Tag: Futures

Trade Zcash Futures on BitMEX

Arthur Hayes

zcash-logo

Zcash (ZEC) is the hot new altcoin this fall. Zcash aims to bring complete privacy to digital currency transactions.

“Zcash offers total payment confidentiality, while still maintaining a decentralized network using a public blockchain. Unlike Bitcoin, Zcash transactions automatically hide the sender, recipient, and value of all transactions on the blockchain. Only those with the correct view key can see the contents. Users have complete control and can opt-in to provide others with their view key at their discretion.” [z.cash]

The Zcash genesis block is scheduled to launch on October 28th. After the astonishing rise of Monero over the past few weeks, many traders are equally bullish on Zcash.

ZEC coins will be distributed by mining and earning the block reward; there will be no Initial Coin Offering. As a result, the initial supply of ZEC coins will be limited.

Most traders want economic exposure to ZEC rather than buying, holding, and storing ZEC itself. Futures contracts allow traders to gain long or short exposure without ever touching ZEC.

Zcash funded development partially by pre-selling ZEC coins to investors. A portion of each block reward will be given to initial investors for a period of time. The spot market will be quite illiquid until enough blocks have been mined, and block rewards earned. Initial investors can forward sell their allotment of ZEC by selling futures contracts.

BitMEX is committed to providing price discovery for new and promising digital currencies. We are proud to be the first exchange to allow trading of any kind for ZEC/XBT. The BitMEX Zcash / Bitcoin futures contracts allow traders to go long or short with leverage on the ZEC/XBT exchange rate.

Product Details:

Symbol: ZECZ16
Underlying: ZEC/XBT
Contract Value: 1 ZEC
Quote Currency: XBT
Expiry Date: 30 December 2016 12:00 UTC
Settlement Currency: Margin and PNL are denominated in Bitcoin
Leverage: 2x

Given that ZEC/XBT has not begun trading on any spot market, we do not know which exchange will have the most liquid market. We will make an announcement in early November about which spot exchange will be used for the settlement price.

Announcing The Launch of Ether Classic 5x Leveraged Futures

Arthur Hayes

ETC is a special chain quoting the Ethereum Classic pre-fork chain, which is the chain created by the original Ethereum code as it existed before the hard fork.

ETC has proven a very popular digital currency right out of the gate. As a result, BitMEX is pleased to announce the world’s first Ether Classic futures contract, ETC24H.

ETC24H Contract Details:

  • Each contract is worth 1 ETC
  • The underlying is the Poloniex ETC/BTC exchange rate
  • Margin, profit, and loss are all in Bitcoin
  • Leverage of 5x
  • Expires each day at 12:00 UTC, based on the 11:30 UTC to 12:00 UTC time weighted average price of ETC/BTC
  • More details

Traders can go long or short ETC24H using only Bitcoin. No ETC is required.

To begin trading, deposit Bitcoin to your BitMEX account. Then you can place buy or sell orders on ETC24H.

How To Trade Factom

Arthur Hayes

The hottest new altcoin on the block is Factom (FCT). Factoid is the token used to power the Factom protocol. Although technically incorrect, BitMEX calls the token as Factom. Now that Factom 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 Factom on a spot basis is quite simple. The most liquid Factom currency pair is Factom/Bitcoin (FCT/XBT). Poloniex is the leading exchanges by volume.

Buying Factom

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

Selling Factom

If you hold physical Factom, you can exchange it back for Bitcoin. Selling Factom 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 Factom. 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 Factom with leverage and using only Bitcoin as margin.

BitMEX recently launched the FCT7D, a weekly expiring FCTXBT futures contract. Each FCT7D contract represents 1 FCT. The contract expires each Friday at 12:00 GMT on the FCTXBT exchange rate. All margin, profit, and loss are conducted in Bitcoin. The maximum leverage allowed is 10x.

