Is The ETHUSD Swap Fairly Priced

The Perpetual Swap derivative structure is a beautiful thing. Trading is simple, as it mimics the action of margin trading. Most retail traders are familiar with how to trade on margin. Using this wrapper, we can allow anyone to trade exotic derivatives.

“A quanto is a type of derivative in which the underlying is denominated in one currency, but the instrument itself is settled in another currency at some rate. Such products are attractive for speculators and investors who wish to have exposure to a foreign asset, but without the corresponding exchange rate risk.”Wikipedia

The ETHUSD swap has become the most liquid ETH/USD trading instrument globally. It allows speculators to trade ETH/USD risk, without ever touching Ether or USD. Like all BitMEX contracts, the margin and settlement currency for ETHUSD is Bitcoin. This keeps things simple from a trading perspective.

When the ETHUSD product listed, I walked readers through the mechanics of a quanto derivative. Please read Why Quanto and Hedging a Perpetual Swap for a refresher.

Subsequent to the launch of ETHUSD, the price of Ether took a digger. In such a bear market, many traders expected the funding rate to stay negative. Logically that makes sense.

The market is falling, so the pressure on the margin should be on the sell side. However, the cumulative funding rate from launch till the present is positive. A positive funding rate means longs pay shorts.

My hypothesis was that the positive funding rate represents the quanto risk premium. I then tasked one of the BitMEX Research analysts to conduct a test:

Step 1
Starting on the 9th of August and ending on the 22nd of October, to capture the funding income, you sold ETHUSD (100 XBT notional), and hedged by purchasing Ether with USD.

Step 2
Every hour, you recalculated your net Bitcoin PnL, hedging that exposure into USD.

Step 3
Compute the net returns in USD terms on your portfolio for the period.

Step 4 
Add net total funding you received (paid) from being short the ETHUSD swap over the period.

Results

Absent the positive funding, you would have lost $46,779.73 hedging your Bitcoin PnL. This is expected because you are short correlation. Over the past few months, the XBTUSD and ETHUSD correlation has risen.

When the net funding payments received, $46,010.85, are added, your trade essentially breaks even. Along the way you bought 31.94 ETH to delta hedge and accumulated a 43.83 XBT short position to PnL hedge. The conclusion is that even though the funding rate has stayed positive, this funding compensates for the quanto risk premium.

Correlation is rising, therefore traders will bid up the ETHUSD swap over the spot price to profit from the quanto PnL. A positive funding rate results, and brings the market into equilibrium.

This is true over a long holding period. There were times where your net PnL was positive or negative. The chart above provides a time series of the cumulative PnL from this trade. As we can see, the market does misprice this swap occasionally.

It is quite amazing that in under six months, the ETHUSD swap has been priced to perfection. However, the volatility of both Bitcoin and Ether has fallen. When we return to a normal level of volatility, I expect fearful and greedy traders to push the ETHUSD swap away from the quanto adjusted fair price.

Bear Market Blues

The trend is your friend until it ain’t. Humans are very bad forecasters. We take yesterday’s returns and extrapolate them linear and non-linearly into the future. We believe the world works in perfectly-fitted curves.

When the market reverses, as it always does, a coterie of sad pandas are left in its wake. 2017 was the year of jubilation; 2018 is the year of melancholy. The worst part is knowing your 2018 bonus, should you receive one, will barely buy you a Swatch.

We crypto traders should know better by now, but we never learn. The market may be down 70% from the $20,000 high, but from the mood of traders, Bitcoin might as well be worth bupkis.

When traders lose money, they lash out. They lash out on Twitter, Telegram, Reddit, and other social media platforms. The smallest perceived slight, triggers them worse than a Hillary supporter after the Trump coronation.

This is the Bear Market Blues.

We Have Been Here Before 

The talented individuals at BitMEX Research did some analysis of the previous Bitcoin bull and bear markets.


They made a distinction between two measurements:

1. The peak-to-trough decline:  A peak-to-trough decline is measured by taking the low of a bear market and dividing it by the high of a previous bull market.

2. The intra-market phase increase/decrease: This is calculated by taking the high (low) of the bull (bear) market and dividing it by the price at the start of that market phase.

They conclude that we have more to go in this current bear market. Due to the collapse in Bitcoin price volatility, I agree with this sentiment.

The Double Whammy

Wham, bam, thank you ma’am. Bitcoin volatility and price collapsed this year.

Traders hate sideways markets. Traders can go long and short, not sideways. The chop will eat you alive in a sideways market.

Contrary to popular belief, Bitcoin requires volatility if it is ever to gain mainstream adoption. The price of Bitcoin is the best and most transparent way to communicate the health of the ecosystem. It advertises to the world that something is happening–whether that is positive or negative is irrelevant.

The Bitcoin price volatility is the gateway drug into the ecosystem. The media writes about things that move; therefore no movement, no coverage. The diehard traders and engineers will always hear about a new asset class or technology in advance of popular media outlet coverage. However, their efforts will only be amplified if many more people discover El Dorado. That requires the lazy mainstream financial press to write.

If volatility stays at these depressed levels, the price will slowly leak lower. For those of us who lived through the 2014-2015 bear market, we all await that nasty ass candle that breaks the soul of the bulls. Then, and only then, will volatility and the price ratchet higher.

Limbo Time

How low can we go?

A 75% fall from $9,152 takes us close to $2,000. $2,000 to $3,000 is my new sweet spot but don’t tell Michelle Lee just yet.

The key consideration to “calling the bottom” is the price action around the last gasp of the bears. You will know it when you see it. And the best part is, you probably will be too chicken to click that oh so scary Buy button.

Stablecoins: Sophistry At Its Best

After 10 years, Bitcoin lives on, but the ecosystem still suffers from a critical weakness. Obtaining and maintaining a bank account that can process and clear USD is very difficult for any crypto-related business. The outcrop of this weakness is the industry’s clamour for all things Stablecoin.

Stablecoins fall into two camps. One subsect, of which Tether is the leader, are thinly- disguised USD money market funds. The other subsect are “coins” (Maker / Dai, Haven, Basecoin, etc.) that attempt to do an end runaround holding actual USD by using fancy math and pseudo behavioural economics.

USD Banking

The ongoing Tether melodrama highlights the difficulties of obtaining and maintaining USD banking facilities. Traders want to trade Bitcoin and other shitcoins vs. the USD. The crypto- to-crypto pairs are liquid at times, but we all still think in dollar terms. Therefore, exchanges that can offer these pairs will outperform their peers who cannot.

Tether is novel because it is a USD money market token transferred across the Bitcoin and Ethereum blockchain. The Tether organisation supposedly holds sufficient USD such that 1 Tether = 1 USD for those who can create and redeem Tether. Exchanges that previously only offered crypto-to-crypto pairs could offer a Coin to USD pair and externalise the hassle of dealing with banks onto Tether.

