Crypto Trader Digest – August 10

Bye Bye, New York State


I am sad to announce that due to Bitlicense, BitMEX will cease to service New York State residents. Residents of New York State will be barred from accessing BitMEX as of August 16 12:00 GMT. Affected users must close all positions and withdraw any Bitcoins held with BitMEX. Users who are unable to access their accounts after August 16th, can email to request their positions be closed at prevailing market prices, and their remaining Bitcoin balance withdrawn to a Bitcoin address of their choice.

BitMEX Launches World’s First Ethereum Derivative

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Last Friday, Ether (the token powering Ethereum smart contracts) began trading on selected exchanges. Traders smart enough to buy at the IPO price were immediately up 20x on their investment. As expected, many attempted to rush for the exit and crystalise a profit. The problem was that exchanges were not crediting Ether balances and allowing traders to sell.

The launch of the BitMEX Ether / Bitcoin Weekly Futures Contract (ETH7D) coincided with spot trading launch. Because Bitcoin is used as margin, traders can short Ether and lock in their profit without depositing Ether with BitMEX. ETH7D immediately began trading at a substantial discount to spot. ETH7D represented the only mechanism for true price discovery of Ether’s value. The chart above illustrates this point. As each successive wave of Ether deposits were allowed to be sold, spot gapped down attempting to reach the level of ETH7D.

Holders of Ether from the IPO who have not liquidated yet are still in the money. Given the technical problems associated with the launch of new cryptocurrencies, it is likely that transfers and the sale of Ether for Bitcoin or USD could be halted again. ETH7D represents the only way for holders of Ether to lock in a Bitcoin profit.

Here is how to execute the hedge:

  1. Each ETH7D contract represents 1 Ether (ETH). The contract references the Kraken ETHXBT exchange rate and profit and loss are denominated in Bitcoin.
  2. If you bought 10,000 ETH at a price of 0.0005 ETHXBT at the IPO, you must sell 10,000 ETH7D contracts to lock in your profit.
  3. If ETH7D trades at 0.0025, you have locked in a profit of (0.0025 – 0.0005) * 10,000 = 20 XBT.
  4. BitMEX allows 5x leverage for ETH7D. You must deposit 20% * 10,000 * 0.0025 = 5 XBT as margin to place the sell order.

BitMEX ETH7D futures are not purely a speculative product, but have uses for ETH holders who wish to hedge their holdings. If you have any questions about how to hedge your ETH IPO allocation, please contact us.

Global Macro Musings



Germany, Japan, South Korea, and Taiwan, listed in order of importance, are four of China’s largest export competitors. The commonality amongst these countries is the race to the bottom in terms of currency debasement. While the Greek drama has torpedoed the Euro, the German export juggernaut is humming along as EURUSD has fallen from 1.5 to under 1.1. Kuroda-san and his BOJ have trashed the Yen from 80 to 120 in the last two years.

Xi Jinping and the politburo recognising the challenges facing the Chinese economy, are attempting to engineer a transfer of wealth from heavy investment industries into the hands of households. The chief conduit of change is removing the implicit subsidy of an undervalued Yuan. The Yuan is on a tear vs. the global major trading currencies, the USD, EUR, and JPY.

Unfortunately, the world economy isn’t cooperating with China’s rebalancing strategy. World trade is faltering and the commodity complex is imploding along with it. People don’t want more stuff, and China’s growth rate by some estimates has fallen to sub 5% (the official GDP is 7%, but no one believes those numbers). NPLs are rising and deteriorating local government finances have forced the PBOC to warehouse more and more toxic paper. At some point China will have to respond tit for tat vs. its major trade partners to recover some competitiveness and provide succor to its economy by devaluing the Yuan.

Chinese households that experienced a rise in global purchasing power will not sit quietly during a devaluation. They will invest / speculate on goods they believe will protect their wealth. Bitcoin is one piece of the puzzle. While it is not an income bearing bond or asset, Bitcoin cannot be devalued by diktat. When RMB begins to flood the Middle Kingdom, it will find its ways into various non-standard assets and cryptocurrencies will benefit. The Litecoin ponzi scam will be the tip of the iceberg. A desperate population is prone to believe many tall tales, and promoters will capitalise on this desperation and greed.

