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Author Topic: Incredibly confused by Bitcoin Futures contracts on icbit  (Read 1521 times)
Chuu
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March 25, 2013, 12:22:00 AM
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Hello, I come from a futures trading background and my interest skyrocketed when someone mentioned that bitcoin Futures/Options markets exist (icbit).  I signed up for icbit but their contract definition and pricing is incredibly puzzling to me.  I'm still stuck in the newbie zone, and there doesn't appear to be a way to pose a question to ICBit directly, so I'm forced to post here.

Rather than going into why I am so confused about how products are specified, let me just post an example, and tell me if I am interpreting what is going on correctly.  Here is a screenshot of what I currently see, and I'm about to enter a quote:

http://i.imgur.com/JycbM12.png

So let's say I click "Sell".  How I am interpreting this is "At expiration, I am obligated to sell $10USD @ 81.5BTC/USD."  In other words, when the contract expires, I will receive $0.12BTC, and will give $10.

I realize that this interpretation is probably very wrong, and the inverse explanation (At expiration, I am obligated to buy $10USD @ 81.5 BTC/USD) isn't much better for different reasons.  What is the correct way to interpret what happens at expiration?
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bitster
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March 25, 2013, 06:26:43 PM
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Your not the only one who's confused i find their whole site very frustrating. 
botsofbitcoin
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March 25, 2013, 10:47:18 PM
 #3

Same here. Impossible to understand how to use and no FAQ to help out. And possibly (although I may have misunderstood the interface) very very low volume. Possibly the two things are related?

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Super T
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March 28, 2013, 07:55:29 PM
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Hi Chuu,

I think I get the interface, here goes:

You want to hedge, arbitrage, or simply open a leveraged position against BTC price changes.  ICBIT offers leveraged trades through "futures" contracts, which are exchanged as a quantity of units between buyers and sellers.

CONTRACT VALUE

Each Unit represents $10 worth of BTC at the specified price, so:

   > 1 unit at a trade price of $100 represents $10 worth of BTC, or 0.1 BTC in contract value.
   > 100 units at a trade price of $100 represents $1000 worth of BTC, or 10BTC in contract value.

The current trade value of each open futures instrument is not pegged to the underlying spot price, but is instead based on speculation as to what the final settlement value will be.  For this reason it is not guaranteed/expected to rise and fall as the spot price does.  Final settlement value is determined on listed the day of settlement for each instrument (currently 14th Apr, 14th Jun and 16th Sep) and is based on the spot price of BTC/USD on that day.


OPENING A POSITION

Use the Buy/Sell buttons if you want to place an order with specific price conditions, if no corresponding offers exist at the specified price, then the order will enter the order book and become visible to others as an active bid/ask, if another user places an order which meets the specified price, the order will be filled and contract positions activated.

Use the Buy/Sell at Market button if you simply want to purchase at the most favorable currently available price.

To open a position, the following key fields must be populated.

  • Quantity  = The number of $10 chunks of Bitcoin you want to bet on.
  • Price       = The price you are prepared to buy/sell at.
  • Amount   = Calculated field displaying the amount of underlying BTC you are effectively betting on (Quantity * 10 / Price).
  • Margin    = Calculated field displaying the amount in BTC which must be "reserved" in the account to cover any potential loss incurred against the position (15% I believe).

CLEARING

The nature of the contracts is such that ongoing profit or loss against open contracts is re-distributed once a day in a system wide clearing process (rather than only being realised when a position is closed).

During Clearing all contract positions are evaluated and the latest trade price is used to determine the relative gain loss between the buyer and seller of each open contract. This difference or "variance" is then transferred from the loser to the gainer, the contract remains active and will be re-evaluated at the next clearing session.

