Deribit Suffers Loss – Remains Solvent

Deribit recently announced they have suffered losses due to liquidations triggered by margin calls. Essentially what happened was as the market prices changed, margin calls and forced liquidations were triggered, and the market did not have enough liquidity to fill all the orders in an orderly manner, so as positions were blown out, there was a big gap in fill prices to where theoretical prices might be. The beneficiaries were the market makers who let the market gap down, then filled margin liquidation orders at prices well below expected prices. The exchange made up the difference (since the liquidated positions were the result of margin calls), and then asked major market makers to eat some of the loss, which it sounds like they did.  Below is a copy of the text provided by Deribit.

The case highlights another situation where market participants are at risk since crypto financial intermediaries such as exchanges provide users with too little information about their financial position. With the absence of clearinghouses or independent rating agencies, users are left bearing a lot of risk, and its difficult for users to guage the magnitude of this risk.

Yesterday around 14.00 UTC we had liquidation algorithms of portfolio margin users creation a chaos in the 29 December future. This resulted finally in bankruptcies of more than 105 BTC. Further various client accounts had unjust losses due to liquidations as well.


We had to halt trading yesterday for a while to fix the issue before we could continue again. We are sorry for the downtime.


We solved the issue of the losses by contacting our biggest market makers and traders that have been making profits trading against the malicious algorithm at prices far above the market. We are grateful for their understanding of the incident and for their direct support of our exchange.


Further we decided to refill the insurance fund further such that all other traders will remain completely unaffected and no profits will be socialized among other traders in this session at all.


The total final loss left for the exchange amounts to around 60 BTC (or USD 235.000 at the time of writing). Please note that all users’ funds are safe and we as an exchange can, of course, handle a loss of 60 BTC. The exchange will continue operating as normal.


This was our first major incident since we opened doors for trading in the summer of 2016. We will work hard now to improve various liquidation algorithms such that this could never occur again. This might further delay the launch of new products like Ethereum futures and our upcoming Spot Exchange.

The insurance fund will also be replenished again with 25 BTC.

Crypto Credit Events

Crypto currencies, such as bitcoin and ethereum, are growing rapidly and the opportunities for profit are enormous. But these markets are also highly risky and investors using crypto currencies shoulder this risk. The situation should make risk management a main area of focus for crypto investors.

Risk in the crypto currency markets shows up in a variety of ways including many different forms of financial, tax and other operational risks. Much of the counterparty credit risk found in crypto currency markets comes from undeveloped crypto market infrastructure. We just don’t have the same plumbing in crypto currency financial markets as we do in fiat based financial markets. Fiat economies have developed the rule of law, deposit insurance, and credit ratings, but none of these these exist in crypto currency markets. Crypto currencies also don’t rely on any central authority, so dispute resolution is much more problematic, if not impossible. If your crypto currency wallet gets hacked, for example, you have little (or no) recourse to recover your loss.

Interestingly, the lack of financial market infrastructure also presents profit opportunities. Many financial services businesses operating in developed fiat economies could be replicated by clever entrepreneurs to crypto economies. The opportunities are huge.

Consider the cryptocurrency investor who makes a deposit on Bitfinex or Poloniex, and then lends their crypto currency to traders on the exchange in return for interest. How can this investor estimate the chances the exchange will remain solvent, and how can the investor estimate the chances of their account suffering a loss in the event the exchange gets hacked?  At present, there are very few ways to quantify the risks of such events. The crypto currency investor is left to rely on message boards, online posts, and a poll of their friend’s opinions. These methods are unscientific, and won’t give the investor reliable metrics they can use to make investment decisions. The average crypto currency exchange depositor simply relies on their own “gut feeling” along with some basic rules of thumb about portfolio management to make risk management decisions (don’t put all your eggs in one basket).

As far as I know, there doesn’t currently exist any method of obtaining deposit insurance for a crypto exchange or hosted wallet balance. In developed fiat economies, deposit insurance makes it cheap for consumers to assess the credit risk of counterparties, but the cryptocurrency world doesn’t currently have this same infrastructure. I believe that creating a rating agency for crypto currency credits is required for crypto currency finance to reach a more sustainable path.

One of my main goals as an investor is to better assess the creditworthiness of my cryptocurrency counterparties, and then use this information to make better investment decisions. As an investor, the degree of credit risk matters to me. Mostly all crypto currency investments have counterparty risk, but few ways exist to assess this risk. In fiat currency economies, we can rely on rating agencies, deposit insurance, and many different forms of information to make credit decisions. But this this same market infrastructure does not currently exist for most crypto currency finance.

To enlighten the market, the first step should be to define a credit event. When is a counterparty in default?  Below, I outline five categories of credit events: Bankruptcy, Acceleration, Default, Failure to Pay, and Restructuring.


