Crypto Trader Digest – Feb 8

BitMEX’s New Look


We have been hard at work making changes to the BitMEX UI/UX. A major facelift will be released at the end of this week. You can get a sneak peek on BitMEX Testnet. We also welcome your feedback. This is only the beginning; we intend to go through every widget individually to simplify and improve usability.

In addition to a new look, we will also be greatly expanding the number of order types available. We expect to launch Market, & Stop Market types, Post-only (Maker) orders, and hidden orders in the near future. Many more are coming.

In other news: China, China, China. The long awaited BitMEX China A50 Index Futures Contract is nearing completion. You can view the A50 Contract Details, and a Trading Guide on BitMEX Testnet as well. We aim to list this contract by the end of the month. Keep an eye on the BitMEX Blog and your inbox for further details.

Classic vs. Core Roshambo


Bitcoin Classic has now been released and the race is on to reach 75% consensus. The showdown between Classic and Core is nearing the final stretch. If the Chinese miners are serious about increasing the block size to 2 MB, expect them to begin running Classic shortly after they return from holiday next week. If not, like Punxsutawney Phil… expect more Winter.

Once 75% consensus is reached, then the 28 day grace period begins. During this period, those not running Classic should upgrade their Bitcoin software before Classic goes live. Then the moment of truth will arrive. Will the fork in Bitcoin lead to a price crash or pump?

Every trader has a different opinion on whether a Bitcoin fork will be positive or negative for the price. The one thing we can be sure of is intense price volatility after the 75% consensus is reached. Now is a perfect time to purchase your volatility lottery tickets by trading March (XBTH16) and June (XBTM16) futures contracts.


The above graph shows the % Basis PA (per annum) of each futures contract over the past month. XBTH16’s % Basis PA has gotten smacked hard, while XBTM16 has held up well. Buying XBTH16 vs. selling XBTM16 is the appropriate strategy. The trade has positive carry or theta because the premium earned by selling XBTM16 is higher than what is paid by buying XBTH16. The expectation is that during the period of high volatility XBTH16 will rise faster than XBTM16 due to the depressed % Basis PA level.

If the price crashes, expect the basis to trade lower then snap sharply higher as bottom feeders buy longer dated futures contracts aggressively. Given XBTH16 trades cheaper than XBTM16, expect speculators to focus their buying power on XBTH16. If the price spikes once Classic reaches 75% consensus, again speculators will focus their buying power on the cheaper contract, XBTH16.

If you intend the hold the spread trade until XBTH16 expiry, XBTM16’s % Basis PA would have to be above 94.75% for the trade to start losing money.

Getting paid to wait for the inevitable Classic vs. Core fireworks is a great strategy for those who don’t have a strong bullish or bearish view.

View how many nodes are running Bitcoin Classic at Coin Dance.

Arbitrage During Lunar New Year


Happy Lunar New Year! During Lunar New Year, Asia is closed for business. The most liquid Bitcoin exchanges are all based in Asia. Deposit and Withdrawals of fiat currency will be processed slower, or not at all. Onshore bank CNY transfers are still open during this week, but the major XBTCNY exchanges will have slower processing times. OKCoin USD and Bitfinex both will not be processing USD deposits or withdrawals until February 15th.

Arbitrage opportunities will present themselves for traders who happen to have CNY, USD, and Bitcoin deposited on certain exchanges. The China Bitcoin premium can expand to much higher levels this week as traders will be unable to deposit USD and take advantage of lower prices outside of China. Price differences between OKCoin USD and Bitfinex could persist all week. Do not read too much into large price discrepancies as they are not driven by actual demand, but by closures of the on- and off-ramps.


Crypto Trader Digest – Jan 11

Yuan Devaluation Math

China FX teller_0

MingPao, the most widely read Chinese language newspaper in Hong Kong, reports that Shanghai residents are queuing up at FX dealers to convert RMB into USD before further devaluation occurs. Simon Black reports that Chinese are buying .com domain names as a way to legally transform RMB into more stable currencies. Reuters reports that PBOC policy advisors suggest a 10%-15% sharp and immediate devaluation.