The demand was there, but the hard part is where to stash the cash. Tether acquired and lost banking relationships in a variety of jurisdictions. Others looking in at the Tether saga, concluded that using their connections they could offer a better alternative. Now we have Tether clones offered by various exchanges such as Gemini, Circle, and itBit.

Money Market Funds In All But Name

Money market funds are extremely important to a well functioning banking system. Individuals and institutions park their excess cash on a short-term basis and pick up yield. The money market funds invest in highly-liquid debt instruments. Short-dated government bonds, commercial paper issued by creditworthy corporates and short-dated bank loans, are some of the securities that a money market fund will hold.

Money market funds aim to be very low risk. Their most important aspect is they maintain a par value at all times, such that 1 unit = 1 USD. During the 2008 GFC, some money market funds were at risk of “breaking the buck.” Low risk debt became high risk; liquidity dried up, and investors rushed for the exits.

Today, Tether and clones thereof promise there is 1 USD for one coin in a bank somewhere. Some promoters are able to name their banking partners, some are not. The level of transparency pales in comparison to traditional money market funds.

The other key difference in the crypto sphere is these Stablecoins do not pay interest. The real profit driver of money market Stablecoins is their net interest margin. Why go through all the hassle of hosting USD banking for the crypto ecosystem if there wasn’t a massive future profit potential?

As interest rates rise, that becomes pure profit to the Stablecoin operator. Unscrupulous operators will claim to hold USD cash, while investing in riskier debt instruments. The worst scallywags will pull a Jon Corzine, lever up, and purchase the dodgiest credits to be had.

If you hold any of these money market Stablecoins, you must ask the following:

  • Who is the banking partner?
  • What types of debt instruments, if any, is the fund allowed to hold?
  • Can you as an ordinary individual create and redeem at par, and how long does that process take?

Wannabe Central Bankers

Another group of promoters asked the question, can you create a coin pegged to the dollar without holding any dollars as a backstop?

The substitute for physical dollars is math, behavioural economics, and cryptocurrencies. The reason why these projects need a shit-ton of non-dilutive suckers’ cash is because when shit hits the fan and their shitcoin trades less than par, the promoter must spend hard dollars, Bitcoin, or Ether to restore the peg.

Many of these projects wish to create a rules-based digital central banker; however, all they have done is obfusticate the need for physical cash by using complicated and boring whitepapers.

The central fact is that they are raising funds to act as the buyer of last resort. Otherwise, there is no need for hundreds of millions of dollars worth of investor money into any of these projects. If the math and behavioral modeling goes to plan, the coin should slowly accrue AUM and over time the peg should hold.

I challenge any project to return all the money they raised, and launch their coin purely based on its mathematical merits. I highly doubt I will have any takers.

I bet there are crypto George Soros imitators licking their lips at the chance to break the peg of these coins at the opportune moment. It will be glorious to watch.

Gresham’s law will hold. Money market Stablecoins with honest and transparent operators will accrue the vast majority of the AUM. Their wannabe central banker cousins will flounder under the weight of pseudoscience and hubris.

Bitcoin Cash Hardfork Policy and Impact on BCHZ18

BitMEX Policy
Bitcoin Cash is expected to conduct a hardfork upgrade on 15 November 2018. There are two competing incompatible hardfork upgrade proposals, with the associated clients being Bitcoin ABC and Bitcoin SV. Therefore, there could be a chainsplit; users holding BCH prior to the hardfork could end up with coins on both sides of the split.

On settlement, the BCHZ18 contract will settle at a price on the Bitcoin ABC side of any split and will NOT include the value of Bitcoin SV.

This is consistent with the approach BitMEX took when Bitcoin Cash initially split off from Bitcoin in August 2017. The Bitcoin / USD contracts were settled based on the Bitcoin price at the time and did not reflect the price of Bitcoin Cash.

Impact on the BitMEX .BBCHXBT Index
The BitMEX .BBCHXBT Index is currently comprised of the following constituent exchanges:

⅓ * Poloniex + ⅓ * Binance + ⅓ * Kraken

At the time of the fork, if the constituent exchanges use the BCH/XBT symbol for the BCHABC chain then BitMEX will keep that symbol as a reference, otherwise BitMEX will refer to the relevant BCHABC/XBT symbol to be used as part of the Index.

Product Affected
BCHZ18

Further Information
For more information, BitMEX Research has sponsored a new website, ForkMonitor.info, to assist stakeholders monitoring events on the day of the expected split.

Detailed Report Into The Cryptocurrency Exchange Industry (From CryptoCompare)

Abstract: We present an in depth report into the cryptocurrency exchange ecosystem. The market is broken down by almost all the possible characteristics (Exchange type, exchange region and trading pairs). The robustness and authenticity of exchanges are evaluated  using metrics such as web traffic, average trade sizes, order book depth, security polices and price reliability. The report was produced by CryptoCompare and uses the CryptoCompare’s Aggregate Pricing Index (the CCCAGG), for much of the analysis.

 

(Note: Current CCCAGG Constituent Exchanges, Sized by 24H Volume)

 

Please click here to download a PDF version of CryptoCompare’s report

 

Executive Summary

Major Exchange News in October

  • Bitstamp was acquired by Belgium-based Investment Firm NXMH for ~400 million USD according to reports.
  • Cryptoassets on Gemini are now fully insured with Aon.
  • Coinbase adds 0x to its trading platform as well as USDC after announcing its collaboration with Circle on the CENTRE Consortium.
  • Korean exchange Bithumb starts a new DEX, while Huobi and OKEX list stablecoins GUSD, TUSD, PAX and USDC.
  • Chainalysis will help Binance comply with anti-money laundering (AML) regulations around the globe, and
  • Coinfloor becomes the first exchange to obtain a Gibraltar license.

Exchange Market Segmentation

Spot volumes constitute less than three quarters of total market volumes on average (less than 7 billion USD) compared to futures volumes (3.2 billion USD). BitMEX and BitflyerFX average more than one quarter of total volumes while traditional exchanges such as CME and CBOE constitute just under 1%.

Within total spot volumes, exchanges with taker fees represent approximately 90% of the exchange spot market volumes, while transaction-fee based and no-fee exchanges represent the remaining 10%.

Exchanges that offer fiat to crypto pairs constitute just under a quarter of spot market volumes on average (~2 billion USD) while exchanges that offer only crypto to crypto pairs constitute approximately three quarters (~4.7 billion USD). In terms of exchange count however, approximately half of all exchanges offer fiat to crypto pairs.

Transaction-Fee Mining Volumes

The top trans-fee mining exchange by average 24h volume was EXX (160 million USD), followed by Coinex (114 million USD) and Coinbene (113 million USD). The total average 24h-volume produced by trans-fee mining associated exchanges on CryptoCompare totals just over 550 million USD. This constitutes approximately 10% of total exchange volume over the last 30 days.

