Paypal Finance: A look back at the five-year history of Bitcoin derivatives

Original title: zhoulibao 19th | bitcoin derivatives market development and trends (part 1)

The original author: NBSP; BABEL information & have spent & have spent

Bitcoin began to appear in 2009, and in 2011, there were a lot of transactions. By 2013, the transactions became richer and deeper and better. By 2015, a lot of derivatives started to appear, including contract options and so on. Many people think of the futures market, or the options market, or the derivatives market, as more of an explosion, as a high risk thing. In fact, we can also talk about another role of the option market, futures market and contract market for Bitcoin, and analyze this role from a professional financial perspective.

I. Development and trend of the Bitcoin derivatives market

T. :

Financial derivatives have been developed for many years, from the development of the currency, because the currency itself development time is short, it will follow the market as early as a primary stage, for example we found a coin, and then you want to sell, you where to sell, because all don't know this stuff, just up taobao search keywords, after the search, and then find a BBS, is sending a card, you may be offline this like a bank account on an exhausting. Then there began to be professional exchanges similar to the orderBook provided by the exchange, and then gradually there began to be some physical exchanges like huobi and some of the large scale of OK.

And then later on, probably starting from the BitMEX era, it was mostly concentrated in Europe and the US, and then they needed to manage the risk of bitcoin. The main reason to control the risk is because bitcoin is not going to go up all the time, and you need to control that risk. In addition to spot selling, then the most direct may also be short in the derivatives market. For example, we now have cash in the A stock market, such as the ETF of Shanghai Stock Exchange 300, and then some ETF of 50, etc. But in addition to these standard spot, I can use csi 300 to short my futures market and then protect my spot position.

In the same way, BitMEX has been issuing contractual derivatives since its earliest days, which may actually allow you to go long or short on its platform. Maybe retail investors will understand more that I'm highly leveraged, that I have 100 times or something like 125 times leverage, and then I can take a little bit of a shuttle and so on. And then the fact that you're highly leveraged itself also causes your profit and loss to be magnified, your position to be magnified. With such high volatility, if you take a highly leveraged position, it's easy to blow it up. But just because a tool gives you leverage doesn't mean your true position has to be so leveraged, you can make it so small. That's the leverage That I have right now, which is over 100, and I'm only using about 1 percent of my capital, and I'm actually twice as leveraged in nominal terms. I leverage 100 times with 2% of the money, and my nominal leverage is actually twice that. Double that position and you're much more resistant to that kind of volatility. So the leverage of the tool itself and how much leverage you have to add to it, it's actually two different things. There's also a neutral thing about the tool itself.

Ii. Risk hedging role of Bitcoin derivatives

Taylor-robinson:

I've learned an important keyword called risk control. The emergence and development of financial derivatives is entirely around this key word for evolution. So in the traditional financial market, these financial derivatives, including contracts and options, what role does it play?

T. :

In fact, what people care most about is not how much money I can make in the rally, because in some extreme situation, the market may suddenly reverse, then I need to protect my position. The most important is that if everyone's position is crowded into the spot, the spot in general can only do long, you want to see it up, I can only buy, and then wait for it to go up to a certain extent to throw it off, there is no way to go directly naked short. A derivative is designed to be more flexible than a spot, since the spot is the underlying asset that it is anchored to. But on top of that is the tool layer, and the tool layer, whether you're long or short, is very standardized in terms of contract design.

Bitcoin has evolved into options, which in the great bull market of '16 and' 17, you found a market based on instruments that didn't have a standardized option. One is that the spot market has not reached this stage, and its derivatives may be at the contract level. And then you find out that by the time you get to '19, the market is already in contract and it no longer satisfies risk control, or it requires some strategy that can enhance returns. What happened in the contract was not realized, and then a professional options exchange began to emerge. There are a lot of them out there, and Deribit is probably the biggest one in the world. It started very early, it should have started designing exchanges in '16, but it was just another niche niche market. Even with so many bitcoin holders around the world, there aren't many professionals out there to do that.

But this year we had an opportunity, 17 or 18 years later, the whole market had entered a new bear market, and then it went from $20,000 to $3,000 at its lowest point, went down for a very long time, and then went sideways again. Now the price has risen to $14,000 and back again to around $7,000. The whole market is in a very long a wide range of shocks, under the conditions of the broad shocks, will slowly let you all directional positions are not so good to do, we think that the industry may not have a particularly good sustainability. Maybe it goes up a lot, and then this direction changes. So there's a lot of CTA strategies in this volatility, it's hard to make a very high yield, and there's some people who can make money, like arbitrage. But what you find is that if you want to make bitcoin income from another dimension, then this dimension, we now have a concept from the perspective of transactions, which is the convexity of transactions.

