Tag: BitMEX

XBTとXBUチェーン比較

Sho Hirayama

注：本稿は古い情報に基づいている。2014～2016年、BitMEX ではクオントとインバースの両方を扱っていたが、その後、簡略化のため、インバースのみに移行している。

新しい情報については、XBT シリーズガイド をご覧いただきたい。

BitMEX では、総合的なビットコイン派生商品を取り扱うことを目標にしている。現在の主力商品はクオントとインバースの 2 種類に大別される。XBTUSD スワップ商品ではインバース方式を採用し、XBTU16 契約ではクオント方式を採用している。

XBTUSD はビットコイン価格 (任意) を 1 ドルで除した値に相当する。XBTU16 では、ビットコイン乗数が 1ドルあたり 0.00001 XBT に固定されている。いずれの契約も米ドル建てで提示され、Kaiko BitMEX インデックスビットコイン/米ドル (XBTUSD) 直物レートを参照する。 下表は XBTUSD と XBTU16 の概要である。

シンボル XBTUSD XBTU16
種類 インバース クオント
原資産 1 / XBTUSD または USDXBT XBTUSD
乗数 -$1 0.00001 XBT
建値通貨 USD USD
証拠金と損益通貨 XBT XBT
満期 なし 2016 年 9 月 30 日
決済方式 未実現損益を毎日12:00 UTC に調整し直す Kaiko BitMEX インデックスの10:00 UTC – 12:00 UTC の 1 分足時間平均加重価格 (TWAP)
1契約あたりXBT価値 1 / 価格 * $1 価格 * 0.00001 XBT
1契約あたり米ドル価値 $1 価格² * 0.00001 XBT
1契約の XBT 損益 (1 / 価格T – 1 / 価格0) * -$1 (価格T – 価格0) * 0.00001 XBT

XBTUSD は、XBTUSD と価格が提示されるためインバース (逆) 契約であるが、実際には、原資産は USDXBT または 1/XBTUSD である。インバースとしてクォートされる理由は、ビットコイン市場の大半のトレーダーがビットコインをベース通貨とするクォート方式に馴染んでいるためである。この商品は、ビットコインの米ドル建て価値を固定する必要のあるトレーダーに適している。3 か月以内に$100,000 のビットコインを受領する予定の場合、100,000 XBTUSD 契約を売却して、$100,000 の価値を確保する。

XBTU16 は、米ドル建てでクォートされるためクオント先物契約であるが、乗数は XBT 建てである。以下は Wikipedia の引用。

クオント とは、デリバティブ の一種で、原資産 は 単一通貨建てであるが、商品自体は別の通貨建ての固定レートで決済される。

このチェーンはビットコイン保有者がビットコインの将来価格を適切に予測することでビットコイン収益をあげる場合に適している。

上のチャートには、1,000 XBTUSD 契約をロングした場合において、直物レートの推移に伴う米ドルと XBT のエクスポージャーを示している。米ドルのエクスポージャーは、$1,000 で一定であるが、XBT のエクスポージャーは非線形に変化している。この値が XBTUSD 価格 [XBT 価額 = 1/価格 * $1 * 契約数] に相当するためである。次のチャートでは、証拠金との関係が示されている。

1,000 XBTUSD 契約を$500 で購入したものと仮定する。この契約の XBT 価額は、1/$500 * $1 * 1,000 or 2 XBT の算式で計算される。慎重を期し、2 XBT を証拠金として預託する。この証拠金で価格下落時の損失が十分カバーできるという考えの下での預託であるが、上のチャートでその考えが間違っていることがわかる。青い線は 2 XBT の投資額を示している。赤い線は 1,000 XBTUSD 契約ロングポジションの損益を示している。緑の線は損益相殺後の純投資額を示している。価格が $300 を割り込むと、アカウントの投資額は実際にはマイナスつまり破産状態となる。XBTUSD はインバース契約であるため、1,000 契約を購入すると、実際には、USDXBT をショートしたことになる (XBTUSD のロングでなく)。その結果、XBTUSD 価格が下落すると、ポジションの想定価値相当の XBT を預託しても、追加証拠金が必要となり得る。

上のチャートには、XBTU16 契約を 1,000 枚ロングした場合において、XBTUSD 直物レートの変化に伴う米ドルと XBT のエクスポージャーが示されている。XBT のエクスポージャーは、非線形に変化している。価格変数が 次の式のとおり、2乗されているためである：[USD 価額 = 価格² * 0.00001 XBT * 契約]。

XBTUSD 相場の見通しに応じて、どちらかのチェーンが他方より明らかに有利となる。上の 2 つのチャートには、XBT と 米ドルの損益が示されており、1,000 XBTU16 の 1,000 契約のロングポジションとshort 2,500 XBTUSD の 2,500 契約のショートポジションで、いずれも価格 $500 と仮定されている。$500 では、この 2 つの商品の XBT と USD の価額は等しい。XBTUSD 相場に弱気な見方をしている場合、XBTUSD のショートが適した戦略である。XBTUSD 相場に強気な見方であれば、XBTU16 ロングが最適である。

Share orders, positions, and P&L with Trollbox slash commands

Michael Curry

Today, BitMEX launches an easy, verifiable way to share your positions, orders, and P&L with the Trollbox community: slash commands!

