Report: 950 FTX Users in Taiwan Had Digital Funds Worth $150 Million Held on the Exchange When It Collapsed

November 19, 2022 Bitcoin.com

CME Bitcoin futures trade at a discount, but is that a good or a bad thing?

November 17, 2022 Coin Telegraph

Arbitrage

CME Bitcoin futures briefly traded at a 5% discount, alarming analysts, but what does it mean for BTC price?

The Chicago Mercantile Exchange (CME) Bitcoin (BTC) futures have been trading below Bitcoin’s spot price on regular exchanges since Nov. 9, a situation that is technically referred to as backwardation. While it does point to a bearish market structure, there are multiple factors that can cause momentary distortions.

Typically, these CME fixed-month contracts trade at a slight premium, indicating that sellers are requesting more money to withhold settlement for longer. As a result, futures should trade at a 0.5% to 2% premium in healthy markets, a situation known as contango.

However, a prominent futures contract seller will cause a momentary distortion in the futures premium. Unlike perpetual contracts, these fixed-calendar futures do not have a funding rate, so their price may vastly differ from spot exchanges.

Aggressive sellers caused a 5% discount on BTC futures

Whenever there's aggressive activity from shorts (sellers), the two-month futures contract will trade at a 2% or higher discount.

*CME Bitcoin 1-month futures premium vs. BTC index. Source: TradingView*

Notice how 1-month CME futures had been trading near the fair value, either presenting a 0.5% discount or 0.5% premium versus spot exchanges. However, during the Nov. 9 Bitcoin price crash, aggressive futures contracts sellers caused the CME futures to trade 5% below the regular market price.

The present 1.5% discount remains atypical but it can be explained by the contagion risks caused by the FTX and Alameda Research bankruptcy. The group was supposedly one of the largest market makers in cryptocurrencies, so their downfall was bound to send shockwaves throughout all crypto-related markets.

The insolvency has severely impacted prominent over-the-counter desks, investment funds and lending services, including Genesis, BlockFi and Galois Capital. As a result, traders should expect less arbitrage activity between CME futures and the remaining spot market exchanges.

The lack of market makers exacerbated the negative impact

As market makers scramble to reduce their exposure and assess counterparty risks, the eventual excessive demand for longs and shorts at CME will naturally cause distortions in the futures premium indicator.

The backwardation in contracts is the primary indicator of a dysfunctional and bearish derivatives market. Such a movement can occur during liquidation orders or when large players decide to short the market using derivatives. This is especially true when open interest increases because new positions are being created under these unusual circumstances.

On the other hand, an excessive discount will create an arbitrage opportunity because one can buy the futures contract while simultaneously selling the same amount on spot (or margin) markets. This is a neutral market strategy, commonly known as 'reverse cash and carry.'

Institutional investors’ interest in CME futures remains steady

Curiously, the open interest on CME Bitcoin futures reached its highest level in four months on Nov. 10. This data measures the aggregate size of buyers and sellers using CME's derivatives contracts.

*CME Bitcoin futures open interest, USD. Source: Coinglass*

Notice that the $5.45 billion record-high happened on Oct. 26, 2021, but Bitcoin's price was near $60,000 then. Consequently, the $1.67 billion CME futures open interest on Nov. 10, 2022, remains relevant in the number of contracts.

Traders often use open interest as an indicator to confirm trends or, at least, institutional investors' appetite. For instance, a rising number of outstanding futures contracts is usually interpreted as new money coming into the market, irrespective of the bias.

Although this data can't be deemed bullish on a standalone basis, it does signal that professional investors' interest in Bitcoin is not going away.

As further proof, notice that the open interest chart above shows that savvy investors did not reduce their positions using Bitcoin derivatives, regardless of what critics have said about cryptocurrencies.

Considering the uncertainty surrounding cryptocurrency markets, traders shouldn’t assume that a 1.5% discount on CME futures denotes long-term bearishness.

There's undoubtedly a demand for shorts, but the lack of appetite from market makers is the primary factor leading to the current distortion.

