Crypto Trader Digest – Dec 14

The Wicked Witch Of The West


Will she or won’t she unleash a global dollar margin call, and accelerate a financial market meltdown? This Wednesday, the world will find out if Janet Yellen is a witch or a kitty cat. If you haven’t heard, the financial system is deathly afraid of a 0.25% increase in the Fed Funds Rate. Due to the enormous amount of excess reserves held by Fed member banks, some analysts fear that the Fed may have lost complete control over short term rates. Those who are interested should read up on: Interest On Excess Reserves (IOER) and Reverse Repo (RRP).

How should Bitcoin traders approach this event? Binary events of this nature present amazing opportunities to generate massive returns. There are three scenarios.

Fed Tightens:

Commodities, EM currencies, carry trades, and equities will blow up. The PBOC will have even more of a reason to weaken the currency. The CNY has been pegged to the USD over the past few years. Raising rates is negative for EM currencies which is positive for Bitcoin.

Probability ~25%

Fed Does Nothing:

The market will focus on their forward guidance. Under what circumstances would the Fed raise rates or resume QE? EM currencies and commodities are asset classes will telegraph the market’s forward expectations. The pace of CNY depreciation is unlikely to change if the Fed stays put. For the short term, if the Fed does nothing, it is neutral to slightly positive for Bitcoin.

Probability ~50%

Fed Eases:

There are a few more trading days before the Wednesday announcement. If equity markets and EM currencies accelerate their downward spiral, Yellen might be scared into easing. In the September meeting, Yellen stated that they take into consideration the global economy (read equity, FX, and commodity markets). In the face of global armageddon, the Fed might resume QE and or introduce negative interest rates. The largest central bank restarting the money printer is long term positive for Bitcoin, but I believe it is short term negative for Bitcoin. There will be a massive relief rally and many of the global macro problems beginning to surface today will be forgotten for a short while.

Probability ~25%

No one knows for sure what will happen on Wednesday. There are so many factors which could push the decision one way or the other. Prudent traders will flatten their books ahead of the announcement. Expect deathly silence across all assets until the Wicked Witch of The West proclaims her judgment.

Guo With The Wind


Beijing has its own version of the Pop ‘n Lock. Pop the stock market to all time highs, then Lock up many financial participants when the stock market drops. Various CEOs, hedge fund managers, and government officials have been disappeared by the China Securities Regulatory Commission (CSRC) for their alleged role in upsetting the apple cart. This has been dubbed the “kill the chicken to scare the monkey” campaign.

Guo Guangchen, referred to as China’s Warren Buffett, is the CEO of Fosun International Holdings. Fosun is one of the largest private financial services firms in China. Guo was disappeared by the CSRC, and apparently is now assisting in an investigation. No one knows the full truth, as he is still in custody. Guo is both mega wealthy (worth $8 billion), and connected to high ranking government officials. If Guo isn’t safe, no wealthy Chinese person is.

Global Financial Integrity published a report that claims $1.4 trillion has illegally escaped China over the past decade. Now that China’s tycoon’s are scared shitless, they will accelerate the pace of capital flight. Beijing is no fool, the traditional means of capital flight are being shut one by one. Bitcoin stands as a beacon light to those who wish to internationalise their assets, and is completely legal. If even a small percentage of this hot China money discovers Bitcoin, it will re-rate the entire asset class.

China’s Illicit Outflows Estimated at $1.4 Trillion Over Decade

Market Panics As “China’s Warren Buffett” Detained In “Richter Scale 9 Event”

ZAR She Blows


This weekend I found myself watching the movie “BRICS Back Mountain 2001”: a film directed by Jim O’Neill, from SquidWorks Productions. Investors looking for places to deploy excess capital from the developed markets identified the following growth markets: Brazil, Russia, India, China, and South Africa. The search for virgin markets with the capacity to service debt and produce commodities to be consumed by the developed world is not a new phenomenon.

During the late 19th and early 20th Century, Britain and continental Europe exported capital to South America (Argentina & Brazil), Asia (India & Hong Kong), and Africa (Egypt & South Africa). BRICS was a reality long before a Goldman Sachs partner pontificated on the subject. Unfortunately for the BRICS nations: easy come, easy go. Jacob Zuma, in all his wisdom, decided to fire his finance minister. Investors took the stick to the South African Rand (ZAR) and it now is trading at all time lows. The Rand does not suffer alone.

Meanwhile the Brazilian Real, Indian Rupee, Russian Ruble, and Chinese Yuan are all weakening aggressively. Investors do not want local currency exposure. When they lend money to BRICS nations and corporations, they do so in USD. During the commodity super cycle, these nations enjoyed rising local currencies, rising earnings due to rising commodity prices, and easy access to credit because of Fed largesse.

The Wicked Witch of the West, Janet Yellen, has decided to shut off the free money spigot. The surging USD is wreaking havoc upon BRICS nations’ balance of payments. The strong dollar has crushed commodity prices and raised the cost of funds for BRICS nations. Caught in a negative feedback loop of falling earnings and rising debt servicing costs, investors tapped out and took the stick to BRICS currencies.

The local populations now face rising costs for all imports. Local currency denominated assets provide no protection from the ravages of inflation. Bitcoin represents one avenue whereby locals can both export capital abroad freely and store wealth. The marginal buying pressure will come from BRICS citizens fleeing their local toilet paper currencies. Speculators also see the writing on the wall and will buy along with them.

Divestment from developing markets by western investors has just begun. The initial effects are only beginning to surface. Long term Bitcoin bulls should take comfort in the strengthening fundamentals for citizens of the world to own electronic gold.

PBOC To Go Nuclear On CNY

image (5)

Readers should be quite familiar with the USDCNY vs. XBTCNY chart. The PBOC began devaluing the CNY vs. the USD this August, and stepped up the pace last week. However, the China Foreign Exchange Trade System (CFETS) began publishing a trade weighted CNY index to better reflect actual CNY exchange rate. The CFETS rate is now the all important one. The PBOC devaluation should be judged against this new index.

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The CFETS published the weights of the different currencies in the basket. I took the rates and reconstructed the index starting in December 2014. The chart above shows the relative appreciation (>100%) vs. the index value twelve months prior. What stands out is that the CNY has actually appreciated by over 2%. If the PBOC is to obtain parity with the CNY’s value from last year, USDCNY must be devalued by 8.38%. That assumes that the ECB and or BOJ don’t continue printing gobs of money to depreciate the EUR and JPY respectively. The much hailed USDCNY depreciation over the last 6 months hasn’t even regained the CNY’s relative position from last year.

The mandate is clear. The PBOC must accelerate the pace of liberalisation of CNY trading. The PBOC interventions have propped up the CNY. With the buying pressure removed, expect the CNY to fall fast and hard. Bitcoin is priced in CNY, and the price will continue higher. The road to $1,000 will be paved with the face of Mao. Don’t fight the PBOC, BTFD!

The Launch of RMB Index Helps to Guide Public View of RMB Exchange Rate

XBT Spot

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The quest for the holy $500 is alive and well. Asisted by the favorable global macro backdrop, Bitcoin continues to climb higher. Make no mistake, the PBOC is weakening the CNY further. Traders who fail to understand the implications and continue shorting into this move will get rekt.

This week’s trading is divided into two periods BY (Before Yellen) and AY (After Yellen). The global markets and other central banks are inflicting max pain in order to scare the Fed off its rate hike course. Tanking global markets and EM currencies are postive for Bitcoin. Depending on what Yellen decides, Bitcoin will continue on its upward trajectory or face a sharp correction. In my opinion, the Fed will not raise and indicate further easing in 2016 causing a massive relief rally and short squeeze. Bitcoin will get stick in the short term, but the uptrend will continue in the medium-term.

Trade Recommendation:

BitMEX 50x Weekly Futures, XBT7D: Buy XBT7D and close the long on Wednesday December 16th. Go short XBT7D into the Fed decision (if you are brave). Otherwise, go long XBT7D if they raise, go short XBT7D if they hold or ease.

