Bitcoin / USD Swap Funding Rate Calculation Changes

Due to the ongoing issues at various Bitcoin exchanges with regards to depositing and withdrawing fiat currencies, there has become no credible source for overnight USD and Bitcoin lending rates.

The BitMEX Bitcoin / USD Swap, XBTUSD, currently uses the Bitfinex overnight USD and Bitcoin lending rate in the funding rate calculation. Effective 21 April 2017 12:00 UTC, the interest rate component of the funding rate calculation will be fixed at a positive 0.03% per day.

To arrive at this number, we calculated the average difference between the Bitfinex daily USD and Bitcoin lending rates for a 12 month period ending 31 March 2017 to arrive at the positive 0.03% rate.

If the swap price does not trade at a premium or discount during a funding calculation period (currently 8 hours in length), longs will pay shorts 0.01%. This equates to a daily rate of positive 0.03%.

When the deposits and withdrawals of fiat and Bitcoin are operating normally, we will select an appropriate exchange from which to source overnight USD and Bitcoin rates.

Update on OKCoin Market Disruption Event – Removal Expedited

Traders,

Due to a quicker than expected price divergence on OKCoin International, we are moving the timetable forward for the removal of OKCoin International and the incorporation of GDAX into the index.

The new timetable is:

  • At 21:45 UTC, GDAX will be added to the index. At this time, the index will have three constituents.
  • At 22:00 UTC, OKCoin International will be removed.

For more information, please see our previous post on the removal of OKCoin International.

Market Disruption Event: OKCoin International

Yesterday, OKCoin International announced USD deposits have been blocked:

Starting from today (April 18th, 2017), OKCoin would temporarily suspend USD deposit because of the issues with intermediary banks. Please do not make further deposit as your wires may be rejected by intermediary banks. We are now actively looking for alternatives to resume deposit as soon as possible. Your current account balance remains unaffected. We are sorry for any inconvenience caused.

For this reason, we are weighting OKCoin Intl to 0 in the .BXBT Index, effective 20 April at 08:00 UTC. To re-distribute the index, GDAX will be reinstated as an equal member.

The new distribution will be equally weighted between GDAX and Bitstamp. For reference, this change is live on Testnet and can be used for intermediate pricing data.

Additionally, we will be announcing new price protection mechanisms for BitMEX indices to prevent further bad pricing issues.

Update: Due to rapid price divergence, the timetable has been moved forward to 19 Apr at 22:00 UTC.

New Protections for BitMEX Indices

Traders,

During the past weeks, many major exchanges have experienced issues with their banking relationships, and one sent incorrect prices. These prices caused liquidations on multiple platforms, including BitMEX. Affected traders were reimbursed from BitMEX funds.

We intend for the BitMEX index to accurately represent asset prices on functioning, liquid exchanges. Unfortunately, the landscape is shifting quickly. We expect more index changes to come as exchanges lose and regain their banking relationships.

In preparation for this, we are instituting the following protections to all BitMEX calculated indices:

  • For an index with 3 or more constituents, if any constituent’s price is X% away from the median price, that constituent will be removed until BitMEX manually reinstates it.
  • For an index with 2 constituents, if any constituent’s price is (X% / 2) away from the currently calculated index value, the index value published will be the last calculated index value.
  • For an index with only 1 constituent, if the constituent’s price is X% away from the last calculated index value, the index price will remain unchanged.

For Bitcoin / Fiat currency pair based contracts, the tolerance will be 25%. For Altcoin contracts, the tolerance will be 50%. The tolerance is subject to change with notice.

Additionally, the following protection has been in place since launch:

  • If any constituent exchange’s API feed is not responsive, the last valid price is used. If an exchange’s feed is stale for over 15 minutes, it is removed until the feed is operational again.

Example 1 (3-Exchange Index):

The index is equally weighted between exchanges A, B, and C. The initial price on exchanges A, B, and C is 100, and the tolerance is 25%. The median index price is 100. The price observed on exchange C changes to 50. Exchange C will be removed, the index price will remain at 100, and the index will now be equally weighted between exchanges A and B.

Example 2 (2-Exchange Index):

Tolerance: 25%

Time 0:

Exchange A Price: 100

Exchange B Price: 100

Published Index Price: 100

Time 1:

Exchange A Price: 100

Exchange B Price: 50

New Calculated Index Price: 75

Last Published Index Price: 100

New Published Index Price: 100

Because the difference between the two exchange prices and the New Calculated Index Price is greater than 12.5% (Tolerance / 2), the Last Published Index Price will be used.

