Crypto Trader Digest – Feb 22

23 February 20168 April 2019 Arthur Hayes

China Loves The Crack Pipe

Beijing and economic analysts agree that China’s economy needs to wean itself off debt based GDP growth. The transformation of the Chinese economy requires hard political choices. Economic rebalancing cannot happen without some stakeholders feeling acute pain. Someone must pay for the losses due to the over extension of credit over the last decade.

In the past Beijing opted for inflation and currency debasement. This time around, many thought that Beijing would finally inflict pain on the state owned enterprises who benefited the most from cheap credit. However the latest new loan figures suggest Beijing continues to smoke the pipe. Banks extended 2.51tn CNY in January, a new record. Unfortunately more loans are producing less and less nominal growth.

Banks lend at the behest of the government. If new loans are surging, it is because Beijing has chosen the path of least resistance. Looking back to the 1990’s, Beijing dealt with banking sector losses with crippling inflation and a massive devaluation of the Yuan.

This time around China is not an Asian backwater, but the second largest global economy. There are now various ways for investors globally to express a view on the Chinese economy through different investment products. BitMEX traders can now express direct bets on the direction of the Chinese economy. The BitMEX China A50 Index Futures contract (A50G16) allows traders to bet with leverage (up to 25x) on the Chinese stock market. The good thing about the A50 index is that it is comprised mostly of banks and real estate developers. The A50 index is very sensitive to investors’ views on the future of the Chinese banking system, which is precisely the sector that will lead China to oblivion or nirvana.

China’s New Credit Surges to Record on Seasonal Lending Binge

Grexit : Armageddon :: Brexit : ?

While Greece was on the verge of liberating themselves from Euro hell, the mainstream media (MSM) began scaring the world as to what would happen if the Greek people voted for financial freedom. In the end, the sheep and their shepherds were sufficiently scared back into line. This bought the pro-EU crowd a few precious months.

EU politicians have always feared referendums where the people were actually asked if they wanted EU membership. Each time it appears that they will vote No, the MSM bombards the airwaves with the consequences of leaving the EU. The big daddy of of them all, Britain, is set to vote in late June on whether to remain in the EU. Germany is the biggest daddy, but they are about the only country that has benefited from the debt-vendor financing that is EU economics.

I give credit to British politicians for abstaining from adopting the Euro. But now the plebs must vote on whether to remain in the political union with all it’s benefits(?). David Cameron put on a good show by taking the fight to Brussels and demanding concessions if he was to publically support continued membership in the EU. Boris Johnson (the Mayor of London) has hailed this is a once-in-a-lifetime opportunity to ditch the EU. Oh yeah, it’s going to get interesting.

A Yes vote is not a forgone conclusion. A No vote would be catastrophic to the EU. The countries that would actually benefit the most from exiting the EU would find renewed strength to oppose their country’s membership. PIGS, Portugal Italy Greece Spain.

Last summer presented empirical evidence that Bitcoin reacts positively to the possibility of a EU and Euro breakup. One of the best ways to express an out of the money view on Brexit and ultimately the acceleration of the EU’s demise is to purchase June Bitcoin volatility. Buying the BitMEX June futures contract (XBTM16) vs. short selling spot is a great way to isolate the Bitcoin volatility component. XBTM16 expires one day after the Brexit vote on June 23rd. If Brexit odds begin rising, Bitcoin will begin to rally sharply. This is a classic Buy the Rumor, Sell the Fact. As the fear of breakup intensifies, traders will begin purchasing safe haven assets like Bitcoin and Gold. The fear to reality spread will be highest just days before the vote, and that is the perfect time to unwind the trade.

Boris Johnson backs Brexit as he hails ‘once-in-a-lifetime opportunity’ to vote to leave EU

The Price Is Everything

I was beginning to lose faith in the function of the Bitcoin price to force economically prudent actions by the miners. My faith was restored this weekend during the Bitcoin Roundtable in Hong Kong. BitMEX remains neutral on Bitcoin Classic vs. Core. What we do want is stability in the protocol so that users may use Bitcoin as a common form of collateral to trade financial derivatives.

The largest miners and exchanges met in Hong Kong and discussed a roadmap for a block size increase in conjunction with the Bitcoin core developers. Early Sunday morning, they released the Bitcoin Roundtable Consensus. The price began its ascent Saturday afternoon as roundtable participants tweeted updates on the progress of the meeting.