Buying Factom Futures

BitMEX Factom futures contracts allow traders to speculate on the future value of the FCTXBT exchange rate. A trader who wishes to go long 1,000 FCT, must buy 1,000 FCT7D contracts. The beauty of FCT7D is that it requires Bitcoin as margin. The maximum leverage is 10x. If the FCT7D price is 0.005, the trader must post 0.5 Bitcoin as margin (1,000 Contracts * 0.005 FCTXBT * 10%). If the price rises to 0.006, the profit is 1 Bitcoin = (0.006 – 0.005) * 1,000.

Selling Factom Futures

Short selling, or selling something you don’t possess is usually impossible with altcoins. Using FCT7D, traders are able to placed leveraged bearish bets on Factom as long as they own Bitcoin. For example, a trader who wishes to go short 1,000 Factom, must sell 1,000 FCT7D contracts. Again only Bitcoin is required for margin. If the FCT7D price is 0.005, the trader must post 0.5 Bitcoin as margin (1,000 Contracts * 0.005 FCTXBT * 10%). If the price falls to 0.004, the profit is 1 Bitcoin = (0.004 – 0.005) * -1,000.

Placing leveraged trades, and shorting Factom using only Bitcoin is only possible with BitMEX’s FCT7D futures contract. FCT7D Contract Description

Start Trading Factom Now

Trade The China Stock Market With BitMEX And Bitcoin

Arthur Hayes

China’s stock market is one of the most difficult markets for non-Chinese to access.  Even for normal Chinese investors, trading with leverage both on the long and short side is almost impossible. BitMEX is committed to providing investors access to global markets using Bitcoin.

BitMEX’s China A50 Equity Index Futures Contract allows investors who possess Bitcoin the ability to speculate with leverage, long or short, on the Chinese equity market.

How Does It Work?

The China A50 Equity Index comprises the 50 biggest companies in China. The index is priced in CNY. However, investors using the BitMEX product will receive 0.0001 Bitcoin (XBT) per 1 CNY move in the index.

This is great for investors because if the China stock market rises by 10% and you are long, your futures contracts will be worth 10% more as well. The same is true if you are short.

What Are The Trading Hours?

The China stock market is open daily from 09:15 to 11:30 and then 13:00 to 15:00 Beijing Time (GMT + 8). Even though the stock market is only open Monday to Friday for 4 hours and 15 minutes, the BitMEX China A50 futures contract trades 24/7.

How Does Settlement Work?

The BitMEX China A50 futures contract has monthly expiries. The contract expires based on the closing price of the BitMEX CHINA A50 Index to two decimal places. The closing price of the index is calculated using the last traded prices of the 50 index members. The settlement date is the 2nd to last business day in China of each month.

Your profit is determined by the difference between your entry price and the settlement price. For example, if you bought 100 A50G16 (February 2016 expiring) contracts at 10,000 CNY and the settlement price was 11,000 CNY, your profit would be 10 XBT or (11,000 CNY – 10,000 CNY) * 0.0001 XBT * 100 Contracts.

Is There Leverage?

The BitMEX China A50 futures contracts allow investors to trade with up to 25x leverage. If you want to go long 100 XBT of China, you only need to deposit 4 XBT of equity. Because of the high leverage, the BitMEX China A50 futures contracts are margined according to the Dynamic Profit Equalisation system.

How Do I Get Started With BitMEX?

If you don’t have a BitMEX account, Register Here. Once you have registered, go to your Deposit Page and you will be given a unique deposit address where you must send Bitcoin. Once BitMEX has received your Bitcoin, it will be credited to your account and you can begin trading.

BitMEX Launches 50x Leveraged Daily Bitcoin Futures

Arthur Hayes

We are pleased to announce the launch of our daily expiring 50x leveraged Bitcoin / USD futures. The XBT24H contract will expire each day at 12:00 GMT based on the 11:30 GMT – 12:00 GMT TWAP price on the TradeBlock XBX index. If the Bitcoin / USD price moves 1% the value of XBT24H will move by 1%. Margin, profit, and loss are all conducted in Bitcoin.

