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.

 

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.

Augur Project Status Update

Augur project aims to be an open source decentralized prediction market running on the ethereum network. Its a really cool idea, but it seems like a long time until its ready for live real money trading, or maybe I’m just impatient?

Augur was founded in 2014 with the first release coming in June 2015. Development was funded token crowdsale in October 2015. In 2016, Augur beta was released for testing on the Ethereum testnet. The project has gone through a few iterations since then, and while the community is waiting for real money release, the value of Augur tokens has been on a wild ride. At the time it was issued, the Augur tokens were one of the biggest Ethereum ICOs ever. The current market cap of Augur tokens is 11 million “REP” worth almost 500 million US dollars at the time of writing.

Back in December 2016, the value of REP tokens had been falling since the ICO, trading under $3 per REP, but by the summer of 2017, the price had climbed near $35 per REP. After trading in a range to just below $17, the REP tokens are now trading at all time highs above $40.

I’m not sure we can use the price of Augur REP tokens as a sign of the project’s progress/success. The value of REP tokens are secured by the ethereum blockchain, so digital security of REP tokens is as strong as the ethereum blockchain itself, but at the price of alt coins has been rising across generally, the REP price has gained as well. Its unclear how much of the gains in REP price are due to the specific viability of the Augur project, and how much is due to the general rise in the market value of alt coins. One way to find out would be to construct an index of alt coins, and compare REP returns to that index, try and strip out the market risk.

I’d really like to see Augur and other open source prediction markets such as Gnosis be successful, and I think they will be eventually, but I wish progress towards real money trading would happen sooner. To follow the progress of Augur, check out their regular blog posts.

Let’s talk about how Augur will work. Augur isn’t a for profit business, it will be an open source decentralized prediction market. This distinction is very important because its open source decentralized nature will be one of the features that protects it from being shut down by governments. Since Augur will run on blockchain tokens, it will become very difficult (if not practically impossible) for governments to stop Augur. There will be an Augur app that provides a basic user interface, but the real volume of Augur will likely come by interacting with the network by way of their API, check out their API documentation. If Augur can exist for real money trading, then hosted service providers will emerge to provide users with services that will help users interact on the Augur network. This will come in the form of business that exist to house user accounts, historical data for users, to guard user’s data and money, to provide payment services, etc. There will be data service providers that provide useful information to users.

I can think of lot’s of viable business models that will come to exist once Augur exists for real money. There will also be all sorts of ethical issues that emerge such as what to do about death markets, etc.

The odds that Augur will exist for real money use are getting higher, and I think the odds are becoming likely.

When is Bitcoin Most Volatile?

A user made a search on this site a few days ago wondering “what time of day is bitcoin most volatile?”

I’ll attempt to answer this question below, and if you have your own questions about cryptocurrencies, bitcoin trading, or related topics, please use the contact form on this site, or reply to this or other posts, and I’ll do my best to provide an answer.

It’s nearly impossible to tell what time of day the bitcoin price is most volatile. Since bitcoin is traded on a number of different exchanges around the world, against multiple fiat and cryptocurrencies, we would need to build a program able to get the data and run some statistical analysis to determine an empirical answer.  I suggest pulling data from a number of exchanges using their APIs, and putting this data into a statistical program: even excel will do. You can use the data to try to determine when standard deviation is the highest, etc. There is probably not a single answer, but the data will help you determine an answer that’s helpful to you, so that you can apply this data to improve your own trading process.

There are some other measures of bitcoin volatility to keep in mind. Check out The Bitcoin Volatility Index bitvol.info for a measure of historical volatility. I also think the numbers calculated by Deribit based on their options market are your best source to determine implied volatility.

When thinking about volatility, it’s important to recognize the different types of volatility. Historical volatility, also referred to as “statistical volatility” or “realized volatility”, measures volatility of an underlying by calculating standard deviation over specific periods of time. In comparison, “implied volatility” measures the future expectation of volatility. To calculate implied volatility, use an options pricing model such as Black-Scholes to solve for the volatility variable (this can be done in excel), or use a web based option price calculator.