Decentralized Exchanges

The total average 24h-volume produced by the top 5 decentralized exchanges on CryptoCompare totals just under 2.4 million USD. This constitutes just 0.4% of total exchange volume. The top 3 on CryptoCompare by 24h volume include Waves Dex, IDEX and Dex.

Volume, Pairs and Coins

Binance remains the top exchange in terms of 24h volume with an average of 977 million USD. This is followed by OKEX (405 million USD) and Bitfinex (368 million USD). Yobit offers the highest number of pairs at 7,032, followed by Cryptopia (4,321) and CCEX (2,140).

Bitcoin to Fiat Volumes

The US Dollar represented half of BTC fiat trading on average over the past 30 days, followed by JPY (21%) and KRW (16%). Bitcoin trading to Korean Won (KRW) increased sharply after the 7th of October. The pair previously represented a tenth of bitcoin trading among the top 5 fiats on average. Between the 7th and 15th of October it represented a third on average, a 230% increase stemming from Korean exchange Bithumb’s spike in trading volumes.

Country Analysis

Maltese-registered exchanges produce the highest total daily volume at just under 1.4 billion USD, followed by those based legally in South-Korea (~840 million USD) and Hong Kong (~560 million USD). Among the top 10 volume-producing countries, the highest number of large exchanges (with significant volume) are based legally in the USA, the UK and Hong Kong. Binance and OKEX represent the vast majority of Malta’s volumes, while Bithumb and Upbit dominate in South Korea.

Trade Data Analysis

CoinEx, a well-known trans-fee mining exchange, has a significantly higher trade frequency and lower trade size than other exchanges in the top 25. This may point to algorithmic trading, given its almost 176 thousand trades a day at an average trade size of 125 USD. In contrast, Bithumb and HuobiPro had an average trade size of just under 3,000 and 1,500 USD respectively and significantly lower trades per day (12-18 thousand).

Web User Analysis

IDAX and CoinBene appear to have lower average daily visitors compared to similarly sized exchanges by daily volume. Binance has the highest average daily visitor count, in line with its high trading volumes. Meanwhile, exchanges such as Coinbase, Cex.io and Bittrex have significantly greater numbers of daily visitors than other exchanges with similar daily volumes. ZB and EXX attract significantly lower daily visitors than similarly-sized exchanges.

Order Book Analysis

ItBit, Kraken and Bitstamp have relatively more stable markets compared to exchanges such as CoinEx, ZB and Coinbene. These exchanges appear significantly less stable given their relatively low average order book depth values over the specified period of analysis.

Exchange Security

Out of the top 100 exchanges by 24h volume, only 86% have both a public privacy policy and a terms & conditions page. A third of top exchanges store the vast majority of users’ funds in cold wallets. Exchanges itBit, Coinfloor, Bitfinex and Coinbase are among those that store the highest proportion of users’ funds offline. As a proportion of the top 100 exchanges, 11% have been hacked in the past.

KYC

Just under half of top exchanges impose strict KYC requirements, while more than a quarter do not require KYC.

Total Exchange Volumes and Market Segmentation

This section aims to provide a macro view of the cryptocurrency exchange market as a whole. An area of interest is the proportion of spot trading vs futures trading historically. We will also assess the relative proportion of exchange volumes that represent exchanges that charge fees, as well as those that implement models with no-fees or trans-fee mining. Finally, we will take a look at exchange volumes that represent crypto-crypto exchanges versus those that represent fiat-crypto exchanges.

Historical Spot vs Futures Volumes

Spot volumes constitute three quarters of total market volumes on average.

Total spot volume averaged less than 7 billion USD, while futures volume averaged over 3.2 billion USD over the period of analysis.

Futures exchanges such as BitMEX (XBT to USD perpetual futures) and BitflyerFX (BTC to JPY futures) average just under a quarter of total cryptocurrency market volumes. Traditional exchanges such as CME and CBOE trading bitcoin futures, only constitute a very small proportion of the total market at just under 1% on average.

Historical BTC to USD Futures Volumes

BitMEX’s Perpetual Bitcoin to USD Futures volumes continue to dominate the Bitcoin to USD futures market

When compared to CME’s and CBOE’s futures volumes, BitMEX has represented an average of just over 90% of the market over the last month.

Historical Spot Volumes Segmented by Predominant Fee Type

Exchanges with taker fees represent approximately 90% of the exchange spot market volumes.

On the other hand, exchanges that implement transaction-fee mining represent just over 9% of the total spot market, while those that offer no-fee spot trading represent just under 1% of the market.

Historical Crypto to Crypto versus Fiat to Crypto Exchange Spot Volumes

Exchanges that offer fiat to crypto pairs constitute just under a quarter of spot market volumes on average.

Adjusted Historical Spot Volumes

The cryptocurrency exchange market trades an average of 5.26 billion USD in adjusted volumes over the period of analysis.

Adjusted spot volumes exclude all exchanges that operate trans-fee mining or no-fee trading models.

Historical BTC to Fiat Spot Volumes – Top 5 Fiat Currencies

Bitcoin trading to Korean Wan (KRW) increased sharply from the 7th of October.

BTC to KRW previously represented a tenth of bitcoin trading among the top 5 fiats on average. Between the 7th and 15th of October it represented a third on average, a 230% increase. This increase stems from Korean exchange Bithumb’s spike in volumes.

Proportion BTC Trading to Various Fiat Currencies

The US Dollar represented half of BTC fiat trading on average over the past 30 days, followed by JPY (21%) and KRW (16%).

Summary of Volumes, Coins and Pairs

Top Exchanges by Average 24H Volume in USD

Exchange 24H volume (USD million) Coins Pairs
Binance 977.5 160 408
OKEX 405.0 171 511
Bitfinex 368.5 96 281
Bithumb 323.2 13 13
HuobiPro 310.2 128 293
HitBTC 295.2 427 889
ZB 247.6 58 167
Upbit 211.0 132 261
Bibox 208.9 87 210

Top Exchanges by Number of Pairs

Exchange 24H volume (USD million) Coins Pairs
Yobit 27.7        1,180        7,032
Cryptopia 3.5            785        4,321
CCEX 0.1            628        2,140
EtherDelta 0.2        2,058        2,059
HitBTC 295.2            427            889
TradeSatoshi 0.1            200            840
Bittrex 49.1            514            637
Livecoin 12.5            249            595
WavesDEX 0.9            163            592
IDEX 0.7            563            563
OKEX 405.0            171            511
Kucoin 10.1            189            450
Binance 977.5            160            408
Gateio 48.8            172            358
Zecoex 1.4            119            342

Historical 24h Volume – Top 8 Exchanges

The top exchange by 24h spot trading volume was Binance with an average of just under 980 million USD.

By average 24h volumes, Binance was followed by OKEX and Bitfinex with volumes of 405 million and 368 million respectively.

Bithumb saw a 356% spike in trading volumes from an average of 140 million USD to an average of 640 million USD after the 7th of October. This follows after Singapore-based BK Global Consortium bought a controlling share in the exchange.

