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Crypto Trader Digest

November 17, 2014
Arthur Hayes
Co-Founder & CEO

BitMEX Launch Date

BitMEX, the world's first centrally cleared Bitcoin derivatives exchange, will go live on Monday, November 24, 2014. We will send out further announcements in the coming days. 

A few BitMEX team members are attending the Slush conference in Helsinki November 18 - 19. If you will be there, email us at

Counterparty Risk

This past week, due to bankruptcies, BitVC (Huobi) deducted an incredible 46.1% from the winners on their 14 November 2014 futures contract. 796 taxed 25.01% on their BTC contract expiring 15 November 2015. OKCoin taxed 5.15% on their BTC1114 futures contract. Are these products suitable for businesses hedging real world currency risks? Absolutely not. For arbitrage traders, if the profitable side of your hedge is exposed to ex post taxation from the exchange, spread trading becomes a dangerous game. As a gambling product they are almost acceptable; however, even the casino pays in full on winning bets. The exchanges socialise losses in order to offer aggressive leverage without any material capital risk to their operations.

When potential investors or clients of BitMEX ask what differentiates BitMEX from other derivatives exchanges, I thump my chest and scream "Counterparty risk!" BitMEX stands behind all trades. Every other exchange taxes winners to cover potential exchange losses. On traditional derivatives exchanges, part of the trading fee goes to cover this risk. Not so with Bitcoin, where the current crop of exchanges pocket the fee and still tax winners. That's right - they offer incredible leverage (up to 20x!). With 20x leverage, bankruptcy is only a 5% move away. This is incredibly risky on contracts that can move as much as 20% in a day. These exchanges then enjoy the increased fees gained by their increased leverage and offload the risk onto their users. It may seem that fees are low, but your profits are subject to tax on the backend. Many in the Bitcoin community have not noticed. The losses are not visceral yet. Due to the recent price gyrations, I can point to the magnitude of the Winner's Tax using a real, recent, and painful example.

BitMEX takes the complete opposite approach. BitMEX centrally clears all its derivative products. On a centrally cleared exchange, the exchange faces both buyer and seller as the central counterparty. In the event that one side goes bust, the exchange steps in and makes good on its obligations. BitMEX will be the only Bitcoin derivatives exchange offering this protection. Because BitMEX is the only exchange offering this, it is the only derivatives exchange where one can truly hedge. Our number one focus is risk management because we have skin in the game. As a result, the amount of leverage offered on our products is lower and the attention paid to margin policy is heightened. For example, instead of liquidating entire positions using market orders, during a margin call we incrementally liquidate positions. Liquidation stops once a trader's equity has recovered to the mandated level. Traders can live to fight another day instead of being completely wiped out from a temporary dip or peak.

Our Chief Risk Officer (CRO) is responsible for determining the amount of leverage offered and implementing margin policy. Using Standardised Portfolio Analysis of Risk (SPAN) scenario analysis, the CRO changes different pricing inputs to determine possible losses to traders' portfolios and adjusts the exchange's margin policy accordingly.

When the price of Bitcoin can go from $380 to $475 and back to $380 in 24 hours, counterparty risk becomes non-trivial. Choose your exchange wisely, and make sure you understand completely how the exchange conducts its margin policy.

Settlement History: OKCoin, 796, BitVC

The Day Money Died

Why the hyperbolic title? Yesterday the G20 announced that bank deposits are now fair game for bail ins. Remember Cyprus in April of last year, that was a bail in. Depositors with over 100,000 Euros took a haircut on their bank deposit IOUs to satisfy a capital shortfall of the country's largest banks. Most governments guarantee deposits up to a certain amount, but how sure can you be this won't change under the stress of a financial meltdown? The next Lehman event won't be papered over with central bank QE, but with your hard earned wealth. Bank deposits will rank quite low on the capital structure and during a credit event will become illiquid and trade at a substantial discount to par.

The smart money will convert bank IOU's into hard physical cash. However, storing physical cash is troublesome. Massive plats of 500 Euro notes or Benjamin's are a nice easy target for thieves (insert your Government of choice), and the logistics of moving that amount of physical wealth is no small feat. If too many people act intelligently and express a preference for physical cash vs. bank deposit IOUs, a bank run will ensue.

The even smarter money will move to a store a value that can be accessed anywhere globally and requires no physical storage; Bitcoin can serve these individuals. Bitcoin allows the creation of a personal bank accessible anywhere with an internet connection. The writing is on the wall, and those who sell first win.