Time 2:

Exchange A Price: 50

Exchange B Price: 50

New Calculated Index Price: 50

Last Published Index Price: 100

New Published Index Price: 50

Because the difference between the two exchange prices and the New Calculated Index Price is less than 12.5%, the New Calculated Index Price will be used.

Example 3 (1-Exchange Index):

The index is made up only of exchange A. The price on exchange A moved from 100 to 50. Given that the tolerance is 25%, and exchange A’s price moved 50% (50 vs. 100), the index value remains at 100. If exchange A’s price changes to 51, the index value will still remain at 100. If exchange A’s price were to change to 80, the index value would become 80.

Example 4 (Downtime):

The index is equally weighted between exchanges A, B, C, and D. The API feed for Exchange D has been down for 15 minutes. Exchange D will be removed, and the index will now be equally weighted between A, B, and C. 5 minutes later, D begins responding and is reinstated.

Market Disruption Event: Bitfinex

Just recently, Bitfinex announced that USD deposits will be rejected until further notice. In combination with their previous notice blocking USD withdrawals, this means that Bitfinex is no longer a viable USD/Bitcoin exchange, and we expect the pricing discrepancy between Bitfinex and other exchanges to increase as traders attempt to withdraw via cryptocurrencies.

For this reason, we are weighting Bitfinex to 0 in the .BXBT Index, effective at 16:00 UTC today (30 minutes from the time of this post). In combination with the prior temporary suspension of GDAX from the index due to pricing discrepancies, this means that for the time being, the old .XBT index and the new .BXBT index will print the same prices.

Market Disruption Event: GDAX

At 23:02 UTC on 15 April 2017, one constituent of our .BXBT Index, GDAX, reported a trade print of $0.06 / XBT. This fed into the .BXBT Index and caused the price to temporarily move down to $888.48 / XBT which led to a number of users having their positions liquidated.

This was not a BitMEX engine or pricing issue. However, we strive to create a fair platform where users are not unfairly disadvantaged due to an error on another exchange, even if this error was an official price. As such, BitMEX will be refunding those users who were unfairly liquidated due to the pricing discrepancy from GDAX out of our own company funds.

Those users who had their positions liquidated will see the loss between $1183.00 / XBT and their liquidation price transferred back to their BitMEX Bitcoin wallet. Positions lost due to liquidation will not be reinstated.

For the time being, GDAX will be weighted at 0 in the .BXBT index until we have built in sufficient outlier protections.

The Rock Is In The Building

Litecoin is affectionately referred to as “rock” by many crypto traders. Litecoin has acted like a rock in trader’s bags since it hit its all time high of $40 in 2013. The technical merits of why Litecoin should be worth more than $0 are few and far between. Litecoin exists on life support only because Chinese traders for some reason enjoy trading it. Mainly that is because it is the only shitcoin the big three Chinese exchanges (BTCC, Huobi, OKCoin) offer.

During the current 2017 altcoin bubble, rock caught a stray bid. The pump and dump operators finally decided it was Litecoin’s time to shine. Rock is up almost 200% since late March.

The narrative supporting the rally is that SegWit is close to being activated. The activation threshold on Litecoin is 75% vs. 95% for Bitcoin. Litecoin is a CTRL+C, CTRL+V of Bitcoin. The slight changes include being Scrypt mined, and a block time of 2.5 minutes on average.

Many traders point to Litecoin as proof that if Bitcoin activates SegWit the price should explode higher as well. Some seriously delusional traders con themselves into believing Litecoin could actually serve as a replacement for Bitcoin if the Core vs. Bitcoin Unlimited civil war results in a contentious hard fork.

Oblivious traders are filling their bags with new shiny rocks. How do I know? Because in a recent tweet, Coinbase CEO Brian Armstrong said they will list a Litecoin / USD pair. Altcoin pumps begin in earnest on Poloniex, and end when exchanges such as Coinbase and / or Bitfinex decide to list them.

A recent example of this phenomenon was Ether in Spring 2016. After a lacklustre performance in the secondary market from listing in August 2015 until January 2016, Ether ignited and went asymptotic. The peak during that particular rally was reached when Bitfinex announced it would list ETH. As soon as ETH listed on Bitfinex, the dump began.

Exchanges late to the party, even BitMEX is guilty of this from time to time, signal that peak fomo is near. Those traders tempting fate by holding Litecoin should be cautious. It isn’t called rock for nothing.

Baby Got BOOST

Before today, I would have thought ASICBOOST was a new form of energy drink. It even could be the long awaited reincarnation of 4Loco. Sadly that would not be nerdy enough.

