NEWS 8 May 2018: Now published on ZeroHedge. The central argument against treating Bitcoin as a serious asset is that it has no intrinsic value because it was thought to have no cashflow. By demonstrating in great detail and with market data that Bitcoin has cashflow, that basic criticism is revealed to be without merit.
There is a fallacy that Bitcoin has no cashflow. That’s what Warren Buffet thinks.
Wrong. Bitcoin has cashflow.
Where is the cashflow?
- Lending to Margin-Traders at Exchanges
- Hard Forks
- Arbitrage of the Basis (Contango or Backwardation) of Bitcoin Futures at BitMEX, OKEX, CME & CBOE
I only treat Lending at Exchanges for now. (I might treat income from HFs and Arbitrage of the Basis in a follow-up piece.)
Lending at Exchanges
You can lend your Bitcoin to margin traders at BitMEX, Poloniex and Bitfinex. Annual compounded rates of over a million percent have been available in the past and this writer has lent at those rates. I provide evidence of that 1,000,000 % below.
At time of writing (20 May 2018) 50,000 Bitcoin with a value of $415 million are out on loan at Bitfinex at 0.01% Daily / 3.6% Annualised (compounded).
You can lend USD as well as Bitcoin to margin traders at Bitfinex. The exchange works like a bank In Real Life pumped on steroids. In Real Life saving rates average about 1% annually in the advanced economies of the OECD. (E.g. Japan 0.1%, Germany 0.1%, UK 1.9%, US 2.35%.) In the Bitcoin world annualised USD rates of 30%-100% are often available, particularly when the market is bullish. How is this possible? Traders at Bitfinex wishing to buy Bitcoin on leverage need to borrow USD to do so. It is the other users of the exchange who lend them these dollars. But USD is in short supply at Bitfinex when the Bitcoin market is optimistic because most users want to be holding Bitcoin not dollars to benefit from the price appreciation.
At time of writing USD with value $720 million are being lent out at Bitfinex at 0.0659% Daily / 27% Annualised (compounded).
When the Bitcoin market is bullish then USD rates tend to exceed Bitcoin rates. (Margin traders need to borrow USD to finance their BTCUSD Longs.) When the market is bearish the BTC rate might exceed the USD rate as traders need to borrow Bitcoin to Short it.
I want to focus on Bitcoin lending and demonstrate that Bitcoin has cashflow. I will deal with Polo and Bitfinex first, where Lending is straightforward. Lending Bitcoin at BitMEX often offers the best rates, but it is a little tricky.
Lending at Poloniex
You can lend BTC to margin traders at Polo who are going Long on ALTBTC positions with leverage. (They need to borrow BTC to pay for the ALT positions.) There is no USD Lending market at Polo.
When Alts are pumping you will get a great Lending rate; rates will be modest when Altcoin markets are quiet of falling. Rates can go batshit when there is volatility incoming. A daily rate of 0.1593% seen in the table below is 79% compounded annualised.
Rates exploded in the run-up to the Bitcoin Cash Hard Fork on 1 August 2017. The reason was every man and his dog moved their BTC off the exchanges into cold storage to ensure they received their Bitcoin Cash. So there was very little Supply of Bitcoin available for Lending.
Zooming out, we can see that pronounced effect of the Bitcoin Cash Hard Fork on 1 August 2017. (Data is from Bitfinex but the point stands.)
How to earn this interest at Poloniex? It’s easy. Move BTC to your Polo Lending Wallet and offer them for Loan under the Lending tab. You need to set an Amount, a Duration, and a Rate. Set a rate that is in line with the market as seen in Loan Offers . If you try for too high a rate your Offer will not get filled. You can ignore the Loan Demands table.
Lending at Bitfinex
Lending is called Funding at Bitfinex. (And confusingly, Funding at Kraken means Deposits and Withdrawals.)
a. You can lend BTC to fund margin traders at Bitfinex who are going Long on ALTBTC positions with leverage.
b. Bitfinex also offers BTCUSD margin trading (unlike Polo) so you can lend BTC to those going Short on BTCUSD . (They need to possess BTC to sell it.)
c. You can also lend USD to traders going Long on BTCUSD and ALTUSD.
USD rates at Bitfinex tend to dwarf those available In Real Life.
So, how to lend at Bitfinex? Again, it’s easy. Move BTC or USD to your Funding Wallet. Then go to the Funding Tab and make your Loan Offers, setting an Amount, a Period and a Rate.
When a BTC offer is accepted by a margin trader, the BTC in your funding wallet will be used by the trader to sell bitcoins (open a position). When the trader completes a trade by closing the position, they buy BTC which is returned to your wallet.
