Crypto Trader Digest – Feb 8

BitMEX’s New Look


We have been hard at work making changes to the BitMEX UI/UX. A major facelift will be released at the end of this week. You can get a sneak peek on BitMEX Testnet. We also welcome your feedback. This is only the beginning; we intend to go through every widget individually to simplify and improve usability.

In addition to a new look, we will also be greatly expanding the number of order types available. We expect to launch Market, & Stop Market types, Post-only (Maker) orders, and hidden orders in the near future. Many more are coming.

In other news: China, China, China. The long awaited BitMEX China A50 Index Futures Contract is nearing completion. You can view the A50 Contract Details, and a Trading Guide on BitMEX Testnet as well. We aim to list this contract by the end of the month. Keep an eye on the BitMEX Blog and your inbox for further details.

Classic vs. Core Roshambo


Bitcoin Classic has now been released and the race is on to reach 75% consensus. The showdown between Classic and Core is nearing the final stretch. If the Chinese miners are serious about increasing the block size to 2 MB, expect them to begin running Classic shortly after they return from holiday next week. If not, like Punxsutawney Phil… expect more Winter.

Once 75% consensus is reached, then the 28 day grace period begins. During this period, those not running Classic should upgrade their Bitcoin software before Classic goes live. Then the moment of truth will arrive. Will the fork in Bitcoin lead to a price crash or pump?

Every trader has a different opinion on whether a Bitcoin fork will be positive or negative for the price. The one thing we can be sure of is intense price volatility after the 75% consensus is reached. Now is a perfect time to purchase your volatility lottery tickets by trading March (XBTH16) and June (XBTM16) futures contracts.


The above graph shows the % Basis PA (per annum) of each futures contract over the past month. XBTH16’s % Basis PA has gotten smacked hard, while XBTM16 has held up well. Buying XBTH16 vs. selling XBTM16 is the appropriate strategy. The trade has positive carry or theta because the premium earned by selling XBTM16 is higher than what is paid by buying XBTH16. The expectation is that during the period of high volatility XBTH16 will rise faster than XBTM16 due to the depressed % Basis PA level.

If the price crashes, expect the basis to trade lower then snap sharply higher as bottom feeders buy longer dated futures contracts aggressively. Given XBTH16 trades cheaper than XBTM16, expect speculators to focus their buying power on XBTH16. If the price spikes once Classic reaches 75% consensus, again speculators will focus their buying power on the cheaper contract, XBTH16.

If you intend the hold the spread trade until XBTH16 expiry, XBTM16’s % Basis PA would have to be above 94.75% for the trade to start losing money.

Getting paid to wait for the inevitable Classic vs. Core fireworks is a great strategy for those who don’t have a strong bullish or bearish view.

View how many nodes are running Bitcoin Classic at Coin Dance.

Arbitrage During Lunar New Year


Happy Lunar New Year! During Lunar New Year, Asia is closed for business. The most liquid Bitcoin exchanges are all based in Asia. Deposit and Withdrawals of fiat currency will be processed slower, or not at all. Onshore bank CNY transfers are still open during this week, but the major XBTCNY exchanges will have slower processing times. OKCoin USD and Bitfinex both will not be processing USD deposits or withdrawals until February 15th.

Arbitrage opportunities will present themselves for traders who happen to have CNY, USD, and Bitcoin deposited on certain exchanges. The China Bitcoin premium can expand to much higher levels this week as traders will be unable to deposit USD and take advantage of lower prices outside of China. Price differences between OKCoin USD and Bitfinex could persist all week. Do not read too much into large price discrepancies as they are not driven by actual demand, but by closures of the on- and off-ramps.


Bitfinex Flash Crash Postmortem

Screen Shot 2015-08-20 at 4.18.33 PM

On August 18th a trader(s) capitalised on the general malaise over the BitcoinXT debate, and the Bitfinex margin trading platform. Bitfinex USD swaps remained at ATH levels even as spot began falling after the Grexit drama washed over. The average “kill zone” slowly creeped higher as traders bought in at the top of the last rally. Pushing the price into the kill zone would set off a wave of cascading margin calls. In addition, traders using Bitcoin as collateral would enter into a negative feedback loop. The value of their collateral declines at the same time as the Bitcoin price falls.

The chart above is from BFXData. I have circled the flash crash event. A trader(s) borrowed a much XBT as possible with the intention of slamming the book to go short. That is the spike in the red line, which is the total XBT swaps outstanding. The blue line, which is the XBT price, tanked as the seller hit bids. We know that that a majority of leveraged longs got cleared out because the green line, the outstanding amount of USD swaps, declined. Traders began getting margin called and Bitfinex had to liquidate their positions and their XBT collateral in some cases.