The views and opinions expressed here are solely those of the author and do not necessarily reflect the views of Cointelegraph.com. Every investment and trading move involves risk, you should conduct your own research when making a decision.

The impact of the Wintermute hack could have been worse than 3AC, Voyager and Celsius — Here is why

September 21, 2022 Coin Telegraph

Arbitrage

Market makers are the backbone of every crypto exchange, ICO, DApp and many token listings, which is exactly why investors shouldn’t shrug off Wintermute’s hack.

Most crypto investors probably never heard of Wintermute Trading before the Sept. 20 $160 million hack, but that does not reduce their significance within the cryptocurrency ecosystem. The London-based algorithmic trading and crypto lending firm also provides liquidity to some of the largest exchanges and blockchain projects.

As a crypto-native trading firm, meaning digital assets have been its core since its inception in July 2017, Wintermute’s expertise in the sector is attested by $25 million in funding from global venture capital investors like Fidelity Investments, Pantera Capital and Blockchain.com Ventures.

Lending and venture capital firms have limited impact on day-to-day operations

An important distinction sets a market maker apart from bankrupt crypto venture capital firms like 3 Arrows Capital or insolvent lending and yield platforms like Voyager Digital and Celsius Network. Wintermute’s $160 million hack could have a much more profound impact on the crypto industry, considering how essential liquidity is.

The very nature of these businesses is vastly different. For example, a venture capitalist typically invests in pre-seed or seed capital by funding the projects ahead of their launch. There is a need for early-stage funding for tokens, nonfungible token (NFT) projects, decentralized applications (DApps) and infrastructure, but the money will eventually come up when a good team, idea and community are assembled.

Furthermore, the failure of a certain venture capitalist, whether it is or is not relevant to the industry, does not damage its competitors' reputation. In fact, the opposite sentiment emerges because it proves that picking the right projects pays off, if the firm has been correctly managing its risk exposure. The same can be said for the yield and lending platforms, which basically compete for client deposits and scramble to offer the best returns.

When market markers fail, liquidity dries up and there is nothing worse for tradable assets than spreads growing wider. Most DApps users and exchanges aren't aware of these intermediaries because their work is hidden within the order books and price arbitrage across intermediaries whether or not they are centralized. The real secret lies in algorithmic trading.

By applying sophisticated modeling and trading software, algorithmic firms like Wintermute resort to diverse strategies to find a competitive advantage over regular traders, including arbitrage, derivatives and colocation servers for high-frequency market access.

In addition to traditional proprietary desk trading, Wintermute provides market-making services by facilitating transactions on intermediaries using their own resources. These services can be hired by exchanges, brokers, token issuers or third-party entities such as foundations and supporting companies.

Specialized trading firms usually handle this process, but the activity can also be carried out independently. Currently, Wintermute, Alameda Research, DRW, Jump Trading and Cumberland are some of the leading prop trading firms that provide liquidity for centralized exchanges and decentralized finance (DeFi) platforms.

This week’s hack was not Wintermute’s first million-dollar mistake

Wintermute was hired by the Optimism Foundation to provide liquidity for its token listing in June 2022 but completely messed up by losing 20 million OP tokens. Wintermute's team disclosed the incident to the Optimism community and posted 50 million USD Coin (USDC) as collateral to ensure the protocol was fully reimbursed.

Think about that for a moment. Exchanges, blockchain projects, venture capitalists and DApps all need some form of liquidity to ensure that the secondary market works seamlessly for end users. Without thin spreads and some depth to the order book, there is barely a chance for any project to succeed.

Whether one considers liquidity providers to be villains or heroes, their importance to the crypto industry cannot be underestimated. The current hack could have been due to mistakes exclusive to Wintermute, and for this reason, they haven’t turned manifest as an additional risk for other market makers.

Traders should not compare the failure of 3AC, Voyager and Celsus to the threat of a liquidity vacuum that is driven by the exodus of the remaining arbitrage desks. There is no indication that widespread risk has emerged at the moment, but until a detailed post-mortem is issued and similar risks eliminated, traders should keep a close eye on the markets.