So if trade prices increase from 100 to 110, then the variance will be ((100*10)/100)-(100*10/110) = 10 - 9.09 = 0.91.  
     > Prior to clearing, the sellers account would show an unrealised loss of 0.91BTC, and the buyer +0.91BTC.
     > At clearing the loss of 0.91 would be deducted from the sellers account, and credited to the buyers account.  
     > After clearing:
               > "Unrealised P/L" balance reverts to 0 for both buyer and seller.
               > "Execution Price" for the open position is reset to the trade price upon which the variance adjustment was made.
               > "Margin" will also be adjusted (again, not sure of the precise margin calculation).

So, open a position of 100 units at around $100 and sell after a rise/fall of say 10 bucks, you are looking at just under 1BTC profit/loss (excluding fees).

Clearing currently occurs at 20:00 GMT.

RANGE

Another feature of the contract format is the use of trading range controls, an upper and lower limit on each instrument beyond which trading cannot occur within the current (24hr) session.  The range for the session is set during clearing as the latest trade price plus or minus 10%, so if the last trade price was 100 at clearing, the range for the following session will be set to 90 - 110.

This appears to be a safety feature to prevent exceptional price swings, and limits risk exposure to traders, however the rapid appreciation of bitcoin has on many occasions led to prices quickly reaching threshold levels, resulting at times in cessation of trade as no-one is prepared to sell within session range threshold.

FEES

Fees are calculated in BTC and are chargeable at the point of contract purchase/sale, therefore each position will incur fees twice during it's lifespan.  Fees are charged according to the quantity of contracts being bought/sold, so whilst the fee is not displayed prior to purchase, it can be calculated by multiplying the quantity by the fee (and double if you also need to consider closure fees).

Actual fees are listed on the instrument reference pages (e.g. https://icbit.se/BUU3) and vary per instrument, with lower fees on contracts which are furthest form settlement, current fees as of 01/04/13 are:
      > Apr 2013 (BUJ3): 0.003 BTC / contract.
      > Jun 2013 (BUM3): 0.002 BTC / contract
      > Sep 2013 (BUU3): 0.001 BTC / contract

Note - for a 100 contract trade against the most expensive instrument, current fees for contract open AND close are 100x0.003x2 = 0.6 BTC (also note these fees are incurred by both buyer and seller, so total commission to ICBIT is 1.2 BTC).  Given the rising value of Bitcoin, fees are becoming prohibitive to some smaller margin trades and are likely resulting in wider bid-ask spreads, and Fireball has suggested a reduction in fees may be in the pipeline.

MARGIN CALLS AND FORCED LIQUIDATION

https://icbit.se/margincall

Already spelt out pretty well on the ICBIT site, but many people still ask this, so here is the text:

"Every user's balance is continually checked by the trading engine if that user has any open positions. Margin call (forced close) is issued when his balance (actual money in the account plus total variation margin) is less than or equal to 75% of the total maintenance (initial) margin necessary to keep the positions.

If there are no respective bids/asks in the order book, the worst case scenario begins. The trading engine will go through users holding counter positions and forcibly close them by such a price that the user's balance who has the loss never goes negative."


@Fireball - did I get it about right?
ikaroshi
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March 28, 2013, 08:13:08 PM
 #5

It seems that four buttons are certainly for buying/selling BTC futures, but you need to specify quantity in USD.
BitFutex
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March 28, 2013, 08:26:41 PM
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If I open at $100 and close at $105 I expect to gain +$5, but actually this is not the case with icbit.  This is because it quotes the price in USD per BTC but the settlement price is actually based on the inverse.
i.e. BTC per USD.

So you are gaining/losing fractions of BTC, which is no good for hedging.


Stephen Gornick
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March 29, 2013, 05:48:59 AM
 #7

So let's say I click "Sell".  How I am interpreting this is "At expiration, I am obligated to sell $10USD @ 81.5BTC/USD."  In other words, when the contract expires, I will receive $0.12BTC, and will give $10.

