Crypto Trader Digest – August 10

Bye Bye, New York State

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I am sad to announce that due to Bitlicense, BitMEX will cease to service New York State residents. Residents of New York State will be barred from accessing BitMEX as of August 16 12:00 GMT. Affected users must close all positions and withdraw any Bitcoins held with BitMEX. Users who are unable to access their accounts after August 16th, can email support@bitmex.com to request their positions be closed at prevailing market prices, and their remaining Bitcoin balance withdrawn to a Bitcoin address of their choice.

BitMEX Launches World’s First Ethereum Derivative

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Last Friday, Ether (the token powering Ethereum smart contracts) began trading on selected exchanges. Traders smart enough to buy at the IPO price were immediately up 20x on their investment. As expected, many attempted to rush for the exit and crystalise a profit. The problem was that exchanges were not crediting Ether balances and allowing traders to sell.

The launch of the BitMEX Ether / Bitcoin Weekly Futures Contract (ETH7D) coincided with spot trading launch. Because Bitcoin is used as margin, traders can short Ether and lock in their profit without depositing Ether with BitMEX. ETH7D immediately began trading at a substantial discount to spot. ETH7D represented the only mechanism for true price discovery of Ether’s value. The chart above illustrates this point. As each successive wave of Ether deposits were allowed to be sold, spot gapped down attempting to reach the level of ETH7D.

Holders of Ether from the IPO who have not liquidated yet are still in the money. Given the technical problems associated with the launch of new cryptocurrencies, it is likely that transfers and the sale of Ether for Bitcoin or USD could be halted again. ETH7D represents the only way for holders of Ether to lock in a Bitcoin profit.

Here is how to execute the hedge:

  1. Each ETH7D contract represents 1 Ether (ETH). The contract references the Kraken ETHXBT exchange rate and profit and loss are denominated in Bitcoin.
  2. If you bought 10,000 ETH at a price of 0.0005 ETHXBT at the IPO, you must sell 10,000 ETH7D contracts to lock in your profit.
  3. If ETH7D trades at 0.0025, you have locked in a profit of (0.0025 – 0.0005) * 10,000 = 20 XBT.
  4. BitMEX allows 5x leverage for ETH7D. You must deposit 20% * 10,000 * 0.0025 = 5 XBT as margin to place the sell order.

BitMEX ETH7D futures are not purely a speculative product, but have uses for ETH holders who wish to hedge their holdings. If you have any questions about how to hedge your ETH IPO allocation, please contact us.

Global Macro Musings

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Germany, Japan, South Korea, and Taiwan, listed in order of importance, are four of China’s largest export competitors. The commonality amongst these countries is the race to the bottom in terms of currency debasement. While the Greek drama has torpedoed the Euro, the German export juggernaut is humming along as EURUSD has fallen from 1.5 to under 1.1. Kuroda-san and his BOJ have trashed the Yen from 80 to 120 in the last two years.

Xi Jinping and the politburo recognising the challenges facing the Chinese economy, are attempting to engineer a transfer of wealth from heavy investment industries into the hands of households. The chief conduit of change is removing the implicit subsidy of an undervalued Yuan. The Yuan is on a tear vs. the global major trading currencies, the USD, EUR, and JPY.

Unfortunately, the world economy isn’t cooperating with China’s rebalancing strategy. World trade is faltering and the commodity complex is imploding along with it. People don’t want more stuff, and China’s growth rate by some estimates has fallen to sub 5% (the official GDP is 7%, but no one believes those numbers). NPLs are rising and deteriorating local government finances have forced the PBOC to warehouse more and more toxic paper. At some point China will have to respond tit for tat vs. its major trade partners to recover some competitiveness and provide succor to its economy by devaluing the Yuan.

Chinese households that experienced a rise in global purchasing power will not sit quietly during a devaluation. They will invest / speculate on goods they believe will protect their wealth. Bitcoin is one piece of the puzzle. While it is not an income bearing bond or asset, Bitcoin cannot be devalued by diktat. When RMB begins to flood the Middle Kingdom, it will find its ways into various non-standard assets and cryptocurrencies will benefit. The Litecoin ponzi scam will be the tip of the iceberg. A desperate population is prone to believe many tall tales, and promoters will capitalise on this desperation and greed.

