Paypal Finance: A Look at the Bitcoin derivatives market from the perspective of capital rate and discount premium

Original title: zhouli broadcast the 20th issue of | bitcoin derivatives market development and trends (part ii)

Source: paypal Financial

In the last issue of Zhouli Broadcasting (Note: Click to view the content of the previous issue"Paypal Finance: A look back at the five-year history of Bitcoin derivatives"), we discussed the development and trend of the Bitcoin derivatives market, the risk hedging role of derivatives and the common arbitrage strategies of current Bitcoin contracts. Among them, we mentioned the question of capital rate and discount premium. So,What does the money rate mean in the Bitcoin market?

Sometimes we say that an arbitrage fund or an arbitrageur is the scavenger in the market, the person who makes the value discovery, so why is it that in February the premium was so high?How does liquidity affect the spread between bitcoin futures and cash?The negative price of crude oil has aroused controversy and speculation. What is the reason for this situation? From the bitcoin perspective,Why wouldn't bitcoin have a negative price?

In addition to the contract,What are the arbitrage opportunities in bitcoin options?This week zhouli broadcast, paypal financial chief investment Officer Chen Xin will continue with Yang Zhou, and we discuss the above issues.

I. Significance of the capital rate in the Bitcoin market

Yang Zhou: For example, now the price is basically the same, there is no discount premium, and then the short seller has to pay the multi-party rate, why is that?

T. :Capital cost is not a constant value, because sometimes short more, sometimes do more, it depends on the overall direction of the whole market.Just like in February, when we were all bullish, the price rose from 6000-7000 to more than 10,000, and then we went all out to be bullish. At this time, you found that the price premium on the contract was 4 points and 5 points, with an annual rate of about 30%, which was already very high, and you could make a risk-free arbitrage.

The annual rate for Funding was about 30%.In fact, the Funding rate in principle should be roughly equal to the premium on the contract, although it is two different contracts, their Funding rate will gradually converge in the market.So you're all bullish when you're trading at a premium, and then all of a sudden when you're plummeting, you're all shorting, and the exposure is going to be reversed, but you're shorting at a discount, or you're paying a certain discount on the contract, and you end up with a lower price than the spot price, so you're losing a basis for that discount. Or you're going to go short on perpetuity, and you're going to pay an extra interest. In fact, these two end up being annualized.

Taylor-robinson:So in fact, the capital rate of the perpetuity contract is approximately equal to the basis for future arbitrage.

In this view, the current market, for example, the futures settled in June by BTC, is at a discount, now at an annual rate of negative 5~6%. However, the short side payment of BitMEX is about one thousand per day, in fact, the rate is still different.

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Ms. Chen: Because the algorithms may be different from exchange to exchange. BitMEX, BitMEX, OK and Huocoin take the same things by their algorithms, but some specific Numbers are different, which may be related to the turnover of their platforms and counterparties.

The contract premium was already there, but the Funding rate was real time,It's hard to judge what the future rate for eight-hour Funding is, and it's not one that's strictly reflected in the price. There were some things that we could see directly from the field, and others that were off the field. Funding was a bit like this off the field every year to get this money.

In short, there is a cost on both sides. But if you want to figure out which one is more expensive and which one is cheaper, you need to pull some detailed and in-depth data to follow over a long period of time.

Ii. How does liquidity affect the bitcoin cash spread

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Yang Zhou: What we talked about just now are the methods of inter-term arbitrage and capital rate arbitrage.

For example, in February, there was a lot of enthusiasm in the market, and then many people kept going long. At that time, the capital rate was very high for the long side to pay the short side, which was close to 30-40% on an annual basis, and then the current premium was also 30-40% on an annual basis.

Sometimes we say that an arbitrage fund or an arbitrageur is the scavenger in the market, the person who makes the value discovery, so why is it that in February the premium was so high? The market is no longer efficient. After March 12, the current discount is very low again, and then the short side payment is very high, which is also a very inefficient market. So what's the main reason for this?