Source: Russell Napier

XBT Spot

Up down, round and round the market goes. We all were taken for a roller coaster ride over the past few trading days. The markets quickly moved from $380 to $486 and back down again. One day can make your whole month or year as a trader; it pays to be prepared. In Bitcoin that means having fiat cash and Bitcoin strategically placed across the most liquid exchanges.

I averaged the hourly XBTUSD price on OKCoin, Bitfinex, Bitstamp, and BTC-e from 11 November 2014 07:00 UTC to 14 November 2014 05:00 UTC. The data is courtesy of I then took the observed average price for that hour and subtracted the mean. The result is the above graph which shows the degree to which one exchange's price deviated from the global average in USD. Traders who had fiat cash deposited on the three largest exchanges outside China were able to arbitrage easily. The key was to have fiat already sitting on the cheap exchanges. The arbitrage disappeared in under 24 hours, which meant that if you noticed the arbitrage and sent banking wires, by the time they reached the exchange one to three business days later the differential had evaporated. Be prepared!


The most noticeable change in the term structure over the last two weeks is that short-term rates have begun to rise. Given the recent price collapse, borrowing USD to buy Bitcoin is becoming attractive. During the recent run up above $400, USD swap rates on Bitfinex have spiked from around 8bps per day to 50bps to 80bps per day. They have since settled around 15bps per day, which represents a doubling of funding costs for speculative positions.

Trade Recommendation 1:

Buy one month or shorter maturity futures contracts vs. short selling XBT spot. As the margin trading USD borrowing rates rise, one month basis will rise in line due to interest rate parity. As USD swap rates rise, instead of borrowing USD and margin trading, traders can borrow USD cheaper through buying futures contract. This process will cause the implied USD rates to equalize between the two leveraged products. 

Trade Recommendation 2:

Go short 1M vs. 3M to 6M calendar spreads. Remember selling a calendar spread involves going short the far month and long the near month. The short end rates will react much faster to the renewed speculative interest on the long side. Long end rates will follow but given the relative illiquidity vs. 1M futures, the curve will become inverted. At expiry of the 1M future, unwind the trade by selling the 3M or 6M futures contract. Due to the greater time value in longer dated futures, as soon as the long end begins to react in a meaningful way the initial unrealised profit will evaporate quickly.

XBTUSD Upside Call Options

The violent surge through $400 has brought the bulls out of hiding. The fall / winter of 2014 witnessed some truly amazing upside volatility in the Bitcoin price. Timing the shift in the volatility paradigm via options strategies can payoff very handsomely.

Above is the BitMEX Totem 11 November 2014 implied volatility (IVOL) surface for XBTUSD options. The 120% strike bucket is of interest. Remember a 120% strike option is an out of the money call option. The difference between 1M and 3M IVOL is only 5 vols (75.00% vs. 80.25%); given how violently Bitcoin can and does move, 3M 120% IVOL looks cheap. The 27 February 2014 XBTUSD 550 Strike Call is of interest. The 27 February 2015 XBTUSD at the money forward is $454.99, using a 15% per annum basis and spot reference of $436. The IVOL is 80.25%, and the risk free rate used is 5%. 

 Cost: $45.83 or 10.07% [$45.83 Premium / $454.99 ATMF]
 Delta: 0.4601
 Gamma: 0.002
 Vega: 94.06
 Theta: -0.3751
 Rho: 0.4035

To play the upside, the trade works. To cheapen the trade, sell an 80% strike put. Downside puts currently are more expensive in IVOL terms that upside calls. A 27 February 2014 XBTUSD 350 Strike Put with an IVOL of 88.75% has a premium of $33.96. Combine the long call vs. the short put.

 Action: buy 1 call, sell 1 put
 Cost: $45.83 - $33.96 = $11.87 or 2.61% [$11.87 Premium /  $454.99 ATMF]
 Delta: 0.4601 - -0.2123 = 0.6724
 Gamma: 0.002 - 0.0014 = 0.0006
 Vega: 94.06 - 70.70 = 23.36
 Theta: -0.3751 - -0.3253 = -0.0498
 Rho: 0.4035 - -0.3792 = 0.7827

Constructing the trade in this fashion has benefits. The cost of the trade is reduced by a factor of 4. As the price trades upwards, skew will increase i.e. OTM call IVOL will increase faster than OTM put IVOL. Vega is still positive, therefore rising skew will increase profit.

Trade Recommendation:

Buy 27 February 2014 XBTUSD 550 Strike Calls and possibly sell 27 February 2014 XBTUSD 350 Strike Puts in a 1:1 ratio.
Image Sources: The TelegraphHuffington Post
Data sources: Investing.comBitcoinity

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