Bitcoin Futures Basis Trading: Lesson 2

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.

image (11)

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:

image (10)

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

image (8)

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.

Screen Shot 2015-09-21 at 4.28.26 pm

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

Screen Shot 2015-09-14 at 3.53.28 pm

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

image (2)


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

Screen Shot 2015-09-14 at 3.24.02 pm


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.

Crypto Trader Digest – Sep 7

Brokedown Palace: EM FX

BROKEDOWN PALACE, seated front from left: Claire Danes, Bahni Turpin, 1999, TM & Copyright © 20th Century Fox Film Corp.


As a Hong Konger with essentially USD (HKD is pegged to the USD), my travels around Asia have gotten much cheaper lately. The Chinese started the party by devaluing the CNY. Subsequently traders took the hammer to emerging market (EM) currencies and many worry a repeat of the 1997 Asian Financial Crisis is upon us.

Talk about volatility, a few weeks back Kazakhstan decided enough was enough and let the Tenge (its currency) fall by 22% in one weekend, annualise that! Meanwhile sleepy Bitcoin has been locked in a tight trading range, and volatility is at historic lows. If Empress Yellen decides to raise rates, the EM FX complex will take another drubbing.

Many EM countries and corporates issue debt in USD not their local currency. Investors understandably don’t want EM FX exposure. Many of these countries are either goods or commodity exporters. The current world economy is characterised by slowing world trade, falling demand for industrial commodities, and a strong dollar. This toxic mix ensures that EM countries and corporates will struggle to pay back USD denominated debt. FX traders see the structural balance of payments problems and continue dumping EM currencies, further exacerbating the problem.

Governments valiantly fight against the global markets by selling down their FX reserves of USD denominated assets. Notable examples are China and Saudi Arabia. At some point smaller nations will have to throw in the towel and allow their currencies to weaken drastically. Regular citizens need not sit back and watch their purchasing power destroyed. Diversifying a portion of their wealth into Bitcoin now, is an intelligent decision. Non-USD Bitcoin exchange rates will begin trading a substantial premiums reflecting the market’s view on the future devaluation that will occur in a particular currency. Get out now while the getting is good.

For readers who are in EM countries and can trade deliverable FX forwards here is a trade idea:

  1. Buy Bitcoin, sell USD at one of the big global exchanges.
  2. Sell Bitcoin at a premium, buy your local EM currency. You now have EM currency that you need to convert back into USD.
  3. Buy a deliverable forward (DF). You will deliver EM currency and receive USD when the DF expires. Now you have USD, wash, rinse, and repeat.
  4. The premium that Bitcoin trades to your local currency must be greater than the premium on the DF for this trade to work.

Tongzhimen Hao (Greetings Comrades)



The whole world now hums to the tune of Zhongnanhai. Xi Jinping put on a powerful parade last Thursday commemorating their “victory” (read: the US and Russia saving their ass) in WWII. However the markets didn’t care, and the Shanghai Composite closed down over 2% today. In addition they continue to fix the CNY stronger, which necessitates the PBOC to sell even more US Treasuries to support their currency.

Bitcoin traders should be watching the China equity, FX, and rates markets like a hawk. Knowing the change in the daily PBOC fix of USDCNY is a must. Up until now the beauty of day trading Bitcoin was that the fundamentals (if there are any) mattered little. The ability to correctly read a chart and the human emotion it conveyed easily conveyed profits upon the punter. As a global financial catharsis courtesy of China is at hand, clueless traders will be caught out by economic data points. Dust off that textbook and educate yourself before you rek yourself.

They keys data points are:

USDCNY Exchange Rate
Daily change of the Shanghai Composite
The 10yr US Treasury Yield

Dramatic changes in any of these variables will begin to have a noticeable impact on Bitcoin just like they do for gold.