Just type / at the beginning of one of the following combinations to send an official view of your activity on BitMEX:

  1. /orders : Share all your open orders.
  2. /orders <symbol>: Share your open orders for a symbol.
  3. /position <symbol>: Share your positions for a symbol.
  4. /pnl <symbol> : Share your total Profit and Loss (PNL) for a symbol.
  5. /rpnl <symbol>: Share your Realised PNL for a symbol.
  6. /upnl <symbol>: Share your Unrealised PNL for a symbol.
  7. /help: Open a reference guide below the Trollbox.

In the above examples, symbol refers to the name of a contract, such as XBTUSD, XBTM18, and ETHH18.

Typing /orders with a symbol like XBTUSD will share all of your open XBTUSD orders in a blue box below your message:

Notice the BitMEX logo in the box? This is how you know the message was generated by the system, and was not a forgery by a user.

Slash commands are available now on all channels, and Testnet. Give it a try today and let us know what you think!

 

How to Market Make Bitcoin Derivatives Lesson 1

Arthur Hayes

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.

Example:

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.

Settlement

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.

Bitfinex Malfunction Saved Longs Yesterday

Arthur Hayes

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.

BitMEX Launches Inverse Daily Futures Contract

Arthur Hayes

BitMEX is proud to announce the launch of a fast-moving inverse daily settling futures contract called XBU24H. XBU24H is live and trading.

XBU24H enjoys BitMEX’s lowest fee structure yet: regardless of whether or not you are on the Trader or Hedger fee schedule, XBU24H is a 0% maker / 0.03% taker fee structure with no insurance fees.

XBU24H is a continuously listed contract that settles daily. It is designed to be traded quickly and easily. It is similar to our longer-term XBU contracts, but the contract size is US$1 instead of US$100.

Contract Details

Listing Date: Today, 2 February 2015 at 12:00 GMT

Underlying: BitMEX Bitcoin / USD .XBT30M Index, this index is used for settling daily futures contracts

Maturity: Daily at 12:00 GMT (ticker: XBU24H)

Quoting Method: USD

Contract Value: 1 USD of Bitcoin

Settlement: The BitMEX .XBT30M Index, the index is a daily measurement of 30-minute Time Weighted Average Price (TWAP) from 11:30 to 12:00 GMT on Bitfinex.

Margin & PNL Currency: Bitcoin

Leverage: Up to 5x

Trading Fees: Maker 0.00% / Taker 0.03%

 

Commercial Hedgers

XBU24H allows commercial hedgers to lock in the USD price of Bitcoin for short term hedges. An example is someone who wished to hedge the Bitcoin price movement during network confirmations. XBU24H will mimic the spot price movements due to the daily expiry.

Speculators

XBU24H allows speculators to trade short term Bitcoin spot price movements with leverage. The contract size is lowered to US$1 to allow traders to trade exactly the quantities they desire. Remember that on all crypto derivatives exchanges, trading fractional contracts is not possible. A smaller contract means more flexibility.

Bitcoin Volatility As An Asset Class

Arthur Hayes

Volatility is the measurement of a financial instrument’s price variation over time. Volatility as an asset class refers to isolating this variable and trading it as a standalone product. Usually volatility is isolated by the trading of delta hedged call and put options. Currently Bitcoin does not have a liquid options market so this method of isolation does not exist. However this does not preclude the existence of tradable Bitcoin volatility.

BitMEX is leading the market in innovations around the trading of volatility absent an options market. The BitMEX 30 Day Historical Volatility Index futures contract (BVOL) and the XBT vs. XBU pseudo volatility allow investors to trade Bitcoin volatility on BitMEX.

Why Trade Volatility?

Trading volatility allows investors to profit from the price movements or lack thereof. They need not predict the direction of the Bitcoin price. Event driven traders can profit from price gyrations after major news or market events which increase volatility. Conversely investors anticipating periods of relative inactively can sell volatility and profit from a quiet or sideways market. The addition of Bitcoin volatility adds another weapon to savvy investors’ alpha arsenal.

