Fade Into Darkness

Success,
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.

Notice Regarding Gnosis Futures Contracts

The following will be effective 2 May 2017 12:00 UTC:

  • The .GNOXBT Index will use the most liquid GNO/XBT spot exchange’s price. At this moment, it appears that the most liquid exchange will be Poloniex.
  • GNOM17 will switch from Last Price to Fair Price Marking. Please read Fair Price Marking for more details on how this will affect trading.
  • The Limit Up / Down restrictions will be removed.

Same Same But Different

Bitcoin and Money Services Businesses (MSB) find it very difficult to open and maintain bank accounts. The global hysteria over possible venues for money laundering (unless of course you are HSBC) has caused banks globally to curtail their support of MSB clients.

Several exchanges figured out that Taiwanese banks would bank them with minimal issues. The two most well known exchanges utilising Taiwanese bank accounts are Bitfinex and OKCoin International.

The American perception of Taiwanese banks lately is that of financial institutions with lax KYC / AML procedures. Read the following excerpt from a Reuters article about problems with Taiwan’s Mega Financial last October.

It is the second bank branch of the state-controlled firm to run afoul of U.S. financial authorities, after its New York branch was fined $180 million for lax compliance and anti-money laundering violations in August.

Mega Financial, which has close ties to Taiwan’s government, has been under scrutiny since about 200 of its customers were named in the so-called Panama Papers, a massive leak of documents from a Panamanian law firm that put the spotlight on the shadowy world of offshore companies used to avoid tax.

In order for Taiwanese banks to maintain their banking relationships in America, they must update their KYC / AML procedures for MSB clients. Unfortunately a large swath of MSB clients will be deemed too expensive to bank, and will be jettisoned.

Compliance is extremely expensive. Banks waste billions of USD a year on compliance and compliance related technology. It only serves to further protect incumbent financial institutions at the expense of small and innovative upstarts.

Bitfinex, OKCoin, and possibly other Bitcoin exchanges are affected. It may be that they have been told their accounts will not longer by active by a certain date. They are now scrambling for alternatives.

Bitfinex officially announced that both USD deposits and withdrawals are halted. OKCoin International has posted a notice that all USD deposits will be refused by their banking partner in Taiwan. Many old-timers know that the suspension of fiat deposits and withdrawals heralds tough times ahead for any Bitcoin exchange.

To some traders, this feeling is all too familiar. Mt Gox’s slow motion bankruptcy began in 2013 when their USD held in America was frozen. As users rushed for the exits, the Bitcoin thought to be held in custody was not there. In early 2014, Mt Gox shut its doors and filed for bankruptcy.

While traders are right to be nervous, it is not a given that Bitfinex and or OKCoin will be unable to operate. Yet, careful traders will take action. This post will examine how to get your money off the platform, and for those risk seeking traders, arbitrage opportunities that will arise during this time of stress.

Correspondent Banking

The biggest hurdle to successfully operating a Bitcoin/Fiat exchange is obtaining and maintaining a bank account. The quality of the banking relationships held by the exchange is a large success determining factor.

Most Taiwanese banks have branches throughout the Asia Pacific region. However, most do not have branches in the US. Ultimately that means that movement of USD between non-Taiwanese entities must pass through a correspondent bank in the US.

The correspondent bank is fully licensed to do business inside America, and can clear USD. Without the assistance of a correspondent bank, exchanges’ Taiwanese banks cannot process USD deposits and or withdrawals for foreign entities. Given that the majority of Bitfinex and OKCoin’s customers are not Taiwanese, most if not all incoming and outgoing USD must be processed with the assistance of a correspondent bank.

Wells Fargo, The Canary in the Coal Mine

In late March, according to a lawsuit filed by Bitfinex, Wells Fargo ceased processing outgoing USD SWIFT wire transfers from Bitfinex’s Taiwanese bank accounts. Wells Fargo is the correspondent bank for the various banks Bitfinex uses in Taiwan. The lawsuit alleged that $180 million of USD was effectively frozen.

This lawsuit is one of the only public windows the community received into the struggle between Taiwan banking institutions and their American correspondent banks. A similar situation may have occurred with OKCoin, but they did not choose to fight back through a public lawsuit.

Bitfinex vs. Wells Fargo Lawsuit

Get Me Outta Here

Bitfinex and OKCoin USD IOU holders are rightfully concerned. All is not lost. There are still ways to remove funds from these platforms.