Once the official communique was released, the price spiked to a high of $451 and 2,995 CNY. Core will release Segregated Witness, and commit to a hard fork in January 2017 with a block size increase of 2 MB to 4 MB. More importantly, the participants committed to not supporting Bitcoin Classic. The participants represent 80% of the network hashing power. Classic needs 75% of hashing power consensus to be activated. If the participants stick to their word, Bitcoin Classic is dead on arrival.

In the end, the motivating factor was the Bitcoin price. Given the global financial system wobbles, Bitcoin should be well above $500. However at the time when Bitcoin could be shining, the community is mired in trench warfare over how to increase network capacity. Those with the most to lose, the miners, finally got their act together and organised a meeting with the Bitcoin core developers and came to an understanding.

The price is the most important signal as to the health of Bitcoin. That one number pronounces Bitcoin a success or failure in real time by collating the buying and selling preferences of millions of people instantaneously. Bitcoin is an open source project, and this is not the last time crisis that it will face. Hopefully at the next fork in the road, the miners will react more quickly to secure their economic interests.

Bitcoin Roundtable Consensus

Fall 2015: The Empire Of Chaos And Bitcoin

6 August 20159 April 2019 Arthur Hayes

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

China

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 – August 3

3 August 20159 April 2019 Arthur Hayes

BitMEX Happenings

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

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

BitMEX To Launch Litecoin Futures

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

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

The Dog Days of Summer

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

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

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

Ethereum: Vapourware No Longer

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

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

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

Bitcoin Leveraged Loans

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

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

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

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

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

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

Weekly Review: Bitcoin Investment Products

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

XBT Spot

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

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

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

Trade Recommendation:

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

Crypto Trader Digest – July 27

27 July 20159 April 2019 Arthur Hayes

BitMEX Happenings

Zero Fees:

From now until September 1, 2015, trading fees across BitMEX are now zero!

25x Leveraged Bitcoin Futures:

BitMEX has raised leverage on our XBT Bitcoin / USD futures contracts to 25x.

New Simplified UI:

The new Simplified UI is now live. Traders may now choose from the “Basic” or “Advanced” layout.

Video Tutorial of the Simplified UI

25x Leveraged Bitcoin Futures Contracts

25x Leverage:

BitMEX aims to serve the entire crypto trading community. The return profile of our XBT quanto Bitcoin futures contracts is ideal for speculators. Starting today, we have raised the leverage to 25x for all XBT contracts. For example, if you wished to open a position worth 100 Bitcoin, you only need 4 Bitcoin of margin.

High-leverage instruments are high-risk. During fast moving markets, it is possible that some traders may go bankrupt. To ensure a zero sum system, BitMEX developed the Dynamic Profit Equalisation system. Traders can withdraw realised profit from the system subject to an adjustment.

Profits are held until settlement or rebalancing of a particular contract. The system loss is calculated, and trader’s profits are adjusted proportionally. Using BitMEX’s state-of-the-art trading engine, BitMEX is able to calculate the projected loss percentage in real-time, giving traders the chance to make trading decisions based on the anticipated systemic loss.

Transparency:

The implied profit adjustment, if any, is displayed on the order book at all times. We want users to enter into trades with full knowledge of the state of the system.

Manipulation Prevention:

To discourage traders from attempting to manipulate the futures market with the intention of causing margin calls, the futures contracts for margin and unrealised pnl purposes will be marked at the Bitfinex spot price plus an exchange set offset. The mark price will generally be set to match the prevailing futures last traded price. It will change in real time with the movement of the spot price. If a trader attempts to aggressively push the last traded price away from the mark price, traders will not be liquidated. The mark price has no effect on realised pnl.

To learn more about the DPE system, please read the blog post Dynamic Profit Equalisation.

Bitcoin Escapes The Commodity Carnage

Last week, the global commodity complex got choke slammed. Gold and silver were monkey hammered through key support levels. The world is afraid of a strong dollar and a less investment-focused Chinese economy. The Australian dollar (the purest play in currency land on commodity strength) is in free fall.

The world economy is not well. Apart from super luxury homes and apartments, people can afford less and less with their stagnating or declining incomes. China is transitioning away from breakneck industrialisation. Chinese electricity consumption (this is about the only statistic you can somewhat trust coming from China) grew at the slowest pace in 30 years.