BitMEX 30 Day Historical Volatility Index Futures (BVOL)

On 5 January 2015, BitMEX launched the world’s first historical volatility index future with the ticker BVOL. The futures contract allows investors to bet on where 30 day volatility will realise. The BitMEX 30 Day Historical Volatility Index tracks the rolling 30 day realised volatility by using daily 10:00 GMT to 12:00 GMT 1 minute Time Weighted Average Prices on Bitfinex for Bitcoin / USD. The product is quoted in annualized volatility % points and investors make or lose 0.01 Bitcoin per 1% point move.

Forward Starting Historical Volatility

The BVOL futures contracts expire on the previous 30 days realised volatility. However, the contracts are tradable before the 30 day observation period starts. This allows investors to trade their expectation of where future historical volatility will realise. If it is 1 January 2015 and an investor is trading the BVOLG15 contract (27 February 2015 expiry), the observation period does not begin until 29 January 2015 (30 days prior to expiry). The price of BVOLG15 reflects the market’s view on where historical volatility will be in the future.

This has interesting implications for the pricing of other Bitcoin derivatives. Bitcoin by some is viewed as a long dated call option. The most crucial component to valuing an option is the volatility of the underlying asset. On a longer term view, higher the forward expectations of Bitcoin volatility lead to more valuable call options and possibly Bitcoin itself.

If there are major market events that will occur at specific dates in the future, the forward expectations of volatility gauge how impactful the market believes these events to be. An investor’s view of the over or under appreciation of the magnitude of the event leads to trading opportunities through the volatility component.

As liquidity and interest grows in the BVOL futures contracts, we will list longer dated maturities. Once complete, investors will have a term structure for expected future Bitcoin historic volatility. This is very useful for options traders pricing longer dated maturities. Using BVOL futures contracts as guide posts, options traders will be able to make markets in over the counter (OTC) options at tighter spreads and larger size.

Once the observation period has begun for a particular BVOL futures contract interesting arbitrage opportunities present themselves. Every day that passes there is more information about where the 30 day historical volatility will realise for a particular contract. BVOL prices too high or too low can be sold or bought vs. a knowledge of the magnitude of impact future prices can mathematically have on realised volatility.

XBT vs. XBU Pseudo Volatility

BitMEX offers two types of futures contracts, the XBT and XBU chain. The XBT chain is quoted in USD but has a XBT multiplier, a quanto style future. Therefore, buyers of XBT chain contracts have unlimited upside, but can only lose 100%. The XBU chain is worth $100 of Bitcoin at all times and is quoted in USD, an inverse style future. Therefore, sellers of XBU chain contracts have unlimited profit potential on the downside, but can only lose 100% if the price moves higher. The XBT chain is an X function, the XBU chain is a 1/X function. All else being equal, for a given maturity the XBT chain should trade at a greater price than the XBU chain. In USD terms multply each function again by X (Bitcoin / USD exchange rate), what is left is XBT – XBU = X * (X – 1/X) = X2 – 1.

Prices observed for the XBTH15 and XBUH15 contract confirm this theory. XBTH15 has been trading at a $25-$40 premium to XBUH15 on BitMEX. Because both contracts have the same maturity, this difference represents a pseudo strangle. A strangle is an options strategy where one buys a put and a call with the put having a lower strike price than the call, and both options having the same maturity. This is a volatility play; buyers of the strangle hope that realised is greater than implied volatility.

Traders who believe the realised volatility will be less than the pseudo implied volatility should sell XBT and buy XBU; those who believe the opposite should buy XBT and sell XBU. For sellers of pseudo volatility, if spot trades outside the profitable range, losses will accumulate in a non-linear fashion.

In the absence of traditional options straddles and strangles, pseudo volatility is a way for traders to express their views on implied volatility for a particular maturity.

Combining BVOL and XBT vs. XBU Pseudo Volatility

The difference between same maturity pseudo implied volatility and realised volatility through BVOL presents trading opportunities. If pseudo implied volatility is much higher than BVOL expected realised volatility, sell pseudo implied volatility (sell XBT, buy XBU) and buy BVOL. If pseudo implied volatility is lower than BVOL expected realised volatility, buy pseudo implied volatility (buy XBT, sell XBU) and sell BVOL.

The addition of volatility products on BitMEX has added three new trading strategies for investors. All of which do not call for the prediction of the direction of the Bitcoin / USD exchange rate.