Quantifying Quanto: XLT7D


BitMEX launched the world’s only Litecoin futures contract that uses Bitcoin as the margin, profit, and loss currency last Wednesday. Because traders are accustomed to trading the LTCUSD exchange rate, we decided to apply a Bitcoin multiplier to the LTCUSD exchange rate. As a result, XLT7D is classified as a quanto futures contract. Many users are still confused as to the implications of quanto vs. non-quanto futures contracts from a pricing perspective. I intend to walk readers through a simple example meant to illustrate how to properly price the quanto risk premium.

Assume that a trader has gone short XLT7D futures contracts. He is now short Litecoin, long USD, and his profit will be in Bitcoin. He decides to hedge his short LTC exposure by buying LTC on the spot market. His LTC and USD exposures as it relates to price movements are now hedged. However, his XLT7D pnl is denominated in Bitcoin while his LTCUSD pnl is denominated in USD. If LTCUSD rises he will be short XBTUSD from a pnl perspective, and if LTCUSD falls he will be long XBTUSD.

The question now becomes, what is the covariance between LTCUSD and XBTUSD. Covariance measures the degree to which two assets move together. I took daily log returns of XBTUSD and LTCUSD from Bitfinex and calculated the covariance over a 30 day period. The result was a positive covariance of 0.068% or 6.8 basis points. Therefore, XLT7D should be priced 6.8bps cheaper than LTCUSD. The adjustment is so small that it can be safely ignored. Traders can treat the quanto XLT7D future as they would a LTCUSD future. The upside is that XLT7D’s settlement currency is Bitcoin, which doesn’t necessitate the holding of Litecoin or USD.

XBT Futures Term Structure

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When I used to be an ETF market maker, there was nothing more exhilarating than taking a large outright position in particular stock. I used to run overnight mean reversion strategies in certain ETFs between the NY and Asian time zones. I would wake up with substantial deltas and have to close out at market open. That only occupied me for a few hours each day. More fun and risk was to be had, playing basis curves between various equity index futures. Now that there is more volume going through BitMEX’s XBT series contracts, curve trades can be executed.

I will begin posting the WoW changes in the XBT futures term structure. The term structure illustrates the % basis per annum each maturity futures contract is trading at. I take a 24 hour average of the % annualised basis each Sunday. Traders who do not wish to predict the outright movement of Bitcoin, may instead trade the relative movement in the term structure.

The curve experienced a parallel shift downwards WoW. To sell basis or go short interest rates, traders would need to sell XBT futures contracts and buy spot. As the spread narrows, unwind the trade for at a profit.

XBT Spot

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The downdraft I had called for finally occurred. A swift fall took the price to $260. The all-important support level held, and now the $260-$270 chop has begun. The Grexit premium has all but evaporated. The $300 bag holders can now hold a “cheap coins” symposium on an r/bitcoin thread.

$260 will be tested again. Failure to hold that level will most likely result in a retest of $220. If Bitcoin can hold firm during the final days of August, the return of traders from summer holiday should buoy the market.

Trade Recommendation:

Sell XBTQ15 while spot is above $265 with a near-term target price of $260. If that breaks, the next target is $240.




Crypto Trader Digest – June 8

The Seven, The Lord of Light, or The Many Faced God


Bitcoin has become pseudo religious for most, especially for the “old” timers. As with any subculture, there are different deities that we all worship. The empirical facts that you choose to disbelieve or challenge point to which Bitcoin religious sect you belong. The heretics are made to repent on the high altar of Reddit and Bitcointalk. That’s much better than ending up in dungeon of the High Septon, or burnt alive by the Red Woman. This week the discussion will focus on the Goddess of Markets, Janet. Don’t let Janet’s appearance fool you, she’s got the global financial system in the palm of her hands.

Some traders and investors (long holders who are down double digits), constantly pray for Janet to deliver Wall St. financial institutions to Bitcoin. “When Wall St. finally gets involved…” the price will be at some absurd nominal level the faithful cry. They pray to be rescued from fomo buying at the all time high.