Bitcoin, the newest monetary commodity on the block, stood its ground. The only global growth area is financial repression. Governments are ratcheting up their efforts to sequester and steal their citizens’ wealth. More and more people are waking up to the fact that the socialist utopia promised by their elected or unelected kleptocrats is a chimera. Governments with their backs to the wall will always steal their citizens’ money with capital controls and inflation. Bet on this one area of global growth by going long Bitcoin.

I Told You So

f you repeat something enough, people will get the message. Many economic pundits globally have been warning Greeks since the beginning of 2015 that a depositor bail-in was coming. The recent Greek capitulation to their European overlords has changed nothing for ordinary citizens. The capital controls remain in place. Businesses cannot import the goods they need. And with each passing day probability and magnitude of a depositor bail-in grows. Now Reuters predicts that capital controls will last for months.

The Europeans have refused to hand over fresh Euros to recapitalise Greek banks. They fear their domestic populations will balk at tax dollars going into the black hole that is the Greek banking system. The capital controls remain, and as a pre-condition for any bailout it is almost certain that ordinary depositors will not see a portion of their wealth ever again.

At this juncture, the Greeks have only themselves to blame. They elected Syriza on the promise of repudiating the austerity platform. That was the moment to pull money out of Greek banks and spirit it away abroad. The wealthy Greeks got out of Dodge and left the plebes to fend for themselves on 60 Euros per day.

In the past 2 years, the first world has been given two concrete examples of capital controls and depositor theft. If you haven’t gotten the message by now, I don’t know what will convince you that money in a bank isn’t yours. This doesn’t mean you should rush to store all your wealth under your mattress or start setting up offshore bank accounts. Recent events have shown that storing 100% of your wealth in your domestic banking system is risky. Diversification is key.

Bitcoin is one pillar of a proper diversification strategy. Capital controls and banking closures are usually the precursor of violence. If you had to relocate, possessing an asset that can be exchanged globally for other currencies or goods is prudent. In addition to your cache of gold and silver coins, consider a Bitcoin wallet filled with emergency funds. The beauty of Bitcoin will make itself apparent during a breakdown of polite society.

Increase Your Bitcoin ROE With Futures Arbitrage

There are now a few platforms offering Bitcoin futures products. In any new market, there are sometimes large price discrepancies between similar products. Traders with sufficient knowledge can employ arbitrage strategies and profit from market inefficiencies. Futures vs. futures arbitrage is one strategy that can increase the return on your dormant Bitcoin.

This strategy is geared towards traders who have a core holding of Bitcoin that they don’t plan on selling. Assume that there are two futures contracts that have the same return profile and expire on the same date. Futures A and B trade at $100 and $110 respectively, and expire in one month. Each futures contract requires margin of 20% in Bitcoin.

You decide to buy future A and sell B to capture the $10 premium. On an annualised basis, you have earned ($110 / $100 – 1) * 12 = 120%. The good thing about futures is the use of leverage. 120% is your un-levered return; however for this trade you only had to put up 20% equity on each side. Your real return on equity (ROE) is 120% * 1/40% = 300%.

Weekly Review: Bitcoin Investment Products

Week Ending	GBTC Avg Volume	WoW % Chg	% Premium	XBT Avg Volume	WoW % Chg	% Premium
7/17/2015	760 XBT		6.03%	1,441 XBT		-0.17%
7/24/2015	311 XBT	-59.07%	8.71%	295 XBT	-79.55%	-0.32%

XBT Spot

Chop, Chop, Chop. Bitcoin exited the $270’s with a bang straight on through to $295. Ever since, the price has been dancing to the tune of LTC, and chopping up trader’s portfolios in the process. $300 looms large, but the battle for that mountaintop is proving intense. It is a tough call to discern whether Bitcoin will collapse to $200, or rise above $300-$320.

The temporary removal of a formal Grexit has left Bitcoin searching for a narrative to carry it higher. In the absence of a new strong narrative, expect the price to languish. The longer it spends within striking distance of $300, the more vulnerable it is to a well executed bear raid.

