on October 1st. Each subsequent day’s index looked at the change in volume vs. October 1st. If Chinese households were using Bitcoin as a USD conduit, then XBTCNY and XBTUSD volumes would have the same magnitude of increase.

The chart clearly shows that there were actual inflows into Bitcoin that didn’t fully leak into USD. This is very price positive. There is actual organic demand from China for wealth preservation or pure upward price speculation using Bitcoin. As the rest of the world piggybacks on the surge in Chinese demand, that ratio will fall further.

USDCNY vs. USDCNH: The Bitcoin Angle

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Currency trading in China is a complicated and fickle beast. There are three currency pairs to know about. The interbank USDCNY rate is set each morning at 9:15am by the PBOC. This is the rate at which member banks can trade USDCNY against the PBOC. USDCNY floats in a PBOC set band around the interbank USDCNY rate. USDCNY can only be traded onshore in China and is subject to capital controls. USDCNH is the offshore version of USDCNY. This pair floats in a band around the USDCNY rate. USDCNH cannot be imported onshore accept in a few circumstances that are irrelevant for this discussion.

USDCNY and USDCNH both have different forward curves, which represent the supply / demand dynamics of onshore and offshore CNY. Only domestic Chinese banks can participate in the deliverable USDCNY forward market, and this market is heavily regulated and monitored by the PBOC. Any bank globally can participate in the deliverable USDCNH forward market; the PBOC have very strong regulatory control over this market. Because of this, the USDCNH is a leading indicator of where the PBOC will set the interbank USDCNY, as banks can effectively use the offshore forward market to speculate. Recently USDCNH has traded at a higher price than USDCNY, which signals the market believes further CNY devaluation will occur.

The chart above shows the USDCNH premium (read: the market thinks CNY will be devalued) vs. the premium of Bitcoin in China. There is no clear correlation between the two metrics. The complicating factor is that the PBOC actively intervenes in the USDCNH forward market to narrow the differential. The PBOC does not want clear market signals of the impending devaluation. I still believe that a major motivating factor for China’s shift to Bitcoin is a real fear of currency devaluation.

How To Play The China Bitcoin Premium

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The China Bitcoin Premium chart as the most important chart in Bitcoin. The premium rose substantially during the recent run up in price. The 5%-10% region is very important. If the premium breaks out of this range, it means the usual avenues of arbitrage are broken. Arbitrageurs provide a price dampening effect in China. If they are unable to effectively move money between China and Hong Kong, then Bitcoin and China will soar farther and faster than in November 2013.

The premium is close to the 10% level. Let’s examine how to properly arbitrage this premium.

  1. Set up a Bitcoin account offshore (Bitstamp and Bitfinex are my top choices), and a Bitcoin account onshore (, Huobi, or BTCC are my top choices).
  2. Set up a mainland Chinese bank account. If you live in Hong Kong, take the bus to Shenzhen and you can open a bank account with just your passport. The Chinese banking system is very easy to enter, but hell to exit.
  3. Wire USD to your offshore exchange, then buy Bitcoin.
  4. Send the Bitcoin to your onshore exchange, sell it to realise CNY, then withdraw the CNY to your onshore bank account.
  5. Now comes the tricky part of converting CNY into USD or HKD. Every person is given a $50,000 equivalent FX limit each year in China. Assume that you have exhausted your limit. You can travel to China and withdraw 20,000 CNY and walk it across the border. If you want to do size, then you need a few friends to come with you each day. Or you can use a shadow bank to move the money from CNY to HKD. Unfortunately Beijing has begun cracking down on these bankers, and your money may or may not appear in Hong Kong.

With $10,000, you could make $800 per day in profit. However moving even $10,000 between China and Hong Kong on a daily basis is quite difficult. Therefore, I expect the premium to continue its upward ascent as the fear of continued CNY devaluation grows. Also remember that as the PBOC lowers the benchmark interest rates, it becomes less attractive to store savings with a bank, and more attractive to speculate on risky assets like Bitcoin.