The XBT24H future is ideal for short-term momentum, swing, and range traders. With 50x leverage, small movements in price can lead to large profits. XBT24H is live and available for trading. If you have any questions about our new product, please contact us at support@bitmex.com.

Bitcoin Futures Basis Trading: Lesson 1

Arthur Hayes

Basis trading is an alternative set of trading strategies to profit from the interest rate differentials in futures contracts on the same underlying asset but with different maturities. This is the first in a series of lessons designed to provide the basic tools for traders to execute these more advanced trading strategies. These trading strategies will use the BitMEX 25x leveraged XBT series futures contracts.

Lesson 1: Time Value of Money

Before beginning to basis trade, it is necessary to understand the basic concept of the time value of money. When the interest rate is positive, money today is worth more than money in the future.

If you borrow $100 from the bank for one year at an interest rate of 10%, you owe the bank $110 in one year.

FV = Future Value

P = Principal

r = Annualised Interest Rate

FV = P * (1 + r) = $100 * (1.1) = $110

Your friend John said he would give you $100 in one year’s time. What is that money worth in today’s dollars assuming the interest rate is 10% per annum? If you had the $100 today, you could earn $10 by loaning it out. $100 of future dollars is worth $90.90 today.

PV = Present Value

P = Principal

r = Annualised Interest Rate

PV = P / (1 + r) = $100 / (1.1) = $90.90

In many university finance classes, they continuously compounded interest payments. However in the real world, you get paid interest once per day. Therefore as traders we must use simple interest.

Continuously Compounding Interest

FV = Future Value

P = Principal

e = Base of Natural Logarithm, approximately 2.78128

r = Annualised Interest Rate

t = Time in Years

FV = P * e^(r * t)

Simple Interest

FV = Future Value

P = Principal

r = Annualised Interest Rate

t = Time in Years

FV = P * (1 + r * t)

Let’s put this in context with a futures contract on apples. You want to buy one apple in a year’s time. The future price of apples is $110 and the current cost to buy and apple right now is $100, what is the cost of money? Remember that when you buy a futures contract you essentially borrow money to purchase an asset today you that will receive in the future.

FV = $110

PV = $100

t = 1

r = (FV / PV - 1) / t = ($110 / $100 - 1) / 1 = 10%

If you borrowed $110 at 10% for one year and bought an apple today, it would be the same as if you bought an apple future for delivery in one year at $110.

Let’s extend this to BitMEX 25x leveraged XBT futures contracts.

Basis (B) = Future Price (F) - Spot Price (S)

The above calculation expresses Basis as a nominal value. For example, if the futures price is $250 and the spot price is $230, basis is $20. Basis trading is all about comparing futures contracts with different maturities. To do that we convert basis into an annual percentage difference.

XBTZ15 December 2015 has 90 days until expiry, or 0.25 years.

F = $250

S = $230

t = 0.25 years

B = ($250 / $230 - 1) / 0.25 = 34.78% annualised

XBTH16 March 2016 has 180 days until expiry, or 0.5 years.

F = $275

S = $230

t = 0.5 years

B = ($275 / $230 - 1) / 0.5 = 39.13% annualised

XBTH16 is more expensive than XBTZ15. This is because the annualised basis is higher. When evaluating the richness or cheapness of futures contracts, calculate the annualised basis and then compare.

In Lesson 2, I will explain the basis term structure and how to trade it.

 

Cash And Carry Arbitrage With BitMEX Futures

Arthur Hayes

One of the most common and profitable trading strategies when trading futures is cash and carry. Traders employing this strategy buy underlying asset and sell its corresponding futures contract. They hold the futures contract until expiry, and profit from the differential between the future and underlying asset.

There are two types of BitMEX futures one can use to execute this strategy. XBU futures have very low risk and low reward. XBT futures have more risk but more reward.

Futures premiums can vary widely depending on the optimism in the market. Executed correctly and at the right time, a cash and carry strategy can lock in guaranteed profit.

