Bitcoin Scaling Game Theory

Go figure a scaling “consensus” was reached at the Consensus 2017 conference. Barry Shillbert’s negotiated Bitcoin Scaling Agreement taken at face value appears to be the holy grail; however, once one engages in a moment of critical thought, its importance quickly dwindles.

The Bitcoin core developers (Core) believe Segregated Witness (Segwit) is the solution to scaling Bitcoin. Many large miners, lead by Jihan Wu of Bitmain, believe a 2MB block size increase via a hard fork is the best scaling solution.

The agreement signed by followers of both factions sets out the following schedule:

  • Activate Segregated Witness at an 80% threshold, signaling at bit 4
  • Activate a 2 MB hard fork within six months

95% of the hashrate must signal for Segwit activation by the end of November 2017. The six month hard fork deadline is at a similar time. This presents an interesting game of chicken.

If the miners signal for Segwit and it is activated before a hard fork, they lose all leverage. Core then has no reason to support a hard fork. The converse is also true. If the hard fork happens first, theminers have no incentive to signal for Segwit.

Each side has the same ultimate goal, increasing the throughput of transactions at a reduced cost. How the goal is achieved could adversely affect each side economically. Many off-chain advancements, such as Lightning, require transaction malleability to be fixed, which Segwit will accomplish.

Blockstream and its investors, which directly pays the salaries of many core developers, is banking on the ability to implement and profit from Lightning. The miners under this circumstance would lose income from transactions not being processed directly on the Bitcoin blockchain.

However, both sides benefit from the price continuing to march higher. A cute and cuddly agreement, with no teeth aimed at can-kicking the important decision as to how Bitcoin must scale, is needed to distract new investors from the fundamental problems that continue to afflict Bitcoin. There is no incentive for either side to blink first.

Both sides must compromise if any solution is to prevail. The status quo will remain as long as the price remains above $1,000. Below that level, miners profit margins become tight, and Bitcoin holders feel moderately poor again, most likely because they FOMO’d into the market at $2,000. When your portfolio is sliced in half, you might come to the negotiating table.

My base case remains that Segwit will not be activated, and the block size will not increase.

The BlockMEX ICO

Last time we spoke about BlockMEX, the company pivoted into a digital asset exchange. Due to theICO craze, BlockMEX is exploring issuing a token. The following is a conversation between BlockMEX CEO Arthur Hayes, and Gary a principle at a VC firm.

Gary recently pivoted as well. Unable to raise his second fund to follow on with Blockchain companies with no hope of exiting, he now runs a fund solely dedicated to ICO’s.

Arthur: Did you hear about DogShit token? They just raised $100 million in under 5 seconds.

Gary: Really, what does DogShit token do?

Arthur: They take pictures of dog shit and put it on the blockchain. Every time you want to view thepictures, you have to spend DogShit token. The ticker is DOGE.

Gary: Wow revolutionary, why don’t you issue an ICO?

Arthur: Funny you say that, we are speaking internally about issuing one. We think we can be the first project to raise over $1 billion.

Gary: That is amazing. One question, why would your platform ever need tokens to operate?

Arthur: Well that’s the trick, we need to invent some plausible reason why users of BlockMEX need to use a token to trade.

Gary: Also, don’t you think some regulators might view ICO’s as securities? That could land you in some trouble. Especially if you raise $1 billion.

Arthur: We aren’t worried about that. We just need to get some fancy Swiss lawyers and just won’t sell equity. The financial regulator rubber stamps all these token sales and we can hide there if we get into any trouble.

Gary: Hmm, don’t you remember how the US government made all the Swiss banks roll over on their clients. In one action, Swiss privacy protections were rendered worthless.

Arthur: It’s a token, it’s the future. We aren’t worried.

Gary: Ok so what is this token going to be used for?

Arthur: Do you want the sales pitch or the reality?

Gary: Both.

Arthur: We will tell potential token holders that in order to buy or sell any product on BlockMEX you must spend 1 MOLLY token alongside posting the relevant Blockcoin collateral. The more transactions that we do, the more useful MOLLY tokens are, and hence the more valuable.

In reality, we will just buy a Lambo in every color of the rainbow. Then houses on the Peak in Hong Kong for all employees.

Gary: MOLLY is the name of the token, that doesn’t make any sense.

Arthur: Brah, I was inspired by Future’s song Mask Off. Seriously go to Youtube and listen to it. Music these days is sooo deep.

Gary: So why should I buy this token, it sounds like you are just going to scam all your token holders.

