Jul 10, 2018

Bitcoin Volatility, Skew, and Options Pricing, Part 2

The market for BTCUSD options is not a recent phenomenon. There were several "startup" exchanges offering options since shortly after Bitcoin itself rose in popularity. Most them failed in contract design, particularly in their design of handling margining of short option positions, or failing to design decent interface to attract traders, or getting active market makers to provide liquidity. To digress, in my experience most of the cryptocurrency exchanges appear to be designed and operated by web-developers, with no knowledge of how modern financial exchanges work.

Anyway, there is one leading exchange for trading cryptocurrency options - Deribit , and several runner-ups. LedgerX is CFTC registered exchange based in the USA, unfortunately liquidity is at this time is quite low. Their contracts are large, aimed at institutional traders, and trading is somewhat sporadic. Bitmex, a leading futures exchange recently introduced a very poorly designed options contract; liquidity is non-existent. Quedex is another options-focused platform, but I cannot find any volume figures or statistics.

As I mentioned above, only Deribit offers robust liquidity at this time; in the next blog post I will explore bitcoin options pricing and trading strategies.

Jul 2, 2018

Bitcoin Volatility, Skew, and Options Pricing

As I wrote before, Bitcoin volatility is quite different from volatility of other assets. I will continue with the same topic here.

Bitcoin prices shot up to all-time highs this winter, and have sharply declined since. When an equity index declines, volatility typically moves up, but in the case of BTC, volatility has actually declined. This behavior is similar to VIX index. Although I know that mechanism behind this effect is completely different, I want to quote Brian Stutland from about a month ago who said

"Bitcoin is sort of becoming the new VIX, in sort of getting ahead of credit risk in the banking industry,"
"There is huge correlation right now between VIX and bitcoin 30 days ago, 30 trading days ago, that is starting to measure out credit risk in the market. That's what cryptocurrency is becoming. It's becoming a way to sort of de-risk yourself from credit risk in the banking industry."

I think that Mr Stutland's analysis is correct, but only explains a part of BTC movement, as other intrinsic speculative factors certainly dominate.

I calculated median monthly price, and volatility (high accuracy from intraday data), and the correlation indeed looks reasonable on raw prices, but not as well on log scale.

While this analysis is done using realized volatility, blogger Flood did similar analysis using implied volatility derived from options prices on Deribit.

Having established the effect, I believe there is a simpler explanation for positive BTC skew - traders as aggregate think of BTC as a speculative, gambling asset as opposed to investment. When prices are high, and speculators are excited, volatility moves up as well. Now that prices have declined, and speculation frenzy subsided, volatility fell as well.

This is great news for long term investors in BTC, who can purchase either cheap puts as hedge for existing holdings, or cheap calls as speculation.

In the next article I will write about pricing of BTC options, and Deribit exchange.

Dec 8, 2017

Bitcoin Futures, Part 2

It was a tight race between CME and CBOE to be the first one to list BTC futures, but CBOE turned out to be a winner. Bitcoin futures will start trading on CFE platform this Sunday, Dec 10, at 6pm EST.

According to Reuters, CME is scheduled to list futures 8 days later, on December 18th.

The margin information is also available now - but in short futures will offer about 2x leverage. To me this seems quite tame comparing to other bitcoin changes, but roughly in line with what I expected for CBOE or CME.

Nov 17, 2017

Bitcoin Futures

While news have been dominated with upcoming launch of CME bitcoin futures, I would like to remind readers that shorting is available on most major bitcoin exchange, and futures are available on major platforms like Bitmex, OKCoin, and Deribit.
In a more recent news, if you want to go with a more established exchange two Swiss banks listed certificates that trade pretty much like futures, on SIX Swiss exchange

I am not familiar with details of the contracts, so cannot offer comparison between them, but there are certainly a lot of options if someone wants to bet against bitcoin.