No one in China is under any illusion that the CNY will hold steady. But I thought China was Scrooge McDuck rich?; China’s official FX reserves total $3.3 trillion. However, analysts believe that $2.8 trillion of that is pledged to other liabilities. Coupled with over $100 billion per month of capital flight and rising banking non-performing loans (NPLs), China is out of cash.

Kyle Bass of Hayman Capital Management believes shorting the Yuan is the slam dunk trade of 2016. The effects of the most aggressive credit expansion since the 2008 GFC are bearing spoiled fruit. Bass warns that China’s “neutron bomb” is its banking system. The state owned banks (SOE) were forced to lower underwriting standards to lend to SOE’s for a variety of industrial products that are not profitable. The rise in NPLs must be absorbed by the central government via the banking system. Bass notes a rise of the official 1.5% NPL ratio to 20% would result in a $3.0 trillion charge.

Aggressive currency debasement and interest rate cuts are the only policy levers left. As the citizenry realises that jobs will be lost and prices will rise, they will search for anything that holds value and or can be sold abroad to receive a stable currency.

The price of Bitcoin is set in Yuan. The Bitcoin premium has compressed lately. In Q1, expect increased volatility and the beginnings of actual cash from China finding its way into Bitcoin. To date, most of the price action has come from speculators front-running this tidal wave of Yuan. When cash buyers return to Bitcoin after a 2.5 year hiatus, the price action will be legendary.

Patient traders should begin accumulating positions in longer dated BitMEX futures contracts. Buying March 2016 (XBTH16) or June 2016 (XBTM16) are great ways to benefit from rising volatility and price.

Pressure on China central bank for bigger yuan depreciation: sources

China Finds $3 Trillion Just Doesn’t Pack the Punch It Used To

For Kyle Bass This Is “The Greatest Investment Opportunity Right Now”

Meanwhile In Shanghai Residents Form Lines To Sell Yuan, Buy Dollars

Here’s the ultra-clever way that Chinese are circumventing capital controls

Chinese Capital Markets Timetable

Bitcoin will react to movements in both the Chinese FX and equity markets. Any serious trader should know the key opening and closing times of these respective markets.

All times are Beijing local time, GMT + 8.

Daily PBOC USDCNY Fixing

The PBOC fixes the inter-bank USDCNY rate each morning at 9:15am.

CNY Onshore Trading Hours

9:30am to 11:30pm

CHH Offshore Trading Hours

CNH trades 24/5

China A Share Market

9:15am – 9:25am Call Auction

9:30am – 11:30am Continuous Trading

1:00pm – 3:00pm Continuous Trading

PBOC daily fixing

Live index prices from the Shanghai Stock Exchange

Bitcoin Implied Yuan

image (11)

An interesting relationship appeared to me while I was looking at XBTCNY, USDCNY, and USDCNH. If we derive the Bitcoin implied USDCNY rate by dividing XBTCNY by XBTUSD, does this implied Yuan follow the CNH movements? Remember that CNH is the offshore Yuan, and generally is a leading indicator of where USDCNY will fix onshore as trading of USDCNH is not as manipulated by Beijing as USDCNY. To get a clearer picture, I graphed the spread between the Bitcoin implied Yuan and CNH against the daily change in the XBTCNY price.

The graph above shows this relationship. The two variables track well until this past weekend. The Bitcoin implied Yuan is trading cheap to CNH. Given the CNH level and expectations of further devaluation, Bitcoin is trading cheap in China.

The appropriate trade is to go long the Bitcoin premium in China and hedge out the Bitcoin price risk. To do that, sell BitMEX 50x leveraged weekly Bitcoin / USD futures (XBT7D) vs. buy XBTCNY. XBT7D trades at a premium; therefore the trade has positive carry. For users who do not have CNY with which to buy Bitcoin, BTCC allows users to wire USD into their HK bank account and they will change into CNY and allow you to trade.

BitMEX Arbitrage Webinar Lesson 2

24x10 - Bart

Thank you to everyone who tuned into Lesson 1 last Friday. Lesson 2 will air this Wednesday 13 January 03:00 GMT.

Lesson 2 Topics:

  • Cash and Carry Arbitrage
  • Volatility Arbitrage

Lesson 2 Live Broadcast Link

Lesson 1 Recording

Lesson 2’s slide deck and spreadsheets will be provided on our blog and via email prior to Wednesday.