What is convexity of a trade? If I want to go long this contract, I might make 100 dollars, but I might lose 100 dollars. If you are in the case of equivalence, then your convexity is almost gone. If it's a product with convexity, like an option. One of the things about options is, if you do the call option, you lose the most, let's say its royalty, and Now I buy a $100 call option on some contract, and Then I only spend $100, I lose the most. But if the market suddenly rises, you find that our profit of $100 May be 20 times, 30 times or even higher, so you can spend $100 and gamble on a gain of more than $2,000, so its gains and losses are completely unequal.

So only options now offer this kind of asymmetrical convexity of trading, so you're essentially using the convexity of options to make some other strategic money. Is that we trade from the dimension, if only do space dimension, is the price dimension, you have contracts and spot ok. You can guarantee that what you have in stock you're getting the real thing, the contract is the real thing at the bottom, but the standardized thing on the contract you're just getting the profit and loss. It doesn't have to be a physical delivery when I settle, but I might settle at a certain settlement price, and then I settle to the corporation, so all I get is the difference.

It's completely different with options, you can make time money, you can have a big position, you can make volatility money. Volatility is the idea that I might feel like the price of Bitcoin is pretty calm right now, but in the future, maybe at night or 24 hours or 7 minutes, there's going to be a big move. I can buy a cross-market combination, which is to buy a bullish one and a bearish one. At this point, a big rise, a big fall is good for us, because my royalty is probably only $200. As the price fluctuates, I could make $400, $500, so I would make money on a volatility scale.

3. Common arbitrage strategies in bitcoin contracts at present

Taylor-robinson:

The first key word is some financial institutions or individual financial risk control tools. The second word turns out to be that some speculators are making profits. The third key word is that this is actually a contract. So why don't we talk about futures and options, what are some of the things that can be done in the bitcoin market right now, and what are some of the things that can be used as hedging tools, as well as for speculative arbitrage.

T. :

I'm going to start with arbitrage, because arbitrage is something that you might have seen since the beginning of Bitcoin, and then different platforms, and it has this arbitrage relationship. A simple example of this is moving bricks, which is on exchange A, maybe it's selling for $7,000, and then exchange B finds out it's selling for $7,050. I'm going to buy all my money on exchange A, and then I'm going to move it to exchange B and I'm going to sell it, and then I'm going to keep moving bricks around.

Taylor-robinson:

This is a space arbitrage, which is an opportunity to develop when the market is relatively immature. We are now noticing that there is actually less and less arbitrage across exchanges. Recently it has been quite obvious that arbitrage across different stabilisation COINS, for example we have seen different prices for USDT and USDC, we have seen different prices for USDT and us dollar, for example BTC on Coinbase, but it is not as significant as it used to be. If you do this arbitrage process again, it's not really worth it.

T. :

In fact, if you think about it the other way around, one is that there's this arbitrage going on that's going to bring the price of bitcoin to an equilibrium level in the whole market. And then this big deviation from a normal mean, this arbitrage plate comes in, and then this mean slowly disappears and disappears, bringing the abnormal price back to a normal level, so the arbitrage plate itself will cause the volatility of bitcoin to drop.

Arbitrage itself this method has a lot of, moving bricks is only the most basic one. If you have three currency pairs, USDT, USDC, or PAX, each stable currency will have one exchange rate against bitcoin or a certain currency, which is equivalent to having three exchange rates. There is often an interest rate called triangle arbitrage among these three exchange rates, which is to calculate the three exchange rates, and then once these three exchange rates say that a certain exchange rate pair has a large deviation, I can make another trade through the other two exchange rates.

And then cross-platform this way and this way. And then the other radical way, let's say I have a bitcoin/DOLLAR transaction pair on a contract, then an Ethereum/dollar transaction pair, and a bitcoin/Ethereum spot transaction pair. If there's a spot where you can borrow leverage, or if you're in an institution where you can add some leverage, you can put a cover on the spot, and then you can put a cover on the contract at the same time, or even in a transaction where the spot and the contract form a cross dish, and then you can put a cover on the spot.