XBT Term Structure


The curve shifted slightly lower in the past week. Given the price rise, this is surprising. The non-linear return in USD for being long the XBT series futures should have lead to an increase in their premium over spot. Long-end futures (Dec15 XBTZ15 and Mar16 XBTH16) look very cheap. If the rally continues and enters the fomo phase, the long end futures will become much more expensive. Traders who wish to profit from a parallel shift upwards due to a rising price should buy XBTZ15 or XBTH16.

XBT Spot: Breakout

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The sleepy 4-day holiday weekend in China culminated with a breakout on Sunday (it was a working day). Bitcoin broke through $230 and traded as high as $248 on Bitfinex. Now the price languishes at $240.

The rally started at $200 and the channel will culminate at $260. $260 is where the previous breakdown in price occurred. Expect price to stall at $240 and trade down into the mid $230’s. If $235 is broken on the downside consider this rally over and ride the rollercoaster back to $220. If $235 can hold, the rally can continue to stair step higher to $250 then $260.

The resistance at $260 will be fierce and in the absence of a new development, the price will not ascend this mountain. China continues puking even after the government has sounded the all clear. Expect more gyrations in the financial markets that could be very positive for Bitcoin if investors view it as a new safe haven.

Trade Recommendation:

Buy XBTU15 (BitMEX weekly Bitcoin/USD futures contract) while spot is $235-$240. The upside target is $255-$260.



比特币本周主要徘徊在$225-$230. 而Bitfinex的借贷市场并没有出现明显与做多或做空方的差异。

情况 1: 上破 $235

有交易量地上破$235后会快速上升至$240 ~ $250.

情况 2: 下破 $220

有交易量地下破$220 后的目标是$200. $200 可说是半个金刚底,跌穿的机会比较少,期望弹回大约$210 的价位




购买BitMEX的25倍杠杆期货(XBTU15) 如果现货上破$235,目标价$250.

沽空BitMEX的25倍杠杆期货(XBTU15) 如果现货下破$220, 在$200平空反手做多,目标价$215.

The World Is On Holiday, Time For A Bitcoin Dump Or Pump

This weekend culminates the end of summer, and China’s 70th anniversary of its victory over Japanese aggression. China the most important market in terms of Bitcoin trading has a four day holiday until Sunday September 6th. This weekend is Labor Day weekend in America and Monday September 7th is a bank holiday.

While the majority of the world’s traders are watching national propaganda parades and grilling burgers, the Bitcoin market will remain open. The thin liquidity presents the perfect opportunity for a market operator to push the market aggressively in one direction using little capital. If I were to conduct a bear raid or short squeeze, I would choose this weekend to execute the operation.

Bitcoin has been trapped in a $225 to $230 range during this week’s trading. The Bitfinex swap market does not point to any gross mismatch between leveraged longs or shorts. When Bitcoin breaks out of this range the movement will be swift and momentum traders will be able to join the ride.

Scenario 1: A break above $235

A solid break above $235 on above average volume will lead to a swift move through $240 to $250.

Scenario 2: A break below $220

A solid break below $220 on above average volume will lead to a swift move downwards towards $200. $200 is unlikely to fall again, and another swift rebound to the high $210’s is expected.


The optimal time to execute the strategy would be Saturday. US traders will be settled in on their long weekend holidays and this is the last day of the China holiday. This will be the lowest level of liquidity this weekend. It will be very easy to push the market and ignite the momentum bots to follow the trend.

Trade Recommendation:

Buy BitMEX September 25x leveraged futures (XBTU15) if spot breaks above $235. The upside target price is $250.

Sell BitMEX September 25x leveraged futures (XBTU15) if spot breaks below $220. Cover the short at $200, then go long with an upside target price of $215.

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

image (1)

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.

Crypto Trader Digest – June 1

BitMEX Happenings

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

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

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


Bitcoin Implied Volatility Surface

image (2)

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

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

Trade Recommendation:

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


Weekly Review: Bitcoin Investment Products


image (1)

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


XBT Spot

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

Trade Recommendation:

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