Efficient Frontier
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Efficient Frontier

Selling the top: Does volume show the whole picture?

We’re writing this during the 8th week of consecutive rise in the price of Bitcoin. During this fresh excitement came the return of interest (pun intended) to the futures exchanges:

Since May 13th, volumes in both Bitcoin futures and options markets remained steady until the recent upswing, which saw a major spike in volume on April 29 and 30.

Options volumes are showing the same trend as futures, while approaching all time highs:

The backwardation we’ve seen since May 13th is over for now, with futures returning to their regular mode of pricing later contracts higher, showing resolute optimism coming into the long awaited Bitcoin halving:

On the exchange front, The Block illustrated the growing distribution of the open interest over the various exchanges:

The changes above reflect the strong competition between exchanges in the cryptocurrency derivatives space. As Bitcoin an exciting markets with such a strong growth potential, this race is sure to benefit users over the next decade.

Bitcoin’s Catch-22 for institutional investors

For Bitcoin to graduate into a 1 trillion dollar market, it may need more institutional participants. While many institution hesitate to use uninsured markets, the few Bitcoin exchanges that are insured (such as CME and ICE (Bakkt)) currently have low Bitcoin liquidity, which is also a red flag for institutions.
A new report by Acuiti, ordered by Bitstamp and CME, shows these assumptions are correct:

According to the survey, institutions that have not participated in Bitcoin trading are most concerned about exchange security and hacking — loss of uninsured funds. Institutions that do trade Bitcoin choose their venue primarily for liquidity.

Perhaps Renaissance Technologies joining the Bitcoin CME markets is an encouraging signal. As Bitcoin becomes more mainstream every year, we predict more institutions, traders and market makers will add liquidity to the insured venues. Meanwhile, an increasing amount of institutions will accept the security practices and trade-offs of online exchanges. It also stands to reason that solutions for online exchange security and insurance will be developed.

More memories from March 12–13th 2020

“[March 12th] was a huge test for our industry. There was a lot of leverage used in the system. The market still worked, which was quite heartening to see. If it would have gone to $1,000 a lot of other systems would have broken down.” said Su Zhu the CEO of Three Arrows Capital and an investor in Deribit in a recent video interview to The Block.

Another interesting effect of the crash can be seen in the strong drop in exchange’s insurance funds. Long positions were liquidated in a rapidly falling market on March 12th-13th, followed by a recovery in the choppy market that followed.

After BitMEX updated its liquidation rules on April 17th (see our news section) the growth in their insurance fund has clearly slowed.

Meanwhile, as the Bitcoin halving is approaching, on April 28th Deribit injected 500 Bitcoins into its insurance fund, recovering it from its despoliation during the crash.

“The move below 6,000 was so fast even market makers would have gotten liquidated. … this definitely happened to a large number of market makers” According to Su Zhu many exchanges operating in the Bitcoin space is a good thing. “Fragmentation is actually healthy… in foreign exchange markets structure, the market is very fragmented, and as a result it’s very healthy. If one exchange goes down it doesn’t really matter because everything else is up.”

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Efficient Frontier

Efficient Frontier

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Leading research & algorithmic trading firm for the cryptocurrency markets efrontier.io