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

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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

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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

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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 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.

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 14

WWYD: What Would Yellen Do?

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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.

China Devalues Yuan, Bitcoin To Da Moon

In the August 10th Crypto Trader Digest, I predicted the PBOC would devalue the Yuan to regain export competitiveness. Less than 24 hours after hitting the press, the PBOC shocked the market with a 1.9% devaluation. Global macro will be tilted on its head now that the world’s largest export regime is actively engaging in currency debasement.

The RMB is one of the largest globally traded currencies and it’s importance in global capital flows cannot be underestimated. Bitcoin, which is a financial and speculative asset, will be affected as well. Chinese households are now faced with a very painful question, how to protect and grow their saved capital.

Stock market and real estate investments have soured. Households are unable to invest abroad due to capital controls (the elite always could, but I am talking about regular folks). Due to a depreciating Yuan, imported goods will become more and more expensive. They must find a way to convert their paper wealth into real assets that cannot be devalued by the central government. Alternative means of investing will become more and more prevalent. P2P loans, wealth management products, and crypto currency will be three alternative areas where Chinese households will rush to convert Yuan into some form of wealth preserving asset.

The PBOC stated this was a one off devaluation. If anyone believes that, I have a ghost city in China to see you. China is mercantilism on steroids. Kuroda-san’s BOJ printing press will now go into overdrive. Mario Draghi will have no choice but use the cover of Grexit to unlease Euro QE. Each successive devaluation by its exporting peers will be met with force from the PBOC. Chinese speculators recognise this, and they will begin selling and borrowing CNY to buy any risk assets they can get their hands on.

It is time to back up the truck and buy buy buy Bitcoin. The $40 fall from $300 is a blessing. Coins can now be bought at much cheaper levels. To obtain long exposure, buy BitMEX December 2015 futures, XBTZ15.

Crypto Trader Digest – August 3

BitMEX Happenings

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

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

BitMEX To Launch Litecoin Futures


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

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

The Dog Days of Summer


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

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

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

Ethereum: Vapourware No Longer


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

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

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

Bitcoin Leveraged Loans


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

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

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

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

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

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

Weekly Review: Bitcoin Investment Products



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


XBT Spot

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

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

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

Trade Recommendation:

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


Crypto Trader Digest – 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?


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 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

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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


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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.