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.


Coinut Binary Liquidity & Implied Vol

One aspect of the Coinut trading platform that is starting to get on my nerves this morning is the inability to modify an open order.  It seems the system does not provide the manual ability to modify an open order.  To change an existing order, the user must cancel the order and re-enter a new one instead. This make it a bit cumbersome to manually work an order book.

It would also make the prices more intuitive if you could choose to view the prices with the first two decimal places removed.  Sometimes it takes second to see that the price of an option is 0.00010 compared to 0.00100.  The difference with the binary implied probability is 1% compared to 10%, so its a big difference.

The market for binary options on Coinut seems to be more liquid than the vanilla options.  So in effort to get my first trade, I placed some aggressive 1 lot orders in a few weekly binaries this morning. Hopefully someone takes me out.

This morning I also took a quick look at implied probability at some of the options I’m making markets in. Considering the May 21st (1 week) binary 464 calls with the underlying at 455.81.  The current market is 0.002097 bid / 0.003000 offer. I am the best offer. The bid price represents implied volatility of 17.09% and the offer price represents implied volatility of 26.92%.  The VIX is currently at 15.04%. So this is very interesting for bitcoin traders.


Bitcoin Options Coinut Initial Thoughts

I’ve been investing in bitcoins for the past year, but I have expertise in derivatives, and I’ve been wishing that a bitcoin derivatives market would emerge soon. I have various bitcoin investments such as funding loans on p2p sites, funding margin on fx sites, and cloud mining pools, but the financial system for bitcoin is still nascent. Benchmark rates don’t really exist at this point, although a bunch of different bitcoin price indexes exist.

I’ve been watching a site called Coinut, which is a bitcoin option exchange, to see whether any liquidity will develop. But it seems over the past few months that liquidity hasn’t really picked up. Instead of waiting on the sidelines, I’ve decided to open an account on Coinut and start making markets myself.

Opening an account on Coinut is fairly easy, you just need a username, password, and e-mail address. Seems like each new account gets a small bonus of bitcoins just for signing up. Once I confirmed my account, I logged in and noticed 7 menu choices on the top main menu of each page. Tutorial, FAQs, Trade, Funding, History, Profile, Audit.

Starting with the audit tab, the audit page lists some details about the user balance and how much is in the Coinut wallet. There is also an audit time lists, but today it looks like the last “audit” was done 5 months ago, that doesn’t give me much confidence!? Seems like the audits are done using a Merkle Tree, which is a type of cryptology that I’m not familiar with, but I should do more research on.

The Profile tab allows users to change their password and enable two factor authorization, they support Google Authenticator.  Users can also change their e-mail address, obtain an API key for integration, and use an affiliate link which provides the referrer with 10% of the fees generated from referred accounts.

The History tab allows users to view their transaction histories and export to CSV.  The Funding tab shows the user’s deposit address which can be re-generated and a withdrawal address. The Trade tab is the order entry screen and a Tutorial tab that I haven’t explored with an FAQs tab with common questions.

There are two types of options available to trade: binary and european. The european options are called “vanilla” options on the site. The contract size is 0.01 BTC or 1% of a bitcoin in other words.  The contracts are based on an internal index that gives various weights to the major BTC platform prices. The index formulation is listed below:

Exchange Price Weight
Bitfinex 452.690000 0.029100
Bitstamp 452.800000 0.011472
Coinbase 455.440000 0.165079
OKCoin 453.170000 0.019601
BTCC CNY 454.953321 0.261188
Huobi CNY 454.973352 0.433884
itBit 453.590000 0.019020

The index is realtime and works just fine for me as I already use Coinbase and Bitfinex.

In terms of account level security, users are sent an e-mail each time an event occurs (logins, trades, etc).  I’ll post more about this site as I gain more experience with it.  I’m going to study various aspects of it including margin requirements, liquidity, etc in future posts. So far, the Coinut market architecture looks promising, although the liquidity looks thin.  I guess this provides both risks and rewards depending on what my strategy will be.