Crypto Trader Digest – Feb 2

You Like It Hard Or Soft, Baby?


Core, Classic, Hard Fork, Soft Fork, SegWit, …the number of terms and proposals released regarding the block size debate has become daunting. We traders are simple creatures. Whether hard or soft, the word fork doesn’t sound auspicious.

As the debate drags on with no implemented solution, the upper ceiling on Bitcoin’s short term price hardens. Since the Bitcoin Hearnia, the price has been unable to hold $400. The $350 to $400 range holds true, and absent a macro economic catalyst the risk of a break below $350 and a retest of $300 grows.

While I believe in the soundness of my Yuan devaluation call, I would not take long term outright long positions. The flurry of technical announcements have usually been price negative as the community further divides.

The addition of leverage is both a blessing and a curse. Using BitMEX futures contracts to construct spread or arbitrage trades and adding a healthy dose of leverage is the preferred strategy in these choppy times.

2016 will witness bans on physical cash, negative interest rates, and competitive devaluation. These trends are all net positive for Bitcoin. Use the dips in the market to go long volatility and interest rates. Buying BitMEX quarterly (XBTH16) or bi-quarterly (XBTM16) futures contracts vs. shorting the weekly (XBT7D) contract is an appealing spread trade. The negative carry of the long dated futures contracts can be covered by selling XBT7D and short rolling week to week. The strategy is price neutral and benefits if volatility and or interest rates rise. Volatility and interest rates will rise during a sustained upward Bitcoin rally, especially if there is a shocking macro economic development precipitating the price movement.

We recently concluded our series of arbitrage webinars. Over the course of four lessons, I explained the basics of arbitrage and basis trading on BitMEX. Please visit the BitMEX YouTube Channel to view the lessons.

Gepetto’s Children


Central bankers are well-paid liars. Last week the BOJ inflicted max pain on JPY longs when they announced negative interest rates. In the weeks leading up to the policy change, Kuroda-san stated that the BOJ would not go negative in the near future. After sippin’ bubbly in Davos, he had a change of heart and decided to cross the Rubicon.

This action confirms the futility of QE. Japan has suckled on the money-printing teet for over two decades. The results: an economy stuck at 0% growth. Even with the gobs of money floating in Japan, the Nikkei has still failed to retake its 1989 high. Faced with failure, they entered the last stage before helicopter money: NIRP. Two of the four most important central banks now employ NIRP (ECB and BOJ). The Fed hasn’t joined the party yet, but that is probably only one presidential election away. Trump or Sanders may not like the fed, but Grandma Yellen still has two years left. If the S&P 500 touches 666 again, you can bet the Fed will roll out all the stops to keep the dream alive.

The PBOC joined the party late, but they are ginning up Mao’s printers. As the calls for a Yuan devaluation crescendo, the PBOC holds steadfast that the Yuan will not devalue. They even trolled George Soros in the People’s Daily for even hinting that he might short the Yuan. China does not have the time or political will to internally devalue by firing millions of migrant laborers, and allowing SOE firms to fail. The Yuan must and will devalue.

Now that two of China’s biggest export competitors are trashing their currencies in hopes to export deflation and goods abroad, China must respond forcefully. The PBOC has been busy abusing Yuan shorters and closing the gates on the obvious ways that capital flees the country. The legal yearly limit for FX is $50,000 per comrade. China has $3.3 trillion in reserves. It would take only 5% of China’s 1.3 billion population to convert their legal amount of Yuan into a foreign currency for the reserves to be depleted this year. There is no way but down.

The PBOC attempted the slow and steady approach. However, unpatriotic comrades began front running them, as evidenced by the widening gap between CNH and CNY. The PBOC then went nuclear on CNH shorts by cornering the spot market and kicking foreign banks out of the onshore market. All the while proclaiming, all is good and no further devaluation will occur. Liar liar pants on fire!

The PBOC will orchestrate a China style devaluation, big, bold, and in your face. It will happen when people least expect it, or are least prepared to react. The Chinese New Year holiday presents an excellent opportunity to shock the markets. Going long XBTCNY vs. short XBTUSD with futures, spot, or a combination of both is an asymmetric bet. Worst case, the PBOC keeps the Yuan stable and continues to bleed FX reserves. Best case, the PBOC devalues big and Bitcoin goes nuts.

If you place trust in Gepetto’s Children, I have an apartment in Ordos to sell you.

China Warns Soros Against Starting A Currency War: “You Cannot Possibly Succeed, Ha, Ha”

Crypto Trader Digest – Jan 11

Yuan Devaluation Math

China FX teller_0

MingPao, the most widely read Chinese language newspaper in Hong Kong, reports that Shanghai residents are queuing up at FX dealers to convert RMB into USD before further devaluation occurs. Simon Black reports that Chinese are buying .com domain names as a way to legally transform RMB into more stable currencies. Reuters reports that PBOC policy advisors suggest a 10%-15% sharp and immediate devaluation.

No one in China is under any illusion that the CNY will hold steady. But I thought China was Scrooge McDuck rich?; China’s official FX reserves total $3.3 trillion. However, analysts believe that $2.8 trillion of that is pledged to other liabilities. Coupled with over $100 billion per month of capital flight and rising banking non-performing loans (NPLs), China is out of cash.