Crypto Trader Digest – Oct 26

To Print Money Is Glorious


On his southern tour of China in 1992, Deng Xiaoping was credited with uttering “To Get Rich is Glorious”. His program of Socialism with Chinese Characteristics unleashed one of modern times’ greatest transformations in a country’s wealth. Since the early 1990’s, China transitioned from the century of humiliation, to a century of prosperity and growth.

China’s growth over the past two decades is legendary, but underpinning this growth is one of the largest credit expansions in human history. Socialism with Chinese Characteristics is a euphemism for a red printing press. Printing money is as old as centralised government. China being China just did it larger and more in your face than any government in history. Since the 2008 GFC, China’s total debt to GDP has almost doubled to 180%. The gargantuan issuance of debt underpinned the creation of ghost cities and bridges to nowhere.

The great financialisation that began in 1971 when Nixon took America off the gold standard is reaching its expiry date. World growth is slowing evidenced by an across the board slump in industrial commodities. China is a highly levered to the global manufacturing economy, and the state owned banks (SOE) loan books are stuffed with industrial companies’ debt. This debt must be warehoused and rolled over to keep the many zombie SOE’s alive. As a result, the PBOC continues to aggressively ease monetary conditions.

This past weekend the Reserve Ratio Requirement was cut by 0.50%, and the benchmark lending rate by 0.25%. These desperate moves are meant to help banks deal with their toxic loan books. As deposit rates drop, the rush to sell CNY and convert into a higher yielding asset will intensify. The PBOC is clearly telegraphing that the CNY will depreciate in the near term. Mao’s red army is watching and as the they earn less and less at the bank, they will start to embrace risky assets. Bitcoin serves as a central bank put, an electronic means of wealth preservation, and a vehicle to export domestic capital.

$300 is just the beginning. If the China narrative catches hold again, a truly explosive upward price burst will occur. For the more patient traders, consider buying BitMEX’s 25x leveraged March 2016 Bitocin / USD futures contract, XBTH16.

XBT Term Structure

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The FOMO was strong this weekend. The amazing China pump to 1950 CNY ignited the inner bull in traders. The short end of the curve shot upwards. The long end barely budged. XBTZ15’s basis was flat, and XBTH16’s basis was up 8% on the week. Traders are still hesitant to believe the rebirth from the $200 to $300 purgatory. That is why the long end has not been bought as aggressively. Many traders expect a $300 breach, and then a quick tumble just like the other two attempts prior.

If the narrative around China grows, the medium term trend for Bitcoin is higher. If $300 can be broken and held for a week, then the FOMO will begin in earnest. Then the long end of the curve will skyrocket. Those patient enough to buy XBTH16 and sell XBTZ15 or spot, will be amply rewarded.

Trade Recommendation:

Buy XBTH16 vs. sell XBTZ15 or spot if you believe $300 can be broken and held for one week.

Dancing With The Daily

image (12)

If Bitcoin is fun, Bitcoin with 100x leverage is a hell of a party. BitMEX’s 100x daily expiring Bitcoin / USD futures contract, XBT24H, has quickly become our most popular product. Because of the heightened volatility and price rise, the premium intraday has been massive.

The above chart shows the premium of XBT24H over spot for October 25th from 00:00 GMT to 23:00 GMT. 12:00 GMT is the settlement time, and that is why there is a dip. Starting yesterday night during the pump to 1950 CNY, the premium of XBT24H reached 1.75% outright. For a contract that expires in 24 hours, that is massive. I call that the FOMO premium. In a trending market, traders following the trend and momentum will overpay for exposure. This is a perfect opportunity for spot vs. futures arbitrage.

The trade is to sell XBT24H and buy spot. This is not a perfect arbitrage. At certain prices, the short XBT24H’s negative USD gamma will cause a loss for the portfolio. The PNL function is quadratic so we can solve a priori for the two break even points. For this particular trade, break even is below $259.37 and above $337.71. Given the spot price was $293, it is extremely unlikely that XBT24H will settle outside of that range. This is a no brainer trade for an arbitrageur.