It depends on how your money is allocated, because the current contract market it's very liquid now, a large currency this liquidity is very good, so it makes this triangle arbitrage a good way to do it.

And when we talk about contracts, the other kind of contract is the basis, which is the inter-term. And then let's say there's a spot, it's at the $7,000 level right now, but there are contracts that expire in three months and it has a discount or premium. Then the final settlement of the contract, for example, on the last day, its settlement is infinitely close to the spot price, which will lead to the convergence of these two prices. So no matter how much basis there is in the middle, let's say you have a basis of 150 points, you just lock the basis of 150 points for three months, you just keep the contracts on both sides until they expire, and you make a basis.

Fire COINS include things like OK, and then it will have some contracts, and this contract will do it this way. This approach was first started by BitMEX, whose contracts are called perpetual contracts, which have no expiration date and are traded daily, typically every eight hours. This money rate, it has a formula, but essentially because of this, if I buy bitcoin, I'm essentially throwing away my stability coin, so I'm swapping my stability coin for bitcoin. And then there's actually an interest rate for bitcoin itself, although it doesn't have an inflation rate, and there's no such thing as a risk-free rate.

But in the lending market, for example, if I borrow bitcoin from an institution, I actually have to pay the interest on the bitcoin, so there's an interest on the bitcoin itself. So let's say I borrow some stability currency, whether it's a DOLLAR or a USDT or whatever, and its stability currency itself pays an interest rate that looks something like this. There's actually a difference between these two interest rates, so if I swap them once in 8 hours, and then I swap them back again in 8 hours, the exchange might not close. But if you don't exchange it for eight hours, and you continue to choose to hold the other asset, then you have to pay the difference between the interest rates in the other middle.

In principle its interest rate swap could be explained normally, if at the trading level if it's a perpetual contract, and you find that in this market it has two parties, two counterparties, then one is long, and then one is short. If everyone is desperately long when things go up, no one is short because the consensus expectation is that this thing is going to go up. If I have 10,000 people and I find that 7,000 of them are long and only 3,000 are short, then the price is a long way from its standard price, because there are more people who are long. More times this price is going to be more expensive, because more expensive times you're going to have to pay a more expensive interest. The interest is given to the counterparty to swap. In fact, if this mechanism is not used to adjust, the whole market has no cost. Leverage at no cost. Go long at no cost. And then the same thing happens when you go down, and you're bearish across the board, and you find out that out of this 10,000, 8,000 people are shorting and 2,000 are long. At this time this market has no depth, no one below the plate, no one is willing to open the warehouse, the plate. At that time the market's multiple single liquidity is no longer, the market may hit a deep.

Taylor-robinson:

We have noticed that the capital rate is constantly changing, how to balance the short and the long. Let's say more people are shorting it, and if no one buys it, the price will go down. The more people do it, the more they look up. There might be a difference between perpetuity and spot, and how that rate came about.

T. :

For example, it's a perpetual contract, it's a reference and there's always going to be an index for reference now, and that's why you started to use the index for reference in general. That's because at the very beginning, whether it was BitMEX or OK, they had their own problem of where to pick my benchmark. So if I choose my own platform, and I only choose Benchmark for my own platform, there is a problem. My price is actually highly correlated with liquidity at some point, and then I find that when there's no liquidity, my price goes down.

An example of rising, if everyone in to buy all at the same time, then only the pool I use your price to do benchmark, originally it was higher, the price of you find that there is no sale or very few sale, so I want to buy, my price is higher, so I have been so the price of this platform will be high, you find than other platforms or even more than the other spot, the price because it's the depth of the liquidity of the so-called premium.

Later, it was found that there would be a problem. If the market fluctuated very violently, such as falling rapidly, suddenly the premium of the platform itself would become a discount state, and then it would be easy to insert a deep needle into the depth. The derivative itself, my position is leveraged, and then maybe your price moves more than other platforms, and people think you're going to have some problems with your platform. And then it's actually very unfriendly to users, because it could explode out of nowhere. If you look at other platforms that go to $7,000, your price has gone to $4,000, $5,000, and it goes back and forth with a very deep needle, so this is its benchmark.

If we have a benchmark, and then we get to the question of discount or premium, the question of discount or premium is a whole market problem. Because my price has taken an average of an average market, seven or eight exchanges. These exchanges already represent standard prices for some of the top exchanges, both at home and abroad. The bigger factor is that the market is broadly long, or broadly short.

Original link:https://mp.weixin.qq.com

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