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A Message from Alexander Höptner, CEO of 100x Group

We all have origin stories for how we got into crypto. Swapping these with each other can tell us a lot about the maturity of the space - the more ubiquitous crypto becomes, the more seemingly ‘unremarkable’ these can seem. But we should remind ourselves that getting into a technology (and an asset) this revolutionary is hardly anything to yawn about. 

It’s telling that a lot of the OGs in our industry got their start in arbitrage. That includes our co-founder Arthur, who in this edition of Crypto Trader Digest delves into what he calls the ‘bedrock of the crypto capital markets’ - the Cash-and-Carry trade. 

Like every good origin story, this one contains challenges along the way. I hope when you’re reading it, you see some parallels with your own evolution as a trader. Happy reading.

- Alex (@AlexHoeptner)

From the Desk of Arthur Hayes



(Any views expressed in the below are the personal views of the author and should not form the basis for making investment decisions, nor be construed as a recommendation or advice to engage in investment transactions.)

I am an arbitrage trader at heart. In May 2013 brimming with my experience as a delta one trader, I entered the crypto capital markets. The first trade I ever put on was buying Bitcoin from Mt. Gox, depositing them on ICBIT, then selling BTC/USD June 2013 inverse futures contracts at a premium. My first trade captured a premium of 200% per annum (PA). When the futures expired, and my PNL matched my spreadsheet calculations exactly, I thought to myself, holy shit, “Bitcoin is LIT!”
This type of trade, called “Cash and Carry,” is the bedrock of the crypto capital markets. The futures implied yields on Bitcoin, USD, and other coins affects all aspects of the market. It is one the simplest and highest risk adjusted return trades one can execute. It also does not entail taking any crypto vs. fiat price risk. Remember, the primary goal of trading and investing is for your portfolio to at least match fiat M2 growth. Essentially, the “Cash and Carry” trade allows you to harvest the structural bid speculators have for crypto and its realised volatility.
In various past newsletters and seminars, I harped on about this trade. As there is a lot of new blood in the markets, and my friends who are analogue market professionals still ask about the details of this trade, it is high time for an in-depth, step-by-step guide to “Cash and Carry.” This tome will be filled with amusing stories about my days as a junior sell-side banking trader, the early days of my crypto trading experience, and my thoughts on how to capture yield in the crypto capital markets.

Don’t take my word for it — do your own research, and replicate my examples on an exchange’s Testnet or a spreadsheet. I will use the BitMEX trading platform as a reference point when describing these strategies. They will work across most if not all of the major crypto derivatives platforms.

SS Arbitrage

I spent a lot of time in the ICBIT chat room. It was a general room where all users could chat. There was a particular user named “SS Arbitrage”. Every time he signed on, he would say “Honk Honk”. I believe it coincided with him selling futures contracts, as his preferred trade was long cash vs. short future to earn the very high basis I just spoke about.
In subsequent years, I learned that he is one of the most OG crypto traders. Rumour has it he also paid 10,000 BTC for a pizza. The dude is a legend, and I am glad I got to meet him in the default world a while back.
In this bull market, the basis on futures contracts looks extremely high. When my banker friends discover you can make 30% PA doing cash and carry using USD, BTC, and futures their minds melt. If you think 30% is aggressive, imagine 200% back in 2013. I will go into the structural reasons of why basis is highly positive in a flat or bull market later.
The biggest dislocation I ever saw was in December 2013 when Bitcoin hit $1,000. China was pumping, and Bitcoin rocketed from $60 in August to $1,000 in December. The March 2014 Future vs. December 2013 Future basis traded at a 100% premium OUTRIGHT. I sold Mar14’s and bought Dec13’s. The trade was delta neutral, but I picked up the price difference between the two contracts. The calendar spread collapsed to flat during January as Mt. Gox started to wobble, and spot began its multi-year bear market. I remarked to another crypto OG trader and former exchange head that I should have bet the house on that trade - and that individual said he went all in on that spread and made beaucoup moneys.
I provide this historical vignette to illustrate that crypto basis trading is nothing new, and today’s levels speak to a more mature market. This maturity is the result of an increase in arbitrageurs willing to lend synthetic USD to long speculators.

Training Day

When I joined Deutsche Bank as a graduate, you had four rotations to find a job, or you were out. They generally had enough slots on the floor for every graduate, but if no one liked you, bye bye. I rotated through the Asian Equity Index Vol, Research Sales, Convertible Bond Trading, and Absolute Strategies desks. I thankfully found a role on the Absolute Strategies desk, which essentially was an Asian equity index arbitrage desk. We traded the difference between the cash basket of stocks and any futures contract listed on top around the region.
If there was a BSD of the Deutsche Equities trading floor, it was my boss. He drove a white Lambo, spoke very quietly, and his desk made the most money on the floor at my time of arrival.
One day I got him the wrong fruit for breakfast and he pulled me aside and said, “you know why this is important, right?”, I replied, “yes, attention to detail.” I never fucked up the breakfast or lunch order again.
DB was making a big push into Asian ETFs, and his desk acquired the mandate to build out the DB X-Trackers product line. I was the grad hired to grow the business.