XBT Spot


Bitcoin traders have been praying to the goddess of volatility for the entire summer. She awoke with a vengeance this weekend. The price action in XBTCNY reminded me of 2013. The highs were high, and the retrace was violent and swift. XBTCNY touched 1950 (appx. $306), and then careened lower by 120 CNY to a low of 1830 this morning.

Bitstamp climbed to $296, and during the downdraft briefly touched below $280. The price action will subside this week, and another attempt will be made for $300 on XBTUSD, and 1950 for XBTCNY. Additional easing from the PBOC will lend the China narrative further firepower. Make no mistake, this is a healthy rally. Short at your own peril.

Trade Recommendation:

Buy the weekly 50x leveraged Bitcoin / USD futures contract, XBT7D, while spot is $280 to $285. The upside target price is $300.

Crypto Trader Digest – Oct 19

BitMEX Smashes Volume Records


The launch of the 100x daily Bitcoin / USD futures contract, XBT24H, corresponded with a surge in intraday price volatility this weekend. The result was a massive surge in trading volumes on BitMEX. This weekend, we hit a high of 29,000 Bitcoin traded over a 24 hour period. We want to thank all of our traders for helping to make BitMEX one of the most liquid exchanges to trade Bitcoin / USD. If you have not tried out XBT24H, you can take it for a spin on the BitMEX Testnet before trading with real Bitcoin.

We are working diligently to improve the trading experience. We received many great suggestions for new features and UI design change requests. Look out for further announcements about upgrades to the platform.

The Case For CNY Devaluation

image (8)

image (9)

Whether or not the recent pump to 1835 CNY and subsequent dump to 1700 CNY is attributable to the MMM ponzi scheme, the premium of XBTCNY to XBTUSD continues to slowly rise. The PBOC resumed the CNY devaluation last Friday, and continued today. Each day at 9:15am Beijing time (GMT + 8), the PBOC releases the CNY Interbank Rate. The Interbank Rate is the rate at which banks can buy and sell CNY against the PBOC. The USDCNY and USDCNH (offshore CNY) follow the trend of the official interbank rate.

The PBOC has allowed the CNY to strengthen vs. the USD and more importantly their trade rivals Germany (EUR), Japan (JPY), and South Korea (KRW) for years. Now with global growth slowing, and the aggressive money printing from Japan and Europe, China’s hand has been forced. Xi Jinping’s biggest economic goal is to shift China away from an investment led economy to a services and consumption lead one. Many politically important groups will be impoverished by the shift in economic focus. A way to cushion the blow to the manufacturing sector is to weaken the CNY.

While the CNY was strengthening, the most popular carry trade was to borrow USD, FX into CNY, then buy bonds yielding significantly more than the cost of USD funds. Because the PBOC had a one way policy of CNY appreciation, carry traders did not forward hedge USDCNY. If they had hedged, the USDCNY forward premium would wipe out most of the profit. These carry traders profited off the PBOC who sold CNY and bought USD. The PBOC’s USD assets, mainly US treasuries, have much lower yields than comparable CNY debt. The easiest way to import USD into China was to fake invoices; this allowed individuals and corporate to FX more USD into CNY than allowed by the PBOC.

The one way CNY appreciation is now over. The carry traders are rushing for the exits, and the PBOC has put up the road blocks. Banks are now enforcing the yearly $50,000 FX limit; overseas UnionPay withdrawals are limited to 100,000 CNY per year; money changers, who previously would help move CNY in and out of China, have been shut. With capital trapped onshore, the PBOC can now devalue the CNY without suffering a loss in China’s capital account.

With the easy and cheap means of moving CNY out of China closed, Bitcoin presents a legal and viable option. The premium of XBTCNY and XBTUSD has begun rising ever since the PBOC devalued the CNY by 4% in August. If this hot money leaks into Bitcoin, the premium and price will shoot higher.

The top chart shows the XBTCNY premium vs. the PBOC Interbank Rate. The premium rose as USDCNY moved higher (read: CNY devalued). The bottom chart shows the premium vs. Bitstamp XBTUSD. As the premium rose, XBTUSD rose as well. These are the most important charts in Bitcoin. China drove the 2013 Bitcoin bubble. The PBOC isn’t done yet. The CNY will weaken, and as it does Bitcoin will slowly leak higher.

