SegWit2x fork trading strategy for virtually guaranteed profit
I’ll provide a condensed summary of the strategy at the top of this post which will make sense to savvy traders, and provide some explainers at the bottom of the post for novice traders who wish to understand more about this strategy and the SegWit2x fork in general.
Let’s assume you have $7,580 USD (current price for 1 BTC).
Before the trade
- $7,580
Strategy
- Buy 1 BTC at spot at $7,580
- Short 1 XBTUSD at $7,580 with 2x leverage @BitMEX (½ BTC as margin)
- Send ½ BTC @Bitfinex
- Use Bitfinex Token Manager to split ½ BTC → ½ BT1 + ½ BT2
- Sell ½ BT2 for USD (BT2/USD price $1,000)
- Wait until SegWit2x fork block 494,784
- Close BitMEX short and sell the BTC at spot
- Sell the BT1 (that is now BTC) at spot
After the trade
- $8,080*
(*Minus swap funding costs. We’ll expand further on this part later. )
Where did the money come from?
The ½ BT2 that was sold for $500.
Remaining positions are perfectly hedged and offset eachother =±0.
How could this possibly work?
The bitcoin bought on the spot market is entirely offset by the short position entered on BitMEX, so you’re hedging two bitcoin positions against each other while receiving additional B2X from the fork.
This works because Bitfinex and BitMEX have different strategies for how they plan to treat the SegWit2x fork — specifically, Bitfinex plans to credit users with B2X tokens while BitMEX won’t. As a result, the BT1 tokens on Bitfinex are enough to cancel out the BitMEX short. This strategy takes this one step further by locking in the B2X profit via the Bitfinex Chain Split Tokens’ futures market.
Another key factor in this is that despite the fact that we’re not actually trading the same product on these exchanges, we’re currently able to enter these trades at price parity. This will likely change as we get closer to the fork date.
Six important things to be aware of
- Price: To get this trade right, you need to enter the XBTUSD short position at a price higher or as close as possible to the price at which you bought the initial BTC. Inversely, when you exit the trade you ideally want the XBTUSD price to be lower than the spot price. In order to be able to enter the trades at the same time, you should purchase the spot BTC while you use BTC already prepared on BitMEX to simultaneously enter the short (same goes for when exiting the trade).
- Deadline: The prices of XBTUSD and spot are unlikely to stay on par forever. The closer we get to the SegWit2x fork block, less likely is the price parity to remain (unless, of course, the BT2 futures price collapses, but that would nullify this strategy since BT2 comprises its profit element).
- Liquidation: If you enter the short at $7,580 with 2x leverage you’ll get liquidated if the price reaches $15,160. That doesn’t mean you lose any money however — if you lose half your BTC by getting liquidated that means that the other half of your BTC has doubled in value, so you’d still have $7,580. At that point you only need to make sure you stay in the game by adding funds and reshorting.
- Leverage: You can actually tweak the leverage parameter to your choosing. For instance, you could use 3x, 5x or 10x leverage (BitMEX supports up to 100x) to decrease the amount of BTC you need to keep as margin on BitMEX — meaning you can keep more BTC outside BitMEX to receive more free B2X; albeit at the cost of a more difficultly managed liquidation price.
- Black swan: If the price of the original Bitcoin chain falls to $1, you’ll still profit from this trade. However, if the price goes to 0, you’ll lose everything. In that instance, it won’t matter how much your short BitMEX hedge pays out; zero times any positive real number is still zero. This strategy assumes a non-zero original Bitcoin price.
- Funding: The XBTUSD contract is a perpetual swap that never settles, purposed to be convenient for traders. But because the XBTUSD swaps never settle, they also lack a natural mechanism by which to track spot price effectively. In order to resolve this, there are funding costs for holding the swaps. But the reverse is also true; you can actually make money by holding a position open. The formula for how this is calculated is rather complex, but generally speaking, when the XBTUSD swap trades at a premium, longs pay shorts, and when it trades at a discount, shorts pay longs. As an example, at the time of writing, the long side of XBTUSD contracts will pay the short side 0.01% of their position at at 5:00 AM UTC+1. Funding is paid and received every 8 hours. BitMEX itself does not charge fees on funding payments.