Trading Clam Coins

CLAM coins are a cryptocurrency based on a proof-of-stake mining method. One new CLAM coin is generated each minute and awarded to users by proportional lottery based on the number of CLAMs they have working on their miner. This means there will be 60 new CLAMs created per hour, 1,440 created per day, and 525,600 CLAMs created each year.

The value of each CLAM simply depends on the interaction of supply and demand; there is no central authority that controls the value of CLAMs and their price is completely up to markets. Since their inception, the value of CLAMs has generally been rising against the US & Canadian dollars much like most other crypto currencies. CLAM users can consult blockchain explorers to check addresses, monitor transactions, etc, and can view the market cap of CLAMs on sites such as CoinMarketCap. At the time of writing, there are about 2.7 million CLAMs outstanding worth about $20,000,000 US dollars.

To get into the CLAM economy, the first thing you should do is buy some CLAMS; since CLAMs are based on proof-of-stake, you can’t mine any CLAMs without first having some CLAMs to stake.

To buy CLAMs, the first step is to get some bitcoins. If you’re Canadian or American, use QuadrigaCX since you can make Canadian dollar deposits using Interac online and then exchange Canadian dollars for bitcoins. For Americans, try a service such as Coinbase.

Once you have your bitcoins, you have a few choices. If you want to trade your bitcoins for CLAMs, you can find 77% of the volume for CLAMs on Poloniex and the balance of volume on Bittrex.  If you are a little wary about using exchanges, you can also use a service such as ShapeShift. At the time of writing Changelly does not offer CLAMs.

If you really want to mine CLAMs, check out my friend’s post on github describing how to set up your own miner.

In my opinion, Poloniex is the best place to trade CLAMs. The market is fairly liquid, but it jumps around enough (this is CLAM coins after-all) that there are opportunities for traders. But keep in mind that you can really only trade the CLAM/BTC pair: there is no other markets for CLAMs to fiat other than private sales between friends, so unless your friends are really into trading CLAMs, it’s probably best to trade on Poloniex.

The nice feature about trading CLAMs on Poloniex is you can both borrow and lend CLAMs. This means you can jack up your leverage at pretty cheap rates. At the time of writing, you can borrow bitcoins against CLAMs for less than 0.001% per day, and you can borrow CLAMs for less than 0.001%. You can also get some pretty cheap leverage on Poloniex.

At the time of writing, here is the current bid/ask spread on both Poloniex and Bittrex:

Poloniex 0.00047464 bid / 0.00047500 ask

Bittrex 0.00047483 bid / 0.00048195 ask

So you can see the bid/ask spread is much tighter on Poloniex, representing their greater volume/liquidity, but interestingly, there is more than a 1% gap between the bid/offer for CLAM/BTC on Bittrex. This presents an opportunity for traders who can arbitrage the different prices between exchanges. The fees on Bittrex are 0.25% per trade, so there is certainly an opportunity for some market making using a bot. Here is a link to Bittrex API documentation.

One funny thing to be aware of when trading CLAMs: since the market is only worth about $20 mil USD in total, and more than half of those CLAMs are tied up on just-dice, the trading for CLAMs can be cornered in an old fashioned way. This happened a few months ago on Poloniex. My friend and I noticed the lending/borrowing rate for CLAMs on Poloniex jumped very high, over 1% per day, much higher than the mining rate, so we moved a few CLAMs to the exchange to lend them out. It looked bullish for CLAMs at the time as the market was well bid. A few weeks went by, and the price of CLAMs kept rising. All of a sudden the market fell out, and the price crashed by half in a few hours. We suspect a small number of traders were borrowing CLAMs at high rates (thereby getting short CLAMs in the process) and feeding the order book with stink bids, and then as they pulled their bids and started selling their CLAMs, the bottom fell out (into air pocket).

