Crypto Trader Digest – June 29

BitMEX Happenings

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We have been hard at work building a new simplified trading UI. The first version is available for comment onBitMEX Testnet. Please test the new interface and provide your feedback. We will launch the new UI along with our new higher leveraged contracts very shortly. If you like the current UI, it will still be available under the “Advanced” option.


The PBOC Is Taking Over From The Fed

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The hottest market in the past year has been the China A share market. The main indices are up over 100%. Millions of newbie traders are entering the casino with freshly minted yuan that they can now leverage. Chinese investors are being herded from one flagging investment (real estate) to the new and shiny equity market. At the helm of the SS. REKT is the PBOC (People’s Bank of China).

Through various liquidity injecting programs and schemes, the PBOC has injected trillions of RMB into financial institutions. The money made its way to the stock market and the results are there for all to see. The universal force of gravity has taken a liking to the Chinese stock market recently. In the last few weeks the Shanghai Composite Index is down almost 20%. The PBOC heard the cries of newly rekt retail traders and responded with a monetary bazooka this weekend.

For the first time since October 2008 (the beginning of the GFC), the PBOC cut both the one-year lending rate (0.25% to 4.85%) and the Reserve Ratio Requirement (by 0.50% for some banks). Forget Greece this is where the real action is. Money printing and the associated inflation never ends up exactly where central banks intend. The excess RMB liquidity won’t sit snugly in equities, but will find other financial assets as well. Bitcoin is one such asset that could benefit from a tidal wave of RMB free money.

Greece is just a sideshow. The real action is happening in China. The PBOC is engineering a financial asset bubble in an attempt to mitigate the inevitable slowdown in the real economy. The effects on Bitcoin may not be immediate, but long term bulls should begin positioning for Chinese traders to once again fall in love with Bitcoin.

Trade Recommendation:

Buy XBTZ15 (25 December 2015) futures contracts.


How Would A Greek Use Bitcoin?


How would a Greek actually use Bitcoin? Now that capital controls are introduced many think it’s the perfect time for Greek citizens to adopt Bitcoin. Let’s analyse how exactly they could do that.

Greeks can now only withdraw 60 Euro per day and outbound remittances are not permitted. The banks and stock market are closed today as well. Currently there are two types of Greeks. Those who got their money into cash or abroad, and those with deposits sitting in domestic banks. The unlucky Greeks with money still in banks are SOL. With no hard cash and no ability to wire money, there is little they can do to buy Bitcoin. Those who have cash and offshore Euro have options.

Will Greeks buy daily necessities (gas, food, water etc.) with Bitcoin?

Probably not because stores want Euros in cash. Stores need to pay for inventory and their staff, that is done in Euro not Bitcoin.

Will Greeks use Bitcoin as a store of value?

Maybe but if they already have offshore Euros, what urgent need do they have for Bitcoin. If they have cash, buying daily necessities is of more use than a store of value that can’t be exchanged for any real goods.

Will Greeks use Bitcoin to turn onshore cash into offshore Euros (buy Bitcoin, sell it abroad, remit Euro to an offshore bank account)?

Possibly, this is the most likely use case currently for Bitcoin. There is one problem, who is going to sell it to them? Local Bitcoin sellers realise Euro once they sell their Bitcoin. They must recycle that cash back into Bitcoin to trade again. Outward remittances are not permitted, so it is effectively impossible for local sellers to replenish their inventory. Tourists are a solution to this problem. If you are planning a trip to Greece, buy some Bitcoin and then sell it locally in Greece at a huge markup. At a 10%-20% markup, a savvy tourist can easily pay for a substantial portion of their trip by selling Bitcoin.

Will the Greek government use Bitcoin as their national currency?

Keep dreaming. Greece needs to devalue its currency to regain competitiveness in Europe. That is not possible using Bitcoin.

Bitcoin isn’t useful for Greeks who didn’t act early to secure their wealth. It isn’t very useful to Greeks who got their money out either. If Bitcoin rallies on Grexit, it is solely because traders believe others globally will re-examine how they store and secure their wealth and turn to Bitcoin as a possible alternative.


