Swaps 101

6 May 20168 April 2019 Arthur Hayes

I Want A Ferrari

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

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

Altcoins Are Like Ferraris

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

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

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

BitMEX Swap Basics

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

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

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

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

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

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

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

Swap Boxes And Arrows

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

How Are Swaps Valued?

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

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

Is There Leverage?

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

How Long Do Swaps Last?

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

Let’s Trade

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

Trade ETHXBT Today!

Crypto Trader Digest – Mar 28

28 March 20168 April 2019 Arthur Hayes

I Think I’m Turning Japanese

Japan is the unorthodox monetary policy guinea pig. A future of tentacle porn and massive money printing awaits all developed nations. After over two decades of print and pray (maybe try just the tip?), Japan has arrived at the final solution: helicopter money.

Helicopter money, or basic income as many governments label it, is an attempt to jump start spending by handing cash directly to consumers. Instead of enriching only those who hold real assets (stocks, bonds, and real estate) via central bank bond buying, Japan will hand out vouchers to low-income young people so they may purchase “daily necessities”.

Helicopter money is nothing new. Some European countries have experimented with this flavor of money printing as well. The difference is that Japan has the world’s largest government debt load as a percentage of productive output. The BOJ puts other central banks to shame in their attempts to reflate a dying economy and country.

Japan produces some of the world’s most delicious produce (make sure it’s not from Fukushima), but imports virtually all of its energy needs. Abe-san and Kuroda-san’s policy of massive money printing trashed the yen, and made life for ordinary Japanese citizens very expensive. First it will be young poor people, soon it will be most able-bodied adults who will receive some form of government handout. The only result will be a cheaper yen, and rampant energy and food inflation. Even though Japan has a healthy farming sector, farmers still need to consume imported energy to grow and transport their crops.

Japanese housewives are renowned for their penchant to speculate in foreign exchange. What happens when they discover Bitcoin and other digital currencies? They can be bought over the internet (Japan has the world’s fastest internet after South Korea), and instantly they can protect and store their wealth. While the USD is the cleanest dirty sheet, it will get trashed as well vs. gold, digital currencies, and other real assets once Grandma Yellen goes negative.

Most of you aren’t Japanese; however that doesn’t mean BitMEX doesn’t have a way for you to profit from Kuroda-san’s freebasing habit. In the next few weeks, in cooperation with Quoine (the largest Bitcoin / Yen exchange), we will launch a daily Bitcoin / Yen futures contract: XBJ24H. Japanese traders will have direct access to XBJ24H through their account with Quoine, and BitMEX will also offer the product via our platform.

Japan Goes Full Krugman: Plans Un-Depositable, Non-Cash “Gift-Certificate” Money Drop To Young People

Brexit Maybe?

The odds of Brexit are climbing, averaging 35% across various betting platforms. Some unofficial polls put the “Leave” vote above 40%. The referendum will be held on June 23rd.

Brexit would be catastrophic for the EU project. EU skeptic parties continue to poll better and better. If one of the richest countries in Europe leaves the EU project, the calls for Portugal, Italy, Greece, and Spain (the PIGS) to exit from their citizens will gain force.

All of the PIGS have massive debt problems. Either they continue suffering from high unemployment, or devalue and accept their old domestic currency. These are the only options to regain competitiveness vis-a-vis ze Germans. After 7 years of “austerity” the plebes are fed up. However, they have been sufficiently scared about the possible post-EU apocalypse to vote themselves out of the Euro. That all changes if Brexit occurs.

The Bitcoin rocketship will ignite if the odds increase further. To gain an appreciation for the positive price effect, chart Bitcoin during the Grexit saga last summer. Brexit is still too far in the future and the odds too low to be on many traders’ radars yet. It is the perfect time to go Bitcoin volatility if one believes that the likelihood of Brexit will increase.