We’ll delve into the XBU (5x) futures first.

Using BitMEX 5x Leveraged Futures (XBU)

BitMEX offers a series of futures contracts that have 5x leverage. That means a trader who deposits 10 BTC can control a position worth 50 BTC. These contracts we classify as Hedging, and use the symbol prefix XBU. The contracts are worth $100 of Bitcoin. Put another way, no matter what the BTCUSD exchange rate is, the contract will equal enough Bitcoin such that its value is $100.

The below example will run through the mechanics and risks of a cash and carry strategy using these futures contracts.

Spot Bitcoin price = $200

March 2016 futures price = $250

Cash and carry profit = $50/Bitcoin

A trader will now buy spot Bitcoin and sell March 2016 futures contracts.

Assume the trader has $10,000. He buys 50 Bitcoin at a price of $200. He then must sell enough March futures contracts to hedge his long exposure.

March 2016 Futures Contracts = $10,000 / $100 = 100 Contracts

Quantity USD Value Bitcoin Value
Spot 50 BTC -$10,000 50 BTC
March 2016 Futures (XBU) -100 $10,000 -50 BTC
Total Exposure $0 0 BTC

The trader has locked in a risk free profit of $2,500 regardless of the subsequent BTCUSD exchange rate. The below example will illustrate why.

Assume that the spot price rises to $250. The below table shows the change in the USD and Bitcoin value of the spot and futures positions.

Quantity Price USD Value Bitcoin Value PNL Total USD Value Total BTC Value
Spot 50 BTC $250 -$12,500 50 BTC $2,500 -$10,000 50 BTC
March 2016 Futures (XBU) -100 $250 $10,000 -40 BTC -10 BTC $10,000 -50 BTC
Total Exposure $0 0 BTC

The trader makes USD PNL on the long spot position, and BTC PNL on the short futures position. The net effect is the total portfolio exposure does not change. Because the trader bought spot at $200 but sold futures at $250, he has actually profited the difference and no price movement will change that.

Assume that the spot price falls to $150. The below table shows the change in the USD and Bitcoin value of the spot and futures positions.

Quantity Price USD Value Bitcoin Value PNL Total USD Value Total BTC Value
Spot 50 BTC $150 -$7,500 50 BTC -$2,500 -$10,000 50 BTC
March 2016 Futures (XBU) -100 $150 $10,000 -67 BTC 17 BTC $10,000 -50 BTC
Total Exposure $0 0 BTC

The trader makes USD PNL on the long spot position, and BTC PNL on the short futures position. The net effect is the total portfolio exposure does not change.

Once a trader has bought spot and sold futures contracts, there is nothing else to do but wait until expiry. This is a pure cash and carry strategy. For this reason, the XBU (5x leveraged futures) premium to spot will be much less than the XBT (25x leveraged futures) premium to spot.

Using BitMEX 25x Leveraged Futures (XBT)

BitMEX’s other Bitcoin futures have 25x leverage. That means a trader who deposits 10 BTC can control a position worth 250 BTC. These contracts we classify as Speculative, and use the symbol prefix XBT.

XBT contracts are differently structured. The contracts pay out 0.00001 BTC per $1 movement of the BTCUSD price. Put another way, if the BTCUSD prices rises by 1% the Bitcoin value of the futures contract rises by 1%. All profit and loss for the futures contract is paid out in Bitcoin.

The below example will run through the mechanics and risks of a cash and carry strategy using these futures contracts.

Spot Bitcoin price = $200

March 2016 futures price = $300

Cash and carry profit = $100/Bitcoin

 

A trader will now buy spot Bitcoin and sell March 2016 futures contracts.

Assume the trader has $10,000. He buys 50 Bitcoin at a price of $200. He then must sell enough March futures contracts to hedge his long exposure.

Given no volatility, the trader would profit 50 * ($300 – $200) or $5,000. But there will be volatility, so there are some considerations.