Weekly Review: Bitcoin Investment Products

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Week Ending GBTC Avg Volume WoW % Chg % Premium XBT Avg Volume WoW % Chg % Premium
6/19/2015 609 XBT 15.66% 1,896 XBT 0.41%
6/26/2015 197 XBT -67.66% 17.32% 923 XBT -51.30% -0.35%

As the rally to $260 fizzled out, so did volumes on GBTC and XBT. Weekly ADV was down over 50% on both securities. Volumes rebound on Friday as the Greece drama reached a new level of absurdity. The Greece EU bailout package referendum is Saturday. Volumes will recover as volatility returns to financial assets globally.


XBT Spot

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The bombshell over the weekend was Greece’s decision to let the people decide whether or not to accept the latest EU bailout program proposal. Faced with real democracy, financial markets worldwide are in turmoil. The market expects voters to reject the EU proposal, which accelerates a possible Grexit. EURUSD opened down 200 pips, S&P 500 futures are down, and Asian markets are down close to 2% as I write this newsletter. All eyes will be on the European open, especially financials (here’s looking at you Deutsche Bank).

Bitcoin has rallied $10 since the announcement, and now hovers at $250. From reading Reddit and many trader chat rooms, sentiment has improved. Traders are bullish and think the Greece turmoil will give Bitcoin a healthy bid. $260 is the all-important near-term level. To confirm the start of a real rally, Bitcoin must shoot through $260 on increasing volume. Another feeble attempt like last week, would be very negative in light of the positive sentiment currently expressed.

Trade Recommendation:

Buy XBTN15 while spot is below $255. If $260 is attempted on declining volume, close the position and go short with a $240 downside target.

Crypto Trader Digest – June 15

Gemini: Don’t Bet On An ETF


Volatility like many traders is on holiday. Traders in search of something to get the market moving again have attached great interest to the imminent launch of Gemini. Gemini is the US Bitcoin exchange to be launched by the Winklevoss twins within “weeks”. The thinking goes that once Gemini is launched the ETF can’t be far away. A pre-emptive rally will occur on the expectation that the ETF will finally bring mainstream American investors into Bitcoin. While I agree an US listed ETF will be a major positive, the launch of Gemini will not accelerate the SEC’s yay or nay decision.

One of the issues with the ETF, is how will the fund manager acquire Bitcoin. The SEC wants to be certain that Bitcoin obtained for the fund will not have come from nefarious sources. The only way for that to happen is that Bitcoin is purchased on a fully compliant US exchange. Gemini plans to be a fully compliant exchange only open to Americans. The other major concern is liquidity.

Let’s assume Gemini launches with a full blessing of the relevant band of regulatory mafiosos, the exchange will be at a significant disadvantage in the liquidity department. Coinbase, who is compliant in a patchwork of states, has an average daily volume (ADV) since launch of 7,456 XBT. itBit, who has a trust license and can operate in all 50 states, has an ADV since launch of 3,656 XBT. The total US market ADV approximately is 11,112 XBT per day. Bitfinex, who has a global user base, for the last six months had an ADV of 33,646 XBT or 3x of the combined Coinbase and itBit market. Gemini will be competing head to head with Coinbase and itBit. The market will further fragment, and if they are successful at current volatility and trading patterns, they can hope for 3,000 XBT to 5,000 XBT of ADV.

5,000 XBT ADV is barely over $1 million at the current exchange rate. If the goal is to present a liquid exchange to the SEC, Gemini in the short and medium term will fail at this mark. The better alternative would be for the Winklevoss twins to focus on being an asset manager and partner with Coinbase and itBit. I would much rather earn points on the package passively, than further cannibalise the US regulated Bitcoin exchange market. Another strategy would be to warm the SEC up to allowing OTC trading as the means of trading the fund’s Bitcoin. Dealing with a few reputable dealers accomplishes all the same things as an exchange, without all the hassle.

If your investment thesis was that Gemini will lead to an announcement of imminent ETF approval in the next three to six months, go back to the drawing board. Gemini might be a step forward in the approval process, but don’t expect the SEC to speed up its glacial approval process. And furthermore 2016 elections are right around the corner, the current head might not want to make waves before its time to kiss the ring of America’s next emperor.