Kyle Bass of Hayman Capital Management believes shorting the Yuan is the slam dunk trade of 2016. The effects of the most aggressive credit expansion since the 2008 GFC are bearing spoiled fruit. Bass warns that China’s “neutron bomb” is its banking system. The state owned banks (SOE) were forced to lower underwriting standards to lend to SOE’s for a variety of industrial products that are not profitable. The rise in NPLs must be absorbed by the central government via the banking system. Bass notes a rise of the official 1.5% NPL ratio to 20% would result in a $3.0 trillion charge.

Aggressive currency debasement and interest rate cuts are the only policy levers left. As the citizenry realises that jobs will be lost and prices will rise, they will search for anything that holds value and or can be sold abroad to receive a stable currency.

The price of Bitcoin is set in Yuan. The Bitcoin premium has compressed lately. In Q1, expect increased volatility and the beginnings of actual cash from China finding its way into Bitcoin. To date, most of the price action has come from speculators front-running this tidal wave of Yuan. When cash buyers return to Bitcoin after a 2.5 year hiatus, the price action will be legendary.

Patient traders should begin accumulating positions in longer dated BitMEX futures contracts. Buying March 2016 (XBTH16) or June 2016 (XBTM16) are great ways to benefit from rising volatility and price.

Pressure on China central bank for bigger yuan depreciation: sources

China Finds $3 Trillion Just Doesn’t Pack the Punch It Used To

For Kyle Bass This Is “The Greatest Investment Opportunity Right Now”

Meanwhile In Shanghai Residents Form Lines To Sell Yuan, Buy Dollars

Here’s the ultra-clever way that Chinese are circumventing capital controls

Chinese Capital Markets Timetable

Bitcoin will react to movements in both the Chinese FX and equity markets. Any serious trader should know the key opening and closing times of these respective markets.

All times are Beijing local time, GMT + 8.

Daily PBOC USDCNY Fixing

The PBOC fixes the inter-bank USDCNY rate each morning at 9:15am.

CNY Onshore Trading Hours

9:30am to 11:30pm

CHH Offshore Trading Hours

CNH trades 24/5

China A Share Market

9:15am – 9:25am Call Auction

9:30am – 11:30am Continuous Trading

1:00pm – 3:00pm Continuous Trading

PBOC daily fixing

Live index prices from the Shanghai Stock Exchange

Bitcoin Implied Yuan

image (11)

An interesting relationship appeared to me while I was looking at XBTCNY, USDCNY, and USDCNH. If we derive the Bitcoin implied USDCNY rate by dividing XBTCNY by XBTUSD, does this implied Yuan follow the CNH movements? Remember that CNH is the offshore Yuan, and generally is a leading indicator of where USDCNY will fix onshore as trading of USDCNH is not as manipulated by Beijing as USDCNY. To get a clearer picture, I graphed the spread between the Bitcoin implied Yuan and CNH against the daily change in the XBTCNY price.

The graph above shows this relationship. The two variables track well until this past weekend. The Bitcoin implied Yuan is trading cheap to CNH. Given the CNH level and expectations of further devaluation, Bitcoin is trading cheap in China.

The appropriate trade is to go long the Bitcoin premium in China and hedge out the Bitcoin price risk. To do that, sell BitMEX 50x leveraged weekly Bitcoin / USD futures (XBT7D) vs. buy XBTCNY. XBT7D trades at a premium; therefore the trade has positive carry. For users who do not have CNY with which to buy Bitcoin, BTCC allows users to wire USD into their HK bank account and they will change into CNY and allow you to trade.

BitMEX Arbitrage Webinar Lesson 2

24x10 - Bart

Thank you to everyone who tuned into Lesson 1 last Friday. Lesson 2 will air this Wednesday 13 January 03:00 GMT.

Lesson 2 Topics:

  • Cash and Carry Arbitrage
  • Volatility Arbitrage

Lesson 2 Live Broadcast Link

Lesson 1 Recording

Lesson 2’s slide deck and spreadsheets will be provided on our blog and via email prior to Wednesday.


The Most Important Chart In Bitcoin

image (7)

The PBOC is back at it again. Today they devalued the Yuan by the most in 2 months. Their first shock and awe campaign sliced 4% off the Yuan’s value vs. the USD. Then the PBOC sold US Treasuries to support the CNY in the open market.

Since August, the PBOC has been hard at work stemming the enormous flow of capital fleeing China. The $50,000 per year FX limit is beginning to be enforced by banks. There is now a yearly 100,000 CNY limit on overseas UnionPay withdrawals. And I have heard anecdotal stories about the closure black market CNY / HKD money changers in China and Hong Kong.

Today’s action might be the resumption of the devaluation trend the PBOC embarked upon this summer. With the closure of the easy, cheap, and convenient ways to squirrel cash out of China, Bitcoin becomes more attractive. If Bitcoin emerges as a legal means to export capital out of China, the premium for it onshore in China will rise.

In my post China Bitcoin Premium Points To Moon, I presented a one month chart of the Bitcoin premium (OKCoin XBTCNY vs. Bitstamp XBTUSD) starting August 30th. The above chart is an extension of that time series. The premium dipped to 1%, but during the recent rally has resumed its climb above 2%. If this premium continues to rise above 5%, then we know China truly appreciates Bitcoin’s potential as a means of wealth preservation.

If the PBOC renews its devaluation of the Yuan, watch this chart closely. A lot of money through a small door will spell riches for those positioned correctly.

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.