On Potential Post-Fork Contract Settlement


Recently, we published A Statement on the Possible Bitcoin Unlimited Hard Fork, a statement of our views on the potential fork to Bitcoin Unlimited, its consequences, and further requirements we consider necessary for adoption.

Many have asked us about the settlement of our existing Bitcoin futures: the Bitcoin/USD series (XBT), the Bitcoin/CNY series (XBC), and the Bitcoin/JPY series (XBJ).

In the event of a fork in which both chains remain viable into the future and maintain double-digit percentages of the original Bitcoin hash rate (a “Contentious Fork“), we will take the following actions:


  • As we predict the value of Bitcoin to then be split between BTC and BTU, currently-listed futures at the time of the fork will settle on the sum of BTC and BTU.
    • It may not be possible to predict or plan to get reliable pricing data from our current Index exchanges, or they may not list the minor coin at all. In the event of a Contentious Fork BitMEX reserves the right to move all Bitcoin derivatives to Last Price Protected Marking, until a stable index can be composed.
    • We will compose two indices representing the majority and minority chain, and the sum will be taken to compose the Mark and Settlement Prices. The indices will be separated in case not all component exchanges list the minority chain.
  • Contracts listed after the fork will settle on the BTC or the BTU price, but not both. Only contracts listed pre-fork will settle on the sum.
  • Perpetual swap contracts will be timed to switch underlying indices in tandem with a futures contract. Ample notice will be given. Like futures, the new index will reference only one chain.


  • During the time immediately after the fork, BitMEX reserves the right to suspend withdrawals to avoid replay attacks and double-spending and account for the development effort required to accommodate a hard fork.
  • Users will be able to withdraw the minor currency, but not deposit it. We have no plans to support multiple margin currencies. Balances of the minor currency will be calculated via a snapshot at the time of the fork and maintained separately to major currency’s margin balance, as further mixing of the currencies thereafter could lead to improper attribution.

Bitcoin Algo Trading and Market Making Seminar

BitMEX CEO, Arthur Hayes, will lead an interactive seminar on the basics of algo trading and market making in the Bitcoin markets.

Arthur will touch on API connectivity through the use of an example python trading bot. He will also talk about the basic principles of market making Bitcoin spot and derivatives.

Participants should bring a laptop, and visit this GitHub repository for the example trading bot.

Date: Wednesday 22 March 2017

Time: 7pm to 9pm

Location: The Hive, 23 Luard Rd, 21/F The Phoenix, Wanchai, Hong Kong

Cost: Free

Please RSVP on Eventbrite.

BitMEX Launches Bitcoin / Chinese Yuan Futures Contracts

BitMEX is proud to announce the launch of the Bitcoin / Chinese Yuan (CNY) series futures contracts, symbol: XBC.

The first future launched in the series is XBCZ16.

XBCZ16 Contract Specifications

Contract Value: 10 CNY of Bitcoin

Quote, Margin, and Settlement Currency: Bitcoin

Settlement Index: The BitMEX XBT/CNY Index (.XBTCNY)

Expiry Date: 30 December 2016

Leverage: 100x

The .XBTCNY Index is an equally weighted index comprised of the XBT/CNY prices on OKCoin.cn, BTCC, and Huobi.

With the addition of XBCZ16, BitMEX allows traders to go long or short the three major Bitcoin currency pairs, CNY, USD, and JPY.

Spread Trading

One of the most watched spreads is the CNY vs. USD Bitcoin premium or discount. This spread is one of the most important Bitcoin trading indicators.

Traders who wish to bet on the expansion or contraction of the China Bitcoin premium can trade XBCZ16 vs. XBTZ16. XBTZ16 is the Bitcoin / USD 30 December 2016 100x leveraged futures contract. Both contracts expire at 12:00 UTC on the settlement date.

Premium Expansion:

Go long XBCZ16 vs. short XBTZ16.

Premium Contraction:

Go short XBCZ16 vs. long XBTZ16.

To learn more about the Bitcoin / CNY series, please read the XBC Series Guide.

BitMEX 2nd Anniversary Trading Awards Winners

The BitMEX 2nd Anniversary Trading Awards have concluded. It is time to announce the winners.

The winner of each category will receive a 2 Bitcoin prize.

Big Spender: Trader with the most Bitcoin turnover summed across all BitMEX products.

Username Bitcoin Turnover
XBOT 4,237.76 XBT
j8 2,354.87 XBT
1,894.32 XBT

Yacht Club: Trader with the largest net profit; this includes unrealised and realised profit.

Username Bitcoin Profit
Waverider83 15.14 XBT
douver 14.48 XBT
14.16 XBT

Shoot The Moon: Trader with the largest liquidation in Bitcoin notional terms.