The views and opinions expressed here are solely those of the author and do not necessarily reflect the views of Cointelegraph. Every investment and trading move involves risk. You should conduct your own research when making a decision.

Tired of losing money? Here are 2 reasons why retail investors always lose

September 17, 2022 Coin Telegraph

3AC

A majority of “traders” end up being losers with empty portfolios. Here is exactly why.

A quick flick through Twitter, any social media investing club, or investing-themed Reddit will quickly allow one to find handfuls of traders who have vastly excelled throughout a month, semester, or even a year. Believe it or not, most successful traders cherry-pick periods or use different accounts simultaneously to ensure there’s always a winning position to display.

On the other hand, millions of traders blow up their portfolios and turn out empty-handed, especially when using leverage. Take, for example, the United Kingdom’s Financial Conduct Authority (FCA) which requires that brokers disclose the percentage of their accounts in the region that are unprofitably trading derivatives. According to the data, 69% to 84% of retail investors lose money.

Similarly, a study by the U.S. Securities and Exchange Commission found that 70% of foreign exchange traders lose money every quarter, and eToro, a multinational broker with 27 million users, reported that nearly 80% of retail investors lost money over 12 months.

The same pattern emerges in every market across different continents and decades: retail traders seldom sustain profitable operations. Still, novice and experienced investors think they can overcome that bias due to ingenuity or mass marketing campaigns from influencers, exchanges and algorithmic trading systems.

Below are the 4 culprits behind the inevitable failure of retail traders. There is no easy solution aside from a long-term mentality and dollar-cost average-based strategy of buying a fixed amount every week or month.

Exchange servers have downtime and there are trade rollbacks

In June 2021, the U.S. Financial Industry Regulatory Authority fined Robinhood $70 million, alleging “widespread and significant harm” and “misleading information to millions of its customers” starting in September 2016. Specifically, the regulator cited the platform’s outages between 2018 and 2018, affecting clients’ ability to execute buy and sell orders during significant market volatility periods.

On 8 March 2022, London Metal Exchange (LME), the largest commodities trading venue in Europe, canceled all the trades in nickel futures and deferred the delivery of all physically settled contracts. The reason cited by Bloomberg was “unprofitable short positions, in a massive squeeze that has embroiled the largest nickel producer as well as a major Chinese bank.”

Notice that such a decision is vastly worse for a broker that decides to deliberately halt their platform. In those cases, at least the client can choose another intermediary. A rollback, or trade cancellation, is far more problematic because users had already expected the profits, or maybe even hedged, meaning the trade was part of a broader strategy.

High-frequency trading and unlimited funding

Professional traders use colocation servers, placing a server as close as possible close to an exchange's data center because this significantly reduces transmission delays. These exchanges offer premium services to high-end clients, including the private housing servers on-site.

Besides requiring a significant amount of volume to cover the costs, colocation servers provide high-frequency traders the benefit of running strategies such as pinging, which uses a series of smaller orders to scope whales trying to enter or exit the market.

In addition to being heavily funded, these arbitrage traders usually have additional funding from exchanges. These benefits basically mean they can post trades with no collateral, similar to having credits, providing them with a huge advantage over retail investors.

The evidence? Three Arrows Capital's (3AC) insolvency negatively impacted Deribit exchange, which was forced to cover the loss themselves. Moreover, prominent Bitcoin Cash (BCH) figure, Roger Ver, is being sued by the exchange CoinFLEX for $84 million allegedly owed due to liquidations.

Retail traders need to understand that there is no room for amateurs and realize the intricate relationship between exchanges, venture capitalists, market makers and whales. Whether or not a partnership is on paper, a mutual benefit ensures that these players have preferential access to pre-seed funding rounds, listings and market access.

The only way for investors to opt out of losing money is to give up on trading, and avoid leverage trading like the plague. In reality, investors with six months or longer timeframe stand a chance of being profitable in each of their positions.

Report: Crypto Hedge Fund Three Arrows Capital Pitched a GBTC Arbitrage Trade Before Rumored Collapse

June 22, 2022 Bitcoin.com

Signs of fear emerge as Ethereum price drops below $3,000 again

September 28, 2021 Coin Telegraph

Signs of fear emerge as Ethereum price drops below ,000 again

Arbitrage

Traders have yet to flip bearish on Ether price, but the recurrent drops below $3,000 increase the likelihood of a sentiment flip.

