This helps for the theory, but I still don't understand how perps play out in practice.
Suppose Peter Schiff and Mike Saylor each took out a perp on bitcoin. How would they do it? How badly would Peter Schiff get clobbered over this month and next if BTC goes up as expected? If he took a more conservative position, would he be able to make money? What risks would they be carrying? Is aiming for 100x leverage the standard, or is that a massively degen position?
Risks: if Saylor and Schiff went head to head, Saylor's concern should be that Schiff runs out of US Trash Token to pay for the losses on the short (BTC keeps going up). And. Saylor wants to own real BTC as the supply is limited. There is no right to convert a paper contract (perp) into a physical contract (spot BTC) so Saylor could theoretically end up with a large USD profit and no BTC when he closes out the perp.
What is standard? 100x you'll blow up 100% of the time :-)
30-40x leverage is for spread positions in things which are massively correlated due to fundamentals e..g short 2 year bond and long 10 year bond because of your view on how central bank rate policy will impact rates. And you've put that on for the short term and will scale down quickly. Was more relevant 10 years ago than now.
Most "responsible" venues aren't going to let you take on more than 5x leverage (I think this is standard on spot margin cex). I'd say that > 5x is degen in most products except spreads / hedging strategies. If you want to be 150% long equities (1.5x) ($150k of stocks for each $100k of cash you have to invest) and your market timing isn't horrible, that's aggressive but not necessarily degen. Similar to gearing up on real estate.
If you've news before the rest of the market on an altcoin then 5-10x leverage on 1-2% of your net worth, parked in a "degen" hot wallet for this purpose, might be the correct play. You could likely cut for a loss of 1-1.5% (x10) = 15% of your degen pot if the market doesn't react as expected, but if the news was significant it could move 10-20% within a few days netting you a double or better on 10x.
Not really comfortable recommending leverage to anyone who doesn't have a pro derivs background and comfortable enough that they really can afford to lose (think Bull recommended 1-2% of annual income for a gamble on buying some call options, if you're making $250k then losing $5k won't hurt you). Just trying to answer the question of what's considered degen.
Thanks for the feedback, will include more worked examples in future posts.
Taking out a perp is as simple as depositing capital for margin on your exchange of choice (cex or dex), selecting the quantity, and your maximum price. If you have enough margin and there are opposite orders (sellers if you're a buyer) then your trade will go through.
If Schiff sold 120 BTC he would get clobbered for a loss of $120 US Trash Token for every $1 the BTC/USD rate rises above his sell price. But. Every few hours he would get a funding payment (he is lending roughly $7.2 million). That works out to interest payments of $1k every 8 hours assuming a 15% rate on USD. Imagine he holds the position for 30 days. Earns $88k interest. If BTC/USD is more than $740 above his entry price, he loses money ($120 for every point above). If it is below this, he earns. ($120 for every point below) The $740 represents 30 days interest at 15% (spot price $60k).
Saylor's smart so if he was a trader he would probably wait until the perp swap rate was going negative. Selling spot BTC to buy the same quantity of BTC perps keeps the exposure to Bitcoin price movement equal, but he'd get paid interest to be long, and when the market is bearish that interest can be quite significant. These periods ("backwardation") where shorts pay longs are usually short lived, so he'd need to take into account price impact (he owns a lot of bitcoin) and trading fees to decide whether it was worthwhile. Finally, better to hold spot rather than perps if you're concerned about counterparty risk. If BTC goes to infinity the short on the other side of your trade doesn't have enough Trash Token to pay you, and maybe there are no more real BTC for sale. You can't convert a BTC perp into a real bitcoin in your cold storage - they're just paper contracts settled in USD!
If 1.5x leverage is normal, does that mean Schiff had to deposit at least $4.8 million in order to sell the 120 BTC?
Don't exchanges or wherever you buy/sell the perps liquidate your position if you run out of money due to the price moving too much to mitigate counterparty risk? Or do they make you deposit more money?
I see how holding spot is way lower risk than doing perps. However, aside from the broad (perps = high risk, spot = low risk), I'm not quite sure how to compare risk/reward on these. How would I calculate the risk/reward to compare to something like Ohm or Time?
It's basically the difference between the futures price and the spot price (divided by the spot price to convert to a percentage format) and then adjusted by the fraction of a year until expiry. If spot is 1% above futures with 1 day to expiry you are paying a 365% rate per year to be long, but if there are 365 days to expiry you are paying 1% per year to be long.
Yes, $4.8m would be the minimum margin at 120 BTC and $60k BTC/USD.
Usually the approach is to liquidate your position rather than call for more margin. Except for CME futures where your clearing house may call for more margin depending on your relationship / size.