The BitMEX Bitcoin / USD September futures contract, XBTU16, is the ideal product to trade. It settles well after the referendum date. If Brexit does occur, the whole of Europe will decend into chaos over the summer. Greece is out of money again, surprise surprise. They will be back at Merkel’s feet begging for more cash this summer. Maybe this time around the population will follow through on their threat to leave the Euro, and redonominate their debt into Drachmas. These fears will multiply and cause a bid for safe-haven assets like Gold and Bitcoin if Brexit occurs. The aftermath will be more wild than the Brexit vote itself. These fears will be priced into markets if the odds of Brexit increase. That is why a contract like XBTU16 that expires in the fall will be bid up if the odds of Brexit increase.

XBTU16 currently trades at a 62% per annum (PA) premium. Historically, three and six month BitMEX contracts have traded between 40% to over 100% PA premiums. If the Brexit odds increase, XBTU16 is poised to trade at the upper end of that range. In order to isolate the XBTU16’s premium, buy XBTU16 vs. short selling spot Bitcoin.

Brexit Referendum Betting Odds

NYT Kneels At The Alter Of Ether

I wanna get down on my knees and start pleasing Jesus, I wanna feel his salvation all over my face!

— Faith +1

Ethereum is on the warpath and is zeroing in on Bitcoin.

A recent article published by the New York Times (NYT) describes it as a Bitcoin 2.0, a new currency that can overcome obstacles which Bitcoin can’t. Having risen by nearly 1700% in the past three months from trough to peak, it is clear that Ethereum is a serious contender and is now the 2nd largest Cryptocurrency available, overtaking the likes of Litecoin.

Is this exponential rise going to continue? The price has been plateauing lately, almost taking a breather; however no doubt there are a lot of traders with fingers twitching over that buy button, myself invcluded. Anyone who was trading Bitcoin back in 2011 and 2012 must surely feel some sort of déjà vu.

Why has it come to this? The article highlights a few reasons, some of which the Bitcoin community are highly aware of already. Firstly, this tedious battle on the future of Bitcoin between Core and Classic has led to a number of startups and traders lacking the confidence to invest further into the currency and look for alternative virtual currencies. We can all agree that trading Bitcoin over this period has been lacklustre and boring, and until we have a clear answer on what is going to happen I don’t think we are out of this rangebound yet.

Furthermore, Ethereum provides a way to create smart contracts easily. Personally I think this is huge – already the finance community are looking into this and has gained a lot of attention from companies such as JPMorgan, Microsoft and IBM. Smart contracts can save a whole lot of time and money, especially in finance and banking where traditional contracts (such as in inventory financing) can take days if not weeks to execute. Backoffice functions benefit as well, which have a number of different databases and clutter in which a number of things can and will go wrong (being told you are short $5 bucks of an illiquid stock on settlement day and you’re going to enter a ‘buy-in’ was never a fun thing to hear from your backoffice).

Given the fact that the NYT is almost ‘pumping’ ETH, I would suggest to get on board the gravy train. We should witness further news forthcoming about it if discussions between Core and Classic do not go anywhere and Bitcoin remains in a deadzone. This all points to one way ticket for ETH. I recommend buying the dips – anywhere below 0.024 Ether / Bitcoin is attractive. BitMEX is the only exchange to offer a 25x leveraged Ether / Bitcoin futures contract, ETH7D, so get your bids in early and enjoy the ride.

Ether Margin Trading vs. Futures Contracts

20 August 20159 April 2019 Arthur Hayes

Soon after spot Ether trading began, leveraged products on the Ether/Bitcoin (ETHXBT) appeared. BitMEX was the first exchange to offer leveraged trading via a futures contract called ETH7D. The leading spot ETHXBT exchanges Poloniex and Kraken, have just started offering margin trading. This post will explain the differences and costs of margin trading vs. futures trading of ETHXBT.