Technical analysis is a controversial topic, but higher lows are commonly interpreted as a sign of strength. On Sept. 28, Ether (ETH) might be 30% below its May 12 high of $4,380, but the current $3,050 price is 78% higher than the six-month low of $1,700. To understand whether this is a “glass half full” situation, one must analyze how retail and pro traders are positioned according to derivatives markets.

*Ether price on Coinbase in USD. Source: TradingView*

On Sept. 24, Chinese authorities announced new measures to curb crypto adoption, causing the second-largest Ethereum mining pool (Sparkpool) to suspend operations on Sept. 27. According to Sparkpool, the measures are intended to ensure the safety of users’ assets in response to “regulatory policy requirements.”

Binance also announced that it would halt fiat deposits and spot crypto trading for Singapore-based users in accordance with local regulatory requests. Huobi, another leading derivatives and spot exchange in Asia, also announced that it would retire existing Mainland China-based user accounts by year-end.

Pro traders are neutral, but fear is starting to settle in

To assess whether professional traders are leaning bullish, one should start by analyzing the futures premium — also known as the basis rate. This indicator measures the price gap between futures contract prices and the regular spot market.

Ether quarterly futures are the preferred instruments of whales and arbitrage desks. Although it might seem complicated for retail traders due to their settlement date and price difference from spot markets, their most significant advantage is the lack of a fluctuating funding rate.

*Ether three-month futures basis rate. Source: Laevitas*

The three-month futures usually trade with a 5% to 15% annualized premium, comparable to the stablecoin lending rate. By postponing settlement, sellers demand a higher price, causing the price difference.

As depicted above, Ether’s dip below $2,800 on Sept. 26 caused the basis rate to test the 5% threshold.

Retail traders usually opt for perpetual contracts (inverse swaps), where a fee is charged every eight hours depending on which side demands more leverage. Thus, to understand if longs are panicking due to the recent newsflow, one must analyze the futures markets’ funding rate.

*Ether perpetual futures 8-hour funding rate. Source: Bybt*

In neutral markets, the funding rate tends to vary from 0% to 0.03% on the positive side. This number is equivalent to 0.6% per week and indicates that longs are the ones paying it.

Between Sept. 1 and 7, a moderate spike in the funding rate took place, but it dissipated as a sudden crypto crash caused $3.54 billion worth of future contracts liquidations. Apart from some short-lived, slightly negative periods, the indicator has held flat ever since.

Both professional traders and retail investors seem unaffected by the recent $2,800 support being tested. However, the situation could quickly revert, and “fear” could emerge if Ether falls below such a price level, which has been holding strong for 52 days.

$200M hedge fund pauses crypto arbitrage trading amid market downturn

July 2, 2021 Coin Telegraph

Arbitrage

The hedge fund co-founder says it is keeping its investment powder dry for when the crypto market resumes its parabolic advance.

Crypto hedge fund Nickel Digital Asset Management cycled into a cash position following the crypto market collapse of May.

According to Bloomberg, the $200 million crypto hedge fund led by JPMorgan and Goldman Sachs alumni redeployed its capital in anticipation of another explosive price run for cryptocurrencies.

Prior to piling into a cash position, Nickel Digital focused on cryptocurrency arbitrage opportunities resulting from cryptocurrency price differences across the spots and derivatives markets.

Indeed, crypto arbitrage trading reportedly offered double-digit annualized gains for institutional investors with sufficient capital to make sizable returns on these momentary price gaps. These trades are market neutral rather than directional since the focus on price discrepancies and not price action.

Commenting on the fund’s investment thesis, Nickel Digital CEO Anatoly Crachilov told Bloomberg: “We don’t take directional bets, so whether Bitcoin goes up 300% or down 70%, we will seek to capture arbitrage opportunities from market dislocations,” adding:

“Our market-neutral, low volatility strategy is designed to provide positive returns irrespective of market directionality. It’s meant to make a transition into the crypto market easier for investors with lower risk tolerance.”