If that weren’t bad enough for longs, cracks in Bitfinex’s margin trading software became apparent. From Phil Potter’s, the Bitfinex CEO, conversation on Whaleclub TeamSpeak after the event, I speculate there was a miscommunication between the spot trade matching engine and the system that handles margin trading. A latency between the two systems would cause more liquidations to be enacted because the margin engine had stale data. If the margin engine thinks the price is lower than it actually is, it will continue to liquidate traders causing a flash crash.

In Bitcoin, it always pays to have dry powder ready. Bitfinex is still the number one Bitcoin/USD exchange by volume. Violent flash crashes and short squeezes will continue happening on Bitfinex. As of Friday, BitMEX will settle all contracts based on TradeBlock’s XBX Index. When another similar situation occurs, read below on how to capitalise using BitMEX futures contracts.

Assume that Bitfinex’s price is $160 while the other major exchanges are trading at $220. Buying spot on an unlevered basis at $160 and selling at $220 gives an arbitrage profit of $60. Without using derivatives, buying cheap on Bitfinex and selling expensive elsewhere leaves time risk. In the time it takes to transfer Bitcoin between two exchanges, the price on the expensive exchange could fall to the level of Bitfinex.

Instead buy spot at $160, then sell XBT7D (BitMEX’s weekly XBTUSD futures contract) at $220. You have locked in a profit of $60. Once the coins have been transferred from Bitfinex to the expensive exchange, you sell spot and buy back your XBTUSD futures. If the rest of the global exchanges fell to the level of Bitfinex, then your XBT7D short position would profit. This would maintain your $60 arbitrage profit.

Bitfinex Malfunction Saved Longs Yesterday

Yesterday at 20:00 GMT + 0, Kool and the Gang decided it was time to go stop hunting. The price quickly fell $10 to $226 and it looked as if $220 was next up. However, a malfunction in Bitfinex’s order matching engine stopped the party in its tracks. Various users reported weird account balances, and the inability to place and cancel orders. What do panic traders do when a Bitcoin exchange is stalling? Press a lot of buttons very quickly and hope for the best. The frantic actions caused the price to quickly spike to $235, then careen back towards $226. Word to the wise: when the exchange is stalled, sit back and do nothing. At BitMEX if your browser its connection with the trading engine, you are notified immediately and unable to click buttons (I will expand on that in a subsequent post). Take a read of BitFinex Appears To Have Crossed Streams, BTC Crash On Hold for a more detailed explanation about yesterdays price action.

The market is flashing yellow with caution. Leveraged longs should use this respite to reduce leverage, and return to the sidelines. They should thank their lucky stars that Bitfinex’s Alphapoint roll out is experiencing growing pains. Otherwise, a messy and chaotic wall of liquidations looked likely yesterday. I wrote about the $213 – $225 margin call sweet spot in the May 4th Crypto Trader Digest. The savvy operators want to push the market to these levels, and let cascading margin calls do the heavy lifting.

The market is now consolidating around $230. Expect another attempt in the coming days. This time the longs may not be so lucky. If you share my views, begin shorting XBUK15 with a downside target price of $220. I wouldn’t consider the correction broken until the market can retake $240.

USD Interest Rates Lift BTC Forwards Market

Given the current interest rate regime a one year forward on the price of Bitcoin should be trading over $1,200. If you want to peer into the future, consider that crystal ball.

The most important element in any forecast on the forward value of a currency pair is the interest rate differential between the two currencies. Bitcoin to date does not have a reliable interest rate market. Lending out your Bitcoin is a fools errand. The internet is filled with stories of defaults on peer to peer Bitcoin lending platforms. However, where unsecured USD lending is concerned it’s a different matter.

The most popular unsecured lending market for USD which is then used as leverage to buy Bitcoin is on Bitfinex. Traders can deposit their idle USDs and earn a generous return on them. Currently traders can receive 0.30% per day on their USD, that’s 108% per year!

The rate at which traders are willing to borrow USD to speculate on the future price of Bitcoin goes hand in hand with the market movement. The Bitcoin price has shot up over $200 in the last two weeks and interest rates have spiked as well. Given the current interest rate regime a one year forward on the price of Bitcoin should be trading over $1,200. If you want to peer into the future, consider that crystal ball.