Margin Trading

Margin trading requires that traders borrow Bitcoin to go long ETHXBT, and Ether to go short ETHXBT. Traders will then place their leveraged orders into the spot order book. The ability to borrow Bitcoin and Ether is not a sure thing. On Poloniex and Kraken other users must lend out their excess Bitcoin or Ether. If there is no supply, margin trading cannot happen. The interest rates paid are very volatile and can be expensive at times.

Futures Trading

The BitMEX ETH7D futures contract expires weekly every Friday. Each contract is worth 1 ETH, and traders must post Bitcoin as margin to go long or short. BitMEX allows 5x leverage. This means that there is no need to borrow ETH in order to short the ETHXBT exchange rate when using ETH7D. There is no daily interest rate charged either. The difference between where you buy or sell ETH7D and the current spot ETHXBT rate at the time represents an implied interest rate. For traders who have Bitcoin, ETH7D represents the easiest and cheapest way to go both long or short with leverage on ETHXBT.

How To Trade Ether

12 August 20159 April 2019 Arthur Hayes

The hottest new altcoin on the block is Ether (ETH). Ether is the token used to power the Ethereum protocol’s smart contracts. Now that Ether is freely tradable, this post will explain the different ways to express bullish and bearish views on this new cryptocurrency.

Spot Trading

Buying and selling Ether on a spot basis is quite simple. The most liquid Ether currency pair is Ether/Bitcoin (ETHXBT). Poloniex and Kraken are the leading exchanges by volume.

Buying Ether

To buy Ether, send Bitcoin to the exchange and exchange it for Ether. This must be done on a fully funded basis (i.e. there is no leverage).

Selling Ether

If you hold physical Ether, you can exchange it back for Bitcoin. Selling Ether you don’t possess is not possible.

Leveraged or Derivatives Trading

For most of the readers of this blog, leveraged trading / speculating presents a more interesting way to trade Ether. With the exception of Bitcoin and Litecoin, leveraged or derivatives trading on altcoins was not possible. BitMEX recognised that Bitcoin traders would like to speculate on Ether with leverage and using only Bitcoin as margin.

BitMEX launched the ETH7D, weekly expiring ETHXBT futures contract, when spot trading became available last Friday. Each ETH7D contract represents 1 ETH. The contract expires each Friday at 12:00 GMT on the ETHXBT exchange rate. All margin, profit, and loss are conducted in Bitcoin. The maximum leverage allowed is 5x.

Buying Ether Futures

BitMEX Ether futures contracts allow traders to speculate on the future value of the ETHXBT exchange rate. A trader who wishes to go long 1,000 ETH, must buy 1,000 ETH7D contracts. The beauty of ETH7D is that it requires Bitcoin as margin. The maximum leverage is 5x. If the ETH7D price is 0.005, the trader must post 1 Bitcoin as margin (1,000 Contracts * 0.005 ETHXBT * 20%). If the price rises to 0.006, the profit is 1 Bitcoin = (0.006 – 0.005) * 1,000.

Selling Ether Futures

Short selling, or selling something you don’t possess is usually impossible with altcoins. Using ETH7D, traders are able to placed leveraged bearish bets on Ether as long as they own Bitcoin. For example, a trader who wishes to go short 1,000 ETH, must sell 1,000 ETH7D contracts. Again only Bitcoin is required for margin. If the ETH7D price is 0.005, the trader must post 1 Bitcoin as margin (1,000 Contracts * 0.005 ETHXBT * 20%). If the price falls to 0.004, the profit is 1 Bitcoin = (0.004 – 0.005) * -1,000.

Placing leveraged trades, and shorting Ether are only possible with BitMEX’s ETH7D futures contract. ETH7D Contract Description

Crypto Trader Digest – August 10

10 August 20159 April 2019 Arthur Hayes

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 support@bitmex.com 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

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:

Each ETH7D contract represents 1 Ether (ETH). The contract references the Kraken ETHXBT exchange rate and profit and loss are denominated in Bitcoin.
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.
If ETH7D trades at 0.0025, you have locked in a profit of (0.0025 – 0.0005) * 10,000 = 20 XBT.
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

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

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 – August 3

3 August 20159 April 2019 Arthur Hayes

BitMEX Happenings

Last Monday, BitMEX launched 25x leveraged futures contracts and dropped fees exchange-wide to 0%. The initial response has been very positive. Trading volumes and user signups have increased dramatically. In the coming weeks, we plan to add advanced order types, and additional products. Stop Limit orders will be added shortly, and Litecoin futures will launch this week. Please read below for more details on the Litecoin futures’ launch.