The winning trader is trollboxer. Because this award is the result of actual money lost, we will not publish the size of the liquidation.

I’m Feeling Lucky: A random trader in the Trollbox.

The winning trader is habibi.

Thank you to all of our users for helping to make BitMEX the success that it is today. Stay tuned for similar promotions in the near future.

How To Arbitrage Bitcoin Futures vs. Spot


One of the simplest and most profitable arbitrage strategies, is to earn the basis between spot and futures contracts. This post is meant to provide a step by step instruction on how to earn this basis using Bitcoin and BitMEX Bitcoin futures contracts.


Futures Contract: Gives the buyer or seller the economic benefit of owning or shorting Bitcoin.

Spot: The price of Bitcoin for immediate delivery.

Basis: Futures Price – Spot Price

The BitMEX futures contract that will be used in the following examples is the XBTZ16 contract.

XBTZ16 Contract Details:

Contract Value: 1 USD of Bitcoin at any price.

USD Contract Value: 1 USD

Bitcoin Contract Value: 1 USD / Bitcoin Price * Number of Contracts

Settlement Index: Kaiko BitMEX Index, 50% Bitstamp and 50% OKCoin USD, I will refer to this as the Spot Price.

Settlement Date: 30 December 2016 12:00 UTC

Step 1, Buy Spot vs. Sell Futures

Assume that the XBTZ16 price is $120, and the spot price is $100. The basis is $20.

The first step is to wire $5,000 USD to Bitsamp and OKCoin. Then you will by 50 Bitcoin on each exchange. You are now long 100 Bitcoin, and short $10,000.

After you have purchased the Bitcoin, send 20 Bitcoin to your BitMEX wallet. You now need to calculate the correct amount of XBTZ16 contracts to sell. You have bought $10,000 worth of Bitcoin. You will also generate the Basis * Number of Bitcoin Bought of profit.

Total USD to Hedge = $10,000 + ($20 * 100 Bitcoin) = $12,000

Since each XBTZ16 contract is worth 1 USD, you must sell 12,000 contracts.

XBTZ16 is leveraged so you do not need to send the full Bitcoin value of the order to BitMEX. The maximum leverage is 100x, but I advise the use of no more than 10x for this strategy.

Step 2, Calculate Your Profit

You have purchased Bitcoin for $100, and have sold it in the future for $120. You will earn the full basis regardless of where the Bitcoin prices is at settlement.

XBTZ16 profit and loss is based in Bitcoin. Assume the settlement price equals $100.

Bitcoin profit calculation = (1 USD / $100 – 1 USD / $120) * 12,000 = 20 Bitcoin

If the spot price is $100 on settlement date, then your 20 Bitcoin is worth $2,000. You have earned the $2,000 as predicted earlier.

Step 3, Settlement

On 30 December 2016, your XBTZ16 futures contracts will expire. Let’s assume that settlement price is $100. The settlement calculation period is 11:30 UTC to 12:00 UTC. A 30-minute time weighted average price (TWAP) is used; each minute the last price of the settlement index is stored, and an average of the 30 prices is taken to arrive at the final settlement price.

All Bitcoin that is not being used as margin must be sold in order to match the settlement price. Once the futures contract expires, the margin and the realised profit will be available to sell. At that time, withdraw the Bitcoin from BitMEX and sell these Bitcoin.

In the above example, we sent 20 Bitcoin to BitMEX as margin, and the remaining 80 Bitcoin we stored in our personal wallet. You will sell 80 Bitcoin between 11:30 UTC and 12:00 UTC. You will now have 20 Bitcoin of margin and 20 Bitcoin of profit to sell after XBTZ16 expires at 12:00 UTC.

Hopefully you will be able to sell all 120 Bitcoin, and match the settlement price of $100. You started with $10,000, and now you have $12,000. You have successfully used spot and futures contracts to generate a 20% return on capital.

The Future Of Bitcoin In India


Indian Prime Minister Modi’s cash grab has created fantasies of Indians rushing to acquire Bitcoin. While I do believe that India will be an important market for Bitcoin in the near future, the way in which they acquire Bitcoin will have profound implications on how Indian Bitcoin adoption grows.

Financial Repression

Indians do not trust the government or banks with their money. India’s population, like that of many developing countries, holds its wealth in the form of gold and property. Governments cannot print gold, and you always need a place live and farm.

A large percentage of the population does not have a government issued ID or bank account. They deal only in cash. Modi’s ban of 500 and 1,000 Rupee notes is causing havoc. The government will issue new 500 and 2,000 Rupee notes; however, in order to convert old notes into new, a person must first encounter the banking system.

Due to high CPI inflation and a weak Rupee (INR), Indians store wealth using gold. Gold in INR terms (XAU/INR) fell 8.13% over the past four years. Over the same time period, INR depreciated by 25.18% vs. the USD. Gold outperformed by over 17%.