The easiest way is for users to buy Bitcoin and withdraw it. Then they can sell that Bitcoin on another platform. As more users exit via this method, the price of Bitcoin rises on Bitfinex and OKCoin relative to other exchanges. Those exiting these exchanges are pushing up the price globally.

Users can use altcoins such as Litecoin or Ether to exit as well. At the time of writing, the Bitfinex premium to buy alts with USD is similar to buying Bitcoins. Given the low liquidity in altcoins, this may not be cheaper.

Bitfinex first indicated in a blog post,  that users could withdraw funds via Swiss Francs (CHF) and Hong Kong Dollars (HKD). However a few days later, they announced that their bank refused to process any outgoing wires in any currency.

The solution now put forward is to wash funds through their lawyer’s trust account. They claim that as creditors of Bitfinex, users can withdraw via this method only once. Those lucky enough to have domestic Taiwanese bank accounts face no issues withdrawing any fiat currency.

As of right now, OKCoin has not issued any announcements regarding the status of funds in their Taiwan bank accounts.

Arbitrage

Risk and profit seeking traders will be able to conduct arbitrage trades during this funding crunch. The trade I describe below is the most obvious.

  1. Buy Bitcoin outside of Bitfinex.
  2. Sell Bitcoin for USD on Bitfinex at a premium.
  3. Withdraw HKD to your bank account from Bitfinex.
  4. Wire the funds at your bank rate back into USD to a cheap Bitcoin/USD exchange.
  5. Rinse and repeat.

The ability to execute this trade is predicated on the ability to withdraw HKD or another fiat currency easily and quickly from Bitfinex. Given the recent updates, this assumption is questionable. All MSBs globally face similar issues, it may be weeks if not months before Bitfinex, OKCoin, or any other affected exchange is able to establish banking relationships again.

Due to the halt of Bitcoin withdrawals in China, XBT/CNY trades at a 15% discount to Bitstamp and GDAX. Therefore the premium on exchanges where fiat cannot be withdrawn, could easily reach a similar 15% premium.

Bitcoin / HKD: Bitfinex and OKCoin’s Savior

Days after filing, Bitfinex withdrew the lawsuit against Wells Fargo. Suing a correspondent bank in America may have been lights out for Bitfinex’s current and future banking relationships. To make matters worse, it may have attracted attention to other exchanges. If Wells Fargo is blocking Bitcoin exchanges, other banks should be thinking: should we block them too?

For now, there is still some hope. For every HKD issued, the Hong Kong Monetary Authority backs it with an equivalent amount of USD. The Hong Kong Monetary Authority will conduct open market operations to maintain a peg between 7.75 to 7.80 USD. While the peg holds, HKD is a liquid proxy for USD. If Bitfinex and or OKCoin can launch a liquid XBT/HKD market, they can continue to effectively serve as the most liquid XBT/USD spot markets.

Clearing HKD does not require funds to transit through the American banking system. Most of the world just wants to do business, and not worry about hypocritical moralising American politicians’ inspired regulations. Given enough effort, time, and willingness to pay high fees, exchanges will find banking partners willing to process HKD wires.

The on and off-ramps between digital currencies and fiat continue to cause significant friction. However, once traders squeeze through fiat gateways into the crypto universe, the trading opportunities are rich. If you desire a product to speculate on the value of Bitcoin without touching fiat, consider trading the BitMEX Bitcoin / USD Swap, XBTUSD.

Strongman Bullies and Bitcoin

Trump, Xi Jinping, Putin, and Erdogan: these four men are the embodiment of Strongman Bully leaders. Global trends indicate we will soon have more world leaders with similar mindsets.

Over the past 30 years, throngs of Chinese, Russians, and Turks have become rich. The masses held their tongue, while the elite shamelessly lined their pockets. In China, the wealth amassed in coastal cities like Shanghai, Beijing, Shenzhen, and Guangzhou stands in stark contrast to the developing and rural interior. Similar disparities exist in the metro areas of Russia and Turkey.

Xi, Putin, and Erdogan are all promising to restore the bargain with labour at the expense of capital. In previous decades, the masses have accepted disproportionally slow wage growth so long as their standard of living continued to increase. As global growth sputters, the bargain has become less tenable. The plebes are getting restless.

The marginal effectiveness of printing money to generate GDP output is waning. To make matters worse, population growth is shrinking in end markets like America and Europe. In response, central banks are reducing asset purchases. The net result will be higher interest rates and less trade.

All strongman bullies in all countries cannot be successful at the same time. Instead of trading for what they need, these leaders are likely to threaten to take what they need through war. A desperate leader can apply physical force to take resources, disrupt competing markets, and distract the local population from failed promises.