I realize that this interpretation is probably very wrong, and the inverse explanation (At expiration, I am obligated to buy $10USD @ 81.5 BTC/USD) isn't much better for different reasons.  What is the correct way to interpret what happens at expiration?

The different contract types at ICBIT are treated different from each other but all the BTC/USD futures contracts work the same:

For each position:
  -((1/Close) - (1/Open))*$10

So if you sell 1 contract of BUJ3 at $81.50, then you are opening a short position and that $81.50 is your "Open" price.  on April 14th (the contract settlement date) the "24 hour weighted average" price at the largest exchange (presumably it will still be Mt. Gox) becomes the "Close" price.

So let's say the weighted average exchange rate on April 14th is $70.   So plugging in the numbers:
  -((1/$70) - (1/$81.50))*$10 = −0.020157756 BTC.    Since you "bought" (bought to close your short position) you earned this price difference.   But there also are trading fees on BUJ3 of 0.003 BTC, so subtract those, and you net 0.014157756 BTC.  At BTC/USD of $70 on April 14th, then you would have gained $0.99104292 per contract that you sold.   So a $11.50 move in the BTC/USD gained you only about $1.  That will vary based on the open and close prices.  For instance, a $11.50 move from $51.50 to $40 would be a much bigger gain than $1, and a $11.50 move from $121.50 to $110 would be a somewhat smaller gain than $1.

But this is where leverage comes in.  After depositing 1 BTC, you could sell more than 30 contracts from the leverage that 1 BTC provides.  Leveraging at that level is "crazy risky" though and you could easily see a margin call (where your position gets forcefully closed on you). 

This is important because that variation margin calculation from above is performed based on the daily "clearing price", which will vary from the BTC/USD spot market price at Mt. Gox.    So each day you will either earn or lose on the variation margin adjustment for each daily clearing.  Even multiple clearings can happen in a single day, if they are needed due to volatility.

But let's say you were to sell 8 BUJ3 contracts at $81.50 with 1 BTC deposited.  That is about the level where a drop in the BTC/USD is matched by your gain in the BUJ3.   At the same time, any rise in the BTC/USD will be matched by your loss in the BUJ3.

So if today the BTC/USD exchange rate was $75 let's say and the BUJ3 was $81.50, you could lock in a gain of about $6 by sending your 1 BTC to ICBIT, selling 8 BUJ3s, and just waiting until April 14th.  No matter what happens -- up or down on April 14th, you get about $80 in the end, $5 more than if you had sold at $75 today.   Of course, this locks up your bitcoin until the futures contract settlement ... unless  the BUJ3 trading pulls back closer to the BTC/USD earlier than the settlement date.

Right now the BUJ3 trades at a relatively huge premium over the BTC/USD spot price.  This is known as "Contango"  (versus "Backwardation" when the BUJ3 trade price would be below the BTC/USD spot price).    So anyone selling BTCs might have an incentive to sell BUJ3 for a premium and then just wait until April 14th to finish cashing out.   

There are a couple risks though.  ICBIT is offering a service that is a regulated activity in most jurisdictions.  They offer this service but operate anonymously, likely to protect themselves until they get set up as a regulated operation.     So there is counterparty risk from that.

Also, there is the risk that some other trader is reckless with leverage and ends up losing more than the account was worth.  This loss gets assessed to those still holding countering positions which have gains.  So in the example above, even though you might have made a gain on the short, if someone else lost big on a long position their losses could be assessed against your short position, causing you to earn less than you projected.   That should only happen in times of extreme volatility.  This is Bitcoin though -- volatility happens.

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March 31, 2013, 10:35:05 PM
 #8

@Fireball - did I get it about right?

That was very nice, thank you and Stephen for explaining how it should work. Once we are done with the current set of tasks, I will gladly put this up in FAQ section of the website.

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Super T
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April 01, 2013, 08:42:56 PM
 #9

Note - new help/FAQ thread created: https://bitcointalk.org/index.php?topic=164255.0
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