March 2016 Futures Contracts = 500 BTC / ( $200 * 0.00001 ) = 25,000 Contracts

We use the spot price of $200 to calculate the number of contracts to hedge instead of the futures price of $300. This is because you are holding the future until maturity, so it should be valued at the spot price.

Quantity USD Bitcoin
Spot 50 BTC -$10,000 500 BTC
March 2016 Futures (XBT) -25,000 $10,000 -500 BTC
Total Exposure $0 0 BTC

Because of the return profile of the futures contract, this trade is not risk free.

Assume that the spot price rises to $250. The below table shows the change in the USD and Bitcoin value of the spot and futures positions.

Quantity Price USD Value Bitcoin Value PNL Net USD PNL
Spot 50 BTC $250 -$12,500 50 BTC $2,500 $2,500
March 2016 Futures (XBT) -25,000 $250 $15,625 -63 BTC -13 BTC -$3,125
Total Exposure $3,125 -13 BTC -$625

To flatten the exposure to 0, the trader would need to buy 13 BTC at a price of $250. In addition, he is locking in a loss of $625.

Assume that the spot price falls to $150. The below table shows the change in the USD and Bitcoin value of the spot and futures positions.

Quantity Price Value Bitcoin Value PNL Net USD PNL
Spot 50 BTC $150 -$7,500 50 BTC -$2,500 -$2,500
March 2016 Futures (XBT) -25,000 $150 $5,625 -38 BTC 13 BTC $1,875
Total Exposure -$1,875 13 BTC -$625

To flatten the exposure to 0, the trader would need to sell 13 BTC at a price of $150. In addition, he is locking in a loss of $625.

Due to a long spot vs. short futures position, as the price moves the trader must buy high and sell low to have no exposure to the Bitcoin price. Every time he hedges his portfolio he is losing money, meaning he is short volatility. If the price moves too much between now and March 2016, the cost of hedging his portfolio will outweigh the premium earned by selling the future above the spot price.

By employing this cash and carry strategy, the trader is selling volatility for a premium. To determine the trader’s break even volatility, we must solve for the upper and lower bound where the trade ceases to become profitable.

Solving the following quadratic equation will give the upper and lower bound

F = Future Price, in this example $300

S = Spot Price, in this example $200

Sqrt = Square Root

Upper Bound:

[ -2 * F – Sqrt( 4 * F^2 – 4 * S * F ) ] / -2

In this example, $473.21.

Lower Bound:

[ -2 * F + Sqrt( 4 * F^2 – 4 * S * F ) ] / -2

In this example, $126.79.

 

Assume there are 180 days until the March 2016 future expires. That means the trader sold volatility at this level:

( $473.21 / $126.79 -1 ) * Sqrt ( 365 / 180) = 386.40% Annualised Volatility

If the trader rebalanced his portfolio once daily, the price would have to move at greater than a 386.40% annualised volatility for the trader to lose money. For each day that the realised volatility is lower than 386.40% annualised, the trader makes money. This is the daily carry that he earns.

 

Summary

Cash and carry is a valuable strategy that can lock in great returns.

On BitMEX, cash and carry strategies using XBU have no price risk. For this reason, expect XBU contracts to have less premium over spot.

Doing cash and carry arbitrage on the XBT series carries more risk, but may have much more reward.

Case Study: Using Bitcoin Derivatives in Global Trade

Arthur Hayes

Hey HN: Nice to see you on our blog. If you’re interested in giving BitMEX a shot, you can sign up with this special link to enjoy 10% off trading for 6 months. If you have any questions or comments about the service, feel free to email us or talk to us directly in the site’s chat.

One of the stated goals of BitMEX is to allow Bitcoin to be used in global trade by eliminating the price volatility. Two entrepreneurs in Kenya and Hong Kong are using Bitcoin and BitMEX futures contracts to import goods into East Africa from China.