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Ms. Chen: That should be the fluctuation of the price of bitcoin itself. In fact, from March 12th to 13th, it was not only the bitcoin itself, but also the continuous circuit-breakers in the US stock market, which triggered Margin calls.

Say I bought a lot of stock, I found that when the price dropped a lot, I need to add margin, or I risk appetite has been a sharp drop in, need to sell stock to others and get cash back, so basically, all the categories of assets at this time permanently selling, including gold that is always in a few days, stock, goods have been beyond recognition, the currency is no exception.

In fact, that round was a big one because of liquidity-induced selling.

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Yang Zhou: February coincided with a particularly bullish market and an environment in which many people were bullish, and many of them were leveraged.In a liquidity crisis, deleveraging is actually very common.

So why was the premium so high in February because of a lack of dollars in the market? Or is there not enough dollar supply in the market, or are there not enough arbitrage players in the market?

For example, the discount in March, of course, on the one hand because everyone for half after an uncertain expectation, so you may have some more in the futures of June insurance. At this time, there are also arbitrageurs, such as those who want to short bitcoin futures and those who are long futures. In fact, this process is to constantly repair and converge the price.

The premium may be very high, but the discount is not very high, which means the premium could reach 30, 40 or even 50 percent annualized, but the discount could reach 10 percent, which is the limit.

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Chen Xin: I think currency should be one level, because the current currency, liquidity may not actually be scarce, only on March 12-13, because of the additional concerns caused by liquidity.

But then you find out that our currency circle, because it's creating more money, and then it's including the U.S. side, it's actually increasing its balance sheet, creating more money, very quickly, so I thinkThe market itself is not really short of money.

And the vast majority of operations are definitely going to sell the spot, and then go to the contract and buy it back, and then deliver it and buy the coin. And then the price is the price at which each coin is bought at the end of the term, and that's fine.

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Yang Zhou: But it seems that the market is in short supply of bitcoins, and then people can't borrow enough COINS for arbitrage, so the discount cannot be repaired.

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T. :Spot arbitrage is always actually a constraint, that is, the quantity of spot.

Because there are only 21 million bitcoins, you have to borrow them and throw them into the spot market, where you can't do that.

There will be a big problem in the future, which is that in the spot market you find that 21 million spot is not enough, and the bitcoin market is still too small. If 21 million of bitcoin itself is collected by enough players to keep collecting chips, then the market is likely to have the same problems as traditional futures.

Normal futures contracts, normally there are spot to force short orders. Because I have stock, and you have to deliver your short order when it matures, and you don't have stock when it matures, and then your price goes all the way up, until it gets really high you can level it out.

But the advantage of Bitcoin is that most of its derivatives are delivered in cash, and there is no requirement for spot delivery.

3. Why is there no negative price for Bitcoin

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Yang Zhou: When it comes to futures, crude oil has attracted a lot of attention in the past two days.

Some of our friends recently asked us, is there going to be a negative price for Bitcoin? Well, no, let's just explain a little bit, why would crude oil have a negative price? And then what's the reason for that? And then from a bitcoin perspective, why wouldn't bitcoin have a negative price?

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Ms. Chen: Because there are two exchanges for crude oil, one is brent index and the other is CME index. The biggest difference between the two indexes is that the rules of the game are different. In CME Exchange, physical delivery is required. Brent delivery actually does not need physical delivery. You just need to settle in cash. & have spent

But there's a problem with not delivering. The cost of transporting and storing crude oil is very high right now, because it can't be digested, and now about 80, 90 percent of the world's air traffic is shut down.

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Yang Zhou: So the biggest difference is that crude oil has a storage cost, while Bitcoin doesn't. So even if you have this kind of massive shorts, in the bitcoin market it's at most zero, not negative.