Arthur: Brah, didn’t you read Balaji’s recent Medium article on ICOs? I mean if the guy can convince VC funds to invest hundreds of millions of dollars, you included, to build a Raspberry Pi to sell on Amazon, he surely must be right about the ICO market. If he’s selling, I’m buying. Don’t worry about whether the project is worthy or not. Just buy it. It’s the new paradigm.

Gary: Ok, sold. Can I get in on the pre-ICO distribution. I only go in pre-ICO, it’s the only way I can justify my 75% performance fee. Otherwise my investors can just visit your website and purchase thetokens directly from you. They don’t need to pay me.

Arthur: Sure I’ll give you a 20% discount.

Arise China

The bullish Bitcoin narrative surrounding China disappeared after the PBOC neutered the leading exchanges. The most drastic action was the suspension of Bitcoin withdrawals while exchanges’ compliance departments were upgraded. After many months of speculating when the PBOC would give the nod, it appears that Bitcoin trading is normalising.

China being China, the PBOC never overtly told exchanges to halt withdrawals. They exerted pressure where it was needed and obtained the desired result. The big 3 exchanges successfully fluffed their way back in business.

OKCoin and BTCC now allow clients to withdraw token amounts of Bitcoin each day. At OKCoin it is 10 Bitcoin per day. Clients must pass stringent KYC / AML checks, and pinky swear they aren’t using Bitcoin to evade capital controls.

XBT/CNY began 2017 at a modest premium to XBT/USD, and after successive PBOC punitive actions it traded at a discount. The discount reached a low of 20% earlier this month.

A recent Caixin article, which claimed the PBOC would issue exchange fines and clarity as to how Bitcoin would be regulated, injected hope back into the market. The XBTCNY/XBTUSD spread rallied aggressively back to par and after the recent withdrawal resumption news, the spread inched to a small premium.

Even though many traders wrote China off it still has the most number of people with the desire and means to buy BitcoinThe PBOC recognised that it couldn’t ban Bitcoin and thus attempted to stymie its growth through various actions.

Bitcoin in 2017 is more widely held than in 2013. Punters in Japan and Korea took the “must have Bitcoin at any price” baton from China. Even Americans, evidenced by impressive new Coinbase account signups, are chomping at the “bit” to enter the digital industry. This new demand allowed themarket to ignore the PBOC attempts to control the price.

The normalisation of Bitcoin trading in China will serve as another source of dry powder to fuel the rally onwards and upwards. $3,000 Bitcoin is definitely attainable by month’s end with the renewed Chinese buying power. Expect Bitcoin to push through $2,800 by early next week as traders feel more bullishnow that China has their backs.

The Dearth of Dollars

Just like every other asset globally, the pricing of Bitcoin is directly affected by the availability of US dollars on trading platforms. Trust in exchanges is a precious commodity in Bitcoin. Exchange counterparty risk is the reason why dollars held on exchanges are in short supply.

In April, Bitfinex lost its ability to process dollar deposits and withdrawals. Traders who wanted dollar liquidity immediately were forced to buy Bitcoin and other digital currencies. That forced the price of Bitcoin and other digital currencies into a premium on Bitfinex vs. other trading platforms.

The chart above shows the spread between Bitfinex and Bitstamp, and the price of Bitcoin. Bitstamp’s banking relationship remained unaffected, which allowed traders to buy Bitcoin on Bitfinex and sell it for USD on Bitstamp. They could then withdraw dollars. The spread between the two exchanges represents the desire for Bitfinex users to redeem their dollar IOU’s for physical cash.

This glorious rally began in the wake of the announcement that dollar funding options were shut at Bitfinex, OKCoin and other exchanges that banked in Taiwan. However as the market continued to rally, the Bitfinex / Bitstamp spread narrowed and turned negative.

Without the ability to accept fresh dollar deposits, Bitfinex now suffers from a dearth of dollars. This will cause the price to underperform the global average as the price continues to rally.

The Tether Arbitrage

Tether, a pseudo Bitfinex dollar liability that rides on a blockchain, can be used to arbitrage the Bitfinex discount. Theoretically Bitfinex should convert 1 Tether into 1 USD. Currently traders are unable to deposit dollars to Bitfinex for the purpose of creating Tether. Kraken operates a market where traders possessing USD can purchase Tether.

The Steps:

  1. Deposit USD to Kraken, and buy Tether
  2. Send Tether to Bitfinex, and convert into USD
  3. Buy Bitcoin
  4. Send the Bitcoin to Bitstamp and sell for USD
  5. Repeat

Currently Bitfinex is trading at a 5% discount. Tether / USD on Kraken should theoretically trade at a 5% premium. Anything less than that, and an arbitrage is possible. If Bitcoin continues to rally Tether will be sucked back into Bitfinex.