The government in its attempt to force as many people as possible to hold their wealth in INR, tax gold imports 10%. Gold smuggling is big business in India. According to The National:

In January 2012, the import duty in India was set by the previous government at 2 per cent, which was then doubled to 4 per cent in March of that year. A couple more hikes were introduced the following year, so that the import duty reached a record high of 10 per cent, which is where it stands today. This created an incentive for gold to be smuggled into India, to avoid paying the high duties and to reap greater profits.


About 175 tonnes of gold were smuggled into India in 2014, the WGC believes.

Bitcoin is weightless and borderless. If digital payments grow quickly in India, Bitcoin will become a preferred way to save. The question is, how will Indians actually buy Bitcoin.

Buying on Exchange

For most readers, if you want to buy Bitcoin, you transact on your preferred exchange. For countries with little or no currency restrictions, it is quite easy to buy Bitcoin. The most liquid Bitcoin currency pairs are XBT/CNY, XBT/USD, and XBT/JPY.

When exchanges open in a new country, they import liquidity from abroad. The most important consideration for the exchange is the supply of Bitcoin. Given that there are very few if any local companies mining Bitcoin, supply will come from traders sourcing it from the USD and JPY markets. They will not source from China, as CNY is not freely tradable.

Here is the flow of how a trader will supply Bitcoin to India:

  1. Hold USD working capital offshore on a large Bitcoin exchange, for example purposes I will use Bitstamp.
  2. Offer XBT for sale in INR terms on a local exchange.
  3. When someone purchases XBT with INR, immediately buy XBT using USD.
  4. Then convert INR to USD and repatriate abroad to Bitstamp.
  5. Repeat the process.

If capital can flow freely between INR and USD, this is allows India to instantly access a large pool of Bitcoin liquidity. Unfortunately Indians cannot freely convert INR into USD.

The Reserve Bank of India (RBI) allows a person to convert $250,000 worth of INR into a foreign currency each year. The big caveat is that you may not use this allocation to buy foreign exchange abroad.

This restriction makes it virtually impossible for trading businesses to import sufficient liquidity into India.

The RBI may allow an exemption for Bitcoin exchanges to import USD Bitcoin liquidity into India. But that exemption will definitely come with heavy taxation. The RBI raised the gold import duties as the country’s current account deficit worsened and the INR weakened. They will not allow another currency free from their control to suck INR liquidity out of the banking system.

Due to a lack of supply, Bitcoin in India trades at a substantial premium. BtcXIndia is one of the only operating exchanges I could find that reports trading volume. 24 hour turnover is a 170 XBT. The current premium vs. the Kaiko BitMEX Bitcoin / USD Index is 12.14% (54,000 XBT/INR, USD/INR 67.74, XBT/USD 710.86).

Given the current monetary policy regime, the only way to increase the supply of Bitcoin in India is to produce it locally through mining.

Mining Bitcoin in India

The reason why China is the world’s largest market for Bitcoin is mainly due to the large supply of it being produced in CNY terms. Chinese traders do not need to access USD liquidity offshore in order to acquire Bitcoin. If they had to buy Bitcoin from overseas miners, it would be difficult due to China’s currency restrictions.

China has cheap electricity, labor, and manufacturing. India also possess cheap electricity and labor. India is not a global powerhouse in the production of computer chips, but those can be imported from China.

From one mining contact, I am told that the average price per kilowatt hour for electricity in China is $0.025 to $0.045. I don’t know if Indian industrial mining farms could achieve prices that low. When I mentioned the prospect of mining in India, the same contact said it could work with Himalayan hydropower.

Mining capacity in India will be brought online only if the demand for Bitcoin is so high it pushes XBT/INR to a substantial premium over XBT/USD. This could be due to heavy taxation, or a dearth of traders willing or able to sell Bitcoin for INR.

If the premium is greater than the higher cost of electricity and the chip import costs, then mining will start domestically in India. If Bitcoin catches on, Indian farms will begin producing and fabricating their own chips much like the Chinese do today.

The most crucial component is demand. Without the demand for an electronic store of wealth, a price premium will not develop. No premium, no mining. The 12% premium is encouraging, but with only 170 Bitcoin traded in the past 24 hours, the demand isn’t yet sufficient to coax entrepreneurs to build new mining farms in India.

The nature of Indian financial regulations require supply to be provided through mining. It takes time for the market to produce signals to would-be miners to begin building a farm. India will be an important market eventually, but this process will take time.

Spray and Pray, The ICO Investment Strategy


Because most professional money managers are just as clueless as their clients, Spray and Pray is one of the most effective investment strategies. Once a hot new promising sector is identified, spreading an equal amount of capital amongst applicable companies is often better than attempting to pick winners. The digital currency Initial Coin Offering (ICO) market is no different.