During times of war, assessing financial counterparty risk becomes a key investment survival skill. Will a USD deposit held in a Russian bank be worth the same as one held in an American bank? Every asset that you own must be evaluated on the basis of two concerns: beating domestic inflation and movement friction. In times of war, we are very likely to see inflation in necessity goods and deflation in other goods.

Where will the masses turn? Gold has value everywhere and is likely to triumph during these times. Recently, gold rallied when Trump authorised a missile strike against Syria, and when North Korea announced a potential nuclear missile test. Further rallies will come if global instability grows.

Bitcoin fits into this dynamic. Despite all of the issues it faces, it has persevered for over 8 years and still has substantial global value. Consider that as a vote of confidence in its ability to serve as a safe haven asset for a small pool of global capital.

Regardless of your political stance, the next 30 years will not be like the last. Highly intense regional conflicts are likely to flare up again. As desperate citizens look to store and transport wealth in the digital era, Bitcoin looks more attractive than ever.

Gnosis: Shitcoin or Supernova?

Summer is near, that means it’s time to forget Bitcoin and embrace altcoins. The summer of 2016 began with the DAOsaster. The DAO became the largest crowd-sale in human history by raising $150 million in under one month. A few weeks later, in-built security holes allowed an individual to syphon off one third of the funds invested.

The Gnosis ICO will go down in the history books. Investors purchased $12.5 million Gnosis tokens (symbol: GNO) at a price of $29.85, giving GNO a market cap of $298.5 million. The cap of $12.5 million was reached in ten minutes. Investors subscribed for 4.19% of the total GNO float, the other 95.81% is held by the Gnosis development team. Holy pre-mine!

Pre-Mine Token Distribution:

  • 10% will be used to incentivise the Gnosis team over a period of several years. However, there is no explicit lock-up period.
  • The remaining 90% are held by Gnosis LTD. These coins will be used to incentivise others to build applications on top of the Gnosis platform. 99% of these funds are locked-up for 12 months.

Total Potential Float: 4.19% ICO + 9.58% Gnosis Team + 0.86% Gnosis LTD = 14.63%

Gnosis aims to create a truly decentralised prediction market. This is a lofty goal that many entrepreneurs and teams are working towards such as Augur, a competing Ethereum based prediction market project.

GNO tokens can be used to buy WIZ tokens (no this isn’t the 70’s Wizard of Oz remake featuring Michael Jackson). WIZ tokens are used to:

  • Pay trading fees
  • Create markets
  • Speculate on event outcomes
  • Subsidise markets and participation fees

The Gnosis team is very quick to point out the following:

 GNO tokens are functional utility tokens within the Gnosis platform. GNO tokens are not securities. GNO tokens are non-refundable. GNO tokens are not for speculative investment. No promises of future performance or value are or will be made with respect to GNO, including no promise of inherent value, no promise of continuing payments, and no guarantee that GNO will hold any particular value. GNO tokens are not participation in the Company and GNO tokens hold no rights in said company. GNO tokens are sold as a functional good and all proceeds received by Company may be spent freely by Company absent any conditions. GNO tokens are intended for experts in dealing with cryptographic tokens and blockchain-based software systems.

Instead of the traditional ICO model where a token price and supply are set by the team, GNO tokens were issued via a reverse Dutch auction.

Historically ICO’s are underpriced, and once they list in the secondary market, they moon. This price appreciation benefits token buyers and not the team. In the Dutch auction model, the Gnosis team is the biggest beneficiary because their pre-mined stash is instantly worth a lot more … on paper.

With a $300 million market cap GNO, in under ten minutes, has become the 8th most valuable digital currency. Many think this is scandalous. However, armed with nothing more than a slick website and a promise to deliver, Gnosis right now is proving to be an altcoin heavyweight.

Others believe in the future promise of a truly decentralised prediction market. The centralised online gambling and prediction market is massive. If Gnosis only partially delivers on their mission statement, it will still be bigly valuable.

Whether Gnosis is a shitcoin or supernova is a question that only the market can answer. Because BitMEX is committed to providing price discovery, we have launched the Gnosis / Bitcoin 30 June 2017 futures contract, GNOM17.

Traders can go long or short GNOM17 using only Bitcoin, with up to 2x leverage. GNOM17 begins trading before GNO tokens list on any secondary spot market. Trading on Kraken and or Poloniex will most likely begin in under a week.

GNOM17 Contract Details

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.