Crypto Trader Digest

October 6, 2014
Arthur Hayes
Co-Founder & CEO

BitMEX Happenings

The BitMEX Trading Challenge II has ended. We are now hard at work putting the final touches on the exchange for our official launch later this month. More details about the launch will be forthcoming in the following weeks.

Tomorrow October 7th, I will be leading a seminar on Bitcoin trading at the Mobile Wallet Asia conference in Singapore. For more information, please visit the conference website.

XBT Spot

Euphoria struck the Bitcoin community when PayPal announced the integration of Bitcoin into their payments system. The price promptly spiked 10% on the news. However, within days the gains were erased. The chart above shows the BME Index and its 200 and 50 day moving average. On September 5th, the 50d MA fell below the 200d MA which augers for continued weakness in XBT.

The Bitcoin price has entered the capitulation phase. As I write this the price is hovering at the $300 level on Bitstamp. Early this morning Asia time, the price on Bitstamp reached $275. Reversing course, I am now a Bitcoin bull. The talk all over Reddit is why the price has fallen, and scent of castrated traders is palpable. Now is the time to take two hands and buy buy buy. I expect a sharp rally to $330 - $350. The price will consolidate around those levels and build a base for a move higher into yearend.

Trade recommendation:

Go long XBT with a near-term price target of $330 - $350. Resist the urge to add to the position at those levels and wait for a slight dip in price to increase the position.

BitMEX Totem

When trading OTC derivatives at an investment bank, traders submit daily marks so that their positions may be valued. Traders will do anything to get a higher bonus. To keep them honest, banks use Markit Totem marks to value a trader's book. Traders of a particular derivative across the major banks submit where they would trade a particular derivative. Those results are tabulated and distributed. BitMEX has sought to create something similar for the Bitcoin OTC derivatives market. We have asked some of the biggest and most sophisticated Bitcoin traders to submit marks on XBTUSD non-deliverable forwards (NDFs) USD basis, and implied volatility levels for options with various strikes. If you are interested in submitting marks, please email BitMEX Support.

BitMEX Totem: XBTUSD NDF Basis Marks

A non-deliverable forward (NDF) is a FX derivative where instead of delivering the foreign currency, traders settle the cash flows at maturity in the home currency. For a Bitcoin NDF, that means buyer and seller decide a future value, and the winner is paid the USD value of the difference between the NDF price and the prevailing spot price on expiry day.

Basis = NDF Price - Spot Price

For a XBTUSD NDF, basis represents the implied interest rate differential between XBT and USD. Because the NDF is quoted in USD, basis is also quoted in USD. The above chart displays the different basis levels depending on the maturity of the NDF. Traders submit their basis marks in USD, but I have converted that USD amount into an annual percentage using the formula:

Basis USD / Spot / t
t is the number of days until expiry divided by 365

Traders generally prefer to view basis as an annualised percentage so they can compare different NDF maturities accurately. The marks were submitted on September 29th so to calculate the Basis % PA I used a spot reference of $380. For a refresher on basis and covered interest rate parity, please read the BitMEX blog post Bitcoin and Interest Rates

Time value of money dictates that investors demand a higher rate of interest for a longer maturity. Looking at the Basis % PA, there appears to be two time buckets that are out of line. Rates jump dramatically between the two and three month maturities; also six month rates are much lower than three month ones. The easiest way to express this trading view would be to trade calendar spreads. Calendar spreads allow traders to trade the basis between two different maturity futures contracts. On BitMEX, a calendar spread is the far month futures contract price minus the near month futures contract price. Calendar Spread Price = Far Month Future – Near Month Future. A calendar spread is a synthetic instrument, trading a calendar spread generates a position in both the back and front month futures contracts.

Trade Recommendations:

Go short a two month futures contract vs. three month futures contract calendar spread. If two month rates increase relative to three month ones, the trade will make a profit.

Go long a three month futures contract vs. six month futures contract calendar spread. If six month rates increase relative to three month ones, the trade will make a profit.