Conclusion: Long And Strong


Unlike 2013, there are real concrete macro factors affecting the flow of CNY into Bitcoin. Bitcoin has passed through many trials and tribulations over the past two years. Many exchanges have fallen, but Bitcoin and the blockchain are still here. China and the rest of the world tackled the 2008 GFC by engaging in a money printing orgy. The effects of which are only starting to be felt. The volume of world trade is declining and the only method left for nominal growth is money printing. Nominal not real growth is all that matters so that banks can extinguish their pouch of non performing loans. The high priests of central banks will provide this growth at whatever social and or economic cost.

China “rescued” the world in 2008 by going on a massive credit fueled infrastructure spending spree. The PBOC now must fight the spectre of deflation. The tools at its disposal are rate cuts and currency debasement. Bitcoin and other non-standard risk assets will gain favor with a desperate populace trying to escape the jaws of inflation. Short this rally if you must, but cover before you bust.

XBT Spot


$330 dusted, $320 is history, $340 we are almost there. That statement is filled with hubris. As a speculator, I would like to see $300 put to the test and pass before I marched towards $400.

The volumes on non-Chinese exchanges have not increased enough at these levels. This week will be a true test. Will the $300 prices bring out the closet buyers. A good indicator will be premiums paid in America on LocalBitcoins. The volume on Coinbase will also be an important barometer. Coinbase operates the largest American Bitcoin brokerage service, and all that volume is passed onto their exchange. The largest trading market for Bitcoin has spoken, but we still need follow on support from the second fiddle, America.

Shorting this rally has proved fatal. If you want to express your bearishness, earn the carry by shorting the BitMEX daily 100x leveraged Bitcoin / USD futures contract, XBT24H, vs. buying spot.

Trade Recommendation:

If you are bearish, sell XBT24H vs. buy spot for a cash and carry arbitrage trade.

If you are bullish, buy weekly 50x leveraged Bitcoin / USD futures, XBT7D, while spot is $325 to $330.


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Crypto Trader Digest – Oct 26 Tue, 27 Oct 2015 09:40:52 +0000 http://10FFBBC6-2A25-40D5-9721-2973D83F9A34 To Print Money Is Glorious


On his southern tour of China in 1992, Deng Xiaoping was credited with uttering “To Get Rich is Glorious”. His program of Socialism with Chinese Characteristics unleashed one of modern times’ greatest transformations in a country’s wealth. Since the early 1990’s, China transitioned from the century of humiliation, to a century of prosperity and growth.

China’s growth over the past two decades is legendary, but underpinning this growth is one of the largest credit expansions in human history. Socialism with Chinese Characteristics is a euphemism for a red printing press. Printing money is as old as centralised government. China being China just did it larger and more in your face than any government in history. Since the 2008 GFC, China’s total debt to GDP has almost doubled to 180%. The gargantuan issuance of debt underpinned the creation of ghost cities and bridges to nowhere.

The great financialisation that began in 1971 when Nixon took America off the gold standard is reaching its expiry date. World growth is slowing evidenced by an across the board slump in industrial commodities. China is a highly levered to the global manufacturing economy, and the state owned banks (SOE) loan books are stuffed with industrial companies’ debt. This debt must be warehoused and rolled over to keep the many zombie SOE’s alive. As a result, the PBOC continues to aggressively ease monetary conditions.

This past weekend the Reserve Ratio Requirement was cut by 0.50%, and the benchmark lending rate by 0.25%. These desperate moves are meant to help banks deal with their toxic loan books. As deposit rates drop, the rush to sell CNY and convert into a higher yielding asset will intensify. The PBOC is clearly telegraphing that the CNY will depreciate in the near term. Mao’s red army is watching and as the they earn less and less at the bank, they will start to embrace risky assets. Bitcoin serves as a central bank put, an electronic means of wealth preservation, and a vehicle to export domestic capital.

$300 is just the beginning. If the China narrative catches hold again, a truly explosive upward price burst will occur. For the more patient traders, consider buying BitMEX’s 25x leveraged March 2016 Bitocin / USD futures contract, XBTH16.

XBT Term Structure

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The FOMO was strong this weekend. The amazing China pump to 1950 CNY ignited the inner bull in traders. The short end of the curve shot upwards. The long end barely budged. XBTZ15’s basis was flat, and XBTH16’s basis was up 8% on the week. Traders are still hesitant to believe the rebirth from the $200 to $300 purgatory. That is why the long end has not been bought as aggressively. Many traders expect a $300 breach, and then a quick tumble just like the other two attempts prior.