This process will happen either slowly or all at once. To take a longer term bullish view on the devaluation, consider buying the BitMEX March 2016 25x leveraged Bitcoin / USD futures contract, XBTH16.

XBT Term Structure

image (10)

Volatility spiked over the weekend during the China pump and dump. As a result, the term structure parallel shifted upwards. All contracts became more expensive, with shorter dated contracts experiencing the greatest shift upwards. There is a liquidity premium for shorter dated contracts, and that is why they tend exhibit more basis volatility.

The term structure has now become inverted. XBTH16 looks quite cheap in comparison to its peers. XBTH16’s basis only increased 9%. Given the time value this contract still retains, it should increase the most if the price volatility continues. If the curve flattens, XBTH16 should trade at 60%, an increase of 10% annualised. If the curve steepens, XBTH16 could trade at 70%, an increase of 20% annualised.

Trade Recommendation:

Buy XBTH16 (March 2016) vs. sell XBTZ15 (December 2015) to bet on the annualised basis of XBTH16 rising.

XBT Spot

Screen Shot 2015-10-19 at 5.10.38 pm

The stair step rally continued into last Friday’s settlement. Then Saturday early morning China time, a pump began. XBTCNY reached a high of 1835. At the pump’s peak, the premium in China was 10%.

The price languished above 1800 CNY, then dumped late Sunday night to a low of 1706 CNY. The rally that started a few weeks back is not over. $260 held on Bitstamp, and China has remained above 1700 CNY. After the weekend fireworks, expect a period of consolidation between $260 to $265. A break below $260 on decent volume will put pause in the rally. If the price can hold above $270 for 24 hours, a run to $300 is likely.

Trade Recommendation:

Buy October 2015 25x leveraged Bitcoin / USD futures contracts (XBTV15) while spot is $260 to $265. The upside target price is $270 and then $300.

Crypto Trader Digest – Oct 12

BitMEX Happenings

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

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

Announcing 100x Leveraged Daily Bitcoin Futures

Screen Shot 2015-10-12 at 4.47.19 pm

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

The Wizards of Oz

wizard of oz

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

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

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

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

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

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

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

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

How Liquid Is Your Portfolio?


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

— Coleridge, The Rime of the Ancient Mariner

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

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

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

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

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

CSRC holds hearing for illegal stocks operations

XBT Term Structure

image (5)

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

Trade Recommendation:

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

XBT Spot

Screen Shot 2015-10-12 at 2.43.10 pm

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

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

Trade Recommendation:

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

Crypto Trader Digest – Oct 5

Spot The Hedge Fund Manager


All of us Bitcoiners are gamblers, whether you admit it or not. At some point you decided it was a good idea to send some of your hard earned money to a website that allowed you to buy magic internet money. The ultimate gamblers’ high was the fall 2013 spike to $1,200. Ever since, many in the industry have been jonesin’ for a return to the promised land of instant riches.

If regular Bitcoin holders are gamblers, those of us who own Bitcoin related businesses are even bigger risk takers. Unfortunately this streak of risk taking is sometimes applied in the wrong context. Two of the individuals above bet their working capital on a stable or rising Bitcoin price. Bitpay held a large amount of Bitcoin as a result of their payment processing service. Ethereum raised a significant amount of capital in the form of Bitcoin and held it. Unfortunately the price halved and we see the results from two of our industries most successful businesses and projects.

The problem with hedging is the upside is capped. If the price was back at $1,200, I wouldn’t be writing this article. Nobody asks how you make your money when you are making it, but they surely do when losses rack up. The question for Bitcoin business owners is are you running a hedge fund or a business. Many businesses claim they do X with Bitcoin, but when you inquire how they hedge a particular facet of their business that is exposed to the price, you get a blank expression. At that point call up Ray Dalio.

If part of your business’s working capital is in any way exposed to the price of Bitcoin or another cryptocurrency, a properly implemented hedging strategy is a must. One of BitMEX’s goals is to provide hedging tools to crypto businesses. We are always open to new ideas and new products that might be of use to the community. Get in contact with us if you want help thinking through how derivatives products can help protect your business from the irrationality of the market.