Crypto Trader Digest – Nov 30

Welcome To BlockMEX



Arthur: Hi Garry (VC), I want to tell you about a pivot we just made. BitMEX is now BlockMEX, we allow trading of Blockchain Derivatives.

VC: Oh that’s great. You know we are not that interested in Bitcoin, but very positive about the Blockchain. Please tell me more.

Arthur: Clients use Blockshares to trade on BlockMEX. And we allow the trading of financial derivatives using the Blockchain.

VC: Wow that’s awesome. So you no longer use Bitcoin? You were previously called BitMEX right?

Arthur: We never were a Bitcoin company. The “Bit” merely stood for digital information, you know like Bits and Bytes.

VC: Gotcha. So what kind of Blockchain do you use for your derivatives, do you touch Bitcoin in any way?

Arthur: Touch Bitcoin, oh heavens no. We created our own Blockchain that uses Blockshares. It is proprietary to BlockMEX.

VC: Wow, you created your own Blockchain? I’m really impressed. So if anyone can trade anything using the BlockMEX Blockchain, how do regulations work?

Arthur: Regulations are irrelevant with the Blockchain. It’s all decentralised, so no legacy regulations apply to BlockMEX.

VC: Man, the Blockchain is so amazing. So what about trading volumes?

Arthur: We have not done a single trade on BlockMEX yet. That’s okay, we’re just pre-revenue. Our technology is meant for large financial institutions. We are going to revolutionise how they trade derivatives.

VC: I totally agree that legacy finance needs services like yours. What about your team? Finding good Blockchain engineers is getting harder and harder.

Arthur: Our team is top notch. We have expert MySQL and PHP developers straight from Tokyo. They have been involved with the Blockchain since 2010.

VC: I really think you guys are onto something. How can our firm, FOMO Capital, get involved?

Arthur: On the back of our strong traction, we are raising $116 million at a $500 million valuation.

VC: That sounds very reasonable. FOMO Capital typically writes checks for $50 to $100 million. We are interested in leading your round.

Chinese Exchanges: Bitcoin Shadow Banks


How do Chinese Bitcoin exchanges make money when they charge no fees to trade spot? When asked, management of the big three (OKCoin, Huobi, and BTCC) assure us that they do indeed make money. In this post, I will conduct a thought experiment as to how I would monetise a spot business that charges zero fees in China. I have no concrete evidence to back up any of my claims other than deductive logic.

China accounts for the vast majority of all on-exchange Bitcoin trading. Exchanges must therefore have a large balance of customer CNY and Bitcoin. I believe that Chinese exchanges act as shadow banks. They borrow at 0% from clients who wish to trade Bitcoin, and lend out customer funds by purchasing China debt instruments.

When the product is free, you are the product. Chinese Bitcoin exchanges use the captive CNY held to trade Bitcoin to earn interest income. How much does it cost to operate the exchange? I have no hard data, but the big three generally have around 150 staff. Assume an average salary of 10,000 CNY per month. Demand deposits yield between 3% to 5%; this is the least risky form of lending as it can be redeemed at any moment from the bank to satisfy withdrawals. The yearly salary costs alone are CNY 18 million. To earn that amount in interest income at 5% requires CNY 360 million or $56 million of stable customer funds. Given the reported trading volumes, it is reasonable to assume that the big three could each possibly hold this amount of capital.

Unfortunately only investing using demand deposits just barely covers salaries. If the exchange is to turn a profit, they must step out on the risk and maturity curve. Private companies cannot obtain credit from banks. All bank credit is reserved for State Owned Enterprises (SOE). In the last decade, high interest rate Wealth Management Products (WMP) have emerged to provide credit to SMEs. The banks underwrite these WMPs off balance sheet which are secured on a company’s assets. WMP yields range from 10% to 20% and have various maturities. Investors believe there is an implicit guarantee provided by the issuing bank. The belief is the government would not let WMPs fail because of the catastrophic losses retail investors would suffer. Therefore, in the few cases where it appeared a company would default on a WMP product, the banks have stepped up and rolled the debt.

Like any bank, a Chinese exchange must keep a portion of the float liquid so they can’t lend the entire balance out via WMPs. The below table assumes that the Demand Deposit rate is 5% and the WMP rate is 20% per annum. NIM is the Net Interest Margin, which in this case is the full interest rate since customers are paid nothing on CNY they hold with the exchange.

% Liquid % WMP Yearly NIM Costs Profit
50% 50% $7,031,250 $2,812,500 $4,218,750
40% 60% $7,875,000 $2,812,500 $5,062,500
30% 70% $8,718,750 $2,812,500 $5,906,250
20% 80% $9,562,500 $2,812,500 $6,750,000
10% 90% $10,406,250 $2,812,500 $7,593,750

As the table shows, the more credit and maturity risk management is willing to take the more money they make. Given there is no regulation as to how the exchange holds customer funds, management can invest in whatever they like to generate a positive NIM. It is not a far stretch to imagine the CEO’s punting the A share market in their spare to time to generate enhanced returns.

Bitcoin trading has become a side show, and these entrepreneurs have created very profitable banking institutions. Because they have excess cash, they are able to pledge customer CNY to fund whatever assets will generate a positive risk adjusted NIM. The Chinese Bitcoin exchange model will be copied in other emerging markets with broken credit intermediation and high nominal rates of interest. If I was opening a spot Bitcoin exchange in India, this is the model I would choose. Private credit in India is hard to come by, and nominal rates are sky high.

The Magic Number Is 6.40

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The IMF is set to announce the CNY’s inclusion into the SDR basket today. Analysts expect that after the inclusion, the PBOC will intervene less in the FX markets and allow the CNY to depreciate further. 6.4 is the highest level USDCNY reached this summer after the shock devaluation.

If USDCNY rises above 6.4, the dominoes may begin to fall. The expectation of future weakness will become more acute. Ordinary citizens will search for any means to preserve their purchasing power. The Bitcoin meme is gaining ground in the financial media. Zerohedge mentions Bitcoin daily when talking about the Chinese financial markets. Once the mainstream pundits at Bloomberg, FT, and WSJ discover Bitcoin, make sure you have your moon boots ready.

Apart from the Federal Reserve meeting December 16th, nothing else will have more impact on Bitcoin than the USDCNY exchange rate. The above chart shows the Bitcoin premium expansion as CNY has depreciated (as USDCNY rises, CNY is worth less USD). To check the PBOC’s daily USDCNY interbank rate click here. If you are lucky enough to have access to Bloomberg or Reuters, search for the USDCNY daily fix. It is announced each day at 9:15am Beijing Time GMT + 8.

Don’t fight the Fed. In Bitcoin, don’t fight the PBOC.

XBT Spot


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$400, here we come. Global macro is providing so many positive catalysts for Bitcoin it is hard to keep them all straight. Argentina has descended into currency chaos. The CNY depreciation continues. The Fed is expected to lift rates and torpedo asset markets globally.

Yet – $400 won’t be taken as easily as it was one month ago. The retrace from the graces of $500 has been slow and steady. However, the recent price action contains the wiff of FOMO, and the upward pressure is likely to accelerate if the CNY devaluation continues.

Trade Recommendation:

Daily 100x Futures, XBT24H: Buy XBT24H while spot is $375 to $380 with an upside target price of $385.

Weekly 50x Futures, XBT7D: Buy XBT7D while spot is $375 to $385 with an upside target price of $400.

Crypto Trader Digest – Oct 12

BitMEX Happenings

This past Tuesday, I participated on a FinTech disruption panel at the Bloomberg Most Influential Summit. [Video Link]

Also, I sat down for an interview with Coin Republic’s David Moskowitz. We talked about how and why Bitcoin businesses should hedge. [Video Link]

Announcing 100x Leveraged Daily Bitcoin Futures

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Due to the low price volatility, BitMEX has increased leverage on its daily (XBT24H) and weekly (XBT7D) Bitcoin / USD futures contracts. Traders can now use 100x leverage on XBT24H, and 50x leverage on XBT7D. Due to the tight trading ranges, traders employing scalping strategies should use these two contracts. Traders are not forced to use the maximum amount of leverage. If “Isolate Margin” is not enabled, the liquidation price will be calculated based on a trader’s total available equity with BitMEX.

