Recurring market commentary on what’s happening in the crypto markets, summarized by the Crypto Broker team at Crypto Finance AG.
Market commentary
Good Morning!
Bitcoin (BTC) is currently trading at around $16.5k price mark (+4.4% in 7 days) while Ethereum (ETH) is sitting at $1.21k (+9.6% in 7 days). The Ethereum vs. Bitcoin ratio (ETH/BTC) is trading at the 0.0737 mark (+5.1% in 7 days).
Credit risk (as well as counterparty risk, etc.) is a tough topic in general, and in crypto even more so. In traditional finance we have many years of history and clearer regulation that make it "easier" to evaluate some tail risk events. In crypto we have none of the above.
Market Makers reassess risk
- Not your keys, not your coins
- Futures (and derivatives more generally) are non-fungible
While real assets (i.e. BTC, common shares, etc...) are fungible assets, derivatives are not. Derivatives, by design, are financial contracts set between two or more parties. To clarify: two standardised futures contracts with the same specifications (underlying assets, maturity, margining, etc.) but with different counterparties (i.e. Binance and Kraken) are not the same instruments: you cannot sell (buy) the futures on Kraken and buy (sell) them on Binance.
Historically, the futures basis across exchanges were almost identical (+/- some spread due to withdrawal/deposit costs and different margining systems) as market makers and arbitrageurs were playing the spreads. Today, this is no longer the case, and futures prices across exchanges are diverging.
FTX contagion spreading
- Market makers take more spread for their inventory risk (risker = expensive)
- Traders play the counterparty/default risk by entering long positions on riskier counterparties, and short positions on the safer ones.
Initially, by entering the “same” future contract on different exchanges, you are playing the basis spread. If your bias is a default event of an exchange – but you still want to have some hedge – it is reasonable to go long on the risky exchange and short on the safer one. In case of default of the risky exchange, the loss is the cash balance on the exchange. Expecting a general bearish sentiment following the bankruptcy of a big player, your short position on the other exchange will gain at least as much your losses.
Betting on an exchange default
The trade is profitable if then the profit on the credit risk free exchange is greater or equal to the cash balance on the defaulting exchange. Assuming a leverage of 10x, the short position should earn at least 10%. The current 3m rolling annualised basis for BTC futures across different venues is as follows:
- CME: -7.7%
- Kraken: -7.25%
- Bitmex: -5.87%
- Deribit: -1.75%
- Bybit: -1.72%
- Okex: -1.7%
- Binance: -1%
- Kraken: 0.45%
- Bitmex: 1.83%
- Deribit: 5.95%
- Bybit: 5.98%
- Okex: 6%
- Binance: 6.7%
Happy Trading!
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Disclaimer
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Risk disclosure
Investments in virtual currencies are high-risk investments with the risk of total loss of the investment and you should not invest in virtual currencies unless you understand and can bear the risks involved with such investments. No information provided in this publication shall constitute investment advice. Crypto Broker AG excludes its liability for any losses arising from the use of, or reliance on, information provided in this publication.