Bitfinex saw a spike in volumes towards the 15th of October as the Bitcoin premium on Bitfinex vs Coinbase reached an all-time high of 11.28% according to CrypoGlobe.

Month on Month Average 24H Trading Volume – Top Exchanges

Average Bithumb volumes increased 187%, while those for Binance and OKEX dropped by 8% and 35% respectively

Korean exchange Bithumb saw a significant increase in average trading volumes from 96 million USD between August/September to 276 million between September/October. Meanwhile, Binance’s volumes over the same time period dropped from 974 million USD to 893 million USD. Finally, the 2nd largest exchange by 24h volumes, OKEX, saw trading volumes drop 655 million USD to 423 million USD.

Country Analysis

Exchanges maintain operations in a variety of countries, in order to serve the wider global community of cryptocurrency traders. They often change legal jurisdiction to avoid regulation in countries that might restrict their abilities to conduct business as they wish. The following country analysis aims to highlight the top 10 legal jurisdictions by the total 24h volume produced by the top exchanges legally based in each jurisdiction.

Top 10 Exchange Legal Jurisdictions – 24h Volume vs Exchange Count

Maltese-based exchanges produced the highest total daily volumes, while the highest quantity of top exchanges are based in the USA and the UK.

Maltese exchanges produce the highest total daily volume at just under 1.4 billion USD, followed by those based legally in South-Korea (~840 million USD) and Hong Kong (~560 million USD). Among the top 10 volume-producing countries, the highest number of exchanges (with significant volume) are based legally in the USA, the UK and Hong Kong.

Top 10 Exchange Legal Jurisdictions – Constituent Exchanges by Impact on Volume

Binance and OKEX represent the vast majority of Malta’s volumes, while Bithumb and Upbit dominate in South Korea.

Top 10 Exchange Legal Jurisdictions – Constituent Exchanges and Count

 

Well-known USA-based exchanges include Coinbase, Poloniex, and itBit, while those in South Korea include Upbit, Bithumb and Coinone.

Hong Kong exchanges include HitBTC, CoinEx and Bit-Z, while those in more remote jurisdictions include HuobiPro in the Seychelles, ZB in Samoa and Coinbene in Vanuatu.

Pair Offering Analysis

The following analysis aims to highlight both the total volumes produced by crypto-crypto vs fiat-crypto exchanges as well as the total number of exchanges that fall within each category.

Crypto to Crypto vs Fiat to Crypto – Average 24H Volume and Exchange Count

On average, exchanges that offer only crypto-crypto pairs constitute approximately three quarters of the total spot trading market (~4.7 billion USD)

Those that that offer fiat-crypto pairs constitute only a quarter of the total exchange market (~2 billion USD) on average. In terms of exchange count, approximately half of all exchanges offer crypto-crypto.

Trade Data Analysis

This analysis aims to shed light on the trading characteristics of given exchange. It helps to answer whether an exchange’s volumes might be the product of consistently large trades, or the product of many small trades which may suggest the use of algorithmic trading or bots.

Average 24H Trade Frequency vs Average Trade Size – Top 25 Exchanges

CoinEx, a well-known trans-fee mining exchange, has a significantly higher trade frequency and lower trade size than other exchanges in the top 25.

This may point to algorithmic trading, given its almost 176 thousand daily trades at an average trade size of 125 USD. In contrast, Bithumb and HuobiPro had an average trade size of just under 3,000 and 1,500 USD respectively.

Average 24H Trade Frequency vs Average Trade Size – Top Exchanges

Exchange AVG 24H Volume (Millions) Average Trade Size (USD) Trades in 24H (Thousands)
1 Binance 977.5 950 95.7
2 OKEX 405 701 48.5
3 Bitfinex 368.5 1,438 38
4 Bithumb 323.2 2,788 12.4
5 HuobiPro 310.2 1,483 18.7
6 HitBTC 295.2 2,873 12.1
7 ZB 247.6 702 29
8 UPbit 211 732 22.5
9 Bibox 208.9 1,253 16.4
10 EXX 159.9 1,134 24.1
11 BitZ 143.9 2,333 8
12 IDAX 131.5 520 37.4
13 CoinEx 113.6 125 175.6
14 CoinBene 113.2 298 35.2

Web Traffic Analysis

This analysis examines the web traffic stats of the top exchanges within CryptoCompare’s total pool of exchanges. It is based on similar studies that have attempted to make a connection between the number of unique web users per domain and the subsequent 24h trading volume for that specific domain. This analysis assumes that the more unique visitors an exchange attracts, the higher its trading volume.

Average Daily Visitors versus 24H Volume – Alexa Rankings Above 100,000

IDAX and CoinBene appear to have lower average daily visitors compared to similarly sized exchanges by daily volume.

The figure above represents the top exchanges by volume that have an Alexa ranking above 100,000. The reason for this is that according to Alexa, any ranking below this may not be statistically significant.

What we can see that exchanges such as IDAX and CoinBene have lower Average Daily Unique Visitor numbers than other exchanges with similar volumes such as Kraken, Bitstamp, and CoinEx.

Binance has the highest average daily visitor count, in line with its high trading volumes. Meanwhile, exchanges such as Coinbase, Cex.io and Bittrex have significantly greater numbers of daily visitors than other exchanges with similar daily volumes. In Coinbase’s case, this can be attributed to the exchange’s reputation and age.

Average Daily Visitors versus 24H Volume – All Alexa Rankings

ZB and EXX attract significantly lower daily visitors than similarly-sized exchanges.

The above figure represents the top 20 exchanges by 24h volume regardless of whether their Alexa rankings are below 100,000. Noticeably, unique visitor counts for exchanges ZB and EXX are significantly lower than other exchanges within a similar 24h volume band.

These exchanges maintain average daily trading volumes of 248 million and 160 million USD
respectively. Despite this, their daily unique visitor counts amount to no more than 700 visitors per day.

Although there is a chance that these web statistics may present errors given Alexa rankings below 100,000, in the interests of mitigating any potential risks, these exchanges will be flagged until clarification is provided.

Order Book Analysis

The following order book analysis investigates the relative stability of various cryptocurrency exchanges based on snapshots of the average order book depth for the top markets on each exchange in 10-minute intervals over a period of 10 days. In the context of this analysis, average depth down is defined as the cumulative volume required (in USD) to reduce the price of a given market by 10%. This is compared to the average daily volume for the top 5 pairs. The result of this analysis is that we are able estimate the relative stability of a given exchange based on the ratio of depth down to average daily pair volume.

Average Order Book Depth Down vs Average Daily Exchange Pair Volume

In relative terms, CoinBene, ZB and CoinEx have the thinnest markets.

Despite relatively large average volumes per top pair (~12 million USD), CoinBene’s average order book cumulative depth down (order book buy side) totals only 33 thousand USD. In other words, to move the price 10% downwards, a trader would need to sell 33 thousand USD worth of currency.