BitMEX Totem: Option Implied Volatility Marks

The Black-Scholes option pricing formula is the most widely used option price valuation model. The model is by no means perfect, but it gives a ballpark figure. The most important component in the Black-Scholes formula is a trader's guess as to the implied volatility (IVOL) of an asset from the present until maturity. Traders were asked to provide their IVOL marks for options with a one month, two month, and three month maturity. They were also asked to provide IVOL marks that varied by strike. Strike in the surface above is presented in percentage terms of spot.

Strike % = $ Strike / $ Spot.

A strike equal to 100% represents an at the money (ATM) option. A strike below 100% represents an out of the money (OTM) put option. A strike above 100% represents an OTM call option. The chart above is a 3D volatility surface for September 29th.

The most interesting thing about this surface is the level of skew or the different between OTM IVOL for calls and puts. For one month options there is an 8 vol difference between 80% strike options and 120% strike options. 1 vol equates to 1% annualized volatility. Near term, traders believe there is a greater probability of a fall in Bitcoin price than a rise. Traders are willing to pay a greater amount for downside protection via an OTM put, explaining why the 80% strike IVOL is marked at a higher level. The fall / winter of 2013 featured truly astounding levels of annualised volatility. If this current "low" volatility regime for Bitcoin switches abruptly as it did in 2013, being long volatility via options structures will be very profitable.

Trade Recommendation:

Buy three month 100% strike straddles. A straddle is an option structure whereby a put and a call of the same strike and maturity are purchased. No one knows when or if the volatility regime will shift, so it is most prudent to buy the longer dated straddle. The 100% strikes are the cheapest in IVOL terms.


Arbitrage is back. The best oportunity at the moment is to buy XBT on Bitstamp and sell them expensive on Chinese exchanges. I am also busy trading this morning, and I am noticing very long waits for XBT withdrawals from exchanges. Completing the circle might take hours longer than it would under normal market conditions. Excercise good judgedment, sometimes things are cheap for a reason.

Chart Source: Bitcoinity

The Three Horsemen of the Bitcoin Apocalypse

Over the last three months, the USD has screamed higher. The above chart displays the Dollar Index (DXY) over the last three months. DXY is a weighted index of the major world currencies value vs. the USD. The market is preparing for the end of quantitative easing asset purchases from the US Federal Reserve. Given the BOJ, ECB, and other global central banks' balance sheets are still growing the USD has strengthened. The market is also anticipating a 2015 hike in short term interest rates by FED. This will be the first rate hike since the global financial crisis. Whether you believe the accuracy of the data or not, US unemployment is falling most recently to 5.9% and the US economy is purported to be on the mend. The FED has committed themselves to normalising USD interest rates as unemployment falls and US GDP grows. The FED’s credibility is at stake so US rates will be going higher. These three horsemen could be part of the reason why Bitcoin has taken a tumble along with other global USD denominated assets such as gold, silver, and oil.

China is the biggest market for Bitcoin, and XBTCNY trading volume is the global leader. The CNY and USD are tied at the hip. A stronger USD will translate into stronger CNY as China must import America's monetary policy to maintain their currency regime. China’s leaders have committed to rebalancing the Chinese economy which requires a stronger CNY and higher domestic interest rates.

Higher USD interest rates will have a profound effect on traders wishing to speculate on Bitcoin appreciating. USD swap rates on margin trading platforms will begin to increase. At the current depressed price levels, many traders will begin establishing leveraged long positions at a lower cost base. The basis will increase as a result.

Trade Recommendation:

Buy longer dated XBTUSD forwards or futures contracts vs. short sell XBT spot. Basis will increase as USD interest rates rise, and the trade will make a profit. To short sell XBT simply borrow XBT and sell it on the spot market. The longer the forward of future maturity the more time value it contains. Greater time value equates to a greater interest rate exposure, which is the variable from which this trade profits.

Chart Source: Bloomberg

Data sources:, Bitcoinity

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