Bitcoin Volatility Phases

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The current volatility drought while painful has happened before in Bitcoin’s six year history. I decided to investigate the periodicity of Bitcoin 30 day realised volatility since Mt. Gox opened its doors in 2010. I assembled a data set that combined Mt. Gox (until 31 December 2013) and Bitfinex XBT/USD daily prices. The above chart is a time series plot of the 30 day realised volatility.

Quintile 30 Day Volatility
20th 44.66%
40th 62.74%
60th 93.86%
80th 161.47%
100th 311.40%

I then calculated the volatility quintiles. The table above lists those values. A “low” volatility phase is anything below 45% 30 day realised volatility. Looking at the volatility time series, distinctive volatility phases emerge. Low volatility persists for an uninterrupted period time, and then the price action normalises, and the daily gyrations traders have come to know and love in Bitcoin return.

State Date End Date Start Volatility End Volatility Length Days Start Price End Price Period Price Return
4/17/2012 6/22/2012 35.92% 44.40% 66 $4.98 $6.55 31.59%
9/18/2012 2/2/2013 44.39% 45.89% 137 $12.25 $19.63 60.24%
5/14/2014 9/28/2014 42.94% 45.66% 137 $443.81 $391.18 -11.86%
4/8/2015 6/13/2015 43.36% 15.31% 66 $249.38 $229.70 -7.89%

Including the current period, there have been three other instances of prolonged sub-45% volatility periods. The table above lists the relevant statistics. Except for the Fall 2012 to Winter 2013 period, the other two periods began in the middle of spring (remember the data is backwards looking, when volatility reaches 45% the decline in price action started 30 days prior). The end of the low volatility phase occurred in the summer. It is difficult to draw patterns from only 4 period samples, but I predict price action won’t begin to pick up until mid to late August. Traders are beginning to take summer holidays, and trading activity will wane while their tan’s wax.

The price direction is anyone’s guess. There is a 50/50 split between price increases and decreases during the low volatility phase. The trend is your friend until it ain’t. The down trend has yet to be broken; until a volatility upward phase shift, it will remain very difficult to break the bears.

Trade Recommendation:

Sellers of volatility can profit handsomely in this environment. Traders should sell daily and weekly volatility by going short BVOL24H and BVOL7D respectively. The short durations of these contracts limit the upside risk when volatility phase shifts upwards again.


Weekly Review: Bitcoin Investment Products

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Week Ending GBTC Avg Volume WoW % Change Avg % Premium XBT Avg Volume WoW % Change Avg % Premium
6/5/2014 113 XBT 31.20% 388 XBT 1.13%
6/12/2015 131 XBT 15.82% 26.70% 766 XBT 97.60% 0.57%

Volume was up across the board last week. XBT ETN continues to build on its volume lead over GBTC. Investors appreciate the low premium and constant presence of a market maker who can keep the premium and discount low. The GBTC premium which was near 100% last month continues to fall. If the downtrend continues, more holders of BIT will convert into GBTC shares and the premium will decline further.


XBT Spot

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$220 was breached on the downside for a moment, and since then the price rallied $15. A holding pattern has set in above $230. Another push above $235, and the bulls will attempt a break above $240. The range bound chop is frustrating many traders, and the smarter ones have decided to sit on their hands until a definitive trend is established.

The Grexit melodrama is being largely ignored by the market. The raging debate over the block size has not caused an observable impact either. A new unknown catalyst is needed to jolt the market from its slumber. I don’t know in what form it will take, but until then a few merry band of traders will ping pong the price between technical levels up and down.

Trade Recommendation:

If the price holds above $235, buy XBTM15 with an upside target of $240. If the price falls back below $230, sell XBTM15 with a downside target of $220.

Synthetic Bitcoin Report – June 10

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GBTC trading volume declined to 74 XBT, these levels haven’t been seen since the product first launched. The premium stands at 26%.

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XBT’s volume was an impressive 705 XBT. The premium stayed relatively constant at 1%. The fears over KnC Group’s credit risk have largely been ignored by the market. It would be a good time for other issuers to list similar products in other European markets.