The Wizards of Oz

wizard of oz

The last few weeks have witnessed the death of the cult of central banking. The investing narrative of the past 7 years was “central bankers can save the world economy”. With the ability to print unlimited money, there was no economic ill that couldn’t be cured. Investors who invested in risk assets were amply rewarded for their belief. The religion of central banking produced 0% interest rates and income inequality, and those who noticed the ills were regarded as Cassandras.

Nothing lasts forever, and market participants are now openly questioning the monetary policies followed by all central banks. Even central bankers themselves are quick to point out that they alone cannot produce an economic nirvana. Straight from the horse’s mouth, the G30 Group report highlights the dim view that central bankers have of themselves [link]:

Central bank policies since the outbreak of the crisis have made a crucial contribution to restoring the appearance of financial stability.

Nevertheless, for this appearance to become a reality, underlying problems rooted in very high debt levels must be resolved if global growth is to be more sustainably restored.

Investors construct narratives as shortcuts to process the incomplete information they have about the future. As the central bank omnipotence narrative wanes, investors might focus on cash flows again. The question used to be, which sectors will benefit the most from inflows of hot money. Whether or not a business can generate a net profit was of secondary concern. The question will now become, if free money is no longer effective in boosting asset prices, does this business produce a good or service that is actually desired by the market, and can they turn a profit.

The most important question is what assets can one buy to express a negative view on the effectiveness of central banking. Gold traditionally has been the go to asset, and the new kid on the block is Bitcoin. The 2015 narrative for Bitcoin was “Bitcoin bad, blockchain good”. Banks and other financial institutions eschewed the word Bitcoin, and transformed into digital payments and blockchain companies.

Bitcoin became the scarlet letter. The price and interest in the currency suffered as a result. The price fell 50%, and volatility remains at all time lows. As it becomes popular again to bash central bankers’ attempts to control every variable of the global economy, Gold and Bitcoin will benefit as an expression of dissatisfaction with the high priests and priestesses.

Now is the best time to increase exposure to assets that have fallen out of favour and price. Bitcoin will be fashionable again when the price exits its funk. Savvy traders who purchase Bitcoin derivatives now will see above average returns as premiums on the future value of Bitcoin rises as well as the price. Any product that has significant time value should be bought. For patient traders, BitMEX March 2016 futures are recommended. Between now and March we might get the first and last Federal Reserve rate hike, and/or a severe correction in the global financial markets. We are at the end of a 7 year bull market. Nothing moves in a straight line, or lasts forever.

How Liquid Is Your Portfolio?


Water, water, every where,
And all the boards did shrink;
Water, water, every where,
Nor any drop to drink.

— Coleridge, The Rime of the Ancient Mariner

A common refrain about Bitcoin from many institutional investors is its illiquidity. Bitcoin trades close to $100 million per day; this is very illiquid compared to G10 currency pairs. But what many forget is that in our centrally planned economic world, citizens are one government directive away from being unable to trade the assets in their portfolio.

Turning to the biggest success and failure of 2015, the Chinese equity market, many investors are learning just how liquid this market is. The Chinese government began aggressively pushing anyone and everyone to trade the stock market. The aggressive policies helped the market more than double in one year. But as the market corrected almost 50%, the government barred many large traders and funds from selling securities. The CSRC has to date brought 41 cases of “market manipulation” (read: selling stocks) against various institutions.

At certain points this year, the CSI300 futures contract was more liquid than Globex S&P Mini futures contract. And then the liquidity plummeted as the government began creating examples of traders attempting to realise profits or cut losses. Many in the west chided Chinese about their immature response to their stock market collapse. And many large investors have completely pulled out of China and will not return for some time.

This is not just a Chinese phenomenon. Bans on short selling and long selling were used during the GFC just 7 years ago. These same countries that claim to be committed to capitalist principles, have all implemented policies with a similar spirit.

If a market’s national government can effectively shut the market at a moment’s notice when it serves political ends, how liquid is your portfolio? Contrast this to Bitcoin, where there are a multitude of exchange operators. When MtGox went down, that wasn’t the end of Bitcoin trading. When Bitstamp got hacked and was offline for one week, people still exchanged Bitcoin in an orderly fashion. While the absolute liquidity is orders of magnitude less than other assets, at least Bitcoin can still be traded when the leading exchanges are shut down.

CSRC holds hearing for illegal stocks operations

XBT Term Structure

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Volatility continued to fall last week. XBT7D, XBTV15, and XBTH16’s basis all declined WoW. The drop in volatility is happening against a backdrop of a slowly building rally. If Bitcoin can break through $260, the surge of trading will lift the volatility out of its slump. XBTH16 has the most amount of time value remaining, therefore it has the greatest sensitivity to a move in basis. It is the most attractive contract to buy if one believes in a normalisation of volatility and a possible continuation of the rally.

Trade Recommendation:

Buy XBTH16 vs. sell XBTV15 to profit from a rise in price volatility and interest rates.

XBT Spot

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The slow ascent to $260 continues. Bitcoin / USD is now flirting with $250. There is formidable resistance at this level, but the underlying fundamentals of this rally are encouraging.

Golden Week is now finished in China, and price action will increase. The next major known event is the Silk Road auction, which takes place in early November.

Trade Recommendation:

Go long 50x leveraged weekly Bitcoin / USD futures (XBT7D) while spot is $245-$250. The upside target price is $260.

Crypto Trader Digest – Sep 28

Daily 50x Leveraged Bitcoin / USD Futures Contracts

Last Friday we launched a daily 50x leveraged Bitcoin / USD futures contract with the symbol XBT24H. Due to the low volatility of Bitcoin, scalping or range trading is the preferred strategy of many day traders. With 50x leverage, traders can double their initial investment with only a 2% move in the spot price. XBT24H has quickly become our most popular contract, and we have added additional market makers to help improve liquidity.

Is Bitcoin A Safe Haven Asset?


Don’t fight the Fed was the investing mantra over the past 6 years. Indeed fund managers who did not heed that advice were eviscerated. The Fed did a beautiful job of constructing the narrative of central banking omnipotence. There was no economic problem that couldn’t be solved with lower interest rates, money printing, and equity market bubbles.

Nothing lasts forever and investors confidence in central bankers ability to engineer higher asset prices has come undone. It began in China where the PBOC lost the plot and has not been able to convince the hoard of ordinary punters to return to the tables. Next up was Grandma Yellen. Her concern over the weak world economy and markets was heard loud and clear except this time traders actually sold assets. The bribe of more free money didn’t turn the tide, and now the S&P 500 has given up all QE3 gains.

Where can investors hide? After falling almost 50% from the its high of $1,900 per ounce, gold was one of the best performing assets over the last few weeks. The question for Bitcoiners is whether Bitcoin will be viewed as a safe haven asset in the times of market turmoil to come. Market turmoil tends to benefit Bitcoin. The Grexit summer scare was negative for the broader financial markets, but Bitcoin performed beautifully in the risk-off environment. It traded up to $320. As soon as the Greeks folded to ze Germans, risk-on was back and Bitcoin fell back into low $200’s.

image (1)

The above graph shows the 30 day realised volatility over the past month. Volatility fallen by almost half in that time period. This is quite surprising when compared with a backdrop of a deteriorating global financial system. Once the world’s most volatile asset, Bitcoin has put many traders to sleep. As turmoil increases in the financial markets, Bitcoin is poised for a breakout in price and volatility.

The market neutral strategy is to buy October 2015 (XBTV15) 25x leveraged Bitcoin / USD futures contracts and short sell spot. An uptick in volatility on a breakout move will result in the XBTV15 premium rising. At that point sell XBV15 and buy back the shorted Bitcoin.

If you believe Bitcoin will begin behaving more akin to gold, go long December 2015 (XBTZ15) 25x leveraged Bitcoin / USD futures. It is still cheaper in basis terms than March 2016 (XBTH16) futures, but has sufficient time value to experience a nice pop if basis and price began moving upwards.