In contrast, Kraken which has similar average daily pair volumes (~13.5 million USD), has an average order book cumulative depth of 4.2 million USD. This is almost 130 times larger than that of CoinBene’s and therefore suggests a much more stable exchange.

Average Depth Down to Average 24H Pair Volume Ratio

ItBit, Kraken and Bitstamp have relatively more stable markets compared to exchanges such as CoinEx, ZB and Coinbene.

In the case of ZB for instance, its depth to volume ratio was just 0.4%. I.e. in order to move the price down 10%, a trader would only need to sell 0.4% of average daily pair volume. These ratios are similarly low in the case of CoinEx (0.7%) and CoinBene (0.3%).

Meanwhile other exchanges such as Bitstamp and ItBit, had ratios of 30% and 40% respectively. This is a factor of 100 times greater than those of CoinBene’s for instance.

Transaction-Fee Mining Exchanges

Average 24H Trans-Fee Mining Volumes

The total average 24h-volume produced by trans-fee mining associated exchanges on CryptoCompare totals more than 550 million USD. This constitutes approximately 10% of total exchange volume over the last 30 days.

Decentralized Exchanges

Average 24H DEX Volumes

The total average 24h-volume produced by the top 5 decentralized exchanges on CryptoCompare totals just less than 2.4 million USD. This constitutes just 0.4% of total exchange volume.

Security Analysis – Top 100 Exchanges by 24H Volume

This security analysis aims to evaluate a pool of the top 100 exchanges by 24h volume considering the proportion of exchanges with both a public privacy and a terms & conditions page. In addition, we analyse the proportion of exchanges that have been hacked in the past as well as the publicly stated proportion of cold wallet vs hot wallet storage for users’ funds. In theory, the higher the amount of funds stored in “cold storage” (i.e. offline), the less exposed the funds held by a centralized exchange will be to hackers.

Proportion of Exchanges with both a Public T&C and Privacy Policy Page

Out of the top 100 exchanges by 24h volume, only 86% have both a public privacy policy and terms & conditions page.

Proportion of Users’ Funds Held by Exchanges in Cold Storage

A third of top exchanges store the vast majority of users’ funds in cold wallets.

Proportion of Users’ Funds in Cold Storage by Exchange

Exchanges itBit, Coinfloor, Bitfinex and Coinbase are among those that store the highest proportion of users’ funds offline.

Proportion of Exchanges Hacked in the Past

11% of top exchanges have been hacked in the past.

KYC Requirements Among the Top 100 Exchanges

Just under half of top exchanges impose strict KYC requirements, while more than a quarter do not require KYC.

Those that impose partial requirements (25%) require KYC verification in order to conduct certain activities such as to withdraw fiat, to trade fiat pairs, or to increase maximum trading amounts.

Trade Data Assessment of New Exchanges

A visual inspection of the trades on the new exchanges is now carried out. Snapshot data cannot capture volatility, so these trade graphs allow the characteristic trading to be assessed in light of its effect on the CCCAGG. Graphs were produced of all trades vs the CCCAGG for the top 5 trading pairs for each new exchange over the last month.

BCEX

BCEX displays high volatility on both of the pairs that it trades. Buying of large amounts of the order book is visible, suggesting a very thin market. The price on this exchange will accordingly not reflect the price of the cryptocurrency well, so it will not be included.

CoinTiger

Top trading pairs on CoinTiger display agreement with the CCCAGG, but due to anomalous volumes further monitoring will be carried out before considering inclusion into the CCCAGG.

iCoinBay

Pairs on ICoinBay show agreement with the CCCAGG. This exchange is a possible inclusion to the CCCAGG.

Iqfinex

A flash crash on the largest trading pair elicits a longer period of assessment before consideration for inclusion into the CCCAGG.

Liqnet

Pairs on Liqnet show agreement with the CCCAGG. However, large amounts of API downtime can be observed. The quality of the exchange API will be monitored and the exchange will be considered for inclusion in the event of an improvement in API provision.

P2PB2B

Poor agreement with the CCCAGG gives grounds to exclude P2PB2B.

StocksExchange

StocksExchange displays some unusual trading activity and a flash crash. The exchange will not be included due to trading behaviour.

Example Assessment of BTC to USD and Future Exchange Methodology Additions

This section provides a quantitative analysis of trade data received from exchanges. The purpose is to provide an understanding of what the exchange trading ecosystem looks like, and to allow for selection of exchanges that best represent the price of a cryptocurrency.

In order to make comparisons across exchanges, an estimate of the trading price of the cryptocurrency needs to be ascertained. For the BTC-USD pair, all trades over a 30-day period were collated and plotted. In this time period, there were around 6.5 million unique trades. The trades are plotted such that colour indicates the density of points in the area.

All BTC to USD trades over 30 days

This graph represents the entire ecosystem of the price of BTC-USD trading over a 30-day period. This is now used to generate a representative price for BTC. The median was selected to calculate a trading price for the cryptocurrency. The motivating factor behind this measure being used was the large number of outliers in the trade data set. To keep the computation tractable, trades were grouped into 1-hour long time bins, and the median for each of these bins was computed.

For the purposes of this investigation, volume weighting was not used. This was due to high volume buying up of order books being observed when looking at individual exchange trade data. It was hypothesised that the arithmetic median would better reflect the mid-price of the order books of the exchanges, as the majority of trades take place at the mid-price. The median should therefore reflect the price that the average trade was carried out at.

The 1-hour median line was then plotted on the trade data, and a visual inspection of a section of the above graph shows that the line follows the highest trade density, which is indicative that it is a good estimate of the trading price of the cryptocurrency.

BTC to USD trades over 30 days with hourly median price line

CryptoCompare’s CCCAGG is an aggregation of trade prices, and aims to reflect the current trading price of an asset. It is possible to validate the CCCAGG price by comparing it to the median trade price. It can be seen that there is agreement between the two measures, suggesting that the CCCAGG is accurately capturing the trading price.

CCCAGG Price vs Median Trade Price for BTC to USD

 

 

BitMEX Research Sponsors Fork Monitoring Website

Abstract: We are proud to announce the launch of ForkMonitor.info, a new website sponsored by BitMEX Research. The website is connected to several different nodes, both Bitcoin and Bitcoin Cash implementations. It displays various pieces of information regarding the chains followed. This website can be useful for monitoring the situation during network upgrades (softforks or hardforks), as well as being potentially useful in helping to detect unintentional consensus bugs. Thanks to Sjors Provoost for helping develop the site.