This past week traders convinced themselves that Janet would deliver a watered down Bitlicense, and the launch of the newest fully US compliant spot exchange Gemini. Bitlicense came and went, and the price briefly rallied a few dollars. There were no game changing announcements of a legacy financial institution finally actively trading Bitcoin. The Winklevoss twins sent a tweet with a rocket ship, and traders again prayed to Janet that Gemini was a herald for the holy grail of an US listed ETF. Janet was too busy awaiting Non Farm Payrolls to really care.

I made a pilgrimage to Jekyll Island to pray to Janet and she told me, the Wall St. banks desire the sacrifice of retail traders before they will go all in. They want to trade against retail “dumb” money, not a cohort of their banking peers. The exchange that can offer a plentiful supply of dumb money trading or investing in Bitcoin is the exchange where Janet will send the Wall St banks first. The location is irrelevant and so are the regulations. Ask any Wall St. trader, and they will hark back to visions of the old days. The old days before the current ineffectual myriad of global securities regulations existed. The old days when you could operate a chat room called “The Cartel” and compliance looked the other way while you blatantly rigged the global FX market. They certainly don’t profess their love for Glass-Steagall or Dodd-Frank.


A Step Towards A Bitcoin Zero Curve


A currency cannot be considered well functioning until there is a liquid local debt market. Bitcoin currently lacks credible companies and or governments issuing Bitcoin denominated debt. To price a proper yield curve, it is necessary to produce a zero curve. A zero curve uses the yields of zero coupon bonds at different maturities. A straight bond such as an US Treasury Bill, Note, or Bond (the demarcation depends on the maturity), is a combination of zero coupon bonds each with a principal and maturity equal to each coupon and or principle payment. E.g. A 1 year Treasury Bill that has semi-annual coupons, is a combination of two zero coupon bonds. Using bond math one can bootstrap the zero curve and begin to price fixed income securities in a particular currency.

Overstock announced that they will issue a $25 million private bond using the blockchain. The bonds will be traded a regulated exchange called Pro Securities (Overstock recently bought shares in the exchange). This is a very important first step in the evolution towards a liquid Bitcoin and other crypto currency debt market.

Issuing Bitcoin debt is a very attractive proposition for a company. Holders of Bitcoin grasp at any opportunity to invest their coin in reputable operations, and will accept lower yields given the chance to invest. Currently investment grade corporates can issue debt at very attractive rates because of central bank largesse, but that won’t always be the case. For Bitcoin companies that do not have fiat currency earnings, it would be advantageous to issue Bitcoin bonds. If Overstock can create an exchange where reputable Bitcoin and non Bitcoin companies offer debt securities, this will jump start the movement.

From a derivatives standpoint, having a pool of investable debt securities and a zero curve allows the creation of many new types of products. Bond futures, interest rate swaps, swaptions, credit default swaps, and many other products will now be possible. The global debt market is the most important and the most liquid. We as a community should do what we can to support Overstock’s efforts, it will benefit us all.


Weekly Review: Bitcoin Investment Products

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GBTC’s average volume for the week was 113 XBT up 44% WoW. The premium declined 5% points to 31%. XBT’s average volume for the week was 338 XBT down 25% WoW. The premium rose 1.3% points to 1.13%. Volatility rose moderately during the week, but volumes for both products are much lower than during their debut week.


XBT Spot

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The $230-$235 range monotony was ended with a swift fall to the low $220’s. $220 was breached, but quickly regained. Bitlicense was finally announced and the price briefly rallied to $228. The range then reset to $220-$225.

Daily volatility spiked up for a short moment, and traders rejoiced. Volatility vanished over the weekend, and this week looks to be another choppy one. The inexorable downtrend to $210 then $200 has not been broken. Each wave of positive news produces a less extreme price rally. It is only a matter of time before the final act, and a concerted push towards $200.

Trade Recommendation:

Sell XBTM15 (26 June 2015) between $220-$225. The downside price target is $213, $210, then $200. Be ever vigilant of a short squeeze, and consider covering the position if the price holds above $230.