 I really didn’t have a deep understanding of the basis trading business acutely until an incident occured a bit later down the line (I’ll get to that in a bit). In 2009, traction on ETFs in Asia was a nothingburger. We launched a series of ETFs on the Hong Kong and Singapore stock exchanges. No retail investors bothered buying them and the only trades we saw were the result of my prices getting arbed by other trading houses. Shout out to Su Zhu of Three Arrows. Before he joined crypto, he used to arb my ass when I got sloppy.
In the summer of 2009, I dropped a few hundred thousand USD in a matter of hours because I did not fully grasp the relationship between cash stock baskets and futures contracts. I don’t remember what the political catalyst was, but one morning Taiwan opened strong, and the cash markets traded limit up (7% up over the previous close) within an hour.

I had an ETF listed that tracked the MSCI Taiwan Index. I did my usual morning routine, checked the index constituent file to make sure my quoter would produce the right prices on the exchange, and then opened the market. However, I quickly noticed that I kept getting lifted even after the Taiwanese cash market was limit up. I soon had so much short delta that I began trying to buy cash baskets, but I could not because all the constituents were locked limit up. Instinctively, I just started raising my prices, but I kept getting lifted, which meant I got shorter and shorter. The exposure was in the millions of USD of naked Taiwan risk that I couldn’t hedge in the cash markets. I thought “Fuck Fuck, Fuckity Fuck Fuck” I had way too much Taiwan risk and no ability to hedge. I looked around for my boss. He was nowhere to be found, so I frantically ran around the trading floor looking into all the meeting rooms for him. I located him chilling with a bunch of other swingers, and I interrupted them — telling him how much delta I had, and that I couldn’t hedge. He told me to keep raising my prices. I returned to my desk and kept skewing my prices higher. I kept getting shorter. I got back up, went and found him again, and told him the situation. At that point, he followed me back to my desk and I showed him what I was doing. He asked me if I was buying futures contracts, and I said, “No, why would I do that? My hedge is the cash basket.” WRONG.COM
I don’t remember if he called me a “fucking idiot” or not. I definitely received that feedback on other occasions due to mispricing. But I was scared shitless.
The MSCI Taiwan futures contract in Singapore did not have a 7% limit up provision, so they traded at the true market level. He then instructed me to price my ETF off the fair price of the MSCI Taiwan index as derived from the futures market. The MSCI Taiwan index arb trader gave me his fair every morning, and I would trade my offset in my spreadsheet and adjust my quoter. This chap is also a legend— he is currently one of the head traders of the desk I received a pink slip from at Citi in Hong Kong. Luckily, I instinctively knew that if someone traded against me, I was wrong, not them. After hedging my position in the futures market, the loss was a few hundred thousand USD. I never forgot that painful lesson on the connection between the cash and the futures market...

Click here to continue reading this edition of Crypto Trader Digest 

–  Arthur Hayes, Co-Founder of 100x Group (@CryptoHayes)

From BitMEX Research



The Blocksize War - Chapters One and Two 

The opening chapters of The Blocksize War have been released on the BitMEX blog. This book covers Bitcoin’s blocksize war, which was waged from August 2015 to November 2017. On the surface the battle was about the amount of data allowed in each Bitcoin block, however it exposed much deeper issues, such as who controls Bitcoin’s protocol rules.

The full book is available on Amazon. Half of any profits from physical book sales will be donated to Médecins Sans Frontières, a charity that provides medical assistance to people affected by conflict, epidemics, disasters, or exclusion from healthcare.


Latest News from BitMEX

Scheduled Temporary Downtime for 8 April (Mainnet) for Upgrades to System Architecture

We’re continuously enhancing our trading engine to maintain the BitMEX platform’s excellent performance. As part of our latest initiative to facilitate a major upgrade to our system architecture, we will temporarily halt trading in our production (Mainnet) environment on Thursday, 8 April at 02:15 UTC. Trading will recommence from approximately 02:45 UTC. 

We successfully completed the same upgrade in our Testnet environment on Thursday, 1 April. 

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No articles in this email should be copied or reproduced in whole or in part. The information contained does not constitute research or a recommendation. 

Neither HDR Global Trading Limited nor any of its affiliates make any representation or warranty as to the accuracy or completeness of the statements or any information contained in these articles and any liability therefor (including in respect of direct, indirect or consequential loss or damage) is expressly disclaimed. This is not providing any financial, economic, legal, accounting or tax advice or recommendations. In addition, the receipt of this email is not to be taken as constituting the giving of investment advice nor to constitute such person a client of the BitMEX trading platform.

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