XBT Futures Term Structure

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Volatility continued falling last week. As a result, the term structure barely moved. The XBT term structure is in a healthy contango. The appropriate strategy is to sell XBTH16 and buy XBT7D and short roll. Below are a step by step instructions:

  1. Sell XBTH16 and buy XBT7D in equal contract amounts.

  2. When XBT7D expires, sell the next weekly expiring contract. This is called short rolling. The goal is to remain price neutral.

This trade has positive carry or Theta.

Daily BTC Theta = $Basis / Days Until Expiry * 0.00001 BTC Multiplier * Contracts

Assume that 100,000 contracts per side were traded.

XBTH16 Theta = $56.63 / 180 * 0.00001 BTC * 100,000 = +0.31 BTC
XBT7D Theta = $0.91 / 5 * 0.00001 BTC * 100,000 = -0.18 BTC

Daily BTC Theta = 0.31 BTC - 0.18 BTC = 0.13 BTC

Assume the curve does not shift, a 0.13 BTC profit each day will be earned from this carry trade.

If the short term rates rise significantly, there could be losses incurred when short rolling occurs. The point at which the short XBT7D has a negative daily BTC theta of 0.31 BTC is the break even.

0.31 BTC = $Basis / 5 * 0.00001 BTC * 100,000
$Basis = $1.55

A $1.55 basis equates to a 48.39% annualised percentage basis.

Assuming the rates do not rise on the XBTH16 contract, if the XBT7D annualised % basis rises above 48.39%, it is optimal to let it expire and sell the XBTH16 contracts at the Friday 12:00 GMT settlement.

The above example I walked through is a real world example of the basis trades I wrote about in our recent blog post Bitcoin Basis Futures Trading: Lesson 2. In Lesson 3, I will speak about risk management, and the different variables to monitor.

XBT Spot

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Bitcoin ended the weekend doldrums with a rally that began in the early afternoon China time. The price briefly broke through $240 on both Bitfinex and OKCoin USD. The move was a continuation of the spike in China early last week. This is a healthy rally. Higher highs are being made on increasing volume.

The near term price target is $250. Bitcoin failed there in the last liftoff attempt. Expect a cooling off period of a few days, and a general fade downwards. The retrace might lead to Bitcoin trading in the mid $230’s for a few trading sessions.

Trade Recommendation:

Buy weekly 25x leveraged Bitcoin/USD futures (XBT7D) while spot is $235-$240. The upside price target is $250.

Crypto Trader Digest – Sep 21

When Doves Cry


Janet Yellen dropped a bombshell on the market, and it was not received well. Yellen cited concerns over the global financial markets / economies as the main reason why the Fed decided not to raise rates. Even scarier, is she did not rule out negative interest rates or additional QE. If China and EM commodity exporters continue collapsing QE4EVA is coming.

The SPX (S&P 500) initially rallied on the news, but then puked into the close Thursday. The selling continued on Friday. A dovish Fed many thought would signal risk-on and a continuation of the equity market levitation, The Fed admitted the world economy is not well, and if they raised rates by even 25bps, EM countries and China would come unglued. Then the financial blowback would hit the land of the free. Investors have a good reason to be frightened. If the markets reacted this poorly to the expectation of more free money and even negative interest rates, what hope is there. The whole reason why markets roared back from the depths of the hellish 2009 spring was free money being doled out first by the Fed, and then by every other central bank globally.

Bitcoin’s reaction to the news was muted. Volatility dropped as it re-emerged in other asset classes. While Bitcoin and gold share many differences, the big similarity is that both are put options on the credibility of central banks and fiat money. Gold rose in the last two trading days. If the markets open Monday and the bloodbath continues, Bitcoin may catch a bid and begin a slow methodical rally.

If the US decides to travel into never never land with negative interest rates (NIRP), the war on cash will begin in earnest. In effect the USD market will be split into physical notes and digital bank credit. Good money, physical notes, will be hoarded and bad money, digital bank credit, will be in abundance (Gresham’s law). For policy makers this creates issues as it is impossible to fully track and police the flow of cash. Europe is next, the ECB’s QE program is failing as there are not enough bonds to buy without severely impairing the markets. More NIRP is on the horizon for the EUR. The SNB (Swiss Franc) and Riksbank (Swedish Krona) are reading the tea leaves too. They will move aggressively into negative territory in response, as they aren’t happy at the appreciation of their currencies vs. the EUR.

It is not outlandish to imagine global governments banning cash, and forcing the plebes to tender cash for digital bank credit. Bitcoin is one solution, gold is another but carrying around your wealth in gold can get heavy (hopefully I have these problems soon). Bitcoin is digital money with no domestic restrictions. Those who realise this early will have a chance to protect a portion of their wealth from NIRP by buying Bitcoin at reasonable prices. These things happen slowly then all of a sudden. Greece is the poster child. Capital controls were almost assured once Syriza was elected. But still many Greeks did not withdraw their EUR. Then one Monday the banks didn’t open, and when they did only 60 EUR per day was allowed to leave. Don’t be like the Greeks, buy Bitcoin.

XBT Term Structure

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Price volatility was muted last week which meant the term structure did not experience much change. XBTU15 continues to be the most expensive future in terms of basis. That is due to the liquidity premium. If price volatility returns to Bitcoin this week, XBTV15 should experience a basis pop. It will be the front month future as of Friday, and it trades at the cheapest basis. Consider selling XBTU15 and buying XBTV15 to take advantage of a curve steepening. XBTH16’s basis has shown the most stability recently. It has traded in a 5% point range for the last month. Another way to benefit from a rise in XBTV15’s basis is to buy XBTV15 and sell XBTH16. This trade has positive carry (or positive Theta) so even if your prediction is wrong about volatility returning, you will earn the basis differential because XBTH16’s basis is higher than XBTV15’s. That way you can exit the trade with a slight profit if the market stays comatose.

Trade Recommendation:

Sell XBTU15 vs. buy XBTV15 to profit from rise of the XBTV15 basis. Alternatively, buy XBTV15 vs. sell XBTH16 to earn positive carry and profit from a rise of the XBTV15 basis.

The first installment of our series of lessons on basis trading was published last week, Bitcoin Futures Basis Trading, Lesson 1. This was a discussion on the time value of money and how to compare futures rich or cheapness by looking at the annualised percentage basis. Lesson 2 will deep dive into the different curve structures and appropriate trades to implement given certain situations.

Screen Shot 2015-09-21 at 4.28.26 pm

After a very boring weekend in terms of price action, Bitcoin awoke and dropped $5. The price is solidly below $230, and the new range is $225-$230. The ranges have gotten tighter and tighter, and the time spent in a sideways motion has increased. The breakout whether higher than $235 or lower than $225 will be violent.

Bitcoin is in a wait and see mode while the global markets digest the historic September FOMC. The chop will continue until traders decide whether NIRP and more QE is a short term positive or negative for Bitcoin. Absent a clear break out, going long when spot is $225 and short at $235 is a reasonable strategy.

Trade Recommendation:

Go long XBTU15 (September 25x leverage Bitcoin/USD futures) when spot is at $225, with an upside target price of $235. If spot breaks below $225, sell XBTU15 with a downside target of $210. If spot breaks above $235, buy XBTU15 with an upside target of $250.

Crypto Trader Digest – Sep 14

WWYD: What Would Yellen Do?

jesus christ

There are four days left until the Fed decides whether to usher in the next financial meltdown. Anyone who believes fundamentals have powered the rally in risk assets need only look at the two charts below. The top chart from BaML shows that the expansion of the Fed’s balance sheet (QE, money printing, or monetary heroin) corresponds to the rise of the SPX rocket ship. The bottom graph shows the Baltic Dry Index (BDIY) which measures global shipping rates. The healthier the world economy, the more things that move on boats, and the higher freight fares are. Unlike the SPX, this chart is in depression territory.


jpm finally gets QE

Screen Shot 2015-09-14 at 3.53.28 pm

It’s not just the American equity markets that live on QE, many emerging markets (EM) are beginning to suffer balance of payments and currency crisis due to an anticipated stronger dollar and positive USD short term rates. The Fed has telegraphed the start of a rate tightening cycle. 2016 is a presidential election year, and the Fed will not raise interest rates during an election year. That leaves 3 meetings left for 2015. The September FOMC meeting is this Thursday the 17th. At this point no one has a clue what Empress Yellen will do.