BitMEX aims to be the most trader friendly exchange globally. Please let us know anything we can add or do to enhance your trading experience.

BitMEX To Launch Litecoin Futures

At 12:00 GMT Wednesday August 5th, 2015, BitMEX will launch its first altcoin futures contract XLT7D. XLT7D will allow traders to speculate on the LTCUSD exchange rate. XLT7D will expire each Friday at 12:00 GMT based on the Bitfinex LTCUSD 10:00 GMT to 12:00 GMT two-hour Time Weighted Average Price (TWAP). The biggest problem with other Litecoin futures contracts is that you must use Litecoin as margin. XLT7D will be margined in Bitcoin; profit and loss will also be in Bitcoin. Traders stand to gain or lose 0.001 Bitcoin per $1. If the XLT7D price is $4, each contract is worth 0.004 Bitcoin.

The XLT7D contract is ideal for traders who hold Bitcoin, but want to speculate on LTCUSD. The maximum leverage allowed will be 15x. A position worth 150 Bitcoin will require 10 Bitcoin as margin. If a trader’s equity drops below 2%, BitMEX will liquidate the position. XLT7D will be margined according to the Dynamic Profit Equalisation system.

The Dog Days of Summer

The northern hemisphere summer finale is here. Europeans have flocked to the Med, perfecting their North African look; New Yorkers (the only city that really matters in American finance) have packed their searsucker suits and nantucket reds, and headed for the Waspy enclaves of The Cape, The Hamptons, or The Breakers; The Chinese are escaping the sweltering Beijing desert and concrete Shanghai jungle for Southeast Asian beach paradises. Intraday volatility has declined, and the annualised variety while initially rising in July, has stayed fairly constant.

The jobbers left trading Bitcoin have time to ponder the events that could pop or drop the price in the final quarter of 2015. The biggest event or non-event will be whether Empress Yellen decides to raise rates. While many now expect a 0.25% rise by their December meeting, various US economic data points could forestall liftoff. The Greek / European drama has not ended. Capital controls remain, and the stock market crashed when it reopened after being closed for over a month. Various European countries hold national elections in 4Q as well. The wrong result for Brussels could see Euro contagion risk soar, taking Bitcoin along with it. Don’t forget the Chinese. The CCP is battling to convince their population to Keep Calm, and Trade Equities. The externalities of more free money in the Middle Kingdom could materialise in the most unexpected places (read cryptocurrencies).

Global macro investing is fun again. The Bitcoin price action in July shows that challenges to the global financial system status quo are positive for Bitcoin. 7 years after the GFC and a systematic attempted eradication of volatility, who amongst us believes that the re-introduction of macro risk into the system will carry us to new heights? Between now and year end, a steady stream of events will introduce uncertainty and that is the fuel on which Bitcoin feeds. The best way to purchase year-end long exposure is by buying BitMEX December futures, XBTZ15. XBTZ15 allows up to 25x leverage, and is the cheapest of the XBT series in terms of its premium to spot. XBTZ15 will profit from global macro uncertainty in two ways. The rise in the price of Bitcoin and the increase of price volatility. These will increase the spot and interest rate component of XBTZ15.

Ethereum: Vapourware No Longer

Congratulations are in order for the Ethereum team. After completing one of the most successful crowdfunding campaigns ever, many thought Vitalik & Co. would be permanent residents at the Bunny Ranch, and Ethereum would live up to the etymology of its name.