According to Tether, there are 68.5 million Tethers in circulation. Depending on the length of this rally, the supply of Tether that can be used to arbitrage the Bitfinex discount will evaporate quickly.

The Bitfinex / Bitstamp spread may transform into a leading indicator of the Bitcoin price. Bullish and bearish traders will go long or short the spread respectively.

EOS and Tezos Futures Contracts Now Live

Behold the clash of the Titans! We believe that the EOS and Tezos token sales will be the largest of 2017.

EOS Futures

BitMEX is proud to announce the launch of EOS Futures contracts, expiry 28 July 12:00 UTC with symbol EOSN17. Each contract is worth 1 EOS and the contract offers 2x leverage.

Since the EOS platform is still under development, the following rules will apply:

  • If no EOS auction is completed before the expiry date, EOSN17 will settle at 0.
  • EOSN17 will have 25% Up and Down Limit against the previous session close price to prevent price manipulation. Each session is 2 hours long, and session closes occur every even numbered hour.
  • Settlement will occur either at the most recent EOS auction price (if EOS/XBT trading has not begun) or at the .EOSXBT30M Index Price if EOS/XBT has begun trading prior to 27 July 12:00 UTC.

Further details about this contract can be read in the EOS Series Guide.

Tezos Futures

BitMEX is proud to announce the launch of Tezos Futures contracts, expiry 29 December 12:00 UTC with symbol XTZZ17. Each contract is worth 1 XTZ and the contract offers 2x leverage.

Since the Tezos platform is still under development, the following rules will apply:

  • If the Tezos crowdsale is not completed before the expiry date, XTZZ17 will settle at 0.
  • XTZZ17 will have 25% Up and Down Limit against the previous session close price to prevent price manipulation. Each session is 2 hours long, and session closes occur every even numbered hour.
  • Settlement will occur either at the ICO price (if XTZ/XBT trading has not begun) or at the .XTZXBT30M Index Price if XTZ/XBT has begun trading prior to 28 December 12:00 UTC.

Further details about this contract can be read in the XTZ Series Guide.

Bitcoin Basis and Arbitrage Trading 101

BitMEX CEO, Arthur Hayes, will lead an interactive seminar geared towards traders who would like to take advantage of very profitable arbitrage opportunities trading Bitcoin derivatives. He will discuss in depth the following arbitrage strategies:

  • Cash and Carry
  • Stair Step Cash and Carry
  • Funding
  • Swaps vs. Futures

Date: 29 June 2017

Time: 7pm to 9pm

Location: The Hive, 23 Luard Rd, 21/F The Phoenix, Wanchai, Hong Kong

Cost: Free

Given the recent surge in interest, we expect this event to be standing room only. Please RSVP on Eventbrite to secure your spot.

If you are unable to attend, a video recording will be available shortly after the event on the BitMEX Youtube Channel.

Notice Regarding BitMEX Futures Contracts

The following contracts will begin trading Friday 16 June 2017 08:00 UTC:

  • DASHU17
  • ETHU17
  • LTCU17
  • XBJU17
  • XBTU17
  • XMRU17
  • XRPU17
  • ZECU17

The following contracts will not re-list on Friday 16 June 2017 12:00 UTC:

  • REP7D

The following currency pairs will not have BitMEX derivative contracts after Friday 30 June 2017 12:00 UTC:

  • FCT / XBT
  • GNO / XBT
  • REP / XBT (Delisted effective 16 June 2017 12:00 UTC)
  • XBT / CNY

Additional Withdrawal Time at 10:00 UTC

We have received several support tickets asking about a special early withdrawal period, so that users may claim entry in the Byteball Fair Initial Distribution, which takes place at 13:10 UTC.

To support this, we will be initiating early withdrawals at 10:00 UTC tomorrow. No opt-in is necessary; all withdrawals will be processed if confirmed before that time. The usual time at 13:00 UTC will be honored as well. If you wish to participate in this distribution, we recommend hitting the 10:00 UTC cutoff so you have sufficient time for the transaction to confirm.

Status Futures Now Live

BitMEX is proud to announce the launch of Status Futures contracts, expiry 28 July 12:00 UTC with symbol SNTN17. Each contract is worth 1 SNT and the contract offers 2x leverage.

Since the Status platform is still under development, the following rules will apply:

  • SNTN17 will have 25% Up and Down Limit against the previous session close price to prevent price manipulation. Each session is 2 hours long, and session closes occur every even numbered hour.
  • Settlement will occur either at the ICO price (if SNT/XBT trading has not begun) or at the .SNTXBT30M Index Price if SNT/XBT has begun trading prior to 27 July 12:00 UTC.