 

New Website: ForkMonitor.info

 

(Website screenshot as at 3rd Nov 2018)

Overview

The website is currently connected to the following 13 nodes:

Bitcoin Nodes Bitcoin Cash nodes
Bitcoin Core 0.17.0.1 Bitcoin ABC 0.18.2
Bitcoin Core 0.17.0 Bitcoin ABC 0.18.0
Bitcoin Core 0.16.3 Bitcoin ABC 0.17.2
Bitcoin Core 0.16.0 Bitcoin ABC 0.16.2
Bitcoin Core 0.10.3 Bitcoin ABC 0.14.6
Bitcoin SV 1.0.1
BUCash 1.5.0
BUCash 1.3.0.1

(Nodes run by forkmonitor.info as at 4 November 2018)

The website is primarily geared towards Bitcoin Cash, running 8 Bitcoin Cash nodes compared to 5 Bitcoin nodes. The reason for this is the upcoming Bitcoin Cash hardfork, where several different nodes appear designed to follow different chains.

The forkmonitor.info website may also be useful in monitoring the situation during this upgrade. After the Bitcoin Cash hardfork is complete, the website’s intention is to move some of the focus over to Bitcoin. The plan is to run more versions of Bitcoin Core (especially older versions), as well as independent implementations such as Bcoin, BTCD and Libbitcoin. This may be helpful in spotting any consensus bugs, such as the inflation bug CVE-2018-17144, which was discovered in September 2018. The website’s code will be made open source, which may hopefully encourage other organisations to spin up multiple nodes and monitor the chains in a similar way.

The Bitcoin Cash hardfork

At around 16:40 UTC on 15th November 2018, Bitcoin Cash is expected to hardfork. There is potential for three competing chains:

  • a hardfork implemented by Bitcoin ABC
  • a second hardfork implemented by Bitcoin SV
  • potentially the original rules chain

A list of some of the main clients and their respective positions on the hardforks is provided below:

Client name Comments
Bitcoin ABC Versions of Bitcoin ABC after and including 0.18.0 are expected to activate a hardfork at around 16:40 UTC on 15 November 2018, according to the median past time. Versions of Bitcoin ABC prior to this, are not expected to follow this new chain.

In our view, Bitcoin ABC is the most popular implementation and the economic majority of Bitcoin Cash users are likely to support the hardfork and follow the new chain. It is unclear to us what will happen to older versions of Bitcoin ABC; however, the likely outcome is that no additional blocks are produced on the original chain.

Bitcoin SV Bitcoin SV (or Bitcoin Satoshi’s Vision) is a client promoted by Craig Steven Wright, who is popularly known as the “Fake Satoshi”. In 2016, Mr Wright produced what he claimed was proof that he was Satoshi, however it quickly emerged that this was a digital signature copied from Bitcoin’s Blockchain, presented in a manner designed to be confusing.

Bitcoin SV is also expected to activate a hardfork at the same time as Bitcoin ABC, however, this hardfork is supposedly incompatible with Bitcoin ABC.

In our view, Bitcoin SV is likely to have limited support from users, investors and traders. However, some of the large Bitcoin Cash mining pools, apparently support Bitcoin SV or are otherwise affiliated with Mr Wright:

  • Coingeek: 25% share (A pool owned by Calvin Ayre, allegedly a financial backer and  supporter of Wright)
  • BMG Pool: 12.5% (Another pool believed to be linked to Wright, with BMG being a division of Wright’s company nChain Group)
  • SV Pool: 7% market share (A pool set up to support Bitcoin SV)
    (Source: cash.coin.dance)

In addition to the above, the listed Canadian mining company Squire Mining (SQR CN), with a CAD$65 million market capitalisation, is likely to be supporting Bitcoin SV.

According to Squire’s investor presentation, Stefan Matthews is a director while Bloomberg data shows that he owns 9.3% of the company’s shares. Furthermore, a June 2016 book on Wright entitled “The Satoshi Affair” implies that Matthews is a long standing and close friend of Wright. Matthews was the CEO of “nChain”, another company deeply involved in the shenanigans of the “Fake Satoshi”. Squire’s investor presentation states that Mr Matthews:

is currently the chairman, of the nChain Group, known for global leadership in blockchain and Bitcoin research. BMG, a division of the nChain Group

Therefore we believe it is likely that despite the lack of community support for Bitcoin SV’s hardfork, the chain could have considerable hashrate, even if it’s only for a limited period. Although, despite all the noise and promotion generated by nChain, Coingeek and Wright, we do not know for sure if the mining pools related to these entities are actually running Bitcoin SV. Even if Bitcoin SV does have significant or even majority hashrate, if the Bitcoin Cash economy ignores it, the chain should have little financial impact. We view this as the most likely outcome.

Bitcoin Unlimited There is a third client group called Bitcoin Unlimited. This group’s BUCash 1.5.0 client is designed to follow the hardfork of Bitcoin ABC. Earlier versions may behave differently.

While it appears that the economic majority will support Bitcoin ABC’s hardfork, there is significant uncertainty over how each client will behave and which chains they will follow. Therefore, BitMEX Research has sponsored this new website which has launched before the hardfork is due to occur. This will hopefully provide useful information to some stakeholders, as the events get underway next week.

 

Competing with Bitcoin Core

Abstract: We examine the power and dynamics of the “Bitcoin Core” software project and we draw distinctions between the various different ways one can compete with the project. We address the misconception that the Bitcoin Core software repository has the unique capability to change or prevent changes to Bitcoin’s consensus rules. We also discuss some common misconceptions and explain that if the Bitcoin Core repository becomes hijacked by nefarious actors or deleted, Bitcoin should be largely unaffected.

Venn diagram illustrating the various ways to “compete” with Bitcoin Core

(Sources: Bitcoin ABC, Bitcoin UASF, BTCGPU, Bitcoin XT, BTC1, Bitcoin Classic, Bitcoin Cash Cobra, Bitcoin SV, Bitcoin Unlimited, BitcoinX, Bitprim, Bcoin, Parity Bitcoin, BTCD, Libbitcoin, Caesure, Bits of Proof, Bitcoinj, Ufasoft Coin, Bitcrust, Picocoin, Bitcoin Addrinex, Bitcoin Knots, Bitcoin-RBF, Bitcoin BitMEX Research)

The three kinds of competition

One can categorise competing software projects with Bitcoin Core into three different groups:

Type of competition Explanation
Competition between chains This is when the competing software project deliberately has a different set of consensus rules to the implementations the users currently run. This includes both hardforks and softforks. Running such software can be considered risky in certain circumstances, as it can split the coin into two chains.

Therefore this kind of competition is between different coins/chains, rather than  merely competing with a different implementation of Bitcoin. Indeed if one does a software fork of Bitcoin Core and changes the consensus rules, most of the code is still likely to be written by the same development team, so it is not really competing against the team, but potentially launching a new coin whose code was written by that same team.

Competition between independent implementations This form of competition occurs when Bitcoin is re-implemented without using the code from Bitcoin Core. Typically a new coding language is used; to try to capture some advantages other languages may have.

Like the above form of competition, many consider this form of competition risky, as it may increase the chance of unplanned chain splits, caused accidentally by different consensus rules. The alternative client needs to match the consensus behaviour of the software users currently run, even matching bugs or unintended behaviour in the majority client.