Quantifying Quanto: XLT7D

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BitMEX launched the world’s only Litecoin futures contract that uses Bitcoin as the margin, profit, and loss currency last Wednesday. Because traders are accustomed to trading the LTCUSD exchange rate, we decided to apply a Bitcoin multiplier to the LTCUSD exchange rate. As a result, XLT7D is classified as a quanto futures contract. Many users are still confused as to the implications of quanto vs. non-quanto futures contracts from a pricing perspective. I intend to walk readers through a simple example meant to illustrate how to properly price the quanto risk premium.

Assume that a trader has gone short XLT7D futures contracts. He is now short Litecoin, long USD, and his profit will be in Bitcoin. He decides to hedge his short LTC exposure by buying LTC on the spot market. His LTC and USD exposures as it relates to price movements are now hedged. However, his XLT7D pnl is denominated in Bitcoin while his LTCUSD pnl is denominated in USD. If LTCUSD rises he will be short XBTUSD from a pnl perspective, and if LTCUSD falls he will be long XBTUSD.

The question now becomes, what is the covariance between LTCUSD and XBTUSD. Covariance measures the degree to which two assets move together. I took daily log returns of XBTUSD and LTCUSD from Bitfinex and calculated the covariance over a 30 day period. The result was a positive covariance of 0.068% or 6.8 basis points. Therefore, XLT7D should be priced 6.8bps cheaper than LTCUSD. The adjustment is so small that it can be safely ignored. Traders can treat the quanto XLT7D future as they would a LTCUSD future. The upside is that XLT7D’s settlement currency is Bitcoin, which doesn’t necessitate the holding of Litecoin or USD.

XBT Futures Term Structure

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When I used to be an ETF market maker, there was nothing more exhilarating than taking a large outright position in particular stock. I used to run overnight mean reversion strategies in certain ETFs between the NY and Asian time zones. I would wake up with substantial deltas and have to close out at market open. That only occupied me for a few hours each day. More fun and risk was to be had, playing basis curves between various equity index futures. Now that there is more volume going through BitMEX’s XBT series contracts, curve trades can be executed.

I will begin posting the WoW changes in the XBT futures term structure. The term structure illustrates the % basis per annum each maturity futures contract is trading at. I take a 24 hour average of the % annualised basis each Sunday. Traders who do not wish to predict the outright movement of Bitcoin, may instead trade the relative movement in the term structure.

The curve experienced a parallel shift downwards WoW. To sell basis or go short interest rates, traders would need to sell XBT futures contracts and buy spot. As the spread narrows, unwind the trade for at a profit.

XBT Spot

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The downdraft I had called for finally occurred. A swift fall took the price to $260. The all-important support level held, and now the $260-$270 chop has begun. The Grexit premium has all but evaporated. The $300 bag holders can now hold a “cheap coins” symposium on an r/bitcoin thread.

$260 will be tested again. Failure to hold that level will most likely result in a retest of $220. If Bitcoin can hold firm during the final days of August, the return of traders from summer holiday should buoy the market.

Trade Recommendation:

Sell XBTQ15 while spot is above $265 with a near-term target price of $260. If that breaks, the next target is $240.

 

 

 

BitMEX Launches 15x Leveraged Litecoin Futures

BitMEX is proud to announce the launch of the world’s first Litecoin futures contract margined in Bitcoin. There is no need to hold Litecoin in order to trade / speculate on the Bitfinex LTCUSD exchange rate.

Contract Specifications

Ticker Symbol: XLT7D, The BitMEX Weekly Litecoin / USD Futures Contract

Traders gain or lose 0.001 Bitcoin per $1 movement in the Bitfinex LTCUSD exchange rate.

The contract settles every Friday at 12:00 GMT.

Trade with leverage of up to 15x. Margin, profit, and loss are all denominated in Bitcoin.

For more details, please read Series Guide: XLT.

Weekly Expiring XBT Contracts

Due to customer demand, BitMEX is introducing a weekly expiring XBT contract. The Speculation or XBT series of Bitcoin / USD futures contracts allow leverage of up to 25x.

Ticker Symbol: XBT7D, The BitMEX Weekly Quanto Bitcoin / USD Futures Contract.

Traders gain or lose 0.00001 Bitcoin per $1 movement in the Bitfinex BTCUSD exchange rate.

The contract settles every Friday at 12:00 GMT.

For more details, please read Series Guide: XBT.

Advanced Order Types

Stop Limit orders will be available starting next week. If there are additional order types that you require as a trader, please let us know.

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

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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

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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

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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

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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

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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.