An email from Greg Maxwell made the rounds yesterday, and is causing an uproar. Bitcoin Magazine published an article about the email that is going viral throughout the Bitcoin industry.

TLDR

  • An unnamed leading mining equipment manufacturer is using a patented technology, called ASICBOOST, to achieve efficiency gains of up to 30%.
  • If activated, Segregated Witness (SegWit) would eliminate any advantage for miners using the ASICBOOST technology.
  • Therefore the reason why large miners refuse to support SegWit activation is because they would lose their economic advantage.
  • Maxwell proffered a Bitcoin Improvement Proposal to eliminate gains achieved by using the ASICBOOST technology.
  • Although not explicitly mentioned, everyone assumes Maxwell spoke of Jihan Wu’s Bitmain.

Let’s Assume It’s True

The purpose of this piece is not to argue whether or not I believe Maxwell. Rather I believe for good or bad, many in the community will agree with Maxwell’s analysis and there will be a discernible impact on the Bitcoin price.

My base case is that SegWit will not be activated, and there will be no hard fork this year. If Jihan Wu is truly a Chinese devil (or Gweilo if he was white), and can secretly mine Bitcoin 30% cheaper than everyone else, my base case will hold.

If Bitmain captures above average profits mining Bitcoin as it currently stands, they have no reason to actually desire a contentious hard fork. They also would not want SegWit to smash the piggy bank. Therefore the optimal strategy is to vocally support a hard fork to erode support for SegWit.

SegWit to many is a convoluted way to scale Bitcoin. Many would just prefer a simple increase in the block size from 1MB to 2MB. However, Bitmain would never go so far as to actually conduct said hard fork.

In essence, Jihan can buy a new pad on the Hong Kong Peak each year under the status quo. Despite high Bitcoin network transaction fees, the price keeps rising. Users prefer Bitcoin as a store of value and a global form of money good collateral, to a fast and cheap payments network.

A continuation of the status quo is bullish for the price. The price dipped from $1,200 to below $900 on fears of a paradigm shift. If you believe the arguments put forth by Maxwell, then it makes business sense for Jihan to prefer the current small block, high fee, rising price situation.

The Market Hath Spoken

The price is steadily rising post publication of said article. If the community believes in the veracity of the claims put forward, the price will shortly surpass $1,200 and retest $1,300.

I’m All Blocked Up

Will Segwit be activated? Will a hard fork occur? Will the block size ever increase? These are the burning questions that act as a drag on further Bitcoin price appreciation. I don’t know how it will all pan out, but that doesn’t mean that BitMEX can’t allow its clients the ability to profit by predicting how Bitcoin will or will not scale.

BitMEX is pleased to announce the launch of two prediction futures contracts themed around the ongoing Bitcoin scaling debate.

Segwit

SEGWIT, symbol: B_SEGWITZ17, is a prediction future on whether or not BIP141, also known as Segregated Witness, will be activated on the longest Bitcoin chain by the expiry date (31 December 2017, 12:00 UTC).

SEGWIT will settle at 100:

  • If BIP141 is activated during an “activation period” by the expiry date, and
  • The Bitcoin chain that activated SegWit must remain the Bitcoin chain with the largest hash power for 1,512 out of the following 2,016 blocks (75%). These 1,512 blocks must have passed by the expiry date.

SEGWIT will settle at 0 if the above conditions are not met.

What is an Activation Period?

An activation period spans one difficulty period (2016 blocks). 95% of the blocks mined during an activation period must signal acceptance of BIP141 for SegWit to be activated.

View Activation Periods

Big Blocks

BLOCKS, symbol: B_BLOCKSZ17, is a prediction future on whether a block larger than 1MB will be mined on the longest Bitcoin chain.

BLOCKS will settle at 100:

  • If a greater than 1MB block is mined on the Bitcoin chain with the largest hash power, and
  • If the Bitcoin chain that mined the greater than 1MB block must remain the Bitcoin chain with the largest hash power for 1,512 out of the following 2,016 blocks (75%). These 1,512 blocks must have passed by the expiry date.

BLOCKS will settle at 0 if the above conditions are not met.

Note that blocks of size > 1MB due to SegWit activation shall not mean a block greater than 1MB has been mined; BLOCKS is contingent on an actual base block size limit increase.

Trading Prediction Futures

Each contract can either settle at 100 or 0. The value of each contract is 0.0001 XBT multiplied by the futures price. For example, if you bought one contract at 50.00 , it would be worth 0.005 XBT. If the contract settled at 100, you would make 0.005 XBT. If the contract settled at 0, you would lose 0.005 XBT.

No leverage is offered on prediction futures contracts.