BitMEX Launches Bitcoin Volatility Futures Contracts

Arthur Hayes3 Comments

We are proud to announce the launch of the world’s first Bitcoin 30 Day Historical Volatility Futures Contract (BVOL). The product will allow traders to speculate on the 30 day historical volatility of Bitcoin / USD as observed on Bitfinex. Traders will now be able to profit on the increase or decrease of Bitcoin price volatility without taking a position in the exchange rate.

Wikipedia defines volatility as, “a measure for variation of price of a financial instrument over time. Historic volatility is derived from time series of past market prices.” BitMEX has constructed a 30 day historical volatility index by taking the daily 10:00 GMT – 12:00 GMT 1 minute Time Weighted Average Price (TWAP) for Bitcoin / USD on Bitfinex. Each daily index value represents the realised volatility over the past 30 days. The futures contract on settlement day will equal the index value on that day.

The futures contracts have the symbol BVOL and expire on the last Friday of every calendar month at 12:00 GMT. The contract is quoted in annualised volatility % points. A futures price of 50.00 corresponds to an annualised volatility of 50.00%. For each 1% point movement, traders stand to make or lose 0.01 Bitcoin.

The futures contracts will be margined the same as all other BitMEX futures contracts. Initially up to 5x leverage will be allowed on this product. Margin, profit, and loss are all denominated in Bitcoin. As the liquidity grows, we will gradually increase leverage on this product.

Launch of Affiliate Referral Program

Arthur Hayes

Affiliate Referral Program

At BitMEX we want users to share in our success. To reward users for spreading the word about the BitMEX platform, we have introduced an Affiliate Referral Program.

How it Works

Each user has been given a unique affiliate link. Any new user who signs up with this link will be credited to you. The new user gets a 10% discount on trading fees for their six months of trading when they use your affiliate link to sign up. As the affiliate you receive a percentage of the total commissions paid by all your referrals for their first six months of trading. The percentage of commissions you receive depends on the total Bitcoin notional trading volume of all referred accounts. The more your referrals trade, the bigger your slice of their trading fees.

Payouts are made daily at 12:01 GMT. To learn your affiliate link and more about the program visit the Referrals page on BitMEX.

XBT vs. XBU Chain

Arthur Hayes

Note: This information is outdated. From 2014 to 2016, BitMEX had both quanto and inverse offerings. To simplify our products, we moved to inverse-only.

For up-to-date information, see the XBT Series Guide.

BitMEX‘s goal is to provide the most complete Bitcoin derivatives product offering. There are currently two types of popular structures, quanto and inverse. The XBTUSD swap product uses the inverse structure, and the XBTU16 contract uses the quanto structure.

XBTUSD is worth $1 of Bitcoin at any price. XBTU16 has a fixed Bitcoin multiplier of 0.00001 XBT per $1. Both contracts are quoted in USD and referencing the Kaiko BitMEX Index Bitcoin / USD (XBTUSD) spot rate.  The below table summarises XBTUSD and XBTU16:

Symbol XBTUSD XBTU16
Type Inverse Quanto
Underlying 1 / XBTUSD or USDXBT XBTUSD
Multiplier -$1 0.00001 XBT
Quote Currency USD USD
Margin & PNL Currency XBT XBT
Maturity No Expiry 30 September 2016
Settlement Mechanism Unrealised profits and losses are rebalanced daily at 12:00 UTC 10:00 UTC – 12:00 UTC 1 minute TWAP on Kaiko BitMEX Index
XBT Value of 1 Contract 1 / Price * $1 Price * 0.00001 XBT
USD Value of 1 Contract $1 Price² * 0.00001 XBT
XBT PNL of 1 Contract (1 / PriceT – 1 / Price0) * -$1 (PriceT – Price0) * 0.00001 XBT

The XBTUSD is an inverse contract because it is quoted as XBTUSD but in actuality the underlying is USDXBT or 1/XBTUSD. It is quoted as an inverse because most traders in the Bitcoin community are accustomed to seeing Bitcoin quoted as the home currency. This product is suitable for traders who need to lock in a USD value of Bitcoin. If you were to receive $100,000 of Bitcoin in three months, you would sell 100,000 XBTUSD contacts to lock in the $100,000 value.

The XBTU16 is a quanto futures contract because it is quoted in USD but the multiplier is in XBT. From Wikipedia:

A quanto is a type of derivative in which the underlying is denominated in one currency, but the instrument itself is settled in another currency at some fixed rate.