Bankruptcy occurs when a relevant regulator declares the organization to be bankrupt.


Acceleration covers the situation, other than a Failure to Pay, where the relevant obligation becomes due and payable as a result of a default by a reference entity before the time when such obligation would otherwise have been due and payable.


Default covers the situation, other than a Failure to Pay, where the relevant obligation becomes capable of being declared due and payable as a result of a default by the reference entity before the time when such obligation would otherwise have been capable of being so declared.

Failure to Pay

Failure to Pay is defined to be a failure of the reference entity to make, when and where due, any payments under one or more obligations. Grace periods for payment are taken into account.


Restructuring covers events as a result of which the terms, as agreed to by the reference entity and the holders of the relevant obligation, have become less favourable to the holders than they would otherwise have been.

By the above definitions, I believe it would be possible to achieve consensus on whether a credit event has occurred. The process of determining consensus could be done by a system of member voting and/or a pari-mutuel pool. The result of the credit event determination process could be used to settle derivative markets such as default insurance pools. These default insurance pools could in turn be used by market participants and credit rating agencies to help determine the creditworthiness of underlying entities. The pools themselves could also be used by both speculators and hedgers to manage their investment risk.

Bitcoin Core/Unlimited Risk Management & Probabilities

Bitcoin holders are keeping an eye on a potential fork that will create “Bitcoin Unlimited“, a proposed new chain that will solve some perceived shortcomings with the current bitcoin “core” network. Bitcoins have the largest market cap of any crypto currency, and so there is an important network affect associated with bitcoin values/prices. Any forks or modifications to the bitcoin blockchain is bound to have implications for holders. This post describes my current thinking on how bitcoin/crypto investors should approach the anticipated Bitcoin Core (BTC) / Bitcoin Unlimited (BCU) fork.

The first thing we should understand is why there is a split in the bitcoin community. Bitcoin exists as long as its blockchain is being updated, and the value of bitcoin is related to the number/amount of miners/users willing to do things with or make transactions using bitcoins. Whether bitcoins are more or less valuable depends on a number of factors, including the scale of the bitcoin economy. If the scale of bitcoin use/adoption falls, its also likely the value/price of bitcoin will fall as well. One of the features of bitcoins is there is a fixed block size limit of 1MB. This “hard coded” limit restricts the amount of traffic that can be processed by the bitcoin blockchain, and therefore causes processing delays when the number of transactions on the bitcoin blockchain reaches certain levels. Lately, with the popularity of bitcoin rising, the bitcoin blockchain has pressed up against this constraint, causing transactions to either be delayed or expensive.  Part of the reward for bitcoin miners is receiving newly mined bitcoins but they also prioritize processing transactions with associated fees, and the portion of mining earnings coming from fees relative to newly minted coins has been rising along with blockchain “congestion”.

As a way to overcome this perceived handicap of the bitcoin blockchain, various forks have been proposed and implemented that remove or modify the hard coded cap on the block size.  Let’s keep in mind that anyone can copy, modify, and create a new crypto currency based on bitcoin or any other open sourced crypto currency. As a way to encourage adoption, new cryptos will provide credit to holders of other currencies. For example, a new “better coin” could be forked from bitcoin and all bitcoin holders could automatically have their address and keys available on the “better coin” blockchain. Users of the new chain receive tokens for “free” and the value of those tokens will be determined by other means (such as a market).

Since the value of a new crypto is related to its popularity, for any crypto to exist, there needs to be at least some miners/users willing to keep the blockchain up to date. Cryptos with low popularity, will likely be worth less. With all this in mind, we cannot create something out of nothing, a market will bake in all the perceived risks/rewards and prices will tell us the weighted aggregate opinion.

I want to make it clear, bitcoin unlimited does not impact the current bitcoin blockchain. Miners/users might stop using BTC in favour of BCU, but the bitcoin blockchain cannot be destroyed as long as at least someone is willing to defend it. If you currently own bitcoins on an address you control with a private key, you will still own those coins following a bitcoin unlimited hard fork. After the fork, you might also have access to new coins on the bitcoin unlimited network. Since you can’t create something out of nothing, its likely that the value of the combined bitcoin core and bitcoin unlimited coins will be worth some related amount. We don’t know whether this will be less than current, more than current, or the same amount. Time will tell, but anything is possible.

How do we determine the value of BTC and BCU?  The first place I’d suggest starting is the split chain tokens traded on Bitfinex. Bitfinex has listed a few different tokens that represent part BTC and part BCU. A holder of a split token can request delivery of each constituent part, so with these split tokens, we can use market prices to determine the relative values of each constituent part and therefore the probability of the impact on the future value of BTC and BCU.

