Crypto Trader Digest – Oct 19

BitMEX Smashes Volume Records

rankings

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?

Sunbeam-on-Deep-Water-HD

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 – 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?

fully-stocked-swiss-bank-safe-10776

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.

image (1)

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

image (1)

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

Screen Shot 2015-09-28 at 6.01.07 pm

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.

Crypto Trader Digest – Sep 21

When Doves Cry

Prince-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, Wrong.com. 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.