If the narrative around China grows, the medium term trend for Bitcoin is higher. If $300 can be broken and held for a week, then the FOMO will begin in earnest. Then the long end of the curve will skyrocket. Those patient enough to buy XBTH16 and sell XBTZ15 or spot, will be amply rewarded.

Trade Recommendation:

Buy XBTH16 vs. sell XBTZ15 or spot if you believe $300 can be broken and held for one week.

Dancing With The Daily

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If Bitcoin is fun, Bitcoin with 100x leverage is a hell of a party. BitMEX’s 100x daily expiring Bitcoin / USD futures contract, XBT24H, has quickly become our most popular product. Because of the heightened volatility and price rise, the premium intraday has been massive.

The above chart shows the premium of XBT24H over spot for October 25th from 00:00 GMT to 23:00 GMT. 12:00 GMT is the settlement time, and that is why there is a dip. Starting yesterday night during the pump to 1950 CNY, the premium of XBT24H reached 1.75% outright. For a contract that expires in 24 hours, that is massive. I call that the FOMO premium. In a trending market, traders following the trend and momentum will overpay for exposure. This is a perfect opportunity for spot vs. futures arbitrage.

The trade is to sell XBT24H and buy spot. This is not a perfect arbitrage. At certain prices, the short XBT24H’s negative USD gamma will cause a loss for the portfolio. The PNL function is quadratic so we can solve a priori for the two break even points. For this particular trade, break even is below $259.37 and above $337.71. Given the spot price was $293, it is extremely unlikely that XBT24H will settle outside of that range. This is a no brainer trade for an arbitrageur.

XBT Spot


Bitcoin traders have been praying to the goddess of volatility for the entire summer. She awoke with a vengeance this weekend. The price action in XBTCNY reminded me of 2013. The highs were high, and the retrace was violent and swift. XBTCNY touched 1950 (appx. $306), and then careened lower by 120 CNY to a low of 1830 this morning.

Bitstamp climbed to $296, and during the downdraft briefly touched below $280. The price action will subside this week, and another attempt will be made for $300 on XBTUSD, and 1950 for XBTCNY. Additional easing from the PBOC will lend the China narrative further firepower. Make no mistake, this is a healthy rally. Short at your own peril.

Trade Recommendation:

Buy the weekly 50x leveraged Bitcoin / USD futures contract, XBT7D, while spot is $280 to $285. The upside target price is $300.

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Crypto Trader Digest – Oct 19 Mon, 19 Oct 2015 17:05:48 +0000 http://D4976695-3DC9-4814-A9BC-8E16D5520C97 BitMEX Smashes Volume Records


The launch of the 100x daily Bitcoin / USD futures contract, XBT24H, corresponded with a surge in intraday price volatility this weekend. The result was a massive surge in trading volumes on BitMEX. This weekend, we hit a high of 29,000 Bitcoin traded over a 24 hour period. We want to thank all of our traders for helping to make BitMEX one of the most liquid exchanges to trade Bitcoin / USD. If you have not tried out XBT24H, you can take it for a spin on the BitMEX Testnet before trading with real Bitcoin.

We are working diligently to improve the trading experience. We received many great suggestions for new features and UI design change requests. Look out for further announcements about upgrades to the platform.

The Case For CNY Devaluation

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Whether or not the recent pump to 1835 CNY and subsequent dump to 1700 CNY is attributable to the MMM ponzi scheme, the premium of XBTCNY to XBTUSD continues to slowly rise. The PBOC resumed the CNY devaluation last Friday, and continued today. Each day at 9:15am Beijing time (GMT + 8), the PBOC releases the CNY Interbank Rate. The Interbank Rate is the rate at which banks can buy and sell CNY against the PBOC. The USDCNY and USDCNH (offshore CNY) follow the trend of the official interbank rate.

The PBOC has allowed the CNY to strengthen vs. the USD and more importantly their trade rivals Germany (EUR), Japan (JPY), and South Korea (KRW) for years. Now with global growth slowing, and the aggressive money printing from Japan and Europe, China’s hand has been forced. Xi Jinping’s biggest economic goal is to shift China away from an investment led economy to a services and consumption lead one. Many politically important groups will be impoverished by the shift in economic focus. A way to cushion the blow to the manufacturing sector is to weaken the CNY.