China Bitcoin Premium Points To Moon

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During the November 2013 Bitcoin bubble, the belief was that Chinese people would rush to convert their RMB into Bitcoin to escape the financial repression they faced at home. That did not come to pass as it was still very easy and cheap to spirit capital out of China. That all changed this summer when the PBOC shocked the world by devaluing the CNY by 4% over one week.

The PBOC did not stop there. The Chinese government is aggressively trying to stem the capital flight out of China. Many real estate commentators have lamented how Chinese buyers have slowed down the pace of property purchases because of the increasing difficulty they face exporting their RMB.

In my article Hello Bitcoin: China Begins Enforcing Capital Controls, I speculated on the potential impact on the Bitcoin price if for the purposes of real estate Chinese buyers began using Bitcoin to export their wealth.

Now China is attacking another capital flight enabler, UnionPay. UnionPay is China’s bank card network operator. Previously while abroad, Chinese people could withdraw limitless amounts of cash into a foreign currency. In Macau you would walk up to a pawn shop and “buy” a very expensive item. Then you would “return” said item and get Hong Kong or US dollars in cash. The pawn shop would take a 3-5% cut of the item’s price as their fee for washing your money. This was a several billion US dollar a year business. Overseas UnionPay withdrawals are now limited to 100,000 CNY per year, which is about $15,500. For the Chinese who love overseas shopping trips to Paris, London, and Milan that amount barely buys two luxury handbags.

The first signs of a possible shift of wealth from China outwards through Bitcoin will be the premium of XBTCNY to XBTUSD. The above chart shows the 24 hour moving average of the premium between Bitstamp (XBTUSD) and OKCoin (XBTCNY) over the past 30 days. While the absolute premium at the present moment is not large, the trend is up and to the right. I plotted the premium against the price of Bitcoin. The two exhibit no correlation over this 30 day time period; however, I predict that if premium continues to rises, it will lay the groundwork for a moon shot.

In the 3% to 5% premium range, it becomes worthwhile to buy offshore, sell onshore in China, and remit money between China and Hong Kong. The difficult step is bringing CNY from China into Hong Kong. If you cross the border between the two territories the legal limit is 20,000 CNY (3,000 USD). At a 5% premium that is a 150 USD gross profit before exchange fees and bank wire fees. That isn’t compelling. This trade needs to be done in a size >$10,000 on a daily basis and electronically. Previously there were certain individuals who would take CNY onshore in China and remit you HKD or USD offshore into Hong Kong in any size.

If truly the traditional avenues of moving money out of China have been shut, then the premium will rise above 5%. That presents a clear signal that there is an imbalance of demand to sell CNY and buy Bitcoin. That is when the rocket ship will ignite.

A Desperate China Caps Card Withdrawals In Frantic Attempt To Stem Outflows

XBT Futures Term Structure

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Last Friday’s weekly price volatility (BVOL7D Index) declined to 2.79%. That is the lowest reading since we began collecting data in November of last year. The low volatility impacted March 2016 futures (XBTH16) dramatically. The annualised basis declined 7% WoW. Looking at the current term structure, the question is how much longer will this low volatility regime continue. As volatility returns to risk assets globally, will Bitcoin continue to sit out this party?

While XBTH16 still is the most expensive in terms of basis, I would be hesitant to sell it and buy spot. There is still more than 5 months left until expiry, and that is an eternity in Bitcoin. If 30 day realised volatility returns to 50%, basis will jump across the curve. The biggest winner will be XBTH16. It has the most time value remaining. If you believe that there are more volatile times ahead, go long XBTH16 vs. short XBTZ15. This upside volatility option will cost you 5% (XBTH16’s basis minus XBTZ15’s) in annualised basis terms. If the volatility increases, the spread between XBTH16 and XBTZ15 will widen and a profit will be realised.

Trade Recommendation:

Buy XBTH16 vs. sell XBTZ15 to profit from a volatility normalisation and a widening of the spread between the two contracts.

The last installment in our series on basis trading has been published. Lesson 3 deals with risk management.

XBT Spot

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Golden week has begun in China. Trading has ground to a halt. The banks and markets reopen on Thursday. Until the Chinese return expect a very boring market.