Perps are adding a counterparty risk which holding spot doesn't have. And they are not settled in BTC so you do not have the right to convert your position to spot. This is distinguished from a physically settled future where you could go long the bitcoin and receive actual coins at settlement. (there's a physically settled Bitcoin future, Baakt warehouse, traded on the ICE exchange but nobody really uses that)
Your last question was covered in outline on BowTiedBull's stack but a refresher or more detailed explainer of how to think about risk will probably appear here on DeFi in the next few weeks, it's a popular question.
The short answer is that alts are less liquid, more volatile, and have a greater chance of going to zero (overnight) when compared to BTC. Therefore you should demand a far higher potential reward per unit of risk. And also cap your total risk to a much smaller proportion of your portfolio.
Great article as always! The more I read your articles, the more I realize how much I don't know. I think these have been spelt out in the article but can I just confirm my understanding is correct:
(a) If you are short BTC, then you will receive the funding rate?
(b) If you are long BTC, you have to pay the funding rate?
(c) This means that the market expects the future price of BTC to be higher than where it is currently?
(2) If the funding rate is negative, then that means
(a) If you are short BTC, you will pay the funding rate?
(b) If you are long BTC, you will receive the funding rate?
(c) This means that the market expects the future price of BTC to be lower than where it is currently?
(3) Is a positive funding rate always bullish (ie. BTC price to go up)? Likewise, is a negative funding rate always bearish (ie. BTC price to go down)?
Sort of. I wouldn't say "the market" expects price to be up so much as there are marginal longs willing to back their view by borrowing at a reasonably high cost (and vice versa for shorts).
So at 20% annualized you can say that the people paying those rates have a very bullish view. Doesn't mean they are correct. Will dig into this more with examples later, on a cell now...
funding rates tend to reflect short term biases/expectations but aren't correlated with immediate future price change (that would be too easy, wouldn't it?). So it tells you expectations of participants but they aren't always correct! Prices update as new information arrives...
This helps for the theory, but I still don't understand how perps play out in practice.
Suppose Peter Schiff and Mike Saylor each took out a perp on bitcoin. How would they do it? How badly would Peter Schiff get clobbered over this month and next if BTC goes up as expected? If he took a more conservative position, would he be able to make money? What risks would they be carrying? Is aiming for 100x leverage the standard, or is that a massively degen position?
Missed two questions in first reply.
Risks: if Saylor and Schiff went head to head, Saylor's concern should be that Schiff runs out of US Trash Token to pay for the losses on the short (BTC keeps going up). And. Saylor wants to own real BTC as the supply is limited. There is no right to convert a paper contract (perp) into a physical contract (spot BTC) so Saylor could theoretically end up with a large USD profit and no BTC when he closes out the perp.
What is standard? 100x you'll blow up 100% of the time :-)
30-40x leverage is for spread positions in things which are massively correlated due to fundamentals e..g short 2 year bond and long 10 year bond because of your view on how central bank rate policy will impact rates. And you've put that on for the short term and will scale down quickly. Was more relevant 10 years ago than now.
Most "responsible" venues aren't going to let you take on more than 5x leverage (I think this is standard on spot margin cex). I'd say that > 5x is degen in most products except spreads / hedging strategies. If you want to be 150% long equities (1.5x) ($150k of stocks for each $100k of cash you have to invest) and your market timing isn't horrible, that's aggressive but not necessarily degen. Similar to gearing up on real estate.
If you've news before the rest of the market on an altcoin then 5-10x leverage on 1-2% of your net worth, parked in a "degen" hot wallet for this purpose, might be the correct play. You could likely cut for a loss of 1-1.5% (x10) = 15% of your degen pot if the market doesn't react as expected, but if the news was significant it could move 10-20% within a few days netting you a double or better on 10x.
Not really comfortable recommending leverage to anyone who doesn't have a pro derivs background and comfortable enough that they really can afford to lose (think Bull recommended 1-2% of annual income for a gamble on buying some call options, if you're making $250k then losing $5k won't hurt you). Just trying to answer the question of what's considered degen.
Thanks for the feedback, will include more worked examples in future posts.
Taking out a perp is as simple as depositing capital for margin on your exchange of choice (cex or dex), selecting the quantity, and your maximum price. If you have enough margin and there are opposite orders (sellers if you're a buyer) then your trade will go through.