Further details about this contract can be read in the SNT Series Guide.

QTUM Futures Now Live

BitMEX is proud to announce the launch of QTUM Futures contracts, expiry 29 September 12:00 UTC with symbol QTUMU17. Each contract is worth 1 QTUM and the contract offers 2x leverage.

Since the QTUM platform is still under development, the following rules will apply:

  • QTUMU17 will have 25% Up and Down Limit against the previous session close price to prevent price manipulation. Each session is 2 hours long, and session closes occur every even numbered hour.
  • Settlement will occur either at the ICO price (if QTUM/XBT trading has not begun) or at the .QTUMXBT30M Index Price if QTUM/XBT has begun trading prior to 28 September 12:00 UTC.

Further details about this contract can be read in the QTUM Series Guide.

Fade Into Darkness

It’s got enemies. Lots of enemies.
The success took a shot at you.
What you gonna do? Kill it?
You gonna become unsuccessful?

— American Gangster

The Bitcoin phenomenon created a whole new industry of cryptocurrencies and digital tokens. The top dog was and still is Bitcoin. But starting in 2017, challengers began seriously nipping at the heels of the champ.

According to Coinmarketcap, the entire digital currency market cap increased $22.89 billion YTD. Bitcoin’s share decreased from 87.60% to 60.06%; that represents $6.3 billion of funds diverted away from the King of Crypto.

Big Daddy Vitalik must be pleased with himself and his Ether child. Ether’s market cap rose by a factor of 10 in 2017. Its market share jumped from 4% to 18.23%. You can bet the devs will be having fun blowing money on the usual accoutrements of suddenly wealthy men at Devcon 3 in Cancun. PSA: please don’t wear socks and sandals unless you play in the NBA.

ICO mania began this year with Gnosis. The ICO made Gnosis the most valuable crowd-funded project ever at inception. Gnosis, like many other projects, is token built using the Ethereum protocol. Dapps (Decentralised Applications) must spend Ether in order to function. The more successful and useful you believe Dapps will become, the more Ether must be purchased and then spent. That is one major reason why Ether’s value is skyrocketing.

The vast majority of projects that launch ICO’s aren’t worth even one satoshi. The same can be said for the vast majority of startups, or even listed companies. Here’s looking at you Snap.

ICO’s will not go away. For the first time in financial history, founders can access capital from both large and small investors armed with nothing more than a slick website. No regulatory filings or egregious investment banking fees are required to raise capital. The capital of the 99% is there, and they are hungry to participate in the success of the next Google, Facebook, Tencent etc.

The same excitement Ether developers and users exude is not as palpable in the Bitcoin community. The community is no closer to an agreement on the proper way to scale Bitcoin. And banking issues continue to curtail the ability for new money to enter the ecosystem. The rising Bitcoin price papers over the major issues the ecosystem faces.

The Bitcoin to Ether comparison is not apples to oranges. One is digital gold, the other is a decentralised applications protocol.

They both can be wildly successful together. After the DAOsaster, Ether is being treated once more by some as digital money. The utility that Ether provides Dapps could give it the velocity to challenge Bitcoin’s status as the reserve currency of crypto.

That utility could be Ether’s achilles heel. Big Daddy Vitalik and the Ethereum Foundation care not if Ether is used as money good collateral, they care for it to power useful applications. Therefore, they will make decisions regarding the Ethereum protocol that could harm Ether’s moneyness in favour of its utility.

Most Bitcoiners desire Bitcoin to remain the best form of digital money. The varying viewpoints on how to achieve this lofty goal is one reason why development on the protocol has stalled. While this frustrates many, it also means that the community will not approve actions that would damage Bitcoin moneyness.

BitMEX is bullish on the industry as a whole. A rising market cap is good for everyone, even if the previous star shines less bright. In the end, BTFD!

Hong Kong Altcoin Arbitrage Seminar

Bitcoin trading strategies are becoming more well known; however, other digital currencies (altcoins) are also gaining in popularity. BitMEX CEO, Arthur Hayes, will lead a seminar on how to apply simple arbitrage strategies to the altcoin universe.

Arthur will discuss the following strategies:

– Cash and Carry Arbitrage
– Create to Lend
– Altcoin Market Making
– ICO trading using derivatives


Date: 17 May 2017

Time: 7pm – 9pm

Location: The Hive, 23 Luard Rd, 21/F The Phoenix, Wanchai, Hong Kong

Cost: Free

Please RSVP using Eventbrite.