Nickel Digital has reportedly earned 29% in gains at 3% volatility, far lower than the 78% market average for crypto assets. However, Bitcoin’s (BTC) blow-off top back in April and the ensuing altcoin capitulation in May has reportedly upended these arbitrage opportunities for hedge funds like Nickel Digital.

Bitcoin’s 50% crash from its $64,000 all-time high triggered a cascade of liquidations in the futures market especially for over-leveraged longs to the tune of about $9 billion. Altcoins also crashed more than 70% and price action has remained in a sideways accumulation state with frequent 10 to 15% dips.

For Crachilov, it is all about playing the waiting game, for now: “June will be remembered as a cash-rich, wait-and-see month.” The Nickel Digital CEO also stated that the current market downturn is not out of the ordinary for investors long in the crypto business.

The crypto hedge fund chief stated that institutional investors are starting to move away from seeing crypto investments as a reputational risk. Indeed, banks in the United States and Europe are beginning to offer direct exposure to Bitcoin for both retail and big-money players.

Back in June, Alex Mashinsky, CEO of crypto lending platform Celsius, told Cointelegraph that he sees Bitcoin reaching a new all-time high of $160,000 before the end of the year.

GBTC discount presents a unique challenge for Grayscale and investors

May 8, 2021 Coin Telegraph

Arbitrage

The Grayscale Bitcoin Trust continues to trade at a discount compared to BTC, a situation that presents a unique challenge to Grayscale and investors.

Since 2013 the Grayscale Bitcoin Trust Fund (GBTC) has offered its investors exposure to Bitcoin (BTC) through a publicly quoted private instrument. However, the trust's convertibility and liquidity vastly differ from an Exchange Traded Fund (ETF).

Trusts are structured as companies, at least in regulatory form, and are 'closed-end funds' which can initially only be sold to accredited investors. This means the number of available shares is limited, and retail traders can only access them via secondary markets. Furthermore, a GBTC share cannot be redeemed for the underlying BTC position.

Historically, GBTC used to trade above the equivalent BTC held by the fund, which was caused by the retail crowd's excess demand. The common practice for institutional clients was to buy shares directly from Grayscale at par and sell at a profit after the six-month lock-up period.

During most of 2020, GBTC shares traded at a premium to its Net Asset Value (NAV), which varied from 5% to 40%. However, this situation drastically changed in March 2021. The approval of two Bitcoin ETFs in Canada heavily contributed to extinguishing the GBTC premium.

ETF funds are less risky and cheaper compared to trusts. Moreover, there is no lock-up period, and retail investors can attain direct access to buy shares at par. Therefore, the emergence of a better Bitcoin investment vehicle seized much of allure that GBTC once possessed.

Can DCG save GBTC?

*Grayscale GBTC premium vs. net assets value. Source: Ycharts*

In late February, the GBTC premium entered adverse terrain, and holders began desperately flipping their positions to avoid getting stuck in an expensive and non-redeemable instrument. The situation deteriorated up to an 18% discount despite BTC price reaching an all-time high in mid-March.

On March 10, Digital Currency Group (DCG), Grayscale Investments' parent company, announced a plan to purchase up to $250 million of the outstanding GBTC shares. Although the conglomerate did not specify the reason behind the move, the excessive discount certainly would have pressured their reputation.

As the situation deteriorated, DCG announced a roadmap for turning its trust funds into a U.S. ETF, although no specific guarantees or deadlines have been informed.

On May 3, the firm announced that it had purchased $193.5 million worth of GBTC shares by April. Moreover, DCG increased its GBTC shares repurchase potential to $750 million.

Considering the $36.3 billion in assets under management for the GBTC trust, there's reason to believe that buying $500 million worth of shares might not be enough to ease the price discount.

Because of this, some important questions arise. For example, can DCG lose money by making such a trade? Who's desperately selling, and is a conversion to an ETF being analyzed?