Outside of China, Bitcoin is hovering at the $240 level. Looking at a weekly chart of Bitcoin since the crash to $150 in January, a strong support between $220 and $230 has formed. The price has bounced off this level for the last 10 months. The last dip below $200 lasted minutes and within a day the price rallied above $220. The length of this consolidation phase is unknown, but when Bitcoin does reawaken the charts point to an upward bias.

Trade Recommendation:

Buy 25x leveraged October 2015 futures (XBTV15) with spot $235 to $240. The upside target price is $250.

Crypto Trader Digest – Sep 28

Daily 50x Leveraged Bitcoin / USD Futures Contracts

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

Is Bitcoin A Safe Haven Asset?


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

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

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

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

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

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

XBT Futures Term Structure

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

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

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

This trade has positive carry or Theta.

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

Assume that 100,000 contracts per side were traded.

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

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

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

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

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

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

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

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

XBT Spot

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

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

Trade Recommendation:

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

Bitcoin Futures Basis Trading: Lesson 2

*Note: This article explains the 2015 and 2016 futures products. Please go to our product page for the most up to date details.

Lesson 1 explained the time value of money and how to calculate the annualised basis of a futures contract. Lesson 2 will focus on the basis term structure and different ways to profit from curve shifts.

The basis term structure is a graphical representation of the annualised percentage basis for different maturity futures contracts.

Contango Term Structure

For a Bitcoin/USD future, being in contango means that the USD interest rate is higher than Bitcoin’s. Or put another way, traders believe that Bitcoin will appreciate in the future vs. the USD.

Assume there are three futures contracts:

Spot = $250

XBTU15 (September 2015): $260, t = 0.08 (days until expiry, Days/360)

XBTZ15 (December 2015): $290, t = 0.25

XBTH16 (March 2016): $340, t = 0.5

Below is a graphical representation of the upward sloping term structure.

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The best trading strategy for playing an upward sloping yield curve is a carry trade. Selling the longer dated XBTH16 and buying the shorter dated XBTU15 allows traders to capture the interest rate differential. When XBTU15 expires, the trader will purchase the XBTZ15; after XBTZ15 expires, the trader purchases XBTH16 to close the position.

Numerical Example:

T0 days:

Buy 1,000 contracts XBTU15 @ $260

Sell 1,000 contracts XBTH16 @ $340

T12 days:

XBTU15 expires at the spot price of $250

XBTZ15 = $258

XBTU15 Realised PNL = ($250 - $260) * 1,000 * 0.00001 BTC = -0.1 BTC

Buy 1,000 XBTZ15 contracts @ $258 (this replaces the long XBTU15 position)

T30 days:

XBTZ15 expires at the spot price of $250

XBTH16 = $310

XBTZ15 Realised PNL = ($250 - $258) * 1,000 * 0.00001 BTC = -0.08 BTC

Buy 1,000 XBTH16 contracts @ $310 (this closes out the XBTH16 position)

XBTH16 Realised PNL = ($310 - $340) * -1,000 * 0.00001 BTC = 0.3 BTC

Total PNL:

-0.1 BTC from XBTU15

-0.08 BTC from XBTZ15

+0.3 BTC from XBTH16

Total Profit = 0.12 BTC

As time elapsed the trader gained profited more from the fall in XBTH16’s price, than the loss experienced when XBTU15 & XBTZ15 expired. This is called positive carry, or positive Theta. The risk to this strategy is that the interest rate differential between XBTU15 & XBTZ15 or XBTZ15 & XBTH16 increases dramatically when the trader short rolls the position. The trader is short rolling, because he is short the near month contract and must buy it back, and then short the farther month contract to stay hedged against his long XBTH16.

Backwardation Term Structure

For a Bitcoin/USD future, being in backwardation means that the USD interest rate is lower than Bitcoin’s. Or put another way, traders believe that Bitcoin will depreciate in the future vs. the USD.

Assume there are three futures contracts:

Spot = $250

XBTU15 (September 2015): $240, t = 0.08

XBTZ15 (December 2015): $200, t = 0.25

XBTH16 (March 2016): $120, t = 0.5

Below is a graphical representation of the downward sloping term structure:

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The best trading strategy for playing a downward sloping yield curve is a carry trade. Buying the longer dated XBTH16 and selling the shorter dated XBTU15 allows traders to capture the interest rate differential. When XBTU15 expires, the trader will sell the XBTZ15; after XBTZ15 expires, the trader sells XBTH16 to close the position.