If Schiff sold 120 BTC he would get clobbered for a loss of $120 US Trash Token for every $1 the BTC/USD rate rises above his sell price. But. Every few hours he would get a funding payment (he is lending roughly $7.2 million). That works out to interest payments of $1k every 8 hours assuming a 15% rate on USD. Imagine he holds the position for 30 days. Earns $88k interest. If BTC/USD is more than $740 above his entry price, he loses money ($120 for every point above). If it is below this, he earns. ($120 for every point below) The $740 represents 30 days interest at 15% (spot price $60k).
Saylor's smart so if he was a trader he would probably wait until the perp swap rate was going negative. Selling spot BTC to buy the same quantity of BTC perps keeps the exposure to Bitcoin price movement equal, but he'd get paid interest to be long, and when the market is bearish that interest can be quite significant. These periods ("backwardation") where shorts pay longs are usually short lived, so he'd need to take into account price impact (he owns a lot of bitcoin) and trading fees to decide whether it was worthwhile. Finally, better to hold spot rather than perps if you're concerned about counterparty risk. If BTC goes to infinity the short on the other side of your trade doesn't have enough Trash Token to pay you, and maybe there are no more real BTC for sale. You can't convert a BTC perp into a real bitcoin in your cold storage - they're just paper contracts settled in USD!
Thanks for the examples, they're helpful!
Where does the 15% interest rate come from?
If 1.5x leverage is normal, does that mean Schiff had to deposit at least $4.8 million in order to sell the 120 BTC?
Don't exchanges or wherever you buy/sell the perps liquidate your position if you run out of money due to the price moving too much to mitigate counterparty risk? Or do they make you deposit more money?
I see how holding spot is way lower risk than doing perps. However, aside from the broad (perps = high risk, spot = low risk), I'm not quite sure how to compare risk/reward on these. How would I calculate the risk/reward to compare to something like Ohm or Time?
The 15% interest rate is an example, you can calculate using this formula:
https://www.tradingview.com/x/cJ6GWav1
It's basically the difference between the futures price and the spot price (divided by the spot price to convert to a percentage format) and then adjusted by the fraction of a year until expiry. If spot is 1% above futures with 1 day to expiry you are paying a 365% rate per year to be long, but if there are 365 days to expiry you are paying 1% per year to be long.
You can see historical data for basis here:
https://studio.glassnode.com/metrics?a=BTC&category=&m=derivatives.FuturesAnnualizedBasis3M
and a table of current prices here
https://www.coinglass.com/Basis
Yes, $4.8m would be the minimum margin at 120 BTC and $60k BTC/USD.
Usually the approach is to liquidate your position rather than call for more margin. Except for CME futures where your clearing house may call for more margin depending on your relationship / size.
Perps are adding a counterparty risk which holding spot doesn't have. And they are not settled in BTC so you do not have the right to convert your position to spot. This is distinguished from a physically settled future where you could go long the bitcoin and receive actual coins at settlement. (there's a physically settled Bitcoin future, Baakt warehouse, traded on the ICE exchange but nobody really uses that)
Your last question was covered in outline on BowTiedBull's stack but a refresher or more detailed explainer of how to think about risk will probably appear here on DeFi in the next few weeks, it's a popular question.
The short answer is that alts are less liquid, more volatile, and have a greater chance of going to zero (overnight) when compared to BTC. Therefore you should demand a far higher potential reward per unit of risk. And also cap your total risk to a much smaller proportion of your portfolio.
a fellow troglodyte
Great article as always! The more I read your articles, the more I realize how much I don't know. I think these have been spelt out in the article but can I just confirm my understanding is correct:
(1) Funding rate on Bitcoin is currently positive (https://www.coinglass.com/FundingRate). Am I right to say that means:
(a) If you are short BTC, then you will receive the funding rate?
(b) If you are long BTC, you have to pay the funding rate?
(c) This means that the market expects the future price of BTC to be higher than where it is currently?
(2) If the funding rate is negative, then that means
(a) If you are short BTC, you will pay the funding rate?
(b) If you are long BTC, you will receive the funding rate?
(c) This means that the market expects the future price of BTC to be lower than where it is currently?
(3) Is a positive funding rate always bullish (ie. BTC price to go up)? Likewise, is a negative funding rate always bearish (ie. BTC price to go down)?
Thank you!
1&2 (c)
Sort of. I wouldn't say "the market" expects price to be up so much as there are marginal longs willing to back their view by borrowing at a reasonably high cost (and vice versa for shorts).
So at 20% annualized you can say that the people paying those rates have a very bullish view. Doesn't mean they are correct. Will dig into this more with examples later, on a cell now...
Thanks Iguana!
Your question (3)
funding rates tend to reflect short term biases/expectations but aren't correlated with immediate future price change (that would be too easy, wouldn't it?). So it tells you expectations of participants but they aren't always correct! Prices update as new information arrives...