This chain is suitable for traders who have Bitcoin and want to earn Bitcoin by correctly predicting the future price of Bitcoin.

xbt_xbu_1

The chart above displays the USD and XBT exposure of being long 1,000 XBTUSD contracts as the XBTUSD spot rate changes. The USD exposure is constant at $1,000; however, the XBT exposure changes in non-linear way because you are taking the inverse of the XBTUSD price [XBT Value = 1/Price * $1 * Contracts]. The next chart shows the margin implications.

xbt_xbu_2

Assume you bought 1,000 XBTUSD contracts at a price of $500. The XBT value of those contracts is 1/$500 * $1 * 1,000 or 2 XBT. Being a cautious trader, you deposited 2 XBT as margin. You assume because you have fully margined the position that you cannot go bankrupt if the price drops. The chart above shows that you are incorrect. The blue line shows your 2 XBT of equity. The red line shows the PNL from the long 1,000 XBTUSD contracts. The green line shows your net equity after netting your PNL. Your account actually goes into negative equity a.k.a. bankruptcy as the price drops below $300. Because XBTUSD is an inverse contract, when you buy 1,000 contracts you are actually short USDXBT – not long XBTUSD – and as a result when the XBTUSD price drops, your account can be margin called even if you deposited the full XBT notional value of your position.

xbt_xbt_3

The chart above displays the USD and XBT exposure of being long 1,000 XBTU16 contracts as the XBTUSD spot rate changes. The XBT exposure changes linearly with respect to XBTUSD. The USD exposure changes in a non-linear fashion because the Price variable is squared [USD value = Price² * 0.00001 XBT * Contracts].

xbt_xbu_4

xbt_xbu_5

One chain is clearly better than the other depending on your view of future XBTUSD prices. The two charts above show the XBT and USD PNL assuming a portfolio of long 1,000 XBTU16 contracts and short 2,500 XBTUSD contracts both at a price of $500. At $500 the XBT and USD value of the two products is equal. If you have a bearish view on the XBTUSD price, going short XBTUSD is the optimal strategy. If you have a bullish view on the XBTUSD price, going long XBTU16 is the optimal strategy.

Future vs. Future Arbitrage With The XBU Chain

Arthur Hayes

Arbitrage between different futures contracts with similar underlyings and payoff structures can be a very profitable trading strategy. The most common futures contract structure in Bitcoin is worth a fixed amount of USD and pays out in Bitcoin. BitMEX, OKCoin, BitVC, and ICBIT all have futures contracts using this structure.

BitMEX offers a XBU chain where each contract is worth $100 in Bitcoin, and quoted in USD. As the spot Bitcoin (XBT) / USD exchange rate moves up and down the contract’s worth stays fixed at $100. If you are long the contract, as the XBT/USD price rises the contract is worth less and less XBT; as the XBT/USD price falls the contract is worth more and more XBT.

The goal is to find two futures contracts that have similar structures. The below table lists the relevant details on the two contracts.

Exchange BitMEX OKCoin
Futures Contract XBUH15 BTC0327
Underlying XBT/USD XBT/USD
Multiplier $100 $100
Expiry Date 27 March 2014 27 March 2014
Expiry Time 10:00 UTC – 12:00 UTC TWAP on Bitfinex 08:00 UTC BTC/USD Index (an OKCoin constructed index)
Clearing Method Central Clearing Socialised Losses

The similar payout structure and expiry dates make these two contracts good candidates for arbitrage.

For the following example assume the following:

  1. The Bitcoin price on Bitfinex and the OKCoin BTC/USD Index is $395 and $392 respectively
  2. XBUH15 and BTC0327 are trading at $405 and $395 respectively.

The two contracts trade on different indices so to evaluate the arbitrage potential let’s look at the basis on each contract. Basis = Futures Price – Spot Price.

Futures Contract XBUH15 BTC0327
Futures Price $405 $395
Underlying Spot Price $400 $387
Basis $5 $8

XBUH15’s price is greater than BTC0327’s; selling XBUH15 and buying BTC0327 will yield a profit. But how much? The price differential is $10; however, BTC0327 uses a different settlement index than XBUH15 for which needs to be considered. Because we are selling XBUH15 we receive the basis or +$5, and we pay the basis or -$8 on the purchase of BTC0327. The total expected profit is $10 + $5 – $8 = $7.

At 08:00 UTC on 27 March 2015 the long BTC0327 contracts will expire. The long exposure the contract generated is now gone. From 08:00 UTC to 12:00 UTC, you are short XBT/USD because you sold XBUH15 contracts. For those four hours, you can either buy Bitcoin on Bitfinex and sell during the TWAP settlement period or run the short exposure until the XBUH15 contracts expire. Depending on the execution slippage and market movement the expected $7 profit may be higher or lower.

