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.

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.

 

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.

Review of Hive Blockchain Technologies

A friend of mine who is an investor based in Ontario Canada asked me recently to provide him with my thoughts on Hive Blockchain Technologies, which is a TSX listed company based in Vancouver. Below are my thoughts.

My process to analyse a public company (in Canada and/or the US) is pretty straight forward. The first thing I do is a Google search for their name. This helps link me to their company website, but also helps me see the main pages that might be relevant. I arrive at Hive’s website and download their investor presentation which is a 38 page PDF.  According to their investor presentation, Hive owns 2 GPU based mining facilities and owns the option to buy 2 more facilities from Genesis Mining (which is a cloud mining company, that I’ve used and reviewed on this blog). Genesis in turn owns 30% of Hive.

The first thing that strikes me as I’m reading Hive’s investor presentation is they are rightly currently focused on GPU based mining, which includes such currencies as Monero, Dash, ZCash, Ethereum. Bitcoin mining is not profitable anywhere in the world unless the miner can secure a subsidized price for power, and this usually involves some shady deal with some government or utility. From what I can see, its profitable to mine bitcoins if your facility is in a cold climate, with no taxes, right next door to a hydro electric facility so that no transmission costs are involved. This should be a hint to Ontario based towns with old hydro facilities, and a missed opportunity for Ontario Power Generation.

The problem with focusing on GPU based mining is that in the long run, the profitability of this type of mining should erode. As the market for the most popular based GPU based mining becomes more liquid, it should drive down mining profitability (especially when any kid living in his parents basement running a GPU rig is getting free electricity because his parents pay the utility bill) to the point where profit focused miners will need search further afield to less popular coins to mine. Could this be one of the reasons why Genesis is selling to Hive?

At the time of writing, Hive has a market cap of 800 million Canadian dollars. I visit Sedar.com to find their financial statements. According to their September 30th, 2017 filing, Hive has 5.8 mil in cash and receivables, almost 9 mil worth of equipment, and accounts payable of 3.2 mil. Looks like they spent more than 500k on marketing expenses and 129K on professional fees. These expenses are likely related to their fundraising. They also recorded a 2.7 mil expenses related to share based compensation.

Starting in on the notes from the financial statements, looks like Hive will recognize revenue from mined coins as they are mined and apply an exchange rate at the time the coins are mined, they will also recognize the change in value of their coins on hand based on current rates and apply the difference to current year’s profit/loss. This accounting method could cause their income/loss to swing wildly as the value of the currencies they mine rise and fall. This accounting method could also cause Hive to pay a lot more tax than they otherwise would because they are realizing the tax liability on an ongoing basis, as compared to a passive investor in cryptocurrencies who would only recognize the capital gains and losses as they are realized.

Hive will also depreciate their computer equipment on a four year straight line basis. This policy will also have a dramatic impact on earnings and taxes since these assets make up a large part of Hive’s balance sheet.

Digging further into the notes on the financial statements. The initial deals with Genesis leave Hive public shareholders in a secondary position. Genesis will hold the balance of power. The deal to sell Genesis their shares comes at a great expense to Hive’s shareholders. A finder’s fee of 3.9 million shares was paid to secure Genesis’s 30% stake, and at current market prices, these shares are worth 12 million dollars. Genesis is also the service provider to Hive’s mining operations, so now we have a situation where the “manager” of the assets is also the largest shareholder, I’ve seen situations like this before, and it never turns out good for public minority shareholders.

There have been a number of related party transactions over the past few quarters, and as a public minority shareholder, this would be a red flag.

So Hive doesn’t make profits, the only way they will make money is if the value of crypto currencies gain in value relative to the Canadian and US dollars. Who would want to invest in this company?  I’d say lot’s of people actually. The main investor would be the retail investor in Canada and US who knows enough about crypto currencies to be suckered in my a slick investment sales process. These investors know the potential power of crypto currencies, but not enough to evaluate the profitability of Hive specifically. I think these investors would be better off holding the crypto currencies and riding the wave themselves, rather than entrusting their money to a company with a lot less accountability directly to them. Another strategy for the retail investor who is a potential investor in Hive is to treat their cryptocurrencies as a fun hobby and learn about how to mine themselves. Find a friend who lives in an apartment building where the building pays the electricity, and setup a small GPU mining rig in their apartment, share the profits. You’ll never get rich this way, but actually, the best way to get rich is to do something like the managers of Hive has done, know more than your investors and sell them the investment, pay yourself a handsome fee in the meantime.

 

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.

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.