The global financial markets hang on every word and action of the global monetary clergy. Back in the 1990’s, financial pundits analyzed the color of Alan Greenspan’s ties to gain an insight into what the Fed would announce at a particular FOMC meeting. They certainly don’t teach that in Econ 101. For Bitcoin, the decision will not have an obvious impact. However, what it will introduce is volatility.

I will lay out my trading decision tree:

The Fed Doesn’t Hike

Trading will be on hold until the Thursday decision. Traders will sit on the sidelines and wait until the decision. Volatility will decline across all asset classes. If the Fed doesn’t hike, traders will then switch to what they will do at the next meeting. Remember, we aren’t out of the woods until after the December meeting. The only effect on Bitcoin will be a return to the status quo of low to medium volatility. There will not be any outsized reactions in the price. Whatever your view was before the decision, there is no need to alter it because another holding pattern will set in before the October meeting.

The Fed Does Hike

Look out below. Markets will get slapped globally. EM currencies will accelerate their depreciation vs. the USD. In the short term, Bitcoin will not be spared from the carnage. But like a phoenix, Bitcoin will emerge from the ashes and demonstrate its safe haven status. Volatility will increase dramatically as Bitcoin gyrates in response to crashing global markets and the desire of investors worldwide to opt-out. $200 is a strong support, and Bitcoin might reach that level but it will hold. The V shaped drop and pop will present a great opportunity for fearless traders to enter the market. Take advantage of the time value, and buy BitMEX 25x leveraged March 2016 (XBTH16) futures.

XBT Futures Term Structure

image (2)


The change in the term structure illustrates perfectly how the XBT series premium reacts positively to increased volatility. XBTU15’s basis increased over 30% points WoW. The price drop yesterday night Asia time caused the basis to spike. Bottom feeding traders bid up the basis to obtain long delta and USD gamma exposure at attractive levels. Those who bought the basis at 30% and hedged their price risk were amply rewarded as the basis more than doubled.

Looking at the curve, XBTZ15 looks very cheap compared with XBTU15 & H16. There is a 27% point difference in the basis between XBTU15 & Z15. Consider buying XBTZ15 and selling XBTU15. Either bullish traders will bid up the cheap XBTZ15, or bearish traders will sell the expensive XBTU15. Either way you make money on this curve flattener.

Trade Recommendation:

Sell XBTU15 and buy XBTZ15, delta neutral, this is a curve flattener.

A Note About Basis Trading

Basis trading is the act of trading the implied interest rates between futures contracts with different. The goal of basis trading strategies is to earn positive carry, or predict the future term structure of interest rates. The beauty of basis trading is that you are price neutral. Generally you will construct a strategy where the delta risk, or change in price due to a change in spot, is eliminated. This allows you to place larger bets, and capture small changes in the basis. Due to the quanto payoff structure and 25x leverage of the XBT series, there is a perfect environment to basis trade. The curve routinely gets out of whack and savvy traders are given very juicy entry points.

Soon to come, I will publish a series of blog posts about different curve strategies using BitMEX XBT series futures contracts.


XBT Spot

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The breakout above $235, culminating in Bitcoin touching $248, gave hope that a run at $260 was imminent. Gravity thought otherwise and the price began drifting lower. Eventually the price touched $224 on Bitstamp. Given that Bitstamp does not offer leverage, real cash sellers are dumping coin. The price has since rebounded near $230, but I expect a retest again in the low $220’s.

This week is all about the FOMC decision. Don’t expect any fireworks until Thursday. If Bitcoin trades down to $220, that is a good buying opportunity for a $220-$230 range bound week.

Trade Recommendation:

Sell XBT7D (weekly expiring Bitcoin/USD futures contract) while spot is $225-$230. Cover the short at $220, and go long to play the rebound.

Crypto Trader Digest – Sep 7

Brokedown Palace: EM FX

BROKEDOWN PALACE, seated front from left: Claire Danes, Bahni Turpin, 1999, TM & Copyright © 20th Century Fox Film Corp.


As a Hong Konger with essentially USD (HKD is pegged to the USD), my travels around Asia have gotten much cheaper lately. The Chinese started the party by devaluing the CNY. Subsequently traders took the hammer to emerging market (EM) currencies and many worry a repeat of the 1997 Asian Financial Crisis is upon us.

Talk about volatility, a few weeks back Kazakhstan decided enough was enough and let the Tenge (its currency) fall by 22% in one weekend, annualise that! Meanwhile sleepy Bitcoin has been locked in a tight trading range, and volatility is at historic lows. If Empress Yellen decides to raise rates, the EM FX complex will take another drubbing.

Many EM countries and corporates issue debt in USD not their local currency. Investors understandably don’t want EM FX exposure. Many of these countries are either goods or commodity exporters. The current world economy is characterised by slowing world trade, falling demand for industrial commodities, and a strong dollar. This toxic mix ensures that EM countries and corporates will struggle to pay back USD denominated debt. FX traders see the structural balance of payments problems and continue dumping EM currencies, further exacerbating the problem.

Governments valiantly fight against the global markets by selling down their FX reserves of USD denominated assets. Notable examples are China and Saudi Arabia. At some point smaller nations will have to throw in the towel and allow their currencies to weaken drastically. Regular citizens need not sit back and watch their purchasing power destroyed. Diversifying a portion of their wealth into Bitcoin now, is an intelligent decision. Non-USD Bitcoin exchange rates will begin trading a substantial premiums reflecting the market’s view on the future devaluation that will occur in a particular currency. Get out now while the getting is good.

For readers who are in EM countries and can trade deliverable FX forwards here is a trade idea:

  1. Buy Bitcoin, sell USD at one of the big global exchanges.
  2. Sell Bitcoin at a premium, buy your local EM currency. You now have EM currency that you need to convert back into USD.
  3. Buy a deliverable forward (DF). You will deliver EM currency and receive USD when the DF expires. Now you have USD, wash, rinse, and repeat.
  4. The premium that Bitcoin trades to your local currency must be greater than the premium on the DF for this trade to work.

Tongzhimen Hao (Greetings Comrades)



The whole world now hums to the tune of Zhongnanhai. Xi Jinping put on a powerful parade last Thursday commemorating their “victory” (read: the US and Russia saving their ass) in WWII. However the markets didn’t care, and the Shanghai Composite closed down over 2% today. In addition they continue to fix the CNY stronger, which necessitates the PBOC to sell even more US Treasuries to support their currency.

Bitcoin traders should be watching the China equity, FX, and rates markets like a hawk. Knowing the change in the daily PBOC fix of USDCNY is a must. Up until now the beauty of day trading Bitcoin was that the fundamentals (if there are any) mattered little. The ability to correctly read a chart and the human emotion it conveyed easily conveyed profits upon the punter. As a global financial catharsis courtesy of China is at hand, clueless traders will be caught out by economic data points. Dust off that textbook and educate yourself before you rek yourself.

They keys data points are:

USDCNY Exchange Rate
Daily change of the Shanghai Composite
The 10yr US Treasury Yield

Dramatic changes in any of these variables will begin to have a noticeable impact on Bitcoin just like they do for gold.

XBT Term Structure


The curve shifted slightly lower in the past week. Given the price rise, this is surprising. The non-linear return in USD for being long the XBT series futures should have lead to an increase in their premium over spot. Long-end futures (Dec15 XBTZ15 and Mar16 XBTH16) look very cheap. If the rally continues and enters the fomo phase, the long end futures will become much more expensive. Traders who wish to profit from a parallel shift upwards due to a rising price should buy XBTZ15 or XBTH16.