While the CNY was strengthening, the most popular carry trade was to borrow USD, FX into CNY, then buy bonds yielding significantly more than the cost of USD funds. Because the PBOC had a one way policy of CNY appreciation, carry traders did not forward hedge USDCNY. If they had hedged, the USDCNY forward premium would wipe out most of the profit. These carry traders profited off the PBOC who sold CNY and bought USD. The PBOC’s USD assets, mainly US treasuries, have much lower yields than comparable CNY debt. The easiest way to import USD into China was to fake invoices; this allowed individuals and corporate to FX more USD into CNY than allowed by the PBOC.

The one way CNY appreciation is now over. The carry traders are rushing for the exits, and the PBOC has put up the road blocks. Banks are now enforcing the yearly $50,000 FX limit; overseas UnionPay withdrawals are limited to 100,000 CNY per year; money changers, who previously would help move CNY in and out of China, have been shut. With capital trapped onshore, the PBOC can now devalue the CNY without suffering a loss in China’s capital account.

With the easy and cheap means of moving CNY out of China closed, Bitcoin presents a legal and viable option. The premium of XBTCNY and XBTUSD has begun rising ever since the PBOC devalued the CNY by 4% in August. If this hot money leaks into Bitcoin, the premium and price will shoot higher.

The top chart shows the XBTCNY premium vs. the PBOC Interbank Rate. The premium rose as USDCNY moved higher (read: CNY devalued). The bottom chart shows the premium vs. Bitstamp XBTUSD. As the premium rose, XBTUSD rose as well. These are the most important charts in Bitcoin. China drove the 2013 Bitcoin bubble. The PBOC isn’t done yet. The CNY will weaken, and as it does Bitcoin will slowly leak higher.

This process will happen either slowly or all at once. To take a longer term bullish view on the devaluation, consider buying the BitMEX March 2016 25x leveraged Bitcoin / USD futures contract, XBTH16.

XBT Term Structure

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Volatility spiked over the weekend during the China pump and dump. As a result, the term structure parallel shifted upwards. All contracts became more expensive, with shorter dated contracts experiencing the greatest shift upwards. There is a liquidity premium for shorter dated contracts, and that is why they tend exhibit more basis volatility.

The term structure has now become inverted. XBTH16 looks quite cheap in comparison to its peers. XBTH16’s basis only increased 9%. Given the time value this contract still retains, it should increase the most if the price volatility continues. If the curve flattens, XBTH16 should trade at 60%, an increase of 10% annualised. If the curve steepens, XBTH16 could trade at 70%, an increase of 20% annualised.

Trade Recommendation:

Buy XBTH16 (March 2016) vs. sell XBTZ15 (December 2015) to bet on the annualised basis of XBTH16 rising.

XBT Spot

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The stair step rally continued into last Friday’s settlement. Then Saturday early morning China time, a pump began. XBTCNY reached a high of 1835. At the pump’s peak, the premium in China was 10%.

The price languished above 1800 CNY, then dumped late Sunday night to a low of 1706 CNY. The rally that started a few weeks back is not over. $260 held on Bitstamp, and China has remained above 1700 CNY. After the weekend fireworks, expect a period of consolidation between $260 to $265. A break below $260 on decent volume will put pause in the rally. If the price can hold above $270 for 24 hours, a run to $300 is likely.

Trade Recommendation:

Buy October 2015 25x leveraged Bitcoin / USD futures contracts (XBTV15) while spot is $260 to $265. The upside target price is $270 and then $300.