The lesson from this experience is to beware when margin interest rates move dramatically: when you wonder what is happening, and you don’t have what you believe is the answer, take it slow. Move with caution, or, if you’re super bold, take the opposite position and help bring the market back in line.

Deribit Options Trading Tail Risks

Deribit is a crypto-derivatives site featuring bitcoin futures and bitcoin options. Its a pretty cool site that offers some unique features unavailable to retail users in fiat economies. From a retail user’s perspective, being able to enter limit orders based on either the bitcoin value or the implied volatility value is a cool boost. When users enter an order based on an implied volatility number, the exchange automatically refreshes the order each 6 seconds based on the current variables. This way, a retail trader can enter an order that adjusts to the current market based on a fixed implied volatility number. This is something that most retail brokers in fiat economies do not offer. This type of functionality is obviously available to anyone accessing fiat exchanges using APIs: they simply need to write these crons into their own programs.

I’ve been a fan of trading tail risks ever since the days of InTrade when I wrote the tail risks on economic numbers each night for over a year and never had a losing trade. Its well documented today, with the popularity of behavioural economics over the past few decades, that the untrained human brain makes inaccurate estimates of long shots, and a small mis-estimate for a long shot can translate into a lot of missing/added value when the statistics don’t support such prices.  For example, casinos are able to get a bigger house edge for long shot bets compared to even money bets. Consider the high house edge for most land based keno — which is pure long shots — compared to the low house edge for baccarat, the core game of which is close to even money.

Let’s apply the idea that we don’t estimate tail risks accurately to look for ways to profit on Deribit.

Deribit lists serial expirations on monthly and weekly bitcoin options. As time goes by, and expirations get closer, many of the “deep out of the money” strike prices lose liquidity because the minimum tick value is greater than the theoretical value of these tail risks. These deep out of the money strikes will go “no bid” once their theoretical value is less than the minimum tick. This is where the opportunity to profit can be found. I’ve noticed that what I’m assuming are manual order entry retail users with bids posted in the deep out of the money strikes where the theoretical price is lower than the single tick value. I assume that these users entered limit orders without expiration dates and didn’t cancel those orders as the particular strike went “no bid”. Another explanation is a user is short a particular deep out of the money strike and rather than waiting till expiration, the user is willing to pay an above market rate to close out the worthless position in order to free up margin or clean their position book. Whatever the reason, these bids are “pennies from heaven” for the savvy trader.

See the screen shot below that shows the bid on a worthless option at 0.0002 btc. The theoretical value of this option is actually worth less than the minimum tick of 0.0001 btc. A word of warning for those thinking of playing the tail risks: make them covered and remember the old saying about picking up pennies in front of a slow moving steam roller. Most of the time you’ll be able to take the penny, but there is a long-shot chance that you get called away or put in, so you need to either have the capital or enough liquidity to cover (either buying back or hedging). The nice thing about Deribit options is they are settled based on a futures contract that is liquid on the same exchange.

 

CBOE Bitcoin Futures Contract Specs

On December 10th 2017, the CBOE will launch bitcoin contracts for trading on their futures exchange. Below is a description of the key facts associated with the CBOE contracts. My initial thoughts are that with a contract size of 1 BTC on the CBOE compared to 5 BTC for the CME contract, the smaller CBOE contract might make it more accessible to retail traders. I also think that the two contracts with different sizes with some slight basis risk (due to the reference price each contract uses) will complement each other by adding greater liquidity in a similar way that e-mini and miNY contracts did with other futures contracts. Both contracts will be cash settled based on their respective underlying indexes.

If they take off, another outcome of the CBOE futures contracts is that Gemini Exchange will likely get a lot more volume and attention; this is probably good for the Winklevoss twins’ business.

Here are the CBOE contract specs:

CBOE Bitcoin (USD) futures (XBT) are cash-settled futures contracts that are based on the Gemini auction price for bitcoin in U.S. dollars.