One last attempt to breach $300 in this rally is likely. Failure to scale this peak will give the bears a perfect opportunity to inflict a severe mental and economic blow to the bulls. The past attempt and failures at $300 were followed by a swift downdraft. Expect the operators to go for blood and attempt to puncture $200 once more. In the absence of a global macro wobble, unlevered buyers should wait for cheap pickings in the low $200’s.

Trade Recommendation:

Buy XBTN15 while spot is below $290. The upside target price is $300. If the price trades below $280 again, close the long position.

Bitcoin Is Under Pricing Grexit

14 July 20159 April 2019 Arthur Hayes

Leading up to the Eurogroup summit this past weekend, Bitcoin rallied on expectations of no deal and Grexit. Late Sunday night, Greece was humiliated on the world stage as Germany forced Prime Minister Tsipras to accept draconian terms in hopes of a bailout. Immediately Bitcoin dropped through $300 to $281. The price since has hovered around $290.

Greece has until Wednesday to approve the measures in parliament. The European nations must come up with a 7 to 12 billion Euro bridge loan in cash to alleviate the crisis in Greece. The difficulty of accomplishing these two things is being underpriced by Bitcoin. There are some crucial questions that must be answered in a short amount of time.

How will Tsipras argue the merits of the agreement when economics across the world believe the deal is terrible?

Where will the money come from? David Cameron has said the UK will contribute no money towards a Greek bailout. To get cold hard cash from EU members will require domestic parliamentary approval.

Will the ECB increase the ELA cap and allow Greek banks to reopen without capital controls?

If Greek banks reopened, would depositors rush to withdraw their full balance? This is a big worry of the ECB, and probably why they have been very mum about increasing support for Greek banks.

All of these questions must be resolved in under 48 hours. The market traded as high as $316 on Grexit fears. The longer Greek’s financial limbo lasts, the more lasting damage to their economy and population. Grexit even after the weekend “agreement” is even more likely to happen. Bitcoin under $300 is a buying opportunity. Consider buying XBTN15 (July) futures contracts to express this view.

Crypto Trader Digest – July 13

13 July 20159 April 2019 Arthur Hayes

Greece To Sell Islands To Fund Its Banks

The people of Greece have been betrayed. Prime Minister Alexis Tsipras called a referendum on the conditions of the controversial EU bailout package. The people voted not to accept the terms. Now he has “signed” a new program that cedes all control of Greece to Brussels. The most galling part of the new plan is that proceeds from a 50 billion Euro privatisation fund (read: selling Greek islands and public utilities to the highest bidder) will be used to recapitalise the failing banks. The EU has robbed Peter to pay Paul. In the end they have provided no real assistance to their European brother.

Greece has until Wednesday to pass the agreement in parliament. The Greek people need to make themselves heard. They must put the fear of God into any MP who dares to ignore the landslide No vote in the referendum. If this agreement passes, violence will reign in Greece. If the banks somehow manage to reopen, they will be emptied of Euros within days.

As this agreement hit the newswires, Bitcoin began nosediving. The price touched a low of $281. Once more information about the deal trickles out, traders will focus their sights on Wednesday and the political fight to pass the agreement. $300 Bitcoin may return in a few days time.

Bitcoin is one of the only ways that European people can secure assets outside of the EU banking systems. Germany is hell-bent on demonstrating to Spain, Italy, Portugal, and France what happens when they are disobeyed. Citizens of these countries must read the writing on the wall. It is not enough to hold cash under the mattress, or spirit capital to Switzerland. Every EU citizen will now wonder: is our country next? Will we be made to beg for scraps from unelected bureaucrats? Redenomination risk is real, and the contagion will spread across Europe. Bitcoin will continue to be bought on these fears regardless of whether the Greeks receive another bailout.

China: The Wests Portrait Of Dorian Gray

The financial services industry employs many intelligent people. But in the end there are only two actions, Buy or Sell. China is seeking to remove the sell button permanently in an attempt to prop up its market. Authorities have even threatened jail time for those who sell their holdings. 50% of the market is shut, and you can now pledge your house as collateral for a loan to buy stocks.

Many western commentators have chastised China for not living up to the free market principles they were supposedly striving to implement. China is not doing anything that western governments (US and Europe) haven’t tried before. The Chinese style is just a tad more in your face. Franklin D. Roosevelt in 1933 banned the private holding of gold by US citizens. Those who refused to sell their barbaric relic to the government at a below market rate faced federal prison. China is the US and Europe’s portrait of Dorian Gray.