At the time of writing, here are the current prices

BTC/USD @ 2285

BCC/USD @ 2000

BCU/USD @ 220

BCC/BTC @ 0.90

BCU/BTC @ 0.095

We can glean a lot of useful information from the prices listed above. First thing to notice is the market is expecting the combined future value of BTC + BCU to be worth less than the current value of BTC. In other words, the sum of the parts are expected to be worth less than the current whole. In other words, the sum of BCC/USD & BCU/USD is less than the current price of BTC/USD. This may be caused by an implied carry (a risk premium) that is theoretically baked into the current price of the future. This spread might also reflect the market’s expectation that when you split the current bitcoin economy into more constituent parts, some of the network affects are eroded, so the sum of the parts ends up being worth less than the whole. We could also study this phenomenon with other forks, most prominently with ETH/ETC.

The next thing I notice is the current price of the future value of bitcoin unlimited is worth a lot less than the current price of the future value of bitcoin “core”. Its about a 90/10 split with BCC being worth 90%. This information helps us make some judgments on the likely adoption of bitcoin unlimited. The market does not expect bitcoin “core” users to jump ship en-mass and begin to use the bitcoin unlimited blockchain.

What can bitcoin holders do to manage the “fork risk”?  The first thing I think holders should do is re-examine the way they hold their coins. Do you hold your own key or do you use a hosted service?  Are your coins invested somewhere, and does that debtor have access to the future bitcoin unlimited coins and are they obligated and/or willing to share those with you?  If you are using exchanges such as Poloniex and Bitfinex to make margin loans, how will these exchanges treat your position?

When deciding what to do, its important that you review your investment objectives and allow those objectives to determine your investment strategies. There is a lot to consider when investing in crypto currencies, and users should also consider using hosted services or obtaining advice if they are feeling overwhelmed.


Bitcoin ETF Likely Approved?

Trading on Bitmex implied odds now trading over 50%, and the price of bitcoins versus the USD spike today.

Investors chained to bitcoin bets as U.S. ETF decision looms

NEW YORK Investors are betting market regulators will approve what would be the first U.S. exchange-traded fund to track the price of bitcoin. From investment funds to wealthy individuals and even a Las Vegas strip club, the bitcoin ETF is generating a lot of buzz for a financial product.

Bitcoin ETF Odds

After many failed attempts, the SEC has said it will issue a decision on the Winklevoss Bitcoin Trust by March 11th. Some estimates have the decision being released on the following Monday. BitMEX recently launched a futures contract that allows investors to bet on the odds that the Winklevoss ETF will be approved. The contract listed on BitMex is a binary option that either settles at 100 if the ETF is approved or 0 if it is not. With the contract currently trading at 49.77, the market estimates there is about an even chance of approval/rejection.

If Winklevoss ETF is approved, it could mean that a few hundred million US dollars could flow into a mainstream bitcoin vehicle, this would make a big impact on the price for bitcoin.

Users on bitcoin fantasy sports website CoinRoster, can also bet on the chances of the ETF being approved.


Price of a Binary Option

Consider an underlying price of 918. You are presented with the choice of buying or selling a European binary call option with 1 day till expiration and a strike price of 918 (i.e. at the money). The 30 day historical volatility of the underlying, as measured by standard deviation, is 5%, and the risk free rate is 1.50%.

Since this is a binary option, the bet is about whether the underlying price is going up or down tomorrow. So how should this option be priced?  If the price of the underlying is more than 918 in a day, the binary pays off 1, if the price is lower than 918 in a day, the binary pays off 0. Is this a 50/50 bet?  An amateur would say the option should be worth 0.50 since there is an equal chance of each event happening. But the price of this binary call is actually worth slightly more than 0.50. How so?

To value the option scenario described above, we need to consider the (1) time value of money and (2) the volatility of the underlying. If we use a black-scholes model, with the variables listed above, we come up with a call price of 0.506.

Try out various calculations on this example, check out the CME binary calculator link, here.

Using the same variables, but changing the time to expiration, comes up with the following values.

Days till Expiration Binary Call Price
1 0.506
30 0.531
90 0.552
180 0.572
365 0.599

CME Bitcoin Reference Rate Review

The CME CF Bitcoin Reference Rate (BRR) and CME CF Bitcoin Real Time Index (BRTI) are standardized reference rates and spot price indexes with independent oversight managed by CME Group that were launched on November 14, 2016. Several bitcoin exchanges and trading platforms will provide the pricing data that compose the indexes, including Bitfinex, Bitstamp, GDAX, itBit, Kraken and

The BRR aggregates the trade flow of major bitcoin spot exchanges during a specific calculation window into a once-a-day reference rate of the U.S. dollar price of bitcoin. The BRTI aggregates global demand to buy and sell bitcoin into a consolidated order book and reflects the fair, instantaneous U.S. dollar price of bitcoin. The BRTI will be published once every second. Calculation rules are geared toward a maximum of transparency and real-time replicability in underlying spot markets. CME Group and Crypto Facilities designed the BRR & BRTI around the IOSCO Principles for Financial Benchmarks.