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Your First Deposit And Trade On BitMEX Fri, 02 Oct 2015 10:23:39 +0000 http://68997127-E8A0-4C2E-AF26-1949F8D279C9 Here is an easy to follow step by step guide to depositing Bitcoin with BitMEX and placing your first trade.

deposit link

On the left hand side navigation bar, click on “Account / Wallet” then “Deposit”

verify location

You will be asked to verify your location. Select your country of residence and click “Submit”.

deposit address

Once your location has been verified, you will be presented with your personal BitMEX deposit address. Using your Bitcoin wallet software, copy and paste your address and send any amount of Bitcoin. Please refer to the following guide on an estimate of transaction fees to include for fast confirmation times:


After one confirmation (takes about 10 minutes) on the Bitcoin network, your deposit will be credited to your account. You will receive an email, and a notification will appear on your trading dashboard.

trade panel

Now you can place your first trade. Indicate how many contracts you wish to trade, and the price. If you believe the Bitcoin price will rise, click the “Buy / Long” button. If you believe the Bitcoin price will fall, click the “Sell / Short” button.

That’s it, in just ten minutes you can make your first deposit and begin trading on BitMEX.


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BitMEX Launches 50x Leveraged Daily Bitcoin Futures Fri, 25 Sep 2015 13:10:08 +0000 http://262D636A-1C73-45A7-AF72-47B49B331C60 We are pleased to announce the launch of our daily expiring 50x leveraged Bitcoin / USD futures. The XBT24H contract will expire each day at 12:00 GMT based on the 11:30 GMT – 12:00 GMT TWAP price on the TradeBlock XBX index. If the Bitcoin / USD price moves 1% the value of XBT24H will move by 1%. Margin, profit, and loss are all conducted in Bitcoin.

The XBT24H future is ideal for short-term momentum, swing, and range traders. With 50x leverage, small movements in price can lead to large profits. XBT24H is live and available for trading. If you have any questions about our new product, please contact us at

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Bitcoin Futures Basis Trading: Lesson 2 Wed, 23 Sep 2015 06:35:53 +0000 http://2F67A1B1-13CD-43EF-AF04-7A90F6CF2ACE Lesson 1 explained the time value of money and how to calculate the annualised basis of a futures contract. Lesson 2 will focus on the basis term structure and different ways to profit from curve shifts.

The basis term structure is a graphical representation of the annualised percentage basis for different maturity futures contracts.

Contango Term Structure

For a Bitcoin/USD future, being in contango means that the USD interest rate is higher than Bitcoin’s. Or put another way, traders believe that Bitcoin will appreciate in the future vs. the USD.

Assume there are three futures contracts:

Spot = $250

XBTU15 (September 2015): $260, t = 0.08 (days until expiry, Days/360)

XBTZ15 (December 2015): $290, t = 0.25

XBTH16 (March 2016): $340, t = 0.5

Below is a graphical representation of the upward sloping term structure.

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The best trading strategy for playing an upward sloping yield curve is a carry trade. Selling the longer dated XBTH16 and buying the shorter dated XBTU15 allows traders to capture the interest rate differential. When XBTU15 expires, the trader will purchase the XBTZ15; after XBTZ15 expires, the trader purchases XBTH16 to close the position.

Numerical Example:

T0 days:

Buy 1,000 contracts XBTU15 @ $260

Sell 1,000 contracts XBTH16 @ $340


T12 days:

XBTU15 expires at the spot price of $250

XBTZ15 = $258

XBTU15 Realised PNL = ($250 - $260) * 1,000 * 0.00001 BTC = -0.1 BTC

Buy 1,000 XBTZ15 contracts @ $258 (this replaces the long XBTU15 position)


T30 days:

XBTZ15 expires at the spot price of $250

XBTH16 = $310

XBTZ15 Realised PNL = ($250 - $258) * 1,000 * 0.00001 BTC = -0.08 BTC

Buy 1,000 XBTH16 contracts @ $310 (this closes out the XBTH16 position)

XBTH16 Realised PNL = ($310 - $340) * -1,000 * 0.00001 BTC = 0.3 BTC


Total PNL:

-0.1 BTC from XBTU15

-0.08 BTC from XBTZ15

+0.3 BTC from XBTH16

Total Profit = 0.12 BTC


As time elapsed the trader gained profited more from the fall in XBTH16’s price, than the loss experienced when XBTU15 & XBTZ15 expired. This is called positive carry, or positive Theta. The risk to this strategy is that the interest rate differential between XBTU15 & XBTZ15 or XBTZ15 & XBTH16 increases dramatically when the trader short rolls the position. The trader is short rolling, because he is short the near month contract and must buy it back, and then short the farther month contract to stay hedged against his long XBTH16.