ICO’s are red hot. Armed with a whitepaper and a slick minimal looking web page, teams can amass millions of USD in a matter of minutes. Last week Golem, a distributed computing platform, held a sale of $8 million worth of tokens. They sold out instantly.

Traditional money managers are beginning to take interest. Small funds are opening around the globe with a mandate to invest in new and promising ICOs. I compiled a list of all the ICO’s since and including Counterparty that have completed a subscription round and listed on a secondary market.

The ICO Process

  1. A team will either have a proposal for what they will build, or a finished product ready for market.
  2. The native token that powers the application will be offered for sale to the general public.
  3. A subscription schedule will be announced. Investors send Bitcoin or Ether to an address, and in return will receive tokens.
  4. Once the subscription period ends, the tokens will be distributed in the days or months to follow.
  5. Once distributed, the token will be listed on a secondary market where it trades freely.


Spread a pool of capital equally over a basket of ICO’s. Sell the token a month after it lists on a secondary market. Across a portfolio, this strategy will yield a positive return. Below is a summary table of the portfolio’s performance.

Total USD Raised $192,111,911
Total USD Raised ex. DAO $63,141,251
Number of Deals 10
Average XBT ROI 186.06%
Average USD ROI 165.27%
Biggest XBT Gainer Ethereum
Return 944.00%
Biggest XBT Loser Synereo AMP
Return -93.48%
Win % 60.00%
Loss % 40.00%

Your portfolio would have returned 186% in Bitcoin terms, and 165% in USD terms. That is an impressive return considering that only 60% of deals where profitable one month after the secondary market listing. The results were skewed due to the massive gain on Ethereum. As with any asset, it pays more to be long than short.


Performing in-depth due diligence is difficult in this new industry. Many projects have no commercial product ready. Investors’ investment decision is based on a conceptual whitepaper, and their assessment of the integrity and strength of the team.

A team’s technology may never ship. A team may disband before completion of the project. A team may pivot and release a completely different product. You are not buying equity in the team, but rather a native token used to power an application. The legal protections and disclosures necessitated for equity IPOs are not present.

This is why Spray and Pray is an appropriate strategy. Instead of picking winners, assume that some investments will be duds and a small minority will be super novas. On average, I believe a portfolio of ICOs will outperform.

Because most investors are not technically savvy enough to make a serious long-term call on the viability of a particular application, a shorter time horizon is prudent. Ride the FOMO wave and exit the ICO at a healthy profit immediately after it lists on a secondary market.

Why ICOs Are Hot

According to Bloomberg global equity IPO 1H2016 deal volume was $46.6 billion. My study evaluated 10 deals worth a combined $192 million. In only 6 months equity IPO deal flow was 2,430x that of ICO deal flow over the past 32 months.

The big difference between IPOs and ICOs is the type of average investor who participates. Only large asset managers get access to the best IPOs. Ever wonder why Och Ziff calls up a human to trade stock instead of using a computer? If you do not pay the large investment banks, your fund will not get an allocation of the hot deals. Bankers intentionally underprice issues to generate a first day pop to enrich their high fee paying hedge fund clients.

Usually the retail tranche is tiny and massively oversubscribed in any IPO. Additionally, the minimum order size might be in the thousands of USD, which is unaffordable for the vast majority of the global population.

ICOs due to the low minimum subscription size are accessible to anyone holding Bitcoin or Ether. ICOs also don’t require you to have a brokerage account. ICOs are perfect for small retail investors who are locked out of the IPO market due to their inability to open a brokerage account or to afford the minimum ticket size.

There is a massive pool of money globally that needs to invest and save. Those who are technologically savvy have understandably gravitated towards these new types of projects, and the new way of funding them. The insatiable demand for positive yielding investments in the face of negative and low interest rates is why even mediocre projects will continue to sell out within minutes.

As teams realise that creating a native token for their application is an easy way to raise money without selling equity, ICO projects will flood the market. However at the same time, traditional money managers will begin allocating funds towards ICO investments. They cannot ignore a new asset class that historically has performed well.

Supply of and demand for ICOs will ratchet higher. Over the next 24 months, ICO deal flow will grow aggressively.

How to Market Make Bitcoin Derivatives Lesson 2

In Lesson 1, I described how to calculate a two-way quote, dynamically hedge, and match the settlement for an ETC7D futures contract. In this lesson, I will discuss how to calculate Basis and Skew, and how to apply these to your two-way quotes.

Calculating Basis

To calculate the future value of any currency pair, you need to know the cost to borrow and lend the home and foreign currencies. The underlying currency of ETC7D is the ETC/XBT exchange rate. Assume that as a market maker you only own Bitcoin and not any other currency.

