Crypto Trader Digest – July 20

Slow Motion Banking Collapse

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

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

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

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

Liftoff

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

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

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

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

Strategy 1:

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

Trade Recommendation:

Buy XBUZ15 (25 December 2015) futures contracts.

Strategy 2:

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

Trade Recommendation:

Buy XBUZ15 futures contracts. Short sell spot Bitcoin.

Strategy 3:

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

Trade Recommendation:

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

Weekly Review: Bitcoin Investment Products

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

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

XBT Spot

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

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

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

Trade Recommendation:

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

Bitcoin Is Under Pricing Grexit

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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.

Bring On The Weekend: Grexit & China QE

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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

BitMEX Happenings

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

 

The PBOC Is Taking Over From The Fed

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

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

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

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

Trade Recommendation:

Buy XBTZ15 (25 December 2015) futures contracts.

 

How Would A Greek Use Bitcoin?

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

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

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

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

Will Greeks use Bitcoin as a store of value?

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

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

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

Will the Greek government use Bitcoin as their national currency?

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

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

 

Weekly Review: Bitcoin Investment Products

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

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

 

XBT Spot

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

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

Trade Recommendation:

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

Crypto Trader Digest – June 22, 2015

BitMEX Happenings

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

 

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

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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

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

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

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

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

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

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

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

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

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

 

Is Litecoin The Bitcoin Oracle?

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

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

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

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

 

XBT Spot

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

— CeCe Peniston

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

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

Trade Recommendation:

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