How Does Bitfinex Funding Work?

If you have spare bitcoins kicking around, one way to use them is by lending them out to margin traders on an exchange such as Bitfinex. This post will explain how the Bitfinex funding market works, and how you can use it to earn more bitcoins (and even US dollar tether).

Bitfinex is a cryptocurrency exchange. Users can signup to Bitfinex to trade cryptocurrencies such as bitcoins, ethereum, bitcoin cash, and many others. One of the unique features of Bitfinex is their margin funding markets. For users who want to add leverage to their positions and users who want to earn interest on their bitcoins, Bitfinex offers a margin funding order book where those users can exchange margin funding with each other. So if you’re a trader with a bullish view on ETH over BTC, you can actually borrow BTC on Bitfinex and use those borrowed funds to jack up your ETHBTC position. This funding isn’t free, so users can also choose to lend those BTC and earn a daily interest rate.  The user funding market is an ingenious feature offered by Bitfinex which is one of the main reasons the exchange has attracted so much volume. Whereas a typical margin loan is made by a broker or dealer, as the exchange Bitfinex cuts out these middleman (as they remain as the middleman themselves).

What kinds of rates can lenders expect to receive? Since Bitfinex runs an open order book for funding, the rate you will receive is simply result of of supply and demand, and so the rate you will receive will fluctuate as the market dictates. Rates are quoted as percent per day. To find the simply daily annualized rate, multiply by 365 or use your own formula to find an APR. Follow this link to BFXdata where you can view historical Bitfinex funding rates. You will see that bitcoin funding mostly range from 0.01% per day and sometimes spike up to 0.60% per day.

What are the risks? Other than interest rate risk, and the risk that their bitcoins fall against your own unit of account (your home fiat currency?), the main risks that Bitfinex lenders face is the default risk of borrowers and the credit risk of Bitfinex itself. The risk that borrowers default is actually very low, in fact its so low that you will probably never have a borrow default on a loan. Why?  Because of the Bitfinex margin limits. Follow this link for a description of the margin rules. Bitfinex borrowers receive a margin call when the net value of their account equity reaches 22.5%. When the net value of their account falls below 15% of your borrowed funding value, the position will be force-liquidated.  Since Bitfinex is a very liquid exchange, and since there are so many ways to arbitrage the bitcoin price, the exchange can virtually always liquidate positions to make the lender whole.

The credit risk of Bitfinex is the main risk for lenders. Even though the risk of any individual defaulting is very low (virtually non-existent), the main risk is Bitfinex itself goes bust or gets hacked, and this is not pie in the sky, its happened before and it could happen again. I personally think the risk of Bitfinex being hacked again in a major way is low, the rate of return users can earn by funding margin loans reflects this risk.  Bitfinex funding does not earn you free money. I hope eventually clearing houses (maybe blockchain based clearinghouses?) will emerge to reduce the exchange default risk.

So, you want to earn some bitcoin interest by lending your funds out on Bitfinex? After you open an account, you deposit your bitcoins, and move them to your funding wallet. Now you can place an order to lend out your coins using similar mechanics to trading stocks and cryptos. There is an order book with bids and offers, choose your strategy and work your lending book. You can use the Bitfinex Flash Return Rate (FRR) which is kinda like the average daily rate on funding to automatically renew your loans, or you can auto renew at a fixed price, or you can manually update your loans using your fingers or the Bitfinex API.

Bitfinex also charges fees on margin funding. At the time of writing fees are 15% of the interest you earn.

If you have questions about Bitfinex lending, please post your comments below and I’ll do my best to answer specific questions.

Choice Properties offers to buy CREIT

This is a great move by Choice Properties as it provides diversification and more scale. It shows how Weston is moving towards greater diversification of their investment portfolio in general and making Choice Properties a key part of their strategy. As a holder of both Choice Properties and CREIT, I support this proposal and will choose the cash option.

Choice Properties REIT buying Canadian REIT for $3.9-billion

Choice Properties Real Estate Investment Trust has signed a deal to acquire Canadian Real Estate Investment Trust (CREIT) for $3.9-billion in cash and stock. The combination of Choice Properties, which counts Loblaw as its principal tenant and largest unitholder, and CREIT will create a company with a diversified portfolio of 752 properties.

Loblaw Companies Limited supports Choice Properties REIT’s acquisition of Canadian Real Estate Investment Trust

To facilitate Choice Properties’ financing for the transaction, Loblaw has agreed to convert all of its outstanding Class C LP units of Choice Properties Limited Partnership with a face value of $925 million (“Class C LP units”) into Class B LP units of Choice Properties Limited Partnership (“Class B LP units”) on closing.

Bank of Canada raises key rate to 1.25%

Bank of Canada raises key interest rate to 1.25% | CBC News

The Bank of Canada raised its key lending rate by a quarter percentage point to 1.25 per cent Wednesday, the third time it has moved its benchmark rate from once-record lows last summer. The bank’s rate has an impact on rates that Canadians get from retail banks for things like mortgages, savings accounts and GICs.