Other competing software projects (which neither change the consensus rules nor re-implements the codebase) One can compete with Bitcoin Core by neither trying to change the consensus rules nor by writing a new independent codebase. One can do this by creating a software fork of the project and then making only non consensus changes.

This type of competition does not share many of the risks mentioned above.

The debate over competing consensus rules

This topic has been widely discussed in the Bitcoin community, largely in the context of the “blocksize war”, which ran from the summer of 2015 to November 2017. We are not going to repeat all those arguments in this report, where the primary purpose is to articulate the different types of competition.

In favour of competition Opposed to competition
Competition over the rules should be encouraged, since this ensures the coin is flexible and able to adapt and compete. The model of the status quo ruleset always prevailing mean that the rules may never change, even when the case is highly compelling, as in this contentious environment a minority will always oppose any change.

Competition over the rules is far less likely to cause significant disruption than many people think. In reality large businesses and the community will quickly rally behind one coin and change the client they run to follow the economic majority or hashrate majority.

It is best to try to avoid competition over the consensus rules, as doing so is risky and damages the stability of the coin. In the event of a dispute, the existing consensus rules should prevail, this keeps the existing rules of the coin, such as the 21 million cap robust, a key and unique property of Bitcoin. The disruption which can be caused by changing the consensus rules without widespread agreement, is therefore a highly desirable characteristic of Bitcoin.

Changing the consensus rules should therefore occur in one of the following two ways:

  1. With widespread agreement across the community of coin users and technical experts.  Sufficient time must also be given for users to upgrade their clients
  2. If developers are unsure if a sufficient number of users will upgrade to the new rules, this could result in the launch of a new coin. In this case various safety measures such as strong two way replay protection and chain wipeout protection (for both fully verifying clients and light clients) may be necessary to reduce the risk of users losing funds

(If the change in the rules is a softfork (as opposed to a hardfork), it may be possible to prevent a chainsplit if the majority of miners upgrade)

The debate on competing independent implementations

As above, this is also a very controversial and divisive topic, however we still think it’s a fundamentally different issue to competition over deliberate changes to the consensus rules.

In favour of competition Opposed to competition
Although one dominant implementation may protect the network from unexpected consensus bugs, it may leave the coin exposed to certain types of critical bugs, such as bugs which caused clients to crash or allow unexpected coin inflation to occur. A recent example of this is CVE-2018-17144, a critical inflation bug only discovered in September 2018.

If, for example, there were ten independent implementations, each with a 10% market share, if a bug occurred on one of the implementations which caused it to crash or caused inflation, 90% of the network could continue as normal. The network would therefore become more resilient. Diversity of the clients users run is therefore a key strength.

The strongest opponent of this form of competition was probably Satoshi, he/she famously said:

I don’t believe a second, compatible implementation of Bitcoin will ever be a good idea.  So much of the design depends on all nodes getting exactly identical results in lockstep that a second implementation would be a menace to the network.  The MIT license is compatible with all other licenses and commercial uses, so there is no need to rewrite it from a licensing standpoint.

A second version would be a massive development and maintenance hassle for me.  It’s hard enough maintaining backward compatibility while upgrading the network without a second version locking things in.  If the second version screwed up, the user experience would reflect badly on both, although it would at least reinforce to users the importance of staying with the official version.  If someone was getting ready to fork a second version, I would have to air a lot of disclaimers about the risks of using a minority version. This is a design where the majority version wins if there’s any disagreement, and that can be pretty ugly for the minority version and I’d rather not go into it, and I don’t have to as long as there’s only one version.
(Source: Bitcointalk)

Although ten popular implementations might be good, the issue is the transition from one dominant implementation to a diversity of popular clients, without entering dangerous territory such as two popular independent implementations, each with a 50% market share, leaving the network vulnerable to consensus bugs. Therefore a better plan may be to have one dominant implementation which is highly scrutinized, to keep consensus bugs to a minimum. This way the network may be reliable for all users, even 10% of a minority chain may be a problem for that 10%.

Other competing clients

Even if one really likes a robust ruleset, opposes competition over the consensus rules and one religiously follows Satoshi’s negative view about competing implementations, this does not mean one cannot have competing software projects. The competition can simply be in the white area, outside of the circles in the above venn diagram. This form of competition, which neither initiates a deliberate change to the consensus rules nor re-implements the code, is not controversial at all, as far as we can tell.

Therefore in theory Bitcoin never needs to suffer from the apparent problems of who controls a particular software repository in Github or arguments over who has commit access to the repository. In our view, many of these apparent problems are based on a misunderstanding, by people who appreciate some of the risks of competing software projects, but fail to distinguish appropriately between the different types of competition. Therefore many seem to overestimate the power of the Bitcoin Core software repository, thinking that any competition is risky or somehow unacceptable.

Bitcoin Core’s genesis

Prior to 2013, there was no software project named Bitcoin Core. The Satoshi client was sometimes just called the reference implementation or Bitcoin-QT/Bitcoind. Then in February 2013, Gavin Andresen, a prominent Bitcoin developer, posted to the Bitcoin Foundation forum asking:

There was some discussion about renaming Bitcoin-Qt and the reference implementation in general in IRC today; I thought some of you smart people might have good name ideas.

Mike Hearn, another developer, then responded:

Oh good, about time. This has irritated me for a while. How about Bitcoin Core?
(Source: Bitcoin Foundation Forum)

Many then started referring to the software project as “Bitcoin Core”, but nothing actually changed. Bitcoin Core then began to develop a strong brand, associated with prudence and stability, or as Gavin said at the time, “[its] like a rock”.

The impact of the “blocksize war”

During the blocksize war, many characterised the debate as being Bitcoin Core vs miners or large businesses, with the Bitcoin Core side opposing hardforks and blocksize limit increases. In our view the characterisation was mostly incorrect. However, many who made this characterisation then subsequently concluded that Bitcoin Core won, since there was no hardfork. This same group therefore currently overestimate the power of Bitcoin Core, in our view.

Bitcoin Core is not as powerful as many people think

It is not the Bitcoin Core software repository that defines Bitcoin’s consensus rules. The rules are defined by the clients economically significant users currently run. These are typically previously released versions of Bitcoin Core. The Bitcoin Core software project cannot change what software users are running and the users are a lot more independent minded than many people think, in our view. Even if Bitcoin Core had released a hardfork client, which increased the blocksize limit, it is not clear if the community would have upgraded. Therefore concerns about the Bitcoin Core software repository becoming deleted, hacked or hijacked should be far less of an issue than many people think. If this happens it will not affect clients users are already running and if further upgrades or improvements are needed, one can simply switch to a different repository or many different repositories, without worrying about any coordination problem or other risks.