XBT Spot: Breakout

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The sleepy 4-day holiday weekend in China culminated with a breakout on Sunday (it was a working day). Bitcoin broke through $230 and traded as high as $248 on Bitfinex. Now the price languishes at $240.

The rally started at $200 and the channel will culminate at $260. $260 is where the previous breakdown in price occurred. Expect price to stall at $240 and trade down into the mid $230’s. If $235 is broken on the downside consider this rally over and ride the rollercoaster back to $220. If $235 can hold, the rally can continue to stair step higher to $250 then $260.

The resistance at $260 will be fierce and in the absence of a new development, the price will not ascend this mountain. China continues puking even after the government has sounded the all clear. Expect more gyrations in the financial markets that could be very positive for Bitcoin if investors view it as a new safe haven.

Trade Recommendation:

Buy XBTU15 (BitMEX weekly Bitcoin/USD futures contract) while spot is $235-$240. The upside target is $255-$260.

Crypto Trader Digest – August 31


Alice cooking her shot in the bathroom of a Taco Bell in Denver. Places where you can lock the door and not have anyone barging in is a pretty safe place to shoot. She and Iris made enough quick money for a bag each and after getting high will fly their signs again to make money for their afternoon and morning shots and also a bag for rent for the room they are living in. Denver, Colorado Tuesday,  July 17,  2012.      Joe Amon, The Denver Post When I was 13 I started taking pills and then I figured out you could shoot up some of them and I liked doing that more than meth. But itÕs way more expensive and way harder to find. From the time I was 13 until now. Like I donÕt really do pills anymore because heroin is a lot better and not as expensive but if it were ever like, I didnÕt have the money or if someone were to still give me pills I would still do them just out of lack of anything else I guess.

For the first time in almost two decades, Petrodollar recycling countries are net sellers of USD denominated assets. To arrest the fall of the RMB, China has begun selling US Treasuries to support their currency. Other Emerging Markets countries faced with plunging currencies now must sell USD assets to intervene as well. If that’s not bad enough, the Fed just might raise interest rates for the first time in 6 years.

Up until now the Fed has strongly telegraphed its intentions to begin raising rates this fall. Liftoff looks more and more unlikely given the global macro landscape. An even stronger USD exacerbates the above issues. EM currencies and RMB will get weaker and cause more selling of USD assets for their defense. Standing still is not an option for the Fed. To get out in front of potentially catastrophically high interest rates, another round of money printing is in the cards.

If the world financial markets continue free falling even after another hit of the free money heroin, investors will seek safety in other risk assets. Bitcoin having bottomed at $162 (down over 80% from the ATH) looks very attractive on a longer term horizon. BitMEX recently listed March 2016 Bitcoin futures contracts, XBTH16. The pernicious effects of a global central bank printing orgy will be unmistakable by March. Consider buying XBTH16 to express a 6 month bullish view.

First They Laugh… Then They Buy

Logos are seen outside a branch of Barclays bank in London July 30, 2013. REUTERS/Toby Melville

Earlier this year I proclaimed that 2015 would be the year Bitcoin was co-opted by legacy financial institutions. It started with investments in high profile Bitcoin firms (Coinbase, Circle etc.). Now the first bank has publicly admitted to buying Bitcoin, and is now rolling out a program that allows their clients to donate Bitcoin to charities. It only applies to charities, but this is a step in the direction of a full scale trading and storage operation.

The Wall Street moment that Bitcoiners have been dreaming about is here. Nothing happens in a vacuum. Now that Barclays has backed Bitcoin and the blockchain publically, banks will come out of woodwork announcing how they to are innovating by buying and accepting Bitcoin for certain purposes. The bear winter is nearing an end.

The zeitgeist is changing and profits are in order for savvy traders. The grand finale of summer is upon us. VC’s are all busy taking drugs in the desert, and the east coast Brahmans are finishing out the summer in the Hamptons, the Cape, or Nantucket. Come September 8th, a full on barrage of positive acceptance news will change the tide of sentiment.

Barclays to become first UK high street bank to accept bitcoin

XBT Term Structure

image (1)

XBTQ15 expired and XBTH16 was listed in the past week. The downdraft to $200 compressed basis as well. The steepest fall was for XBTZ15, which fell almost 18% points. A break out in either direction should see the curve shift upwards. On a down move, bottom feeders bid up the basis to get long exposure for the rebound. On an up move, Fomo buyers bid up basis to ride the upward momentum. Volatility is cheap at these levels especially for longer dated futures. If 30 day volatility normalises to 75%-100%, the basis will rise significantly especially for XBTH16.

Trade Recommendation:

Buy XBTH16 and sell XBTU15 to take advantage of a rise in longer dated basis.

XBT Spot: Margin Call

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The final weeks of summer are not going quietly. Tuesday’s flash crash took Bitcoin below $200 on Bitfinex. The $162 print I will call the double bottom. While we might drift lower towards $200, I find it very unlikely it is breached again.

Cash buyers will emerge and will pick at the carcasses of leveraged longs. The $220 level was breached again, and now we hover between $215-$220. Expect another down draft to $200-$210. At these levels consider increasing leveraged long exposure to overweight and prepare for a V-shaped rally.

Trade Recommendation:

Buy XBTU15 with spot at $210-$220 with an upside target price of $240.

Fall 2015: The Empire Of Chaos And Bitcoin

The financial markets have largely forgotten the pain experienced during the GFC. This time around with 0% interest rates and free money galore, all sorts of risk assets have been buoyed. Bitcoin came about during the depths of the GFC depression. Bitcoin at its core is a reaction against ways in which mainstream finance has been practiced over the past 100 years. Bitcoin feeds off of investors dissatisfaction with monetary and governmental regimes.

After 7 years of free money, cracks in the world economic edifice are beginning to show. I have identified three salient areas where instability might flare up this fall. While I can’t predict the exact response of global assets in each scenario, I am willing to wager that Bitcoin will benefit from chaos and instability.

The Federal Reserve Rate Hike

The Fed aggressively lowered interest rates and printed money via quantitative easing starting in late 2008. Now they are determined to show the world that they can raise interest rates and recover some of their tattered credibility. Through different mediums they have loudly telegraphed that 0.25% rate rise will happen by year end. The financial media has touted the party line that the US economy and in particular equities can handle positive short term rates.

I disagree strongly. When discounting any asset at 0%, even a small rise wrecks havoc on any discounted cash flow analysis. Even more troublesome, is what happens to companies who must now roll low interest debt into higher yielding debt. That is not a problem when the general business climate is improving. However, the collapse in the commodity complex tells us that end demand and real economic activity is falling worldwide. Many businesses only exist because yield starved investors have financed them at ridiculously low interest rates.

Important Dates:

Federal Reserve Open Market Committee (FOMC)

September 16-17

October 27-28

December 15-16


Grexit And Eurozone Turmoil

After Alexis Tsipras acquiesced to Germany’s bloodless coup, Grexit was temporarily taken off the table. For ordinary Greeks, the situation has become worse. Capital controls still remain, and business activity is grinding to a halt. Greece might still need a “time out” from the Eurozone to shave its unserviceable debt load.

Once European bureaucrats return from their Mediterranean beach holidays, the uncomfortable truths of a troubled Eurozone will appear once more. Spain and Poland have national elections this fall. Anti-EU parties are gaining strength. PM Rajoy’s People’s Party is being assaulted by Pomedos. Pomedos is campaigning on an anti-austerity framework. If Greece is able to receive debt relief, Pomedos will campaign for similar tactics to be employed by Spain.

Polish MP’s are up for re-election this fall. Dissatisfaction with the EU program could lead to a change in the makeup of parliament. Given that many of the EU bailout programs need domestic approval before the commitment of funds, a hostile parliament can spell trouble for Brussels.

Important Dates:

Polish elections October 25

Spanish elections before December 20


The drama surrounding the correction in the Chinese equities market, while entertaining, is not the main event in the Middle Kingdom. The real problems facing China are accelerating CPI food inflation, a slowdown in economic activity, and the mass exodus of capital.