Crypto Trader Digest – June 8

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


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

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

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

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


A Step Towards A Bitcoin Zero Curve


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

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

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

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


Weekly Review: Bitcoin Investment Products

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


XBT Spot

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

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

Trade Recommendation:

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

Crypto Trader Digest – June 1

BitMEX Happenings

Summer is here and whether you are in the Hampton’s, St. Tropez, or Marbella global macro events aren’t stopping while you bronze. The BitMEX team is hard at work on many improvements to the platform. 20x leverage for our XBT quanto futures contracts is in the works. Our exchange Exchange Default Swap will not be far behind, and the recent events demonstrate the need for price discovery of exchange default risk even more.

Asia Risk recently profiled BitMEX, you can read the article here.

This past Saturday the BitMEX team was on Whaleclub discussing the BitMEX platform and fielding questions. Soundcloud Recording


Bitcoin Implied Volatility Surface

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This past Friday we listed XBTU15 (25 September 2015) and XBTZ15 (25 December 2015). As I have often pointed out, it is possible to glean the implied volatility of Bitcoin from the premium over spot that the XBT quanto futures contract trade. Please read XBT vs. XBU Chain for a more in depth explanation of the return profile. Now that there are three quarterly maturities, a curve of implied volatility can be constructed from actual market prices.

The above chart shows the implied and realised annualised volatility. The implied volatility comes from the premium over spot of the respective XBT futures contract. The realised volatility takes the .XBT2H value (the daily 10:00 – 12:00 GMT Bitfinex 1-minute TWAP), and looks at the realised volatility based on how many days until expiry of the contract. The longer dated the contract, the bigger premium of implied over realised volatility. There is substantial time value premium or theta in these contracts. Traders wishing to collect theta, and go short gamma and volatility should short XBTU15 and XBTZ15. To isolate theta, gamma, and volatility, use the XBU series to hedge spot Bitcoin price movements. Because XBU contracts are worth $100 of Bitcoin, the USD payoff is linear with respect to spot movements, and you can isolate the relevant trading variables. If volatility continues to be subdued, this will be a very profitable trade. Those bidding these contracts believe that volatility will rise in the future, and want to enjoy an asymmetric upside payoff.

Trade Recommendation:

To earn time value and gamma premium, sell XBTU15 or XBTZ15 and buy XBUU15 or XBUZ15. To go long future volatility and gamma, buy XBTU15 or XBTZ15 and sell XBUU15 or XBUZ15.


Weekly Review: Bitcoin Investment Products


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Volumes across the board were lower for both GBTC and XBT. GBTC volume experienced a 82% decline WoW, and XBT a 21% decline WoW. The GBTC premium rose 8% points WoW, and XBT’s discount widened by 0.08% points. XBT is definitely the more popular investment product, I assume that is because it trades close to fair value while GBTC trades at a hefty premium.


XBT Spot

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There were rumours last week about an European interest with a large bid in the OTC market at $235. That level was well defended until the OKCoin fiasco went nuclear on Saturday. The bearish sentiment was unleashed and the price now stands below $230. The kill spot is $213-$225. If the price falls within that range, it is likely that cascading margin calls of leveraged longs on Bitfinex will be unleashed and a run at $200 will commence. The bears have been waiting for a retest of the $150-$170 levels seen in January. It has eluded them for six months. The current price action is a perfect setup for another attempt. $200 won’t come easy, but if it does the suicide hotline will be inundated.

Trade Recommendation:

Short XBUU15 (25 September 2015) futures contracts at current levels. A sustained break back above $235 and consider covering the short. The near term price target is $220-$225.

Synthetic Bitcoin Report – May 29

This report presents the daily trading premium to NAV and Bitcoin equivalent volume for any exchange listed investment securities that track Bitcoin. The report will analyse GBTC (the OTC Markets listing of the Bitcoin Investment Trust), and XBT ( an ETN listed on the Nasdaq OMX Nordic).

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GBTC volume rebounded to 114 XBT, which isn’t that impressive given the previous week’s trading volume. The premium shot up to 40%.

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XBT recored it’s lowest volume since listing of 360 XBT. The premium shot up to 0.70%. Both GBTC and XBT experienced a rise in premium, but on low volume. It remains to be seen if this is a predictor of a immanent breakout to the upside for spot Bitcoin.