Contract multiplier is 1 bitcoin.

Ticker Symbol: XBT

Contract Expirations: “The Exchange may list for trading up to four near-term expiration weeks (‘weekly’ contracts), three near-term serial months (‘serial’ contracts), and three months on the March quarterly cycle (‘quarterly’ contracts).”

“Market Orders for XBT futures contracts will not be accepted. Any Market Orders for XBT futures contracts received by the Exchange will be automatically rejected. Stop Limit Orders are permitted during regular and extended trading hours for the XBT futures contract.”

Minimum Price Intervals: 10.00 points USD/XBT (equal to $10.00 per contract). The individual legs and net prices of spreads in XBT futures may be in increments of 0.01 points USD/XBT (equal to $0.01 per contract).

The reporting limit will be 5 contracts (this seems quite low, but maybe this is something that the CFTC wanted)

There will be price limits: please consult the exchange website for more information.

 

 

Bitcoin Futures on CME December 18th

Today the CME announced bitcoin futures trading will begin on December 18th, 2017. This is very exciting news for crypto market participants. Trading in bitcoin futures on a CFTC regulated exchange will move bitcoin closer to the mainstream, add practically unlimited liquidity, and provide bitcoin holders with a way to hedge their bitcoin price exposure to the USD fiat economy.

The CME bitcoin futures contracts will be cash settled based on the CME CF Bitcoin Reference Rate (BRR), which aggregates bitcoin trading activity across several spot exchanges between 3:00 p.m. and 4:00 p.m. London time each day. The contract size will be 5 bitcoins; given the current price of $10,000 BTC/USD, the notional value of each contract might be around $50,000. This contract size is probably too big for the average retail trader, but good enough for the rest of us.

FAQ: CME Bitcoin Futures – CME Group – CME Group

Get answers to frequently asked questions about CME Bitcoin futures, including when contracts will launch, how to trade and contract specs.

Bitcoin Heads to Wall Street Whether Regulators Are Ready or Not

Two U.S. exchanges, including the parent of the venerable Chicago Mercantile Exchange, are racing to embrace bitcoin, dragging federal regulators into a realm skeptics call a fad and fraud. The development shows how some big financial players are moving to co-opt the volatile cryptocurrency and lure more mainstream investors into the market, even before regulators have agreed on just what bitcoin is.

Bitfinex Euro Market Update

It’s been a few days since Bitfinex listed Euro trading, so we now have some more data to work with. Even though the Bitfinex USD market is based on tether, and fiat deposits/withdrawals will remain severely restricted, the USD market is still much larger than the Euro market. At the time of writing, the current bid/offer for borrowing/lending Euros on Bitfinex is 0.012% to 0.0243% per day. There is 13,000 bid and 140 offered, so the Euro lending/borrowing market is wide and illiquid. This presents some interesting challenges and opportunities. For those of us capable of making a market (either manually or using bots) the wide spread is not such a big deal, at least as long as our volume doesn’t overwhelm the market. For my purposes, I’d put up to 10,000 Euros into this market before I’d start to worry that I can’t get the money out to lenders frequently enough to earn a liquid rate. But it’s a double edged sword, a choice of risk to reward, about whether to get the money out to borrowers or to try and catch a sucker rate.

I’ve also noticed that the volume offered in the Euro lending book on Bitfinex is kinked. There are only about 360,000 Euros offered at up to 0.08% per day (from a market of 0.025% per day) and then there ar an additional 10,000,000 Euros offered at 0.083% per day. So someone must think that there is some chance that this money will get taken at this rate and they are willing to let the cash sit on the exchange (with all those associated risks) until that time. It’s not my style of trading (I hate dead money), but it helps us get a sense of the possible outcomes (and the ceiling on rates).

A quick glance at the loan book total outstanding shows the USD amount at 461,787,500.86 and the Euro 190,431.82, so the Euro market on Bitfinex has a long way to go in order to catch up to the USD volume.