Backwardation Term Structure

For a Bitcoin/USD future, being in backwardation means that the USD interest rate is lower than Bitcoin’s. Or put another way, traders believe that Bitcoin will depreciate in the future vs. the USD.

Assume there are three futures contracts:

Spot = $250

XBTU15 (September 2015): $240, t = 0.08

XBTZ15 (December 2015): $200, t = 0.25

XBTH16 (March 2016): $120, t = 0.5

Below is a graphical representation of the downward sloping term structure:

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The best trading strategy for playing a downward sloping yield curve is a carry trade. Buying the longer dated XBTH16 and selling the shorter dated XBTU15 allows traders to capture the interest rate differential. When XBTU15 expires, the trader will sell the XBTZ15; after XBTZ15 expires, the trader sells XBTH16 to close the position.

Numerical Example:

T0 days:

Sell 1,000 contracts XBTU15 @ $240

Buy 1,000 contracts XBTH16 @ $120


T12 days:

XBTU15 expires at the spot price of $250

XBTZ15 = $240

XBTU15 Realised PNL = ($250 - $240) * -1,000 * 0.00001 BTC = -0.1 BTC

Sell 1,000 XBTZ15 contracts @ $240 (this replaces the short XBTU15 position)


T30 days:

XBTZ15 expires at the spot price of $250

XBTH16 = $163.33

XBTZ15 Realised PNL = ($250 - $240) * -1,000 * 0.00001 BTC = -0.1 BTC

Sell 1,000 XBTH16 contracts @ $163.33 (this closes out the XBTH16 position)

XBTH16 Realised PNL = ($163.33 - $120) * 1,000 * 0.00001 BTC = 0.43 BTC


Total PNL:

-0.1 BTC from XBTU15

-0.1 BTC from XBTZ15

+0.43 BTC from XBTH16

Total Profit = 0.23 BTC

As time elapsed the trader gained profited more from the rise in XBTH16’s price, than the loss experienced when XBTU15 & XBTZ15 expired. This is another example of positive carry or Theta. The risk to this strategy is that the interest rate differential between XBTU15 & XBTZ15 or XBTZ15 & XBTH16 decreases dramatically when the trader long rolls the position. The trader is long rolling, because he is long the near month contract and must sell it, and then buy the farther month contract to stay hedged against his short XBTH16 position.

In the Lesson 3, I will explain some basics about risk management. The terms Delta, Dollar Value of 1% (DV01), and Theta (time value) will be introduced.


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Crypto Trader Digest – Sep 21 Mon, 21 Sep 2015 15:29:43 +0000 http://0C7481F8-9857-4018-A1E4-17FFA50D61F2 When Doves Cry


Janet Yellen dropped a bombshell on the market, and it was not received well. Yellen cited concerns over the global financial markets / economies as the main reason why the Fed decided not to raise rates. Even scarier, is she did not rule out negative interest rates or additional QE. If China and EM commodity exporters continue collapsing QE4EVA is coming.

The SPX (S&P 500) initially rallied on the news, but then puked into the close Thursday. The selling continued on Friday. A dovish Fed many thought would signal risk-on and a continuation of the equity market levitation, The Fed admitted the world economy is not well, and if they raised rates by even 25bps, EM countries and China would come unglued. Then the financial blowback would hit the land of the free. Investors have a good reason to be frightened. If the markets reacted this poorly to the expectation of more free money and even negative interest rates, what hope is there. The whole reason why markets roared back from the depths of the hellish 2009 spring was free money being doled out first by the Fed, and then by every other central bank globally.

Bitcoin’s reaction to the news was muted. Volatility dropped as it re-emerged in other asset classes. While Bitcoin and gold share many differences, the big similarity is that both are put options on the credibility of central banks and fiat money. Gold rose in the last two trading days. If the markets open Monday and the bloodbath continues, Bitcoin may catch a bid and begin a slow methodical rally.