Although longs are paying shorts at the moment, we can assume that this will change to disfavor shorts as we approach the fork. In the hours before the Bitcoin Cash fork, the XBTUSD contract started trading at a discount to reflect the fact that it would not credit users with BCH, which caused the funding rate to drop significantly. Now, although the premium rate went as low as -1.6% as seen in the graph above, the final funding rate on BitMEX is still capped at -0.375%, which at $7,580 amounts to ~$28 every 8 hours. This is unlikely to last for longer than 24h, and is unlikely to significantly offset the BT2 profits.
Other risks
As always, there’s significant risk to keeping funds on exchanges. During forks, these risks are even larger. When Ethereum hardforked as a result of the DAO hack in July 2016, Coinbase lost 17.5k ETC (~$40k) as a result of replay attacks.
The worst example of exchange risk is actually only 3 months old and stems from the Bitcoin Cash launch, where Bitfinex designed their BCH distribution plan in such a way that presented a very similar opportunity to the strategy described in this post for traders to acquire free BCH. This was obviously an error on Bitfinex’ side, but instead of owning up to the error, Bitfinex punished the traders attempting the strategy and even went back on their word on how they would credit the traders.
Although BitMEX has a better track record than Bitfinex, we’ve seen that it isn’t entirely inconceivable that an exchange would alter the rules retroactively. The worst case scenario would be if BitMEX shorts would end up owing B2X after all, despite their statement saying that they wouldn’t.
“I understood nothing of this post. Can you please explain what the hell you’re talking about?”
If you have no idea what’s going on with SegWit2x, I suggest you read this article which does a decent job at explaining the situation. This is the culmination of a very long internal battle in Bitcoin which could have ended in a large number of different ways, as I’ve detailed in a flowchart in a previous post.
“Yes yes, I know all about that, but can you explain the trading strategy to me in more detail? The condensed version didn’t make any sense at all.”
Hmm. Okay, let’s look at the steps again:
- Buy 1 BTC at spot at $7,580
- Short 1 XBTUSD at $7,580 with 2x leverage @BitMEX (½ BTC as margin)
- Send ½ BTC @Bitfinex
- Use Bitfinex Token Manager to split ½ BTC → ½ BT1 + ½ BT2
- Sell ½ BT2 for USD (BT2/USD price $1,000)
- Wait until SegWit2x fork block 494,784
- Close BitMEX short and sell the BTC at spot
- Sell the BT1 (that is now BTC) at spot
“Buying at spot” simply means to buy the real product at an ordinary exchange, i.e. not a futures market.
“Shorting” means to take a position in a trade that will earn you money when the price of the asset goes down. In this instance it means to take the short position of the BitMEX XBTUSD perpetual swap.
The “Bitfinex Token Manager” is a feature Bitfinex introduced to allow you to trade the resulting coins from cryptocurrency forks before they’ve occured. The tool allows you to split your BTC into BT1 & BT2. At the fork date (if successful), BT1 matures into BTC while BT2 matures into B2X.
“Closing a short” means to close the position which technically involves buying XBTUSD. When you close a short on BitMEX, you’ll get less BTC back if the price has risen since you entered the position and more BTC if the price has gone down. You never touch any fiat.
In this strategy, you will in effect purchase BT1 (which will become BTC post-fork) and “virtually” sell an equal amount of BTC via the XBTUSD swap, so your dollar value remains the same. Because the hedge is leveraged, only a partial amount needs to be locked up on BitMEX in order to offset the purchased BTC. Since that allows you to keep some BTC outside BitMEX, you can acquire the BT2 token by-product for free, which you can sell for BTC or USD. And because we’re using the Bitfinex future’s market we can do that immediately — even before the fork happens.
“Isn’t this the same strategy as ‘Trading Shitcoin2X’ which BitMEX blogged about here?”
No. The XBTZ17 futures contract is not the same product as the XBTUSD perpetual swap. As the XBTZ17 is a futures contract, it has a settlement date (Dec 29) and does not require funding.
At different times up until Oct 31, XBTZ17 has been trading at price parity with Bitstamp & GDAX, allowing traders to fully hedge their spot purchase. Since XBTZ17 doesn’t have any rolling funding costs, shorting it instead of XBTUSD would theoretically have been a superior move, but since traders have already exhausted this option, XBTZ17 now trades at a discount. The arbitrage still exists to some degree, although it has decreased significantly in the last few days. Here’s a link to the graph for you to keep an eye on should the opportunity present itself again!
Hope that helps!
Disclaimer: This guide does not constitute financial advice and is only meant for educational purposes. Trade at your own risk.