Use the Auto-Renew feature to avoid a lot of donkey work. More info. on Funding at Bitfinex.
So at time of writing (20 May 2018) $720 million are being lent out at Daily 0.065% / 26% annualised, and 50,000 Bitcoin with value of $415 million at 0.01% Daily / 3.6% annualised.
Lending at BitMEX
Rates for Funding at BitMEX are often the highest in the crypto space. It is not so straightforward as lending at Poloniex and Bitfinex.
When net sentiment in the XBTUSD market is bullish, you earn funding income by shorting the XBTUSD Swap contract. (Shorting Bitcoin essentially means you are holding a USD position.) This was the case for most of 2017.
When net sentiment in the XBTUSD market is bearish, you earn funding by going Long the XBTUSD Swap. Ths has applied to most of 2018.
A few things to note when the objective is purely to maximise funding income:
- Funding fees and rebates apply to the XBTUSD Swap contract only. There is no Funding of the Bitcoin Futures contracts.
- Use small Leverage to avoid getting Liquidated.
- You must ensure your overall BitMEX portfolio (BTC in Wallet, BTC exposed in positions) is delta-neutral, i.e. unaffected by moves in XBTUSD. You need to use the Bitcoin Futures contract to hedge your XBTUSD Swap position to achieve this.
How to find out if you should go Long or Short to get the Funding?
The Funding Rate for the current 8-hour Session is displayed in the Contract Details box bottom-left.
The Funding History page shows the history.
Interest is paid every 8 hour period, so 3 times a day. At 4am UTC then at midday UTC and then at 8PM UTC.
When you are shorting Bitcoin your position (Unrealised PNL) will change according to price of Bitcoin, until you close your short, at which point you will turn it into a Realised PNL. But your interest payments will be realised (Realised PNL) every 8 hours and come into your account.
Whe you are comfortable with shorting with 1x leverage, you can try 2x. Shorting on 2x allows you to keep some of your Bitcoin in cold storage, so you are exposed to less counterparty risk to BitMEX. Watch the market and add extra margin if the price gets near to your Liquidation price to avoid Liquidation.
More detail on this trade in this essay: XBTUSD The Philosopher’s Stone and Earning Interest Income on XBTUSD with Minimised Risk.
Check the Market for Lending
Rates (Daily) at 19 May 2018.
Rates (Annual compounded) at 19 May 2018.
22 May PostScript
I am now half persuaded by replies to the piece (see below) that the only cashflow of Bitcoin in the technical financial sense is Hard Forks. Payments from Bitcoin Lending are cashflow from the Bitcoin Loan, not from Bitcoin. And payments from Arbitrage of the Basis are returns on the Arb. trade, not from Bitcoin. The point remains that Bitcoin has cashflow (from Hard Forks) and Buffett is wrong. I have not editied the original article.
Alex Krüger (@Crypto_Macro on Twitter): Bitcoin, just like gold or a dollar bill, does not generate cash flow. Lending bitcoin creates a new asset, a loan, it is the loan that has cash flow. I had this same discussion with @AswathDamodaran last November, he made me see it’s wrong to state bitcoin generates cash flows. 1 bitcoin, 1 gold oz, 1 house, 1 chair, none of these is a cash flow producing asset. Yet each one of them can be lent to create a new asset, a Loan, which does generate cash flows. It’s a technicality, yes, yet if we say bitcoin has cash flows, can say a chair does as well.
Some of the more informative Replies to the ZeroHedge post :
halcyon: Fucking stupid article again. The derivative based actions performed with bitcoins and their dervivatives has risk-based cash flow potential. Bitcoin has not positive carry. Neither has gold. Both have storage and security costs (albeit marginal for most at the rates they own/hold). This bitcoin pushing and twisting concepts to sell idiots more useless bits (because the holders are too eager to dump them for de jure currencies) is getting desperate.
My reply: Gold had a positive carry through out the 1990s. Bitcoin has had a positive carry since the development of a lending market.
NYC_Rocks: That’s not what Buffett meant. He is implying it has not productive capacity. Like gold which is a rock — just sits there. Same with the $US. A bond or stock is a claim on productive capacity of people. Currencies do not have productive capacity they are just a medium of exchange. Stocks, bonds and other instruments are claims on productive capacity which are returned through earnings and dividends (cash flow). This is basic stuff for which there is not need to post articles.
u4 eee aaa: BTC doesn’t have cash flow? Does cash have cash flow? OF COURSE NOT! Cash is CASH. It can’t have ‘self’ flow. Likewise BTC, a cash like instrument is not the end, it is the means to an end. It is a store of value in a barter transaction. Just like cash