Once you get past the glittering luxury store fronts on the eastern seaboard, Chinese poverty rears its head. The mass of poor people spend a significant amount of their disposable income on food, especially pork. Pork prices have been on a tear this year. Beijing and the PBOC are acutely aware of how food inflation impacts the majority of its citizens. The legitimacy of the Chinese Communist Party (CCP) is at risk during period of high inflation. As a result, the PBOC is hesitant to aggressively cut interest rates for fear of stoking inflation. Instead to prop up the faltering stock market, they must resort bans on selling stocks and directly buying the market.

Beijing recognises that China must transition from an investment to a consumer driven economy. The 10+% GDP YoY gains are a thing of the past. Many economists believe 3%-5% GDP growth is coming. Unfortunately the vast amount of debt underpinning many businesses and local governments need a high nominal GDP growth rate to paid back. The PBOC now must absorb these non-performing loans at a time when they can’t cut rates due to inflation fears. At some point, the government will have to allow selective entities to default and that will send a ripple through the Wealth Management Product (WMP) industry. WMP’s are high yielding debt instruments with implicit guarantees of the issuing banks and or local governments. If investor confidence is shaken in WMP’s, these funds will need to find a new investment vehicle (maybe Bitcoin?).

Finally, the capital flight from China is accelerating. The elites recognise the precarious state of the Chinese economy and their position in it. They are sending their spawn to America, Canada, Australia etc. to deploy RMB into real estate and other assets. The capital account of China is closed only to those without the right Guanxi (read connections). The PBOC has begun selling US Treasuries to offset the flow of capital out of China. If Beijing actually cracks down on the porous nature of the capital account, these funds will need to find another way to escape the RMB and China. Bitcoin is one option. It is still too illiquid to handle the tens of billions USD leaving the country each month, but even a small percentage of these flows going through Bitcoin could lead to a massive price rise.

The RMB strengthened against the USD and other Asian trading rival’s currencies for the past few years. Faced with the set of domestic financial challenges described above, the PBOC at some point may begin devaluing the Yuan. Chinese investors who want to protect against depreciation can turn to Bitcoin to protect a portion of their wealth.


Crypto Trader Digest – July 20

Slow Motion Banking Collapse


The Grexit can was kicked a few months down the road by a last minute capitulation by Prime Minister Alexis Tsipras. A bridge loan has been arranged so that the ECB and IMF can be paid their tribute. The Greek parliament voted to subjugate their nation in exchange for zero. The various EU nations are borrowing money from their populations to pay back zombie loans. The focus will shift to the Greek banking system, and how long the generosity of the ECB lasts.

The banks are open today. Capital controls are still in place. What the world is witnessing is a slow motion bank run. The ECB will not continue to fund the banks indefinitely. At some point they will tire of increasing their Greek liabilities and cut the banks off once and for all. Greek depositors know their banks are living on borrowed time. They will rush to withdraw in cash and send abroad any amount that is permitted. Images of long bank withdrawal lines, and empty store shelves will continue to frame the collective world image of Greece. We like to pretend that our 21st century society is more civilised and advanced than the late 19th and early 20th century. Our Just-In-Time highly advanced production economy depends on the free flow of capital between suppliers of raw materials and producers of finished goods. Remove that even for a short while, and the human condition will regress to levels of our great grandparents.

The European diplomats are all comfortably back at their favorite summer holiday destinations. Beneath the surface, the markets are setting up for an explosion of volatility this fall. Spaniards have watched the complete German subjugation of a vassal state without one bullet fired. They take to the polls later this year. Prime Minister Rajoy’s People’s Party is in trouble. They have towed the austerity line, and there are rumblings of dissent amongst the plebes. If Greece succeeds in getting a debt haircut, which the IMF (aka US) is advocating, the Spaniards will demand one too. To get one, the government will have to take the currency union to the brink of breakup like the Greeks.

Global macro volatility and instability has proven supportive of Bitcoin. Bitcoin was the only asset outperforming during the midst of the latest Grexit crisis. Once Grexit was off the table, the price fell almost 15%. 7 years after the onset of the GFC, it appears that another unlikely event could plunge the world financial markets into turmoil once more. December Bitcoin futures contracts expire just before the end of 2015. If you believe the world is going to get more uncertain, consider buying XBTZ15 and use Bitcoin to reduce the overall volatility in your portfolio.



During Empress Yellen’s testimony in front of the US Congress and Senate, she stated that a hike in interest rates is very likely to happen by the end of 2015. A 0.25% increase in the Federal Funds rate may happen at the September or October FOMC. After over 6 years of 0% interest rates, the onset of positive short term rates will significantly impact financial markets globally.

There are two camps with regards to how markets will react to a Fed in a tightening cycle. The first camp believes that the hike in interest rates confirms that the US economy is strong. The financial markets will welcome confirmation that the largest economy in the world is on sure footing. The second camp believes that the world has become addicted to 0% interest rates, and the onset of more expensive money will destroy asset markets globally.

I agree with the second camp’s doom and gloom position. With regards to the Bitcoin price, it is unclear as to the initial price reaction. During margin calls, investors will dump everything they can to raise cash. Bitcoin could become a casualty as well. Or it could rally substantially as global financial market instability rises.

The one thing I am certain about is that unsecured USD interest rates will rise faster than those for Bitcoin. The basis between forward and spot prices for Bitcoin will increase. I would rather benefit from a general rising interest rate environment, and not be subject to whether I can call the price direction correctly. There are several strategies to profit from this view.

Strategy 1:

If you are a long holder of Bitcoin and don’t intend to sell regardless of the short term price, consider replacing your long physical Bitcoin with leveraged futures contracts. As the USD rates rise, your futures contract will become more valuable. With the Bitcoin not utilised as margin, you can sell them for USD and lend on a margin trading platform to earn extra income.

Trade Recommendation:

Buy XBUZ15 (25 December 2015) futures contracts.

Strategy 2:

To go long solely the futures’ basis, buy a leveraged futures contract and short sell spot Bitcoin. You have removed the price risk from the trade, and will benefit if the futures’ basis increases. You can short sell spot Bitcoin on a variety of margin trading platforms.

Trade Recommendation:

Buy XBUZ15 futures contracts. Short sell spot Bitcoin.

Strategy 3:

To go long solely the futures’ basis, construct a calendar spread between two different maturity futures contracts. Buy a December expiring futures contract, and sell a September expiring futures contract. As rates rise, the calendar spread will increase because the longer dated futures contract has more time value.

Trade Recommendation:

Buy XBUZ15 futures vs. sell XBUU15 (25 September 2015) futures contracts.

Weekly Review: Bitcoin Investment Products


image (2)

Week Ending GBTC Avg Volume WoW % Chg % Premium XBT Avg Volume WoW % Chg % Premium
7/10/2015 1,035 XBT 8.35% 2,673 XBT 0.00%
7/17/2015 760 XBT -26.56% 6.03% 1,441 XBT -46.09% -0.17%

The end of the current chapter in the Greek melodrama caused volumes to slide on both GBTC and XBT. As we enter the final weeks of summer, expect a general decline in volumes traded.

XBT Spot

Screen Shot 2015-07-20 at 5.54.10 pm

The Grexit premium is slowly leaking from Bitcoin. The Greeks were betrayed by their leaders and continue to suffer in the Euro straightjacket. As the price hovers in the $270’s, it will take renewed cash buying pressure to lift Bitcoin back above $300.

Unless PM Tsipras is ejected by his party and fresh elections are called in Greece, the end of summer will end quietly for Europe. Bitcoin volatility will follow as well. Traders can return to their Mediterranean holidays, and stop babysitting their Bitcoin.

To maintain the bullish momentum, Bitcoin needs to hold $260. $300 was held for one 1D candle. That in itself is positive, but bulls will have to remain resilient as they are tested at lower levels. The level of XBT swaps outstanding on Bitfinex has fallen by almost half. The XBT swap rate stands at only 0.0058% per day; it is practically free to short Bitcoin. If the bears want to test $260 with vigor, it will not cost them much to do so.