To buy ETC, you must sell XBT that you own. That XBT has an opportunity cost of capital. If you were to borrow this Bitcoin from another party to fund your business, how much would it cost?

To sell ETC, you must borrow it. There are two ways this is accomplished. For more well established digital currencies, spot exchanges like Poloniex will operate a borrow market. You can automatically pledge Bitcoin as collateral and borrow ETC at the market interest rate when you wish to short it.

If margin trading is not available, you need to borrow it from another trader. The other party will lend you ETC for a period of time at a rate of interest.

Using Covered Interest Rate Parity, we can calculate the Basis.

Basis = (1 + XBTr * t) / (1 + ETCr * t) – 1

XBTr = Bitcoin annualised interest rate

ETCr = Ether Classic annualised interest rate

t = Time in years

In practical terms, we ignore the opportunity cost of XBT. You can compensate for that by increasing your spread profit margin. As a market maker, you are concerned about how much you will pay to short ETC.

Assume it costs you 50% per annum to borrow ETC.

Basis for 7-day Future = 1 / (1 + 50% * 7/365) – 1 = -0.95%

If the spot price is 0.02 XBT, translate that Basis into points.

-0.95% * 0.02 XBT = -0.00019 XBT

ETC7D Quote Mid = Spot + Basis = 0.02 XBT – 0.00019 XBT = 0.01981 XBT

You have lowered your mid price. This will compensate you in the event someone sells to you. If you become long ETC7D, you will have to short ETC and pay the borrow fee.

Calculating Skew

You don’t have infinite capital. Left unchecked, you could build up a large long or short position in ETC7D. Your goal is to capture two-way flow so that you earn half of your quoted spread.

If someone continues selling into your bids, you want to progressively lower your quotes. If someone continues buying your asks, you want to progressively raise your quotes. A simple example will help illustrate the concept.

Assume you quote a two-way market of 10 / 11 for 1 contract each side. The total amount you are quoting on each side is 1 contract; I will call your Total Size Quoted. The bid / ask spread is 10%, half of that spread is 5%; I will call this your Weighted Average Half Spread.

Skew = (Change in Position / Total Size Quoted) * Weighted Average Half Spread * -1

Your position changed by +1.

Skew = (1 / 1) * 5% * -1 = -5%

You originally had a mid price of 10.5. Assume that the mid price represented the spot price.

New Mid Price = Spot + Skew = 10.5 * (1 – 5%) = 9.98

New Bid Price = 9.98 * (1 – 5%) = 9.48

New Ask Price = 9.98 * (1 + 5%) = 10.47

Combining Basis and Skew

Before you begin quoting, you will calculate the Basis. You will do this calculation based on how expensive it is for you to borrow the home currency.

Then while quoting, your trading program will adjust the Skew based on whether traders buy or sell from you.

Quote Mid Price = Spot Price + Basis + Skew

Using these two concepts, you cover your cost of funds, and manage your inventory.

In Lesson 3, I will explain how to handle Auto-Deleveraging events, and other advanced topics. To view the BitMEX sample market making bot, please visit Github.

Important Notice Regarding BitMEX Zcash Futures

This notice is meant to clarify common questions users have about the BitMEX 30 December 2016 Zcash / Bitcoin futures product.

When Does Zcash Spot Begin Trading?

The genesis block is scheduled to launch at 13:00 UTC today. Many large digital currency spot exchanges have indicated they will open Zcash trading shortly afterwards.

Due to its mining reward system, the supply of Zcash will be severely limited. As a result it may be very difficult to buy physical Zcash. If you instead desire economic exposure on the long or short side, the BitMEX Zcash futures contract may be suitable.

Can You Buy Zcash on BitMEX?

BitMEX only offers a Zcash / Bitcoin futures contract, ZECZ16. Users cannot buy and sell actual Zcash on BitMEX.

ZECZ16 Contract Details:

Contract Value: 1 ZEC
Quote, Margin, and Settlement Currency: Bitcoin
Settlement Index: To Be Determined
Expiry Date: 30 December 2016 12:00 UTC
Leverage: 2x

Full ZECZ16 Contract Details

What Exchange Will Be Used for the Settlement Price?

By 1 December 2016, we aim to announce the settlement exchange(s). We will base our decision on which exchange(s) are leading the market in terms of Zcash / Bitcoin trading volume. This decision is at our complete discretion.

Is ZECZ16 Freely Tradable?

From now until 12:00 UTC, the price of ZECZ16 may not go below 0.391884 XBT (Limit Down), or above 1.175652 XBT (Limit Up).

After 12:00 UTC, all trading limits will be removed. ZECZ16 is then free to trade at any price where buyers and sellers meet.

How Is ZECZ16 Valued?