Numerical Example:

T0 days:

Sell 1,000 contracts XBTU15 @ $240

Buy 1,000 contracts XBTH16 @ $120

T12 days:

XBTU15 expires at the spot price of $250

XBTZ15 = $240

XBTU15 Realised PNL = ($250 - $240) * -1,000 * 0.00001 BTC = -0.1 BTC

Sell 1,000 XBTZ15 contracts @ $240 (this replaces the short XBTU15 position)

T30 days:

XBTZ15 expires at the spot price of $250

XBTH16 = $163.33

XBTZ15 Realised PNL = ($250 - $240) * -1,000 * 0.00001 BTC = -0.1 BTC

Sell 1,000 XBTH16 contracts @ $163.33 (this closes out the XBTH16 position)

XBTH16 Realised PNL = ($163.33 - $120) * 1,000 * 0.00001 BTC = 0.43 BTC

Total PNL:

-0.1 BTC from XBTU15

-0.1 BTC from XBTZ15

+0.43 BTC from XBTH16

Total Profit = 0.23 BTC

As time elapsed the trader gained profited more from the rise in XBTH16’s price, than the loss experienced when XBTU15 & XBTZ15 expired. This is another example of positive carry or Theta. The risk to this strategy is that the interest rate differential between XBTU15 & XBTZ15 or XBTZ15 & XBTH16 decreases dramatically when the trader long rolls the position. The trader is long rolling, because he is long the near month contract and must sell it, and then buy the farther month contract to stay hedged against his short XBTH16 position.

In the Lesson 3, I will explain some basics about risk management. The terms Delta, Dollar Value of 1% (DV01), and Theta (time value) will be introduced.

Crypto Trader Digest – Sep 21

When Doves Cry


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

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

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

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

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

XBT Term Structure

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

Trade Recommendation:

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

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

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

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

Trade Recommendation:

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

Crypto Trader Digest – Sep 14

WWYD: What Would Yellen Do?

jesus christ

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


jpm finally gets QE

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

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

I will lay out my trading decision tree:

The Fed Doesn’t Hike

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

The Fed Does Hike

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

XBT Futures Term Structure

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

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

Trade Recommendation:

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

A Note About Basis Trading

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

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


XBT Spot

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

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

Trade Recommendation:

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

Renminbi vs. Bitcoin Correlation

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The PBOC shocked the world this summer with a 4% devaluation of the CNY. What was the effect on Bitcoin if any, due to their actions?

The above chart is a time series from early June until early September of USDCNY and BTCCNY ( The USDCNY rate was stable up until the beginning of August when the devaluation began. After the devaluation began, it appears that the two exchange rates were negatively correlated. Traditional economic thinking would suggest that a weaker currency would lead to a higher BTCCNY  rate.

I then calculated the correlation from Aug 30th to September 8th between the two rates. It came to -0.779. A correlation of 1.00 means the two rates move in the same direction and magnitude, and a correlation of -1.00 would means the two rates move in the opposite direction but same magnitude. The observed -0.779 correlation is a relatively strong negative correlation, meaning as CNY weakened and USDCNY moved higher, and the BTCCNY rate moved lower.
There were many external events such as the block size debate that occurred at the same time as the CNY was devalued. This may explain the divergence, but given China is the world’s largest Bitcoin trading market, I would expect the weakening of CNY to have a meaningful price positive impact on Bitcoin. It remains to be seen if as the effects of currency devaluation  will slowly change investors holding preferences for their domestic currency vs. other international risk assets. If you believe that the PBOC has just begun in its race to the bottom, buy BitMEX March 2016 (XBTH16) Bitcoin/USD futures contracts. As investors begin to sell CNY and buy wealth preserving risk assets, Bitcoin will benefit.

Crypto Trader Digest – August 31


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

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

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

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

First They Laugh… Then They Buy

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

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

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

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

Barclays to become first UK high street bank to accept bitcoin

XBT Term Structure

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

Trade Recommendation:

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

XBT Spot: Margin Call

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

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

Trade Recommendation:

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