Trade Recommendation:

Sell XBTN15 while spot is below $280. The downside target price is $260. If spot manages to rally above $280, cover the short XBTN15 position.

Crypto Trader Digest – June 22, 2015

BitMEX Happenings

This Friday is June expiry. XBTM15 and XBUM15 will expire at 12:00 GMT. July 2015 futures are now listed and XBTN15 and XBUN15 are available for trading.


Forget Greece, How Will Bitcoin React To A Fed Rate Hike?


With all the noise about a possible implementation of capital controls this weekend in Greece, the latest FOMC (Federal Reserve Open Market Committee) meeting was overlooked. The 21 million Bitcoin question is when will the Fed finally raise rates, and how will the global financial markets handle non-zero USD short-term rates?

The Fed Funds rate has been at 0% for over 6 years. Due to the strong US economy (if you believe the US government isn’t juking the stats), the Fed now must attempt to re-introduce the time value of money. Many economists expect the first 0.25% to 0.50% rate hike in the fall of this year. The USD rally that started late last year, will take on a whole new dimension with positive interest rates. For currencies and commodities priced in USD, a positive short term interest rate could spell carnage. Bitcoin will not escape the strong dollar armageddon.

After the initial shock and awe of a positive Fed Funds rate, will the ensuing market carnage will force the Fed to reverse its policies and reinstitute open ended quantitative easing (i.e. money printing). This is the opinion of some market observers and hedge fund managers. If he one-two punch of a rate hike then QE 4eva occurs, the initial dip in the Bitcoin price represents a golden opportunity to increase long exposure. The FOMC Fall 2015 schedule is September 16-17 and October 27-28. Emperor Bernanke (POTUS Obama is merely a King) began the habit of pre-announcing major Fed policy decisions at the annual Jackson Hole summit held in late August of each year. Expect very definitive guidance as to the timing of the rate hike from Empress Yellen at this years Jackson Hole Summit to be held August 27-29th.

A trading strategy involving December 2015 and March 2016 BitMEX futures contracts allows traders to profitably trade this view. Consider selling XBUZ15 (25 December 2015) aiming to cover the position shortly after the announcement of a rate hike. During the dislocation, spot Bitcoin could trade with a $1 handle again. Given the already depressed nominal price levels, expect the price fall not to last long. Cover the XBUZ15 short position, and then go long XBTH16 (25 March 2016).


Bitcoin + BitMEX: Creating Synthetic USD


The war on cash in the US and EU is in full force. Forbes recently wrote a story about the Drug Enforcement Agency in the US stealing the life savings of a college student without any criminal charge. France now restricts cash transactions to 1,000 EUR. First world countries are conditioning their populace through theft and cash transaction limits to hold their wealth digitally in national banks. Citizens who are unbanked in first world countries are doubly screwed as they have no means of protecting their cash from rapacious police officers. What many want is a synthetic USD or other fiat currency that is under the complete control of its rightful owner.

Bitcoin is outside of governmental or banking control. Trust is instead placed in cryptography and a decentralised network of computing power (miners). The only downside from a wealth preservation perspective is the price fluctuation vs. your domestic currency. Using Bitcoin and BitMEX futures contracts it is possible to create synthetic USD. This USD can be stored outside the traditional banking system, and your funds can be accessed anywhere globally with an internet connection.

Here is a step by step guide to creating synthetic USD:

  1. Exchange USD (or your domestic currency) for Bitcoin.
  2. Deposit 30% of your Bitcoin on BitMEX as initial margin, secure the other 70% using a Bitcoin wallet or storage method of your choice.
  3. Sell futures contracts to lock in the USD value of your Bitcoin, each contract is worth $100 of Bitcoin (e.g. if you have 4 Bitcoin each valued at $250, sell 10 December 2015 XBUZ15 contracts to create $1,000 synthetically).
  4. Every time you use some of your synthetic USD (i.e. sell Bitcoin), buy back some of the futures contracts to maintain a perfect hedge.

If you intend to frequently spend your synthetic USD, sell a shorter dated futures contract. The shorter the maturity the more liquid the futures contract. Your counterparty risk is limited to the amount of margin placed on BitMEX (the minimum for our hedging contracts is 20%). The entire process takes under 30 minutes to complete. Regardless of where you take your synthetic USD, there are people or exchanges that will allow you to exchange Bitcoin for a domestic fiat currency. E.g. if you travel to France, you exchange USD (by selling Bitcoin) for EUR. Creating synthetic USD with Bitcoin and BitMEX products provides all the benefits of physical cash without the headache of carrying it around on your person.

Wallet providers can simplify this process. Once Bitcoin is deposited, a “lock value” option is presented. A BitMEX account is created for a specific address by signing a message on the Blockchain. Bitcoin is deposited instantly with BitMEX and the appropriate futures hedge will be automatically executed. We are interested in working with any wallet providers who would like to offer this feature. Please contact us, and we can speak further about a partnership.

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Weekly Review: Bitcoin Investment Products

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Week Ending GBTC Avg Volume WoW % Chg % Premium XBT Avg Volume WoW % Chg % Premium
6/12/2015 131 XBT 26.70% 766 XBT 0.57%
6/19/2015 609 XBT 363.84% 15.66% 1,896 XBT 147.46% 0.41%

The ramp to $260 ignited a fire under GBTC and XBT. Both products experienced all time high trading volumes this past week. GBTC traded over 2,000 XBT on Wednesday, and XBT traded over 3,000 XBT on Thursday. XBT is fast becoming one of the most traded ETN’s on the Nasdaq Nordic OMX exchange. Interactive Brokers will now allows clients worldwide to trade XBT; the ticker is COINXBT.


Is Litecoin The Bitcoin Oracle?

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Do Litecoin moves predict future Bitcoin ones? Many traders believe so and keep a close eye on Litecoin price action. I have conducted analysis on whether the one, three, and six hour LTCXBT return can predict the XBTUSD return for a similar time period. I used the hourly VWAP (Volume Weighted Average Price) data from Bitfinex for both currency pairs from January to June 2015.

My initial hypothesis was there would be a degree of predictive power using a linear regression. The above graph is a scatter plot of LTCXBT return by XBTUSD return on a one hour time scale. E.g. I calculated the LTCXBT return from T0 to T1 and plotted it against the XBTUSD return from T1 to T2. As you can see there is no substantial correlation.

LTCXBT Return Positive Return Probability Negative Return Probability
1H 47.96% 51.29%
3H 52.29% 53.22%
6H 47.01% 58.49%

The next hypothesis was given LTCXBT had an above average positive return (in this case one standard deviation above and below the sample mean) could I predict if XBTUSD in the next period, would have a positive return as well. Using the sample mean and standard deviation at the different time intervals, I observed the sample probability for a positive and negative return. The above table displays the results. The best predictor was if the previous six hour LTCXBT return was negative, 58% of the time XBTUSD’s next six hour return would be negative as well. LTCXBT returns on a short time scale are somewhat helpful in determining the future path of Bitcoin. However, they are not the silver bullet that some traders believe them to be.


XBT Spot

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“Finally it has happened to me right in front of my face
and I just can not hide it”

— CeCe Peniston

Bitcoin finally exhibited a pulse, and leapt furiously towards the all important $260. Many armchair quarterbacks ascribed the move to the latest machinations out of Greece. However, the more likely cause was it was just time for Bitcoin to move a little. Technical resistance levels at $240 and $250 were laid to waste, but Bitcoin could not climb the final mountain to $260. Traders FOMO bought Bitcoin right up to $259, and then were promptly Rekt. The price fell as quickly as it rose through $250 almost breaching $240 within two trading days.

Range set in at the $240 to $245 level. As this newsletter is going to press the price broke out of the range and looks to retake $250. A solid break through $250, and the $260 resistance level will be reattempted. A second failure to breach $260 could spell trouble for the bulls. $220 where we were only weeks ago, could become a reality again quite quickly.

Trade Recommendation:

Buy XBTN15 if spot breaks through $250 with a $260 target price. If higher highs are made on declining volume, take profit between $257-$260. Otherwise, hold on for $300.