If China’s brash way of dealing with falling asset markets proves successful, similar measures will be introduced when the contagion spreads to western capital markets. People invest in paper assets (stocks, bonds, etc.) to store and grow wealth. If there is no exit, these assets are worth zero. You can’t eat stock. You can’t eat Bitcoin either, but at least there are free markets for the exchange of Bitcoin.

Santa Baby

Santa baby, just slip a Bitcoin under the tree for me;
Been an awful good girl, Santa baby,
So hurry down the blockchain tonight

The low volatility phase that began in mid-April is over. 30-day realised Bitcoin volatility has risen to 50.96%. As the volatility mean reverts, the current market structure will change dramatically. With the backdrop of Grexit and turmoil in financial markets globally, the more likely scenario is for Bitcoin to continue its upward ascent with increased vigor. While short dated futures’ basis on BitMEX and our competitors has risen sharply, December futures’ basis (XBUZ15) on BitMEX has barely budged.

As volatility increases, the Bitcoin call option becomes more valuable. Given an unlimited upside, longs will be willing to pay increasing rates to borrow USD and buy Bitcoin. XBUZ15 has the most remaining time value, and the rate rise will impact this contract’s basis the most.

There are two ways to profit. If you would like to retain upside exposure to Bitcoin and rates, buy XBUZ15. If you would just like to profit off of rising rates, then buy XBUZ15 and sell XBUU15. This will cost you around $2-$4, as XBUZ15 is more expensive by that amount than XBUU15. The $2-$4 is your entry fee and maximum loss. Effectively, you are borrowing money between September and December for 5% per annum. Given the explosive nature of Bitcoin, that is very cheap. Compare to Bitfinex, where you can borrow USD at 27% per annum.

Trade Recommendation:

Buy XBUZ15 outright, or buy XBUZ15 and hedge your delta by selling XBUU15.

The Litecoin Pump and Dump

Until last Friday, Litecoin was up 8x on the month. Since writing Chinese Promoter Pumping Litecoin Via Ponzi Scheme on Friday morning, the price of Litecoin has fallen 45%. The promoter began cashing out his position on Friday afternoon. LTC dumped and Bitcoin pumped on all the Chinese exchanges. Spot Bitcoin on OKCoin.cn hit a high of 2335 CNY or $376; a full retrace happened in minutes and any traders with derivative positions that included China prices got rekt. This happened against a backdrop of a major DDoS attack on many of the leading Chinese exchanges and Bitfinex. There is no definitive evidence of chicanery but where there’s smoke, there’s fire.

Which altcoin will this well-run operation pump next? Be sure to let us know when you do.

Weekly Review: Bitcoin Investment Products

Week Ending	GBTC Avg Volume	WoW % Chg	% Premium	XBT Avg Volume	WoW % Chg	% Premium
7/3/2015	771 XBT		14.74%	1,255 XBT		-0.09%
7/10/2015	1,035 XBT	34.31%	8.35%	2,673 XBT	112.98%	0.00%

The LTC and Bitcoin dump and pump on Friday lit a fire under the trading volumes of GBTC and XBT. Volumes surged on Friday, and XBT traded an all time high 5,170 Bitcoin. With the heightened Greek drama, expect volumes to continue increasing. GBTC’s premium now stands below 10%. As more supply enters the market, it appears the market maker is able to better control the premium.

XBT Spot

The news of a Greek deal slid across the wires. The price slowly faded lower. Within minutes, Bitcoin was in freefall and retested $281. The level held on two attempts, and a consolidation is under way around $285. Intraday volatility has returned. Babysitting your Bitcoin is essential. After a sleepy start to the summer, proper risk management techniques need to be employed or you will find yourself rekt.

The Greece saga is not over. The parliament must approve the deal by Wednesday. Bitcoin will be in a holding pattern until then. The news is likely to be negative (Bitcoin positive) up until the vote. My base case is for the Greece parliament to sell their citizens down the river and vote to approve the deal. The downside target is $260. Medium term I am still bullish Bitcoin as the Greece debacle has laid bare the intentions of the EU overloads. Spanish elections are this fall and the ruling party is in trouble. Expect a flare up of European contagion risk as the markets focus on the next weakest links.