If the US decides to travel into never never land with negative interest rates (NIRP), the war on cash will begin in earnest. In effect the USD market will be split into physical notes and digital bank credit. Good money, physical notes, will be hoarded and bad money, digital bank credit, will be in abundance (Gresham’s law). For policy makers this creates issues as it is impossible to fully track and police the flow of cash. Europe is next, the ECB’s QE program is failing as there are not enough bonds to buy without severely impairing the markets. More NIRP is on the horizon for the EUR. The SNB (Swiss Franc) and Riksbank (Swedish Krona) are reading the tea leaves too. They will move aggressively into negative territory in response, as they aren’t happy at the appreciation of their currencies vs. the EUR.

It is not outlandish to imagine global governments banning cash, and forcing the plebes to tender cash for digital bank credit. Bitcoin is one solution, gold is another but carrying around your wealth in gold can get heavy (hopefully I have these problems soon). Bitcoin is digital money with no domestic restrictions. Those who realise this early will have a chance to protect a portion of their wealth from NIRP by buying Bitcoin at reasonable prices. These things happen slowly then all of a sudden. Greece is the poster child. Capital controls were almost assured once Syriza was elected. But still many Greeks did not withdraw their EUR. Then one Monday the banks didn’t open, and when they did only 60 EUR per day was allowed to leave. Don’t be like the Greeks, buy Bitcoin.

XBT Term Structure

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Price volatility was muted last week which meant the term structure did not experience much change. XBTU15 continues to be the most expensive future in terms of basis. That is due to the liquidity premium. If price volatility returns to Bitcoin this week, XBTV15 should experience a basis pop. It will be the front month future as of Friday, and it trades at the cheapest basis. Consider selling XBTU15 and buying XBTV15 to take advantage of a curve steepening. XBTH16’s basis has shown the most stability recently. It has traded in a 5% point range for the last month. Another way to benefit from a rise in XBTV15’s basis is to buy XBTV15 and sell XBTH16. This trade has positive carry (or positive Theta) so even if your prediction is wrong about volatility returning, you will earn the basis differential because XBTH16’s basis is higher than XBTV15’s. That way you can exit the trade with a slight profit if the market stays comatose.

Trade Recommendation:

Sell XBTU15 vs. buy XBTV15 to profit from rise of the XBTV15 basis. Alternatively, buy XBTV15 vs. sell XBTH16 to earn positive carry and profit from a rise of the XBTV15 basis.

The first installment of our series of lessons on basis trading was published last week, Bitcoin Futures Basis Trading, Lesson 1. This was a discussion on the time value of money and how to compare futures rich or cheapness by looking at the annualised percentage basis. Lesson 2 will deep dive into the different curve structures and appropriate trades to implement given certain situations.

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After a very boring weekend in terms of price action, Bitcoin awoke and dropped $5. The price is solidly below $230, and the new range is $225-$230. The ranges have gotten tighter and tighter, and the time spent in a sideways motion has increased. The breakout whether higher than $235 or lower than $225 will be violent.

Bitcoin is in a wait and see mode while the global markets digest the historic September FOMC. The chop will continue until traders decide whether NIRP and more QE is a short term positive or negative for Bitcoin. Absent a clear break out, going long when spot is $225 and short at $235 is a reasonable strategy.

Trade Recommendation:

Go long XBTU15 (September 25x leverage Bitcoin/USD futures) when spot is at $225, with an upside target price of $235. If spot breaks below $225, sell XBTU15 with a downside target of $210. If spot breaks above $235, buy XBTU15 with an upside target of $250.

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BitMEX CEO Sees Bright Future For Bitcoin Derivatives Wed, 27 May 2015 00:46:32 +0000 http://95A6F058-207C-4F7E-AC05-C0C078C839D1 This is a repost from

Asia-based bitcoin derivatives exchange sees increasing hedging demand especially from China

Arthur Hayes, chief executive of Bitcoin Mercantile Exchange (BitMex) doesn’t have an office, in fact his company doesn’t even have a bank account, yet BitMex is one of a handful of bitcoin derivatives exchanges globally and the first major one in Asia outside of China that are betting on the future of the cryptocurrency.

BitMex started live trading in November 2014 and in a short space of time has launched bitcoin futures, leveraged futures and, more recently, what Hayes says is the world’s first bitcoin volatility futures contract.

“We offer financial products that allow businesses and individuals to accept, hold and transfer bitcoin without being exposed to the price volatility. We do this using futures contracts that lock in the future dollar value of bitcoin,” says Hayes who started his career as an equity derivatives trader at Deutsche and then Citi.