Bitlicense: Same Same But Different

Don Lawsky graced the plebes with a press conference last night and announced the final version of the long awaited Bitlicense. The final draft is same same but different. The core requirements remain the same. Some of the more ridiculous provisions were struck. The initial reaction by many was that the revised version is a necessary evil and slightly better than expected.

Those expecting a blockbuster announcement of a major financial institution that now will be accepting or trading Bitcoin were disappointed. Bitcoiners need to realise that large financial institutions do not care about regulations. If it was profitable to trade and accept Bitcoin, they would already be doing it.

Monetary historians will remember how and why the Eurodollar market originated in London. Since FDR’s ascension to power in the 1930’s, America has been a centrally planned and controlled economy. The free market exists in very few arenas. Banking swung from a free for all, to a collection of heavily regulated legacy banks. There were interest rate ceilings and severe restrictions on the issuance of commercial paper and foreign exchange trading. American banks (who loved the regulations so much) decided to issue dollar denominated debt without restrictions from London. The Eurodollar market arose in the 1950’s to escape onerous US regulations. Morgan Stanley was one of the most active players in the new space.

From Investopedia:

U.S.-dollar denominated deposits at foreign banks or foreign branches of American banks. By locating outside of the United States, eurodollars escape regulation by the Federal Reserve Board.

Everyone else followed and the global liquidity centre for FX and derivatives became London. To this day London regulations on derivatives of all sorts are much lighter than American ones. Remember the “London Whale”? He was the trader responsible for JPM $6 billion dollar loss on exotic credit derivatives a few years back. His whole team sat out of London, far away from the prying eyes of the coterie of ineffective paid-off American regulators. Most large financial institutions book and house derivatives on London banking chains.

The Bitcoin community needs to wake up. Large financial institutions will get involved in Bitcoin when there is enough money in it for them. Hopefully that happens soon. Regulations are only meant to extract rent from certain industries, and trick a gullible public that their over paid government overloads actually care about their well being.

The lack of a price pop after the Bitlicense announcement is worrying. Expect the downtrend to continue, and a retest of $220. Sell XBUM15 with a downside target price of $220. If $220 breaks, look to cover at $213.

Don’t Be Fooled, Bitlicense Is Not A Game Changer

Don Lawsky is set to unveil the long awaited Bitlicense. Bitlicense will codify how virtual currency businesses are to conduct themselves vis-a-vis New York State residents. The first draft of the edict was released last summer. The reaction by many businesses and crypto enthusiasts was overwhelmingly negative. Businesses and individuals were allowed to submit their comments in hopes that Don Lawsky would take pity on his vassals.

The final version is expected to be released any day now. For some odd reason, many traders think that Bitlicense will create the conditions for a rally. Regulatory clarity is certainly a good thing for Bitcoin, but it is no secret what provisions and restrictions will be in Bitlicense. Bitlicense will not make it easier or more difficult for people to obtain Bitcoin. itBit obtained their blessing to conduct business across America before and without Bitlicense. The price since itBit’s “historic” launch in the US is much lower, and looks to retest $220. Some also think Bitlicense is a good omen for an eventual launch of an ETF. The SEC is not going to suddenly approve a retail investment product for Bitcoin just because one state has some rules for Bitcoin businesses. Save your Hopium for Hilldog 2016, cause your going to need it.

Any price rally attributed to Bitlicense should be sold into. If you believe a final version will be released this week, go long weekly volatility using BVOL7D. Rise or fall, the increase in volatility will make you money. If the price rallies consider selling XBTM15 above $230, with a downside price target is $220 and an eventual retest of $213.

Crypto Trader Daily – 4 March 2015

Price Action

Early morning in China the rally popped to a new local high of $294 on Bitfinex. The fade has come on strong and the price is down below $280. The rally feels to be on its last legs, a violent plunge to $260 could be in the cards.


Trade Ideas

Take profits if you were long until now. Begin to fade this rally with a price target below $270. Use the daily futures contract, XBU24H to express this view.


In the News

California unveils it’s own BitLicense (CoinDesk)

QuadrigaCX to become world’s first publicly traded Bitcoin exchange (Bitcoin Magazine)

ApplePay fraud skyrockets (WSJ)