Springtime for Bitcoin

Efficient Frontier biweekly derivatives and markets newsletter. On the CME breaking its Bitcoin records, the mining seasons in China and how exchange competition is changing the

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May 26th 2020

If you’ve been doing your job for the last two weeks instead of following popular news sites and Twitter, you might have missed the excitement around the news (published on May 7th) of famed fund manager Paul Tudor Jones announcing that he’s put 1–2% of his $8.4 billion assets under management into Bitcoin futures, using the CME. This is an important moment showing rising institutional adoption during growing uncertainty around fiat currencies.

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It’s unknown if the excitement about Tudor BVI fund’s allocation is what brought the Bitcoin CME futures OI to a record high, or the allocation itself. In any case, growth in accounts trading Bitcoin futures on the CME is accelerating. According to The Block, “256 new accounts have begun trading the product since the start of May, with a cumulative 2,129 accounts trading the product.”

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Meanwhile, the open interest in Bitcoin options traded in CME rose from less than $10 million in April to a high of $174 million today. This growth was not restricted to the regulated options trading in Chicago. The crypto-native venues have also seen skyrocketing participation as new traders enter the Bitcoin options market, while volatility and the halving excitement boosted the interest and volume to historical levels.

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Meanwhile, the “oldest” Bitcoin options venue, 4-year-old Deribit, was surely celebrating when the open interest in their options book broke 1 billion for the first time yesterday.

“Personally, I would be bullish — account opening and daily active users prove more people are adopting and embracing the product; that should have a positive push for Bitcoin in the longer run. We see more people are getting active,” Deribit’s CCO Luuk Strijers said in a recent interview.

Though in traditional markets, options are still considered professional tools which are harder to gain access to, in the free flowing infrastructure of the Bitcoin world, it is easy to see online options speculation is driven by retail investors.

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Retail investors tend to be most bullish at the top and most bearish when the price is low, creating opportunities for professional traders and institutions. The above graph shows a peak in puts vs calls during the only two days in the last two months in which Bitcoin’s dollar price was over $10,000, while the highest percentage of puts were sold during the maximum days of fear around March 12 and 13.

My ego has recovered but liquidity hasn’t

Funding rates from the March 12th and 13th crash until the last market peak on May 6th were negative, showing that the rally came from the spot market and real buyers, while in the futures markets, traders were being paid to maintain long positions in the perpetual swaps.

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According to the former Circle’s Head of Trading, Dan Matuszewski, a lot of the leverage before the March 12 and 13 crash was caused by people wanting to go long before the halving. “I thought it would unwind after the halving, but it got blown out. Following was one of the least owned rallies of all times.” The timing of the Covid-19 related Bitcoin crash could hardly have caused more damage than any other timing during the last 3 years. The Bitcoin markets surviving this deleveraging with minimal scarring shows Bitcoin is ready for its next bull run.

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Liquidity, as shown by the above chart (thelower the percentage, the higher the liquidity) shows that liquidity has not yet completely returned to its previous state, even after the rally into the halving, which hints to permanent damage done to some of the market makers.

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As for the competition between exchanges, Bitmex has gained back some of its market share and currently has a similar amount of open interest to OKEx.

The economics of mining after the halving

Since the day of the halving on May 11th, the Bitcoin hashrate has decreased by over 20%, with the price for mining each coin doubling, causing some mining operations to become unprofitable.

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There are two interesting economic factors affecting Bitcoin miners at this junction: A) Flood season in Sichuan — The “mining season” in China’s Sichuan region usually starts in April or May. During this season, heavy rain drives electricity prices down, due to hydroelectric stations. During this period, a large number of miners in China (the country is estimated to hold 70% of Bitcoin’s mining power) move their activity to Sichuan. This season, which was expected to occur during the halving, should have decreased the immediate economic pressure on miners. Unfortunately, according to reports, Sichuan is suffering from a heat wave, which is instead creating an electricity shortage as the rain season seems to be delayed.

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B) Hedging with options — Investing in Bitcoin mining is a very bullish bet because volatility to the downside can deem an entire operation unprofitable. According to Dan Matuszewski, miners’ bullish biases typically bring them to be distressed sellers on the downside, and holders of the upside. This tendency also exacerbated moves in Bitcoin’s price.

The 2020 halving is the first period in which there is sufficient liquidity in Bitcoin options for most miners to hedge their heavy bets on Bitcoin’s price and mining difficulty. Nowadays there are more sophisticated and price efficient ways to hedge, using options (and other instruments) rather than simply shorting Bitcoin.


  1. New products: Bitfinex launched Bitcoin Dominance futures, FTX launched hash-rate (difficulty) futures and ErisX launched the first USA regulated Ethereum futures

  2. Designing The Tools For Hash Rate Futures: Introducing the CMBI Bitcoin Hash Rate Index and Observed Work

  3. Noelle Acheson’s special update on mining: Bitcoin Markets Are Growing Up. Mining Is, Too

  4. Bitmex trading engine halted for 100 minutes last Tuesday

  5. Deribit integrates with insured custody service