 

 

BitMEX for Commercial Hedgers

Arthur Hayes

BitMEX is committed to serving the needs of commercial hedgers. Commercial hedgers are merchants or payment processors who accept Bitcoin as payment and need to manage their Bitcoin vs. fiat currency risk. This manual is meant to instruct commercial hedgers on how to use BitMEX derivative products to reduce the currency risk their business faces when they choose to accept Bitcoin as a form of payment.

In this lesson, Bitcoin will be referred to with the three-letter currency code XBT. The Bitcoin / USD exchange rate is XBTUSD. The lesson will explain hedging strategies using three different types of futures contracts: XBT, XBU, and XU futures chains.

The XBT futures chain’s underlying is XBTUSD, the contract has a multiplier of 0.0001 XBT, and is quoted in USD. The value of each contract in XBT and USD depends on the XBTUSD exchange rate. Margin, profit, and loss are all denominated in XBT. This lesson will use the XBTUSD December 26, 2014 futures contract and will be referred to using the symbol XBTZ14. The below functions describe the value of a XBTZ14 contract in XBT and USD:

XBTZ14 Value in USD = 0.00001 XBT * XBTZ14 Price * Contracts * XBTUSD

XBTZ14 Value in XBT = 0.00001 XBT * XBTZ14 Price * Contracts

The XBU futures chain’s underlying is XBTUSD, each contract is worth $100 of Bitcoin and quoted in USD. Margin, profit, and loss are all denominated in XBT. This lesson will use the XBT/USD December 26, 2014 futures contract and will be referred to using the symbol XBUZ14. The below functions describe the value of a XBUZ14 contract in XBT and USD:

XBUZ14 Value in USD = $100 * Contracts

XBUZ14 Value in XBT = $100 * 1/XBUZ14 Price * Contracts

The XU futures chain’s underlying is XBTUSD, each contract is worth 0.01 XBT, and is quoted in USD. Margin, profit, and loss are all denominated in USD. This lesson will use the XBT/USD December 26, 2014 futures contract and will be referred to using the symbol XUZ14. The below functions describe the value of a XUZ14 contract in XBT and USD:

XUZ14 Value in USD = 0.01 XBT * XUZ14 Price * Contracts

XUZ14 Value in XBT = 0.01 XBT * Contracts

For the examples presented below assume the current date is Oct 1, 2014, the XBTUSD exchange rate is $800, and the USDXBT exchange rate is 0.002 XBT.

Merchant Accepts Bitcoin as Payment

The merchant is a shoe wholesaler. Normally the merchant accepts only USD as payment for their goods. Their clients order large quantities of shoes today, but will pay at the end of December. All the merchants costs are denominated in USD, i.e. salaries, rent, supplies etc. For cost savings, the merchant has decided to accept Bitcoin as a form of payment.

By taking Bitcoin for future payment, the merchant must cover their costs today in USD, but receive payment in the future in Bitcoin. The merchant cannot simply sell Bitcoin and buy USD on the spot market because the merchant has not been paid their Bitcoin yet. The merchant needs a derivative solution to forward sell Bitcoin and buy USD to hedge the currency risk until their client pays.

Merchant Hedges Using the XBTZ14 Contract

A client would like to buy $100,000 worth of shoes. Instead of paying in USD, the client would like to pay the merchant in Bitcoin when he receives the shoes on December 26, 2014. The XBTZ14 contract is currently trading $1,000, and spot XBTUSD is $800. The merchant and client must decide on an exchange rate to use for their deal. The merchant decides that because the client will pay for the goods in Bitcoin in the future, the XBTZ14 price should be used as the exchange rate. The below table summarises the merchant’s cash flows:

Today 12/26/2014
USD Costs -$100,000
XBT Receipts 100 XBT

If the XBTUSD exchange rate rises, the merchant will make an additional profit as the XBT they receive in December will be worth more in USD. If the XBTUSD exchange rate falls, the merchant will make a loss as the XBT they receive in December will be worth less in USD. The merchant is short USD vs. long XBT or long the XBTUSD exchange rate.