This year has also seen a lot of history, including a rapid fall in stocks, a fall in Treasury bonds at times of liquidity risk, a fall in gold and a severe shortage of dollars. Add in the recent negative price of crude oil for a delivery, and that's something quite amazing. But at the end of the day, it's not really a question of financial instruments, it's really a question of people.

In fact, financial instruments are more of a profit-making tool for financial risk control and arbitrageurs and speculators.So arbitrageurs and speculators are more like insurance providers in the market, and so it's a pretty good ecology compared to the risk that they charge premiums and then eat some institutions out of the market.

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Iv. Arbitrage opportunities for Bitcoin options

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Yang Zhou: What I just said has always been about the contract. Are there any arbitrage opportunities on the options side?

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Ms. Chen: Actually, China's financial markets are not developing that fast. The first option in the financial market was probably a 50ETF option, with a 50ETF underlying it. It took a long time for the fund to slowly move into commodity options, like sugar options, soybean meal options, iron ore, rubber options, natural gas, LPG options, and then this year into the stock index options.

There are two stock index options, one is the 300 fund options, the other is the 300 stock index options. That's basically all the options in China that are traded on the floor, but over-the-counter options have been around since 50.

What do over-the-counter options look like? For example, if I buy a one-month call option on an iron ore mine, Maybe I need to find a subsidiary of a futures company and they will offer me an offer. He'll tell you a price, let's say a one-month call option is 4%, 1.5% if you want to sell it to me, and he'll also give you a buy or sell offer, which is always on the sidelines.

Then a shares this year, there are some stocks, is actually under the big brokerages, he will also have a dedicated trading team, and then they go to is responsible for, including some tickets, then you want to do derivatives, such as Shanghai pudong development bank, and then the target is very good, I'll give you a structured product, like a snowball, or some other index enhancement products. If you think Shanghai Pudong Development Bank is likely to rise 5% in the next three months, you can also buy a three-month call.

But all of these trades are done off-market, and even retail investors on the floor, including some of our institutions on the floor, can't do it. Generally it's an off-line agreement with the big ones, and then it's a counterparty through them.

On the European side, including the United States, they have a very rich options market. Some big stocks like Apple have options, and now oil has options, and it has an index called the VIX. The VIX is an index that calculates the options of an option exchange by weighting them, whereas the index itself has its own options, that is, the index VIX, with which it is the underlying option. You could buy a call or a put on this index, so it would have an option on an option, so that derivative would be more complicated.

The domestic market is relatively simple.

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Yang Zhou: In fact, many of our users, or our counterparties, feel a veil of mystery over cryptocurrencies, especially the bitcoin options market. We could also talk about, what have we done with bitcoin? We haven't also recently offered some shark-fin products with slightly higher returns, or some other customized products, so it itself is carried out by some combination of options, and we can talk about that next.

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Ms. Chen: Bitcoin options are in 2019 to 2020, and at this stage they develop a little faster, and the volume slowly goes up. This year, structured derivatives have been launched, and we need to use option in our structured base. Structured products have no way to directly use linear contracts to build the underlying structure, I need a convexity tool to complete the underlying build.

Let me give you an example. The price of bitcoin is around 7000 now, and then a week from now if it's still around 7000, I'll probably make 50 percent on an annual basis. How does this 50% static annualization come to be? It certainly doesn't make that money from the contract by selling high and sucking low. When its price was stable at 7000, it made money through this premium, the seller received the royalty.

Because option has two directions, one is the buyer, you need only pay royalties, then the seller, you pay the deposit now, receive royalties of the buyer, so the seller is to have two dimensions, is you need the other side of the royalties, then you have to pay deposit as honour, your profit and loss completely or part payment to the buyer.

So if this price stays stable, it's going to be a little bit of a wobble, where it's actually going to go down in volatility over the course of a week. I'm actually making volatility money when I go down, which is equal to now I'm using the option's trading dimension, which is actually moving to another trading dimension, where I'm not doing this thing on the price of space, but on time: I'm either making Theta's money, or I'm making your Vega's money go down. & have spent

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