Looking forward

As the controller of the fund administrator, DCG can buy the trust fund's shares at market prices and withdraw the equivalent Bitcoin for redemption. Therefore, buying GBTC at a discount and selling the BTC at market prices will consistently produce a profit and there's no risk by doing this.

Apart from a few funds that regularly report their holdings, there's no way to know who has been selling GBTC below net asset value. The only investors with 5% or more holdings are BlockFi and Three Arrows Capital, but none have reported reducing their position.

Therefore, it could be potentially multiple retail sellers exiting the product at any cost, but it is impossible to know right now.

While buying GBTC at a 10% or larger discount might seem a bargain at first, investors must remember that as of now, there's no way of getting out of those shares apart from selling it at the market.

Do $100K–$300K Bitcoin call options signal a bullish BTC price path?

March 30, 2021 Coin Telegraph

Do 0K–0K Bitcoin call options signal a bullish BTC price path?

Arbitrage

Derivatives exchanges now offer $100,000–$300,000 Bitcoin call options, but how keen are pro traders to take the bait?

The open interest on Bitcoin (BTC) Dec. 31 call options between $100,000 and $300,000 reached an impressive 6,700 contracts, which is currently worth $385 million. These derivatives give the buyer the right to acquire Bitcoin for a fixed price, while the seller is obliged to honor the price.

One might think that this is a great way to leverage a long position, but it comes at a cost and is usually quite high. For this right, the buyer pays an upfront fee (premium) to the call option seller. For example, the $100,000 call option is currently trading at 0.164 BTC, equivalent to $9,480.

For this reason, option traders seldomly buy these options by themselves. Therefore, longer-expiry derivatives usually involve multiple strike prices or calendar months.

*Bitcoin options block trades. Source: Paradigm Telegram Channel*

Shown above is an actual trade arranged by Paradigm, an institutional investor-focused over-the-counter trading desk. In this trade, a total of 37 BTC December $100,000 and $140,000 calls have been traded between two of their clients.

Unfortunately, there's no way to know which side the market maker was, but considering the risks involved, one can assume the client was looking for a bullish position.

*BTC calendar spread simulation. Source: Deribit Position Builder*

By selling the $140,000 call option and simultaneously buying the more expensive $100,000 call, this client paid a $138,000 upfront premium. This amount represents their max loss, which takes place at $100,000 price on Dec. 31.

The red line on the above simulation shows the net outcome at expiry, measured in BTC. Meanwhile, the green line displays the theoretical net return on June 30.

Thus, this client needs Bitcoin to trade at $65,600 or higher on June 30 to recoup their investment. This number is significantly lower than the $107,150 required for the break-even if this "call spread" strategy buyer holds until the December expiry.

This phenomenon is caused by the $100,000 call option price appreciation being larger than the $140,000. While a Bitcoin price increase to $65,600 is quite relevant for a $100,000 option with six months left, it is not so much for the $140,000 one.

Countless strategies can be achieved by trading ultra-bullish call options, although the buyer doesn't need to wait for the expiry date to lock in profits. Thus, if Bitcoin happens to increase by 30% in a couple of months, it makes sense for this call spread holder to unwind their position.

As shown in the example above, if Bitcoin reaches $75,000 in June, the buyer can lock in a $23,000 net profit by closing the position.

While it's exciting to see exchanges offering massive $100,000–$300,000 expiries, these figures should not be taken as precise analysis-backed price estimates.

Professional traders use these instruments to conduct bullish but controlled investment strategies.

The views and opinions expressed here are solely those of the author and do not necessarily reflect the views of Cointelegraph. Every investment and trading move involves risk. You should conduct your own research when making a decision.

Arbitrage

Aggressive sellers caused a 5% discount on BTC futures

The lack of market makers exacerbated the negative impact

Institutional investors’ interest in CME futures remains steady

Lending and venture capital firms have limited impact on day-to-day operations

This week’s hack was not Wintermute’s first million-dollar mistake

Exchange servers have downtime and there are trade rollbacks

High-frequency trading and unlimited funding

Pro traders are neutral, but fear is starting to settle in

Can DCG save GBTC?

Looking forward

Share this video