You will find all BitMEX prediction futures contracts under the tab entitled “Binary”. All prediction futures contracts’ symbols will begin with “B_”. This prefix denotes that contracts are binary, meaning they will either settle at 100 or 0.

Prediction Futures Series Guide

Hold The Line

Throughout China’s history, northern rulers struggled to effectively control those to the south and west of them. The varied ethnicities, topography, and economies of China meant that no ruler was able to retain absolute power for long. Due to relative global peace and globalisation since WW2, the Communist Party of China (CCP) has been able to maintain control by bribing the masses with employment.

Rich people don’t have kids. As a result, after the baby boom in the mid-20th century, the global developed and developing population rate has fallen or will soon fall below the replacement rate. The replacement rate is defined as a woman birthing 2.1 children over her productive lifetime. Africa is the one exception, but unfortunately their consumption power cannot replace dying first-world consumers.

Xi Jinping’s mission to solidify the political base of the Communist Party of China occurs at a time when global demand for goods is falling, wages in China are rising, and the population is aging. Any perceived threat to the continuation of the CCP’s rule cannot be tolerated. 99% of humans aren’t communist, capitalist or any other “ist”, they are hungry.

China must feed its billion plus population by providing employment. Without employment, young men transform from docile workers to cannon fodder for skilled orators and politicians.

These trends explain why this year’s National Congress is of extreme importance. Calm must be maintained at all costs. However, internal monetary pressures continue to build.

Grandma Yellen unleashed another 0.25% rate hike last week. She also did not alter the forward guidance. Another two rate hikes are expected this year, and some analysts believe the Fed could and should increase the pace of hikes.

The Fed should raise rates faster while the market shrugs them off. The S&P 500, which is the only economic indicator of importance, has not reacted negatively to rising rates. Yellen has cover to raise more aggressively. The higher rates go now, the more they can be cut when the next financial crisis strikes.

For China, USD interest rate normalisation puts increasing pressure on the CNY. In a normal year, this would not be an issue. The PBOC could raise rates onshore, or allow the CNY to weaken. However the directive is for a calm period before the National Congress.

The PBOC can’t materially tighten rates onshore lest they pop the gargantuan property bubble. The Chinese property market is a government sanctioned ponzi scheme. Developers, which are some of the most valuable companies in China, borrow money from financially repressed savers. The developers then purchase land from local governments, who “buy” land from their peasant subjects at below market rates.

The developer must build, sell, and refinance before the bill comes due for past loans. Should rates rise materially, developers will be forced to dump inventory en masse.

Over 70% of household wealth is trapped in property. Each time it appears that Beijing will allow the market to correct, they relent in the face of sure losses from a wide swath of the population.

Tiananmen Square essentially was an inflation inspired middle class protest against the CCP. However in 1989, the middle class were mostly teachers, in 2017 they are hundreds of millions of property punters. Impoverish them, and the CCP will see its mandate to rule evaporate.

The second option of a material currency devaluation is also off the table for the time being. A 20% to 30% one-off devaluation is needed. However, an action of that magnitude would portray China’s economy as both weak internally and externally. A perceived “weak” China will not be tolerated while the new leadership ascends.

A recent Bloomberg article illustrates that Xi Jinping is not relenting in his dive to tame China.

For the first time local party committees are using “negative lists” — including everything from bribe-taking to involvement with illegal construction projects — to screen delegations to the 19th Party Congress, which will set China’s political hierarchy for the next five years. A front-page article endorsing the moves in the party’s flagship People’s Daily newspaper Monday showed the push has support from the highest levels.

The negative lists — a concept often associated with trade negotiations in which anything not specifically mentioned is allowed — gives Xi yet another tool to shape the key party gathering in Beijing. While no date has been set, it’s expected to occur in the second half of the year.

The twice-a-decade congress is crucial for Xi to secure lasting influence beyond 2022, when his own tenure would be expected to end. At this year’s meeting, 11 of 25 Politburo members — including five of seven members on its supreme Standing Committee — could be replaced.

Bitcoin Withdrawals

Mandated by the PBOC, the large exchanges are implementing new KYC and AML policies. Certain accounts must now travel in person to the exchanges’ offices for physical checks of identity. If followed, this will make client onboarding expensive and extremely bureaucratic. The end result will be less people trading on exchange, and more trading on OTC platforms such as LocalBitcoins.

I believe that withdrawals will not resume until after the National Congress and a subsequent CNY devaluation. However, a recent notice from Huobi implies an imminent lifting of the withdrawal ban. To withdraw Bitcoin, clients must state and prove where the coins will go, and state the purpose of the withdrawal. Responses such as “I want to escape a weak CNY” will certainly not fly.

