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.

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.

Where to Buy Bitcoins in Toronto

Kudos to my friends for getting their CoinBerry bitcoin ATM featured in BlogTO 🙂

How to buy Bitcoin in Toronto

As the price of Bitcoin continues to skyrocket many are starting to notice and are wondering how they too can get in on the latest investment sensation. The simplest answer is you can either go online to a Bitcoin exchange like Coinsquare or buy directly at one of the many Bitcoin ATMs around Toronto.

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.

What’s causing the Bitcoin Price to rise?

What’s causing the price of bitcoins to rise so dramatically?  I get asked this question many times a day from friends and colleagues wondering what’s driving the price of bitcoins. My favourite response is the old trader’s adage, “more buyers than sellers”. Even though this response is a joke, the basic fundamentals are true (I guess that’s what makes it an “adage”). The reason why the bitcoin price is rising is because there are a lot more buyers than sellers. An increasing number of people around the world are buying bitcoins, and by most back of the napkin estimates, only a small fraction of the world’s population has any bitcoin yet, so we might be only scratching the surface of the bitcoin price rise.

I think its only a matter of time until a wave of new crypto currency users come from countries with failed governments. There are lots of examples of this happening already such as the number of luxury goods shops accepting bitcoin in popular tourist destinations in France and Switzerland, they are being used by the elite from African and middle eastern countries. There are more than 1 billion people living in India and their governments are ineffective and wasteful, they are subject to wild banking laws and black markets make up such a large part of the Indian economy, it only makes sense that many people in India will move away from using their government currency and use crypto currencies instead. The government will have to spend a lot of resources and restrict the freedoms of citizens to access the internet in order to try and stop this trend.

Where could the price of bitcoin go?  Anywhere the market decides. Nobody is in control of the bitcoin price, and this is part of its appeal. If the bitcoin blockchain cannot provide value to users, its market price will eventually fall, maybe it will crash, but whether its bitcoin or some of the many other crypto currencies, the idea of blockchains has been discovered, and this cannot be unlearned.

Those of us with bitcoins should be less concerned about whether the price rises or falls, and more concerned about what governments will do about it. As the crypto economies grow, they will erode the power of governments to tax residents who do not disclose their crypto income/assets. And there will be increasing arms race between the most sophisticated members of rich countries and their own governments who try to tax their crypto currency profits.

 

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.

How to price CoinRoster bitcoin pools

This post will describe how to use binary options to estimate the odds of a pari-mutuel pool. Friends of mine run a fantasy sports site called CoinRoster where they host pari-mutuel pools on a variety of topics including the bitcoin price. The CoinRoster bitcoin pools are fairly straight forward, users are presented with a binary question such as “will the bitcoin price be over/under a fixed price at a future date”. As the image below shows, at the time of writing, CoinRoster had a pool asking whether the price of bitcoin will be above or below $5,000 USD on February 1st 2017 based on the CME reference price. This pool closes in a few hours with the current bitcoin price is $6,352.

This is a simple market with two possible outcomes, the price will either be $5,000 and above, or below $5,000 as described by the pool’s terms. With the current price of $6,352, we can use a binary options calculator to determine the theoretical price for each outcome. We can even go a step further by converting the binary option price into an odds number format that you prefer, in the example below, I use decimal odds.

To start, let’s tally all the information we need to price the binary option:

Days Till Expiration 92
Strike Price $5,000
Underlying Price $6,352
Volatility 90%
Risk Free Rate 1.25%
Distributions 0

The days till expiration is the settlement date of the pool, in this case, the pool closes on October 31st, and settles based on the February 1st price, this is 92 days.  The strike price is $5,000 since this is the price that the pool uses to determine the outcome (either above or below). The underlying price is the current price of bitcoin, which is $6,352. To estimate the volatility, I used the average implied volatility rate for options on deribit.com, I chose a level of 90%.  I used a risk free rate of 1.25% and there are no dividends or distributions which might impact the price, so this number is zero.

Now we have all the variables, to determine the binary option prices, simply visit a free binary options calculator online and plug in the numbers, below is a screenshot.

With these variables entered, we get a result of a binary call price of 0.62 and a put price of 0.38. The first thing we should notice is since there are only two possible outcomes, the sum of call and put prices should be exactly 1.00. We should also notice that the call option is worth much more than the put option, this makes intuitive sense since the strike price is $5,000, while the underlying price is currently $6,352, making the call option “in the money”.

The binary option values can also be viewed as percentage chances, in other words, a binary option value of 0.62 is like saying there is a 62% chance of the outcome happening. To convert the binary option into an odds format such as decimal odds, simply divide 1 into the binary price = 1 / 0.62 =  1.612 or oppositely 1 / 0.38 = 2.63. Now we have an estimated price for each outcome in this pool, 1.612 for above and 2.63 for below.

In this example, the main variable that will impact the calculation is the volatility rate. We could assume different levels of volatility and get much different results. For example, instead of using a volatility level of 90%, if we used a level of 30%, the result would be binary prices of 0.935 call and 0.065 put. This makes intuitive sense since the less volatile the underlying is, the less likely it is to make big swings “out of the money” in this case, below $5,000 by February 1st.

The CoinRoster bitcoin pools are fun ways to bet on the price of bitcoin, whether you are hedging or speculating.

CME to launch bitcoin contracts

Very exciting news from CME today, they plan to launch bitcoin futures contracts in Q4 2017! If it comes true, I think this would be one of the most dramatic events in the history of crypto currencies. Having a transparent US regulated futures market (can we also hope for options on futures eventually?) will have a cascading effect on the rest of the market. Think about the reasons why regulators have been denying ETF and other crypto product applications, because they say the secondary market is not developed enough, well, if the CME is hosting a liquid market, it becomes impossible to deny ETF applications. There is every reason to believe once the CME bitcoin markets are established, tracker ETFs will be approved and listed on recognized US exchanges as well.

When FX markets were launched on the CME in the 1970s, they supported the growth of a new global market for free floating fiat currencies. I hope something similar happens as the CME begins to host crypto markets, since it will become impossible for governments to deny their efficacy.

CME Group Announces Launch of Bitcoin Futures – CME Group

CHICAGO, Oct. 31, 2017 /PRNewswire/ — CME Group, the world’s leading and most diverse derivatives marketplace, today announced it intends to launch bitcoin futures in the fourth quarter of 2017, pending all relevant regulatory review periods. The new contract will be cash-settled, based on the CME CF Bitcoin Reference Rate (BRR) which serves as a once-a-day reference rate of the U.S.