China produces goods cheaper and in bigger quantities than anywhere else globally. Kenya is one of Africa’s richest countries and consumes many Chinese finished goods. For Kenyan SMEs (Small and Medium-sized Entrepreneurs), procuring goods to resell locally can be troublesome and quite expensive. This is mainly due to the fact it is hard for them to settle payment between the Kenyan Shilling (KES) and Renminbi (CNY). Multinational companies can cheaply settle cash flows between Kenya and China, and manufacturers might even give them credit, but for SMEs the inability to settle payment means they must buy products second hand from parallel traders at large premiums. This mostly comes down to banks supporting larger organisations over smaller ones.

Robin Omwega is the head of Kenyan IT services firm Wageni Tech and also a Bitcoin enthusiast. Joseph Wang is the founder of Bitquant, a quantitative research firm focusing on Bitcoin and other financial markets. He is also a former JP Morgan quantitative trader. They met via a global Bitcoin chat room and devised a way to help supply East Africa with more affordable goods from China. They found that Bitcoin can serve as the settlement mechanism for payments between them, and have began a trading partnership between Kenya and Hong Kong / China.

The biggest issue with using Bitcoin is the price volatility. In the time between when Robin sends Joseph payment for goods in Bitcoin and they arrive in Kenya, the price can fluctuate wildly and cause losses for Joseph. To eliminate the price risk, Joseph hedges Bitcoin payments by selling BitMEX futures contracts that lock in the USD value.

Robin and Joseph have started by importing USB drives. Robin places an order with Joseph for the drives. Joseph selects a Chinese manufacturer with whom he has formed a business relationship. Joseph pays the manufacturer in CNY and now needs payment from Robin. Robin sends Bitcoin equaling the value of the purchase to Joseph, and the coins are locked in escrow using Bitrated. While they are in escrow, Joseph can’t sell the Bitcoin for CNY and needs to hedge. Joseph goes onto BitMEX and sells futures contracts locking in the USD value of the Bitcoin. Since he can trade on leverage, Joseph only needs to deposit as little as 30% of the value he wants to hedge. The USDCNY exchange rate is quite stable and Joseph isn’t worried about the price fluctuations. Once Joseph receives the goods in Hong Kong, he inspects them and ships them to Robin in Kenya. Robin receives the USB drives and releases the Bitcoin from escrow to Joseph. Joseph then buys back the futures contracts on BitMEX, and exchanges the Bitcoin into CNY on a spot exchange.

Robin and Joseph have been able to use Bitcoin as a clearing mechanism and eliminated the price risk using BitMEX derivatives. Without the use of futures contracts, Joseph exposes his business to price volatility and either must pass this cost onto Robin or not do the deal at all.

BitMEX derivatives are unique in the Bitcoin landscape as they are the only futures that guarantee settlement without socialized losses or clawbacks. With this guarantee, traders around the globe can hedge without fear that fluctuating prices – or other traders’ liquidations – will cause them to lose money.

BitMEX Launches Inverse Daily Futures Contract

Arthur Hayes

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

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

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

Contract Details

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

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

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

Quoting Method: USD

Contract Value: 1 USD of Bitcoin

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

Margin & PNL Currency: Bitcoin

Leverage: Up to 5x

Trading Fees: Maker 0.00% / Taker 0.03%

 

Commercial Hedgers

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

Speculators

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

Bitcoin Volatility As An Asset Class

Arthur Hayes

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

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

Why Trade Volatility?

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

BitMEX 30 Day Historical Volatility Index Futures (BVOL)

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

Forward Starting Historical Volatility

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

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

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

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

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

XBT vs. XBU Pseudo Volatility

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

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

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

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

Combining BVOL and XBT vs. XBU Pseudo Volatility

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

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

BitMEX Launches Bitcoin Volatility Futures Contracts

Arthur Hayes3 Comments

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

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

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

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

XBT vs. XBU Chain

Arthur Hayes

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

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

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

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

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

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

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

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

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

xbt_xbu_1

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

xbt_xbu_2

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

xbt_xbt_3

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

xbt_xbu_4

xbt_xbu_5

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