To date trade volume at BitMex has exceeded $5 million from a registered user base of 600 customers mainly from the US and Europe with the company adding six new customers per day. Hayes plans to launch a Chinese language version of BitMex later this year to attract customers from China, the biggest trading market for bitcoin with between 50–80% of global volumes.

BitMex’s base in Hong Kong is advantageous from a proximity perspective to China as well as from a regulatory standpoint. Regulators globally take disparate views on whether and how to regulate this new sphere of finance. In the US, bitcoin is classified as property while other regulators view it as a currency. Hong Kong takes a lighter touch classifying it as a virtual commodity, which Hayes says is like buying “World of Warcraft swords” or any other virtual product.

It also means it sits outside of the scope of regulations governing the markets for fiat currency – paper currency which isn’t backed by gold reserves.

“We are not regulated as we only use bitcoin. We have done that to be outside of traditional fiat derivatives regulation as we don’t think the new economy needs to be restrictive to do business. When we want to offer fiat derivatives versus bitcoin we will see how regulators want to regulate these products; it’s still unclear what they will do. We could be based anywhere but Hong Kong is good as it is close to China which is the largest trading market and the regulatory regime doesn’t cover bitcoin.”

Hayes says he wants to attract more bitcoin start-ups that are exposed to price volatility by accepting and holding a stock of the digital currency.

“Hedgers are people doing remittance. Some companies are disrupting the money transfer market and use bitcoin to send value between Hong Kong and the Philippines for example, and use derivatives to hedge the price risk. Payment processors like Bitpay also need to hedge as they hold an inventory of bitcoin,” says Hayes.

In the last 18 months bitcoin has experienced significant price turbulence, decreasing 90% in value from $1200 to $230. Much of the depreciation took place during a period when Mt. Gox, a Tokyo-based spot exchange for bitcoin, went bankrupt in February 2014 after a combination of fraud, theft and mismanagement led to more than 500,000 bitcoins being unaccounted for.

Hayes says that BitMex has appropriate risk controls in place to prevent such an incident. “The Mt. Gox episode was bad accounting as they didn’t know what they had versus what was on the blockchain of addresses. We have internal records of customer funds and can send tickets to check that versus the blockchain ledger,” he says. “BitMex also uses a multi-signature bitcoin wallet for all customer funds so if we are hacked there is no way that a hacker can spend any customer funds. It’s slower but safer than other wallets.”

In common with most bitcoin exchanges, Mt. Gox used a hot/cold wallet operating procedure for withdrawing funds. A hot wallet has private keys on an internet-exposed server making it vulnerable to hackers as it allows instantaneous withdrawals by customers. When the hot wallet runs out, the operators must refill it from a cold wallet where the private keys are stored offline. BitMex’s multi-signature wallet requires Hayes and his two co-founders to approve customer withdrawals.

BitMex also has strict margining procedures on its products as a risk management safeguard. Initial margin on a futures contract is 30% and maintenance margin (MM) is an additional 20%.

“We reached that figure after examining five-year historical data to find a safe level for us looking at how much the price moves in a 24-hour period,” says Hayes who also adds that margining is instantaneous in contrast to a regular exchange.

“As it’s a 24/7 market we do continuous margining. When customers get to the MM level we begin forced liquidation of positions. Using an algorithm, we liquidate the smallest amount possible of customers’ positions to get them back above the minimum threshold. It’s safer as it’s continuous pricing so you don’t get gaps like when an exchange opens the next day.”

For BitMex’s volatility futures product it takes a price snap every five minutes from the spot price and then takes a standard deviation of the price to create a daily number for customers who want to bet on the historical volatility number at the end of each day.

Digital currencies are also gaining favour for their ability to cut down settlement times for a variety of securities. reported that Blythe Masters, the former JP Morgan executive, is involved in a start-up that uses the blockchain technology of bitcoin to reduce settlement risk and Hayes also sees this as a big advantage for the cryptocurrency.

“In the near future I don’t see why equities can’t be denominated in bitcoin. Why do we have to have five days a week trading at certain times in a certain jurisdiction? If a company wants its shares accessed globally why not have them denominated in bitcoin?” says Hayes.