All long and short positions in ZECZ16 will be valued using the last traded price.

What Happens During Liquidation?

ZECZ16 is classified as highly speculative. As a result, it is margined according to the Auto-Deleveraging System.

Please read the Auto-Deleveraging guide for more information.

Trading ZECZ16 Is Extremely Risky

If you are not comfortable with the inherent risks in trading a new digital currency, please do not trade ZECZ16.

If you have any questions, please reply to this email. (support@bitmex.com)

Need to Hide 200 Million Yuan? Use Bitcoin Instead


Since October 10th, the first trading day in China after Golden Week, the PBOC has weakened the Yuan by over 1.00%. USDCNH is approaching 6.80. CNH is the offshore and freely tradable version of the restricted onshore CNY.

China recently published its 3Q16 GDP. Surprise, GDP grew at 6.70% exactly what analysts expected. If you believe any economic data from any government globally, I have some Paycoin to sell you. The data point of most interest is China’s monthly FX reserves. Goldman Sachs analyst MK Tang estimates that capital outflows in September accelerated to US$78 billion up from US$32 billion in August. He also stated that the official number released by China was bogus.

The PBOC needs to sequester as much capital inside China as possible to mitigate the massive amount of credit being extended by the nation’s banks. As of September the Banking Regulatory Commission reported China’s domestic banking assets totaled CNY217.3 trillion (US$32 trillion), which is up 14.7% YoY. [Zerohedge] They have been closing the gates since August 2015. SCMP reports that SAFE closed 56 illegal underground banks involving more than CNY1 trillion.

To make matters worse, Xi Jinping’s anti-corruption drive has rich comrades running scared. If they look hard enough, almost every wealthy person could be convicted of some sort of graft. What is worse is that the “law” changes to fit the prerogatives of the party. If you do not fall in line with Xi Jinping, you will be made an example of. As a result, government officials and wealthy citizens desperately try to spirit their capital outside of China.

A recent story illustrates the plight of rich Chinese officials. Wei Pengyuan, the former vice chairman of the National Energy Administration’s coal department, was charged with accepting bribes. Police seized CNY200 million (US$29.5 million) worth of cash from his apartment. [Zerohedge]

The conduits through which cash moves abroad are being shuttered. Desperate officials have turned to hiding vast amounts of cash in their primary residence. One problem in China is is the largest denomination bill is worth 100 CNY. This was deliberately done to make it very hard to hold large amounts of wealth outside the government controlled banking system.

Wei’s stash of cash weighed an estimated 1 ton. Wealthy Chinese need a store of wealth that is outside governmental control, and easily portable. Enter Bitcoin. Many people perceive China’s appetite for Bitcoin to be predicated on a desire to get money out of the country. Getting the wealth out of the country is proving to be very tough, therefore the more important concern is hiding in plain sight.

Bitcoin is weightless, and can be accessed using any internet connected device. As of December 2015, China had 620 million users of internet connected mobile devices. Bitcoin can be purchased in as little as 30 minutes from one of the large Chinese Bitcoin exchanges. Bitcoin / CNY is the most liquid pair globally. Put all these factors together, and it is a no brainer for wealthy individuals to store a portion of their wealth in Bitcoin.

Bitcoin purchased need not ever be converted into USD. Bitcoin can be the final destination of wealth for Chinese citizens. When viewed in this light, the China premium for Bitcoin could rise to levels not seen since 2013. In 2013, the China premium reached a high of 40%.

The main stumbling block is education. However, with more and more wealthy comrades meeting a bullet for economic graft related offenses, their life could depend on learning.


How to Market Make Bitcoin Derivatives Lesson 1

high frequency trading

Providers of liquidity, or market makers, provide an essential service to any tradable market. They ensure that there is always a buy (bid) price and sell (ask or offer) price. This allows traders to enter and exit a market at any time.

If Bitcoin and the digital currency trading industry are to grow, exchanges will need more and more market makers to provide additional liquidity. There are many traders who have graduated from purely directional trading, to providing liquidity on various spot markets. This series of lessons is meant to give traders a basic understanding of how to market make digital currency derivatives.

Lesson 1 will focus on how to quote a two-way price, a simple dynamic hedging strategy, and settlement. In order to keep the math simple, we will use an 7-day expiring Ethereum Classic / Bitcoin futures contract, ETC7D.

Contract Details:

Contract Value: 1 ETC

Underlying: Poloniex ETC/XBT exchange rate

Settlement: 30-minute Time Weighted Average Price (TWAP) Friday 12:00 UTC

How to Calculate Bid / Ask Quotes

A futures contract derives its value from the underlying asset. For ETC7D, the underlying asset is the Poloniex ETC/XBT exchange rate.