The spot markets for ETH/USD and ETH/BTC will go live any day now. Given how successfully they have created a community around their project, I expect trading volumes will be brisk. The next question is, what about a derivative on Ether? Ether is the token that powers the smart contracts built on top of the Ethereum protocol. For the ecosystem to have any value, participants must be able to exchange Ether for other cryptocurrencies (Bitcoin) or fiat currencies (USD).

BitMEX is committed to providing leveraged products that are wanted / needed by the trading community. Our initial thoughts are a 10x to 15x leveraged futures contract on ETH/USD or ETH/BTC. For either contract, Bitcoin would act as the currency for margin, profit, and loss. What we want to know from you our users is whether this product is attractive, and which pair you would rather trade (ETH/USD or ETH/BTC)? Please contact us to opine. We want to move quickly to launch a derivatives market to capture the positive momentum surrounding Ethereum.

Bitcoin Leveraged Loans

Last Monday July 27th, we increased leveraged dramatically on our XBT series futures contracts. Almost immediately, the basis between the future and spot price increased. The front month contract at the time, XBTN15, experienced the most dramatic rise in annualised % basis. The chart above is a time series of the Bitfinex spot price, and the annualised % basis.

On the 27th, the basis was trading at 100%. In the next two days, due to the increase in leverage and the upward trajectory of the price, the basis tripled to over 300%. The increase in leverage to 25x was the biggest contributing factor. The return profile of the XBT series favors bullish traders. This is because their return in USD terms is squared on the upside, and their downside in USD terms is reduced as well. The greater the leverage, the greater amount of USD they are implicitly allowed to borrow from the shorts.

The shorts will demand a higher and higher premium over the spot price to compensate them for the negative USD gamma or convexity. The type of traders most prone to supply short interest in the highly leveraged XBT series are arbitrageurs. They will sell XBT futures expensive and buy either spot or another leveraged futures contract trading at a lower premium.

The buyers paying these high premiums don’t expect to hold the contract until maturity. They plan to capture a short term spike in price, which makes the premium almost irrelevant to them. The arbitrageurs must hold the contract until maturity to capture the premium. They will be very aggressive in raising the premium higher and higher as they get shorter and shorter. If they sell too cheaply, they could face exponential losses if the price rises or falls too much.

With these risks in mind, selling the elevated XBTN15 basis was a no-brainer trader for an arbitrager. On the July 29 with 2 days until expiry, XBTN15 traded at a 400% premium while spot was at $295. If you sold XBTN15 and bought spot, the price would need to fall below $258 or rise above $346 to suffer a loss. Given there was only 2 days left until expiry, the likelihood of the price falling outside those bands was very low.

Traders with spare capital should consider loaning USD to leveraged long futures traders. The risk adjusted returns are very attractive.

Weekly Review: Bitcoin Investment Products

Week Ending	GBTC Avg Volume	WoW % Chg	% Premium	XBT Avg Volume	WoW % Chg	% Premium
7/24/2015	311 XBT		5.57%	295 XBT		-0.32%
7/31/2015	326 XBT	4.65%	5.54%	503 XBT	70.75%	-0.59%

XBT Spot

So close, but so far. The $300 ascent was cut short, and back down we slid to $275. The price is now trading in a $275 – $285 range. The good news is that in the absence of a new global macro event, the price has held above $270.

August is an ideal time to accumulate a long position at lower and lower prices. As I have stated above, the number of possible macro shocks in store for the fall from known and unknown sources will favour Bitcoin. Averaging into a long position while things are quiet is prudent.

$260 is the Maginot Line. If this level fails, Bitcoin will retest $220 and then possibly $200. Discerning a short term direction while we aimlessly vacillate between $275 and $300 is a fool’s errand. Pick a direction and stick with it, or the wood chipper will eviscerate you.

Trade Recommendation:

Buy December 2015 (XBTZ15) futures contracts while spot is below $300. If spot falls below $260, transition into a net short position using the front month XBT contract.