Trade Recommendation:

Sell XBTN15 into the retracement of the $281 fall. The downside target price for spot is $260. If a the EU agreement is voted down, cover quickly.

Bring On The Weekend: Grexit & China QE

3 July 20159 April 2019 Arthur Hayes

Screen Shot 2015-07-03 at 3.45.39 pm — Shanghai Composite Index, Bloomberg

Grexit

Greeks head to the polls this weekend to vote on whether or not to accept the now expired EU bailout package. 5 years of can kicking has finally come to a definitive vote on Greece remaining in the EU currency union. The issues and implications have been covered ad nauseam by countless blogs and the financial news media.

In a nutshell:

No Vote: The bank run and capital controls will continue. Greece will attempt to negotiate further with the Troika, but the likely outcome is Grexit.

Yes Vote: The bank run and capital controls will continue unless the ECB provides more Euro liquidity to Greek banks. A new government will likely be formed, and negotiations will begin anew. Grexit isn’t off the table, but the timeline is pushed further into the future.

Impact on Bitcoin:

No Vote: Grexit becomes a very likely scenario, and global asset markets fall. Bitcoin sentiment improves as the misery imposed by capital controls and the shortage of goods continues. Positive price impact.

Yes Vote: The capital controls will still be in place. Global asset markets will rally, but could fade quickly as the facts on the ground will not materially change. This is the scenario that is priced into the markets currently. Bitcoin sentiment might be dampened somewhat, but the fact that capital controls will remain and the ECB still might not provide more Euros to banks means that the Bitcoin story begin pushed by the MSM will continue to gain ground. Neutral price impact.

China QE

The second and more important development is the continuation of the crash in the Chinese equities market. This past weekend the PBOC launched a double rate cut (the one-year lending rate and the Reserve Ratio Requirement). The last time they did that was October 2008 on the heels of the Lehman Brothers bankruptcy. Investors didn’t play ball instead sending equites sharply lower on the week. The Shanghai Composite was down 10% on the week and closed below 4,000.

Regulators are in full panic mode. The government ordered state owned news sites to only publish positive news about the stock market. [ZH] Many analysts expect the margin calls to continue as the various shadow conduits (Umbrella Trusts) of equity market leverage continue to unwind. Calls for additional easing from the PBOC (People’s Bank of China) and outright quantitative easing are growing. The addition of the global market turmoil surrounding Greece means that the PBOC will likely add additional easing measures this weekend. They like to announce rate cuts on Saturday or Sunday. Bitcoin will react positively from additional easing out of China.

The Greek vote and the possibility of PBOC easing is the perfect setup for another Bitcoin rally over the weekend. After almost reaching $270, Bitcoin has retraced $20. The Greek vote is Sunday. Buy the rumour sell the fact. On Friday and Saturday, begin accumulating a long Bitcoin position with XBTN15 while spot is below $255. The Greek vote will be known Sunday night European time right before Asian financial markets open on Monday. That is the optimal time to close the position whether in profit or loss.

Crypto Trader Digest – June 29

29 June 20159 April 2019 Arthur Hayes

BitMEX Happenings

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

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

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

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 22, 2015

22 June 20159 April 2019 Arthur Hayes

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:

Exchange USD (or your domestic currency) for Bitcoin.
Deposit 30% of your Bitcoin on BitMEX as initial margin, secure the other 70% using a Bitcoin wallet or storage method of your choice.
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).
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.

How The DEA Seized A College Student’s Entire Life Savings, Without Charging Him With A Drug Crime

France Restricts the Movement of Gold, Cash, & Crypto-Currencies

Weekly Review: Bitcoin Investment Products

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?

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

“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.

Crypto Trader Daily – 26 April 2015

27 April 20159 April 2019 Arthur Hayes

Price Action

Another push was made for $210 today. The price reached a low of $213 on Bitfinex before rallying back to $220. The retrace was a weak attempt at a rally. A renewed fade to $210 will begin shortly, and expect a hard fought battle. The overall downward trend remains, and the market awaits the all-important retest of $200.

Trade Idea

Sell XBUK15 above $215 with a $210 target price.

In the News

Capital Controls Arrive: Greece Begins Confiscating Deposits Of “Small Debtors” (Zerohedge)

The “War on Cash” Migrates to Switzerland (Contra Corner)