Your trading program needs a live feed of the bid, ask, and last price of ETC/XBT on Poloniex. For starters, I advise you to calculate the mid price (average of bid and ask). As a market maker, you will hold futures contracts until settlement. Because a futures contract will equal spot at settlement, we can value ETC7D by the following formula:

ETC7D Quote Mid = ETC/XBT Mid Price (Spot) + Basis or Skew

After calculating your ETC7D Quote Mid, you will apply your spread. We will discuss how to calculate a Basis or Skew in Lesson 2.

As a market maker your spread compensates you for hedging costs (trading commissions, and bid / ask spread) on the underlying exchange, and the volatility of the underlying asset.

I will ignore the volatility component for now.

Spread = Spot Trading Fees + Spot Bid / Ask Spread + Market Maker Profit

The Market Maker Profit is how much you would like to earn on every trade.


Spot = 0.02 XBT

Basis or Skew = 0 XBT

Spot Trading Fees = 0%

Spot Bid / Ask Spread = 0%

Spread = 1.00%

ETC7D Quote Mid = 0.02 XBT

ETC7D Quote Bid = 0.02 XBT * 0.995 = 0.0199 XBT

ETC7D Quote Ask = 0.02 XBT * 1.005 = 0.0201 XBT

These quotes will be calculated then sent to BitMEX.

Simple Dynamic Hedging

Your goal as a market maker is to be market neutral. As other traders hit your bids and lift your asks, you must hedge yourself in the spot market.

Since each ETC7D contract represents 1 ETC, if you sell 1 ETC7D contract, you must buy 1 ETC. If you buy 1 ETC7D contract you must long sell or short 1 ETC.

A trader buys 300 ETC7D contracts at 0.0201 XBT from you. You are now short 300 ETC. Your trading program will automatically buy 300 ETC/XBT on Poloniex for 0.02 XBT.

Symbol Position Trade Price XBT Value
ETC7D -300 0.0201 XBT -6.0300 XBT
ETC/XBT +300 0.0200 XBT +6.0000 XBT
Unrealised Profit +0.03 XBT

You now have 0 ETC exposure. Because you have sold ETC7D at a greater price than where you bought ETC spot, you have an unrealised profit of 0.03 XBT.

You are still quoting a two-way market of 0.0199 XBT / 0.0201 XBT for 300 contracts each side. A new trader decides to sell 300 contracts at your Bid price of 0.0199 XBT. Your ETC7D position is flat (you sold 300 ETC7D previously, and now you just bought 300 ETC7D), and you are long 300 ETC/XBT; your net exposure is long 300 ETC. Your trading program long sells 300 ETC/XBT at 0.02 XBT.

Symbol Position Trade Price XBT Value
ETC7D -300 0.0201 XBT -6.0300 XBT
ETC/XBT +300 0.0200 XBT +6.0000 XBT
ETC7D +300 0.0199 XBT +5.9700 XBT
ETC/XBT -300 0.0200 XBT -6.0000 XBT
Realised Profit +0.06 XBT

Your portfolio is flat. You have realised a profit of 0.06 XBT or 1% of the value of your quotes. That 1% equates to the spread you built into your Bid and Ask quotes.

This is the simplest form of market making. You take the underlying spot price, apply a spread, and dynamically hedge 1:1 whenever anyone trades on your quotes.


If you hold a futures contract over settlement, it will expire and leave you with no exposure.

Your Portfolio:

Symbol Position Trade Price XBT Value
ETC7D -300 0.0201 XBT -6.0300 XBT
ETC/XBT +300 0.0200 XBT +6.0000 XBT
Unrealised Profit +0.03 XBT

If you do nothing, on Friday 12:00 UTC your ETC7D position will go to 0, and you will be left long 300 ETC/XBT. Your goal is to be market neutral, so during the settlement calculation period you need to reduce your spot hedge to 0.

ETC7D expires based on a 30-minute TWAP. BitMEX will take the spot prices on Poloniex each minute and compute an average, which then becomes the settlement price. To capture the unrealised profit of 0.03 XBT, you to sell ETC/XBT at the ETC7D settlement price.

Your trading program will split your spot hedge into 30 slices, or 10 ETC. Each minute you will sell 10 ETC at market to match the price used in the settlement calculation. Because the settlement calculation uses the last price each minute, you theoretically will match the settlement price.

Any difference between your sell trade executions and the prices used in the settlement calculation is called Slippage. In this example, if your Slippage is more than 0.50%, you will lose money. If you have 0% of Slippage you will earn the full unrealised profit.

In Lesson 2, I will explain how to calculate a Basis and Skew. These two variables tie in closely with inventory management.

If you wish to begin market making on BitMEX, please take a look at our sample market making bot on Github.