The merchant uses their account at BitMEX to trade XBTZ14 contracts. The XBTZ14 contract has an underlying of XBTUSD, to correctly hedge their risk the merchant needs to sell XBTZ14 contracts. If one sells the XBTZ14 contract, one is short XBT vs. long USD or short the XBTUSD exchange rate. The following function describes how to calculate the correct number of XBTZ14 contracts to sell:

Contracts = XBT Value to Hedge / (XBTZ14 Price * 0.00001 XBT)

The merchant needs to hedge the 100 XBT they are receiving. The merchant needs to sell 10,000 contracts [10,000 = 100 XBT / ($1,000 * 0.00001 XBT)]. On December 26, 2014, the client pays the merchant 100 XBT and the XBTZ14 futures contracts expire. The below table shows the merchant’s cash flow using different XBTUSD exchange rates observed on December 26, 2014:

XBTUSD XBT Received XBTZ14 PNL XBT Total XBT Total Value USD
$800 1,000 XBT 20 XBT 120 XBT $96,000
$900 1,000 XBT 10 XBT 110 XBT $99,000
$1,000 1,000 XBT 0 XBT 100 XBT $100,000
$1,100 1,000 XBT -10 XBT 90 XBT $99,000
$1,200 1,000 XBT -20 XBT 80 XBT $96,000

As described above, the XBTZ14 contracts pay out in XBT. The merchant must now decide whether they will keep the XBT or convert into USD. The table above shows that the USD value of the merchant’s XBT is not fully hedged. Any deviation from a XBTUSD price of $1,000, negatively impacts the total value of the merchant’s XBT. The XBT futures chain is a quanto derivative. It is linear in XBT terms, but non-linear in USD terms. For more information about quanto derivatives, please read the BitMEX blog post XBUU14 vs. XBTU14.

The Merchant Uses the XBUZ14 Contract

A client would like to buy $100,000 worth of shoes. Instead of paying in USD, the client would like to pay the merchant in Bitcoin when he receives the shoes on December 26, 2014. The XBUZ14 contract is currently trading at $1,000, and spot XBTUSD is $800. The merchant and client must decide on an exchange rate to use for their deal. The merchant decides that because the client will pay for the goods in Bitcoin in the future, the XBUZ14 price should be used as the exchange rate. The below table summarises the merchant’s cash flows:

Today 12/26/2014
USD Costs -$100,000
XBT Receipts 100 XBT

If the XBTUSD exchange rate rises, the merchant will make an additional profit as the XBT they receive in December will be worth more in USD. If the XBTUSD exchange rate falls, the merchant will make a loss as the XBT they receive in December will be worth less in USD. The merchant is short USD vs. long XBT or long the XBTUSD exchange rate.

The merchant uses their account at BitMEX to trade XBUZ14 contracts. The XBUZ14 contract has an underlying of XBTUSD, to correctly hedge their risk the merchant needs to sell XBUZ14 contracts. The XBUZ14 is an inverse contract meaning when one goes short one is actually going long USDXBT (the inverse of XBTUSD). Therefore, if one sells the XBUZ14 contract, one is  long USD vs. short XBT or long the USDXBT exchange rate. The following function describes how to calculate the correct number of XBUZ14 contracts to sell:

Contracts = USD Value to Hedge / $100

Each XBUZ14 contract is worth $100; therefore to hedge a USD exposure of $100,000, the merchant needs to buy 1,000 contracts [1,000 = $100,000 / $100]. The below table shows the merchant’s cash flow using different XBTUSD exchange rates on December 26, 2014:

XBTUSD XBT Received XBUZ14 PNL XBT Total XBT Total Value USD
$800 100 XBT 25 XBT 125 XBT $100,000
$900 100 XBT 11 XBT 111 XBT $100,000
$1,000 100 XBT 0 XBT 100 XBT $100,000
$1,100 100 XBT -9 XBT 91 XBT $100,000
$1,200 100 XBT -17 XBT 83 XBT $100,000

As described above, the XBUZ14 contracts pay out in XBT. The merchant must now decide whether they will keep the XBT or convert into USD. At each given XBTUSD rate on December 26, 2014, the value of the merchant’s XBT holdings is $100,000. By hedging with the XBUZ14 contract, the merchant has eliminated their USD / Bitcoin currency risk.

The Merchant Uses the XUZ14 Contract

A client would like to buy $100,000 worth of shoes. Instead of paying in USD, the client would like to pay the merchant in Bitcoin when he receives the shoes on December 26, 2014. The XUZ14 contract is currently trading $1,000, and spot XBTUSD is $800. The merchant and client must decide on an exchange rate to use for their deal. The merchant decides that because the client will pay for the goods in Bitcoin in the future, the XUZ14 price should be used as the exchange rate. The below table summarises the merchant’s cash flows:

Today 12/26/2014
USD Costs -$100,000
XBT Receipts 100 XBT

If the XBTUSD exchange rate rises, the merchant will make an additional profit as the XBT they receive in December will be worth more in USD. If the XBTUSD exchange rate falls, the merchant will make a loss as the XBT they receive in December will be worth less in USD. The merchant is effectively long XBT vs. short USD, or long the XBTUSD exchange rate.