Of particular interest to me is the BRR, as it provides a daily reference rate that can be used to settle some derivatives I have designed. The BRR is a price of US dollars over 1 bitcoin, and the min tick size is 0.01. The BRR represents a trade volume weighted price as it is built from trades on the referenced exchanges. The BRR dissemination time is daily between 4pm and 4:30pm GMT which is between 11am and 11:30am EST.

Augur Market & REP Price Impressions

Augur proposes to be an open-source decentralized prediction market built on Ethereum. Augur would be revolutionary if it comes to be, but until now development is still in beta stage. Augur an ambitious undertaking, and has been taking longer than expected to go live with real money trading. The platform will work by allowing users to post and adjudicate outcomes on a nearly autonomous crowd sourced basis. Users will be able to post markets and then determine the results. The settlement of outcomes will be determined by users by voting on the outcome of posted events using their Augur “reputation” tokens. If they vote with the crowd they will receive positive credit, and if they vote with the minority, they will be charged credit. Whether this system works or not will be discovered once the platform goes live for real money trading, for now its still just a theory.

Other event exchanges such as InTrade have come and gone. Usually their fate is determined by governments, who make it difficult for the exchange to comply with AML and securities laws. It becomes too costly for the exchange to comply in all jurisdictions. But if Augur goes live with real money trading, it will be more difficult for governments to stop it. The exchange will use its own currency, Augur “rep”, and so won’t have to comply with AML requirements. It will also be an autonomous organization funded by its own tokens and so it will be difficult to hold Augur accountable to a fiat state based legal system. Especially since the idea and implementation of Augur will be open source, even if governments were to shut Augur down, it could be replicated using code repositories.

What’s also interesting for Augur market watchers is trading will be done using a native crypto currency called “reputation”. These REP digital tokens will be used as currency to trade contracts on the Augur exchange, but also as voting tokens used to determine the outcome of posted events. The tokens were distributed during October 2016, and began trading on various exchanges at that time. This trading has provided market watchers with a guage of expectations. The price of REP has been trailing down since inception which signals declining confidence/expectations.

According to, REP have the 9th largest market cap of all crypto currencies on Dec 12th, 2016 with a market cap of $34 million worth of REP outstanding. After settling into a post-distribution price of $7.07 REP/USD in October 2016, the price has steadily traded lower to a current price of $3.15.  This price action seems to imply that the market is less confident about the eventual launch of the Augur platform. The longer it takes for development, the less confidence the market will have, and the price will drift lower.  Its difficult to determine when the platform will go live for real money. There is not much guidance from the developers and social media posts are also very speculative.

Personally, I am looking forward to Augur live real money trading. Augur could be a valuable tool in many ways.


CME launches Bitcoin Price Index

CME Group has launched their real time bitcoin price index. This is exciting news for the crypto currency markets and also exciting for derivatives traders. With many different bitcoin exchanges operating worldwide, there is a need to find a reliable standardized reference price that market participants can use to price derivatives instruments. has done a good job in my opinion at providing an index that aggregates and weights a number of bitcoin prices from various exchanges. The CME CF Bitcoin Real Time Index takes transparency a step further. This is better than relying on other indexes like CoinDesk’s alone.

With the CME, market participants will know they are dealing with a transparent rules based index that is professionally managed and meets industry best practices. This will give the market greater confidence to price derivatives contracts accordingly.

The next step to watch is whether the CME can list USD cash settled contracts on this index. Obviously, index integrity needs to be tested before trading can take place.

Bitcoin Futures Might Be Coming Soon

News Corp is a network of leading companies in the worlds of diversified media, news, education, and information services. CME Group launches indexes to track the virtual currency that could lead to the listing of futures contracts Bitcoin has moved one step closer to mainstream credibility after the world’s largest futures exchange operator launched a pair of indexes designed to track the virtual currency’s price.

CME Group Launches Bitcoin Price Indexes – CoinDesk

The CME Group launched its bitcoin price indexes yesterday. The derivatives giant has spent the last month beta testing its CME CF Bitcoin Reference Rate and CME CF Bitcoin Real Time Index in partnership with London-based firm Crypto Facilities. Announced earlier this year, the indexes leverage price data from a suite of global bitcoin exchanges in Asia, Europe and North America.