The Guide to Zcash, The Digital Currency That Aims to Dethrone Bitcoin


Zcash is the most anticipated new digital currency of 2016. Zcash aims to create a form of electronic money that is truly a bearer instrument.

One impediment to Bitcoin’s use as electronic cash is that all transactions are viewable on the public blockchain. Bitcoin’s fungibility has become an issue as a result. Some people and businesses (mainly exchanges) will not accept Bitcoin if certain addresses touched or will touch those coins in the past or future. Transaction censorship goes against the core of values of Bitcoin.

Zcash is the latest coin that attempts to create a digital currency where no knowledge of the inputs or outputs of the cryptographic signature are require for verification. This is called a Zero-Knowledge Proof. DASH and Monero are two other digital currencies that attempt to solve the same problem using different cryptographic methods.

The hype surrounding Zcash is deafening. The Zcash development team is held in high regard. They have secured investment from notable Bitcoin venture capital firms such as Pantera, Fenbushi, and The Digital Currency Group. Bitcoin luminaries such as Roger Ver, Erik Voorhees, Barry Silbert, and Li Xiaolai have invested their personal capital. Conformational bias is important in evaluating why investors choose one project over another. If the leading figures of the Bitcoin industry are investing, it must be good, right?

Unfortunately Zcash is not holding an Initial Coin Offering (ICO) to distribute ZEC amongst investors. ZEC is the three character currency code for Zcash. ZEC will be distributed through mining rewards just like Bitcoin. Unlike Bitcoin that was an unknown and unproven concept when it launched, the genesis block of ZEC is highly anticipated. The short supply of ZEC paired against ravenous demand, has and will lead to a price spike.

Zcash Mining

A ZEC block is produced every 2.5 minutes and 12.5 ZEC are awarded to the miner who creates that block. Bitcoin currently produces blocks every 10 minutes, and the block reward is 12.5 BTC. The Zcash team opted for a “slow start” to the mining process. For the first 20,000 blocks (approximately 34 days), only 125,000 ZEC will be created vs. an expected 250,000 ZEC. That leads to an average 6.25 ZEC created per block.

On December 1, 2016, the block reward will revert to 12.5 ZEC per block. By January 1, 2017, the total supply will stand at approximately 348,200 ZEC.

The Zcash team took a total of $3 million worth of outside investment. In order to reward initial investors and pay for operational expenses, during the first 4 years 20% of all ZEC produced will go to the Zcash team and initial investors. The effective supply by January 1, 2017 will be 278,560 ZEC. I will use this as the total supply for the price predictions I will make.

Zcash Trading

BitMEX Zcash Futures ZECZ16
BitMEX ZECZ16 Orderbook, Chart, and Recent Trades

In order to provide price discovery on the future value of ZEC, BitMEX launched the first and only trading product on the ZEC/BTC exchange rate. The ZECZ16 futures contract expires on December 30, 2016 12:00 UTC based on that day’s exchange rate for immediate delivery.

ZECZ16 allows traders to go long or short ZEC with up to 2x leverage. The contract’s listing price on September 15, 2016 was 0.024790 BTC, and now trades at 0.195 BTC, a gain of almost 700%. During that period, 8,590 ZEC (1,675 BTC, $1.08 million) were traded.

The unique feature of ZECZ16 is that traders do not need to own ZEC to trade this futures contract. Using only Bitcoin, any trader can buy and sell ZEC using leverage. This is very important because it will be very difficult to buy, and and almost impossible to short physical ZEC due to the restricted supply. Many miners will not immediately sell the ZEC they produce in hopes of rapid price appreciation. That reduces the amount of ZEC publically available for sale.

The BitMEX ZECZ16 futures contract represents one of the easiest and most liquid ways for any investor to gain exposure to ZEC.

Zcash Future Price

If ZEC is a superior coin to DASH and Monero, then a portion of the funds invested in those two coins will shift to ZEC. The market capitalisation of DASH plus Monero is $154 million. Bitcoin’s market capitalisation is $10.31 billion. DASH + Monero’s market capitalisation is 1.50% of Bitcoin’s. The below table describes what the ZEC/USD price could be on January 1, 2017 depending on what percentage of DASH + XMR funds move into ZEC.


% of DASH + Monero ZEC/USD ZECZ16 % Difference from Current Price
10% $55 $126 -56.08%
25% $137 $126 +8.60%
75% $277 $126 +119.62%
100% $554 $126 +339.24%


Even a relatively small amount of money that chases the small supply of ZEC will lead to a price bubble. It is not inconceivable that ZEC touches price parity with Bitcoin in the near term. These economics are not lost on traders, and that is why the ZECZ16 contract is up over 700% since it’s launch in mid-September.

On Friday October 28, 2016, the genesis block will launch. Expect a frenzied scramble for any and all ZEC that becomes publically available for sale.