The merchant uses their account at BitMEX to trade XUZ14 contracts. The XUZ14 contract has an underlying of XBTUSD, to correctly hedge their risk the merchant needs to sell XUZ14 contracts. If one sells the XUZ14 contract, one is short XBT vs. long USD or short the XBTUSD exchange rate. The following function describes how to calculate the correct number of XBTZ14 contracts to sell:

Contracts = XBT Value to Hedge / 0.01 XBT

Each XUZ14 contract is worth 0.01 XBT; therefore to hedge a XBT exposure of 100 XBT, the merchant needs to sell 10,000 contracts [10,000 = 100 XBT / 0.01 XBT]. The below table shows the merchant’s cash flow using different XBTUSD exchange rates on December 26, 2014:

XBTUSD XBT Received XUZ14 PNL USD Total Value USD
$800 100 XBT $20,000 $100,000
$900 100 XBT $10,000 $100,000
$1,000 100 XBT $0 $100,000
$1,100 100 XBT -$10,000 $100,000
$1,200 100 XBT -$20,000 $100,000

As described above, the XUZ14 contracts pay out in USD. The merchant must now decide whether they will keep the XBT received from the client, or convert into USD. At each given XBTUSD rate on December 26, 2014, the value of the merchant’s currency holdings is $100,000. Buy hedging with the XUZ14 contract, the merchant has eliminated their Bitcoin / USD currency risk.

Contango and Backwardation

The future value of any currency pair is determined by the interest rate differential between the two currencies. This means that a Bitcoin futures contract can and does trade at a premium or discount to the spot exchange rate. When a futures contract trades at a premium to spot, the futures contract is said to be in contango. When a futures contract trades at a discount to spot, the futures contract is said to be in backwardation. To understand more about these concepts, please read the BitMEX blog post Bitcoin and Interest Rates.

In all three examples above, the futures price was different from the spot price. A savvy merchant can take advantage of contango and backwardation in the futures contract to earn extra income. Instead of the merchant using the futures price to determine the amount the client pays, the merchant will use the prevailing spot price at the time of the transaction. The client will pay the merchant 125 XBT [125 XBT = $100,000 / $800] instead of 100 XBT. The below tables illustrate for each hedging option, the monetary outcome for the merchant:

Hedging using the XBTZ14 contract, the merchant will sell 15,625 contracts [15,625 = 125 XBT / (0.00001 XBT * $800)].

XBTUSD XBT Received XBTZ14 PNL XBT Total XBT Total Value USD
$800 125 XBT 31 XBT 156 XBT $125,000
$900 125 XBT 16 XBT 141 XBT $126,563
$1,000 125 XBT 0 XBT 125 XBT $125,000
$1,100 125 XBT -16 XBT 109 XBT $120,313
$1,200 125 XBT -31 XBT 94 XBT $112,500

Hedging using the XBUZ14 contract, the merchant will still sell 1,000 contracts as the USD value of the goods has not changed.

XBTUSD XBT Received XBUZ14 PNL XBT Total XBT Total Value USD
$800 125 XBT 25 XBT 150 XBT $120,000
$900 125 XBT 11 XBT 136 XBT $122,500
$1,000 125 XBT 0 XBT 125 XBT $125,000
$1,100 125 XBT -9 XBT 116 XBT $127,500
$1,200 125 XBT -17 XBT 108 XBT $130,000

Hedging using the XUZ14 contract, the merchant will sell 12,500 contracts [12,500 = 125 XBT / 0.01 XBT].

XBTUSD XBT Received XUZ14 PNL USD Total Value USD
$800 125 XBT $25,000 $125,000
$900 125 XBT $12,500 $125,000
$1,000 125 XBT $0 $125,000
$1,100 125 XBT -$12,500 $125,000
$1,200 125 XBT -$25,000 $125,000

In each example, the merchant is earning more money than before. The XBTZ14, XBUZ14, and XUZ14 are all trading at $1,000, while XBTUSD is at $800. Because the merchant is selling these contracts, they are earning an extra $200.

Merchants should always analyze whether the futures contract they use to hedge is in contango or backwardation and price their goods accordingly. An intelligent hedging strategy can allow a merchant to earn additional income.

Margin Considerations

Merchants are only allowed to trade on BitMEX once they have deposited the appropriate margin. Depending on the futures contract, the merchant will either need to post Bitcoin or USD. For XBTZ14 and XBUZ14, the merchant must post Bitcoin as margin. For XUZ14, the merchant must post USD as margin. Depending on the currency composition of the merchant’s working capital, one contract might be more attractive than another from the currency in which margin is posted.