Bank of Canada raises interest rate to 1.25%, highest in almost a decade

The Bank of Canada had a window to raise interest rates and it opted to use it. Canada’s central bank raised its lending benchmark a quarter point to 1.25 per cent, an historically low setting that nonetheless will seem high to anyone who got used to post-crisis borrowing costs that were closer to zero.

What is Lightning Network?

The Lightning Network is a payment system being developed for bitcoin. The Lightning Network hopes to contribute to overcoming some of the bitcoin blockchain’s payment scalability “problems”/costs. The system is currently in testnet, but has been used for a few transactions, and seems to work. It would be used as an off-chain protocol similar in some ways to XCP.

Basically, the Lightning Network will be a peer to peer system for making micropayments of digital cryptocurrency through a scale-free network of bidirectional payment channels without delegating custody of funds or trust to third parties.

The Lightning Network has the potential to dramatically reduce the cost and time of bitcoin payments, which would reduce one of the major criticisms of bitcoin payments in their current form. It would shift the debate about scalability away from the blockchain itself and onto services using the bitcoin blockchain’s core verification system. I have been expecting more initiatives like the Lightning Network to emerge. I also expect more hosted services and payments processors to emerge as volume on the most popular blockchains continues to increase. I believe these developments will have the impact of driving transaction volume back to main blockchains with the largest network effects as mediums of exchange such as bitcoins, and away from many of the other alt coins that attempt to solve the payment scalability problem in other ways.

Cryoto Crash, What Goes Up?

The value of bitcoin plunged 20% against the value of USD overnight, and some of the typical outcomes are happening. The rate to borrow/lend USD on Bitfinex is currently around 87%. This means someone holding $100,000 on Bitfinex is earning $230 per day of interest. Keep in mind Bitfinex uses USD tether, and the best way to withdraw it is to convert to bitcoins and withdraw those, but 87% is still a very high number.

I’m surprised the rate to borrow/lend bitcoins for margin on Poloniex is still very low. The rate has barely changed as the price of bitcoins has gone up and now down over the past few weeks. I would have expected there to be lot’s more margin demand as the price of bitcoin has been increasingly volatile.

News of volume increasing on options exchanges should also be good for traders. On Deribit, implied volatilities spiked overnight. The implied vol on offers is well over 200% today, this is an opportunity for bitcoin holders who want to trade some time/volatility today in exchange for some limited upside in the future.

The order book on QuadrigaCX is full, and shows similar liquidity to the past few weeks. The price of bitcoin on QuadrigaCX is actually higher than the price on rival exchanges. At the time of writing, there is an opportunity for traders to earn arbitrage profits by selling bitcoin on QuadrigaCX for $12,700 and buying bitcoin on Poloniex at $12,562 and/or Bitfinex at $,12,540. The spread is about 1.5% which covers the fees to make the trade. This should be a golden opportunity for those of us running market making bots.

 

Trading Bitcoin in Canada: how much does it cost?

Have you decided to trade bitcoins, or are you looking for the best venue to trade?  The post below will review some popular exchanges and describe some of the costs and benefits of each.

Before diving into the specifics, it’s important to recognize the difference between a primary exchange and a service provider. A primary exchange includes exchanges such as Bitfinex, Poloniex, and QuadrigaCX, which are the venues where traders interact. Other services such as QuickBT provide foreign exchange services but do not run exchanges per se. This distinction is important depending on the functionality you require to execute your trading strategy.

CoinSquare, trading fees range from 0.1% to 0.2%, no API access, no affiliate, could be a reason why liquidity is a bit lower on this exchange.

QuadrigaCX, trading fees range from 0.2% to 0.5%, decent API documentation, highest CAD to crypto liquidity.

Kraken, trading fees range from 0.16% to 0.26%, robust API, high liquidity, global exchange offering a few different fiat to crypto pairs.

Bitcoin Trading Canada

If you want to buy bitcoins in Canada or sell bitcoins in Canada, you have a few choices. Where is the best place to trade bitcoins in Canada?  It depends on what you are trying to do, below I will list a few different options.

The key factor for Canadians who want to trade bitcoin is to find a venue that accepts Canadian dollars! There are many bitcoin exchanges around the world, but most offer trading in bitcoin against the biggest fiat currencies such USD, CNY, EURO, YEN, but the Canadian dollar is not really offered except by a few specific Canadian exchanges.

When you’re looking to buy some bitcoins. I think the best place to start is to find a friend who can give you some of their bitcoins in exchange for cash or Interac e-transfer. If you can obtain bitcoins in this fashion, you can avoid a lot of the legal/technical challenges that come with verifying your account.

Keep in mind that established exchanges offering services to Canadians should comply with Canadian AML rules including FINTRAC compliance. There are certain exemptions based on the nature and size of the transaction, but otherwise, you will need to prove your identity to the exchange provider in order for you to safely transfer Canadian dollars to the exchange.

So if you don’t have a friend who can trade bitcoins with you, you’ll need to find a crypto exchange that services Canadians.

The best place to trade bitcoins in Canada is by using QuadrigaCX. QuadrigaCX has the highest volume of any Canadian bitcoin exchange, and very low fees, 0.50% (less than 1%) per transaction. QuadrigaCX complies with Canadian AML laws, so you’ll have to identify yourself in order to gain full deposit and withdrawal functionality, but once you do this, you’ll be able to move Canadian dollars directly from your bank account into crypto currencies.