True to form, the government is saddling exchanges with needless bureaucracy to bankrupt those with weak balance sheets. The PBOC will keep inventing new KYC / AML policies until they are ready to allow Bitcoin to be freely traded again.

Unfortunately Chinese comrades aren’t stupid. They recognise the perilous state of the economy and still hold Bitcoin IOU’s on exchanges. The expected stampede for the exits by selling Bitcoin to withdraw CNY has not happened en masse. Held long enough, this Bitcoin IOU could protect wealth against the imminent devaluation. This is one reason why the price still hovers around $1,000.

OPEC : Oil :: Miners : Bitcoin

Jihan Wu, CEO of Bitmain the world’s largest operator and producer of mining equipment, made an apt comparison between the Bitcoin scaling issue and the oil market.

OPEC in their quest to maintain high oil prices sowed the seeds for American shale oil. The high oil price allowed engineers to explore and drill for more expensive shale oil. Shale oil’s extraction price continues to decline as technology improves. As the supply of oil increased, prices fell, and OPEC’s hold on the market withered.

According to Jihan, Bitcoin miners are like OPEC. A small number of players control the majority of the hashrate. Bitcoin transaction volumes have increased, but the network can only process a finite amount of transactions. Therefore, transaction fees rose alongside the price.

Miners are happy. Some users are not. As a work around, some developers (core) altered the Bitcoin protocol allowing it to process more transactions without the need for a larger miner produced hashrate. If these off-chain scaling solutions are successful (e.g. The Lightning Network), miner’s earnings from transaction fees could decline.

On the margin, either you view Bitcoin more as a store of value akin to gold, or a payments network. If Bitcoin is more a store of value, the price of transactions is of little concern. Gold is rarely used for day to day commerce. It is used to store large amounts of wealth, and as a settlement currency for large notional transactions. Therefore the velocity of gold is low.

If Bitcoin is more a decentralised payments network, then the price and speed of a transaction is paramount. Bitcoin must be able to compete with credit card networks such as Visa and Mastercard if it is to become a real payments solution. Currently Bitcoin is clunky and expensive and is no match to these incumbents.

If neither SegWit nor a block size increase reaches consensus, Bitcoin will continue to travel down the road to becoming another form of money good collateral that is expensive in small quantities to move. To many miners this is a perfectly acceptable solution as long as the price remains high. Given that blocks are full, transaction fees are high, and the price continues to rise, users view Bitcoin more a store of value than a payments protocol.

The question is, can another cryptocurrency become a store of value, and be cheap and fast to send. Should another coin achieve this feat, it will become a major challenger to Bitcoin. To date, no coin is within striking distance of Bitcoin. Many claim that Ether will unseat Bitcoin, but it does not command the same global mindspace as Bitcoin.

Will a group of miners engage in a contentious hard fork, I don’t know. But I do know humans. Humans are lazy and greedy. Regardless of the temper tantrums thrown on various social media platforms, miners care about their bottom line. Doing nothing will not harm them in the short to medium term.

A Bitcoin hard fork will not be as cute and cuddly as Ethereum’s. The Ether market cap was barely $1 billion when the DAO disaster necessitated a face saving hard fork. Bitcoin is worth $17 billion. The amount of money invested in mining equipment, exchanges, and wallets tailored for Bitcoin is orders of magnitude larger than for Ethereum.

A failed hard fork that leaves a minority chain commanding a double digit percent of the network hashing power will not be viewed kindly. Unlike Ether and Ether Classic, the sum of the newly formed majority and minority chains will be drastically lower than the pre-fork value of Bitcoin. Ether never positioned itself as a store of value or a payments protocol. It is fuel for decentralised applications.

Bitcoin’s value is its relative stability vs. other cryptocurrencies. Disrupt that stability and its status as the reserve currency of crypto will evaporate. The challenger that does emerge will certainly not use Bitcoin’s Proof of Work algorithm. If successful, the challenger will render all Bitcoin ASIC mining equipment worthless.

Is Jihan going to stake the future of his Billion dollar mining company on a hard fork that could go pear shaped? No chance.

New ETH, XMR and DASH Monthly Futures

On 24 March 2017 at 12:00 UTC, BitMEX will delist the following Altcoin weekly futures contracts: ETH7D, XMR7D and DASH7D. As their replacement, BitMEX will trial the following monthly futures contracts:

  • ETHJ17
  • XMRJ17
  • DASHJ17

These above contracts will settle on 28 April 2017 at 12:00 UTC on their respective 30 minute TWAP. All other specifications on the contracts remain the same.