To avoid this compliance, you can use a service such as QuickBT or CanadianBitcoins, but beware that fees will be much higher. Even most bitcoin ATMs in Canada will require you to submit your cell number and retrieve a code in order to prove basic info before you can process a transaction. These services will charge you anywhere from 5% to 10% of the value of your transaction, and your transaction limits will be severely restricted.  Check out this site that provides a map of bitcoin ATMs.

Check out my blog post about using BitAccess using Flexpin Vouchers.

A few other exchanges that Canadians should consider include Kraken & CoinSquare.  I’ve tried a few times to verify my account with Kraken, and for whatever reason, they will not process it. I haven’t spent much time figuring out why. With CoinSquare, they are based in Canada and comply with Canadian laws, but they are just a little bit more expensive and less liquid than QuadrigaCX.

Crypto-Games Bankroll Returns

A friend of mine invested in Crypto-Games.net ethereum bankroll a few months ago, and this post will evaluate those returns over this timeframe.

He deposited 27.85134771 ether on October 5, 2017 and he now has  28.42479382 ether, a gain of 0.57344611 ether.

To find the time weighted rate of return, I will divide 0.57344611 by 27.85134771, which is 2.05%.  Then I will apply a factor of time. There have been 26 days in October, 30 days in November, and 17 days in December for a total of 73 days since he made his investment, divided by 365 days in the year equals 20% of the year. So I will take 2.06% divided by 20% of the year, to get an annualized rate of return of 10.29%.

10.29% rate of return is a high rate of return in the fiat world, but I guess this is commensurate with the risk of investing in an bankroll of an online casino running on ethereum? Another thing to keep in mind with this rate of return is the investor also gets the ups and downs of the price of ethereum since his unit of account is US dollars.

What do forward prices tell us?

Back when I was a futures trader working at a Canadian bank, I’d often wonder why the future prices of certain commodities would be higher than spot prices, then at other times, those future prices would be lower than spot prices. I’d read somewhere that Keynes had written something about contango and backwardation, the terms used to describe when future prices are either higher or lower than current prices. So I decided to take the library and find out what Keynes actually wrote on the topic. It turns out, he didn’t say much, at least nothing useful in my opinion, but he’s quoted widely on the topic and even today, the wiki article is titled “normal backwardation” the term Keynes used to describe it.

There is nothing “normal” about either contango or backwardation. We can tell empirically from historical data that some things tend to be more often in one state or the other. the S&P 500 futures contract are almost always in contango, but the future price for oil is sometimes in contango and other times its in backwardation. So what gives? why?  We still don’t know, but everyone has an opinion.

Keynes wrote in his Treatise on Money that backwardation is normal, and it comes from the idea that producers of commodities are more prone to hedge their price risk than consumers. Not sure these thoughts would hold up in the academic world of today (or maybe they would?), but nothing is “normal” in a free market, things only are based on your own perception of what is real.  There are reasons why markets would be contango or backward, carrying costs, expectations of future value, etc.

Now that we’ve discovered blockchains and crypto currencies, we have more information to analyse and debate. Bitcoin has very little carrying costs, can be easily traded with very frictional costs, etc, and yet, the forward price for bitcoin currently trades in contango. The spot price on Deribit is 18500, the 1 month future is 18863, and the 3 month future is 20846. On the CME, the spot price is 18591, the 1 month future is 19105, 3 month is 19340, and the 6 month future is 19300.

We also know how much the rate is to borrow and lend bitcoins. We can see on Bitfinex and Poloniex that the interest rate on bitcoins is very low, close to zero.

How does the market’s expectation of future value impact the rate of interest bought and sold today? If I’m expecting something to become much more valuable in the future, then I’m willing to accept a lower rate of interest to lend it, and if I expect something to become less valuable in the future, then I’d demand a higher rate of interest. This can observed by comparing the rate of interest to lend/borrow US dollars on Bitfinex compared to the rate for bitcoins. The interest rate on US dollars, which maybe the market expects will become less valuable in the future commands a much higher rate than bitcoins, which the market might expect to become more valuable. Yet both rates are positive.

We are used to being compensated by a positive interest rate to lend our fiat money until a future date, and we are used to paying a price to borrow money today in order to pay it back at a later date. Could this be due to the productive capacity of capital? We live in a world where we can create more tomorrow with the capital we can marshall today. But we could just as easily demand the opposite. If the future liability of money is greater than its current value, then I’d like pay someone to take my money now, and get less of it back in the future. I’d accept a negative rate of interest in order to reduce my future liability. This state of economy is happening in some places today like Scandinavia, Japan, Switzerland, etc. In these places, capital is being used to consume today, and it’s not being invested productively, so interest rates become negative.  Governments try and use Keynesian economics by increasing the money supply, trying to make the prices of things rise (since money is on the denominator), but the impact of increases in the money supply is also the expectation that it becomes less valuable in the future, so investors are willing to accept negative rates of interest because they know they will get more of it by way of the government (who is also who prints the money) in the future.