Actually, in the summer of 2017, in some ways, a client competing with Bitcoin Core, Bitcoin UASF, overthrew Bitcoin Core and deliberately changed the networks consensus rules. Therefore, concluding that Bitcoin Core is all powerful, is the wrong lesson to learn from the blocksize war.

BitMEX Research is launching a new client to compete with Bitcoin Core (For illustrative purposes only)

Today BitMEX Research is announcing a new client to compete with Bitcoin Core, Bitcoin BitMEX Research. Since it is a software fork of Bitcoin Core, it carries none of the risks of not being bug for bug compatible, like Satoshi was concerned about. The BitMEX Research client also doesn’t change Bitcoin’s consensus rules, so the concerns about contentious chainsplits do not apply. Therefore, if the Bitcoin Core repository gets hijacked or deleted, the codebase can still improve using the Bitcoin BitMEX Research client or any other set of clients.

Conclusion

Following the resolution of the blocksize war, there is too much emphasis on the power of the Bitcoin Core software repository. Common questions now are “Who controls the repository?”, “What if they delete the Bitcoin Core GitHub?”. In our view, these questions may illustrate one is missing the point of Bitcoin.

People tend to look for somebody who is in control of Bitcoin’s protocol rules. Prior to and during the blocksize war, many thought it was miners, large businesses or Gavin Andresen. One of the unexpected negative consequences of that war is that many seem to have switched their opinions to believing Bitcoin Core is incharge, an equally flawed view. The truth is, as hard as it is to appreciate, end users are ultimately in charge of Bitcoin.

Of course this could be unrealistic, in reality, ASIC manufacturers, large mining farms, developers, large custodians, large exchanges and even an individual software repository are highly influential. We may be idealistic in saying that users are ultimately in control. However, isn’t that what “user controlled money” means? If one doesn’t think users control Bitcoin, what exactly is Bitcoin for anyway?

 

 

SegWit vs Bitcoin Cash transaction volume update & Bitcoin Cash investor flow update

Abstract: In March 2018, we wrote a piece on the SegWit capacity increase and compared it to Bitcoin Cash transaction volume. Another topic we have focused on is coins moved for the first time since the split, on both sides of the chain (our September 2017 report). In this piece we briefly provide an update on the metrics we were tracking. The data shows that SegWit is enjoying strong and consistent growth, while Bitcoin Cash volume is also slowly increasing from its lows, to around 9% of Bitcoin transaction volume. As at October 2018, very few pre-split coins are moving for the first time since the fork.

 

 

SegWit transaction volume – Percentage of Bitcoin transaction volume (Daily data)

(Source: BitMEX Research, Bitcoin blockchain)

On the Bitcoin network, SegWit adoption has grown substantially since our first article on the topic in September 2017. Adoption now approaches 50% and the growth has been reasonably consistent and gradual throughout the period.

 

Daily transaction volume

(Source: BitMEX Research, Bitcoin blockchain, Bitcoin Cash blockchain)

As the above chart indicates, Bitcoin Cash transaction volume declined from the c10% of Bitcoin level in March 2018, when we last commented on the topic, to around 6%. Then in the late summer of 2018 Bitcoin Cash volume picked up again, to around the 10% level. The Bitcoin Cash numbers are somewhat skewed by the “stress tests” which occurred in August 2018 and then September 2018. However, the median daily Bitcoin Cash percentage transaction volume compared to Bitcoin in the last six months is 9.0%, a recovery compared to earlier lows of around 5% or 6%.

 

Cumulative transaction volume since the launch of Bitcoin Cash

(Source: BitMEX Research, Bitcoin blockchain, Bitcoin Cash blockchain)

Since the launch of Bitcoin Cash, 22.1 million SegWit transactions have taken place, only 17.0% more than the cumulative number of Bitcoin Cash transactions, which stands at 18.9 million. Although, as the chart above illustrates, this appears to be skewed somewhat by the stress tests.

Prior to the start of the stress tests, in July 2017, there had been 15.5 million SegWit transaction, 95.1% more than the number of Bitcoin Cash transactions.

 

Coins moved for the first time since the fork

(Source: Forks.network, Original chart idea from BitMEX Research)

As for our investor flow analysis system, 9.1 million Bitcoin which existed prior to the spit has moved at least once since the fork, compared to 8.6 million Bitcoin Cash. As the chart above indicates, the gradient of the spend for the first time since the fork lines are flattening out on both sides of the split, potentially indicating further significant changes in the investor flow dynamics are unlikely.

 

Tether – Q2 Puerto Rico data & Noble Bank looking for a buyer

Abstract: Bloomberg is reporting that Noble Bank, which back in February 2018 we speculated could be Tether’s primary reserve bank, may be facing financial difficulties. Tether is said to be diversifying away to other banks and this hypothesis is supported by Q2 financial data from Puerto Rico.

New Puerto Rico Financial Data for Q2 2018

Bank deposits in the International Financial Entities (IFE) category, which includes Noble Bank, were $2.9 billion, down 18.4% in the quarter. This is despite continuing growth of  Tether, which is illustrated in the below chart. In our view, this data supports the assertion that Tether is moving its reserves out of Noble and into other banks outside of Puerto Rico. BitMEX Research has also been informed by Tether insiders that the Tether funds have been diversified into other banks.

Puerto Rico’s IFE aggregate deposits versus the Tether balance in millions of USD. (Source: IFE Accounts, BitMEX Research, Coinmarketcap)

Bloomberg are also commenting on the financial data from Puerto Rico, stating:

Puerto Rico has seen a surge of cash related to cryptocurrencies. By the end of 2017, cash and equivalents held by so-called international financial entities, such as Noble, soared to $3.3 billion from $191 million a year earlier, according to data from Puerto Rico’s bank regulator. As of June 30 this year, the total had dropped to $2.6 billion. The majority of that money on the island was held by Noble, people familiar with the matter said earlier this year.

(Source: Bloomberg)

Bloomberg is also reporting that Bank of New York Mellon is no longer Noble’s custody bank.  Tether’s hunt for more reserve banks continues.

Ethereum holdings in the ICO treasury accounts

Abstract: Following on from our first piece on ICOs in September 2017, which focused on the team members and advisors, in this report we work with TokenAnalyst to track the Ethereum balances of the ICO projects over time. We look at the amount of Ethereum raised and the US$ value of the gains and losses caused by changes in the Ethereum price, for each project. We conclude that rather than suffering because of the recent fall in the value of Ethereum, at the macro level, the projects appear to have already sold almost as much Ethereum as they raised (in US$ terms). Of the Ethereum still held by the projects, even at the current c$230 price, projects are still sitting on unrealised gains, rather than losses.

 

Please click here to download the pdf version of this report

 

Ethereum raised by 222 ICOs – Macro analysis

ETH US$m
ETH raised by EOS 7,211,776 3,824
ETH raised by other projects 7,972,003 1,639
Total ETH raised 15,183,779 5,463
ETH sold by EOS (7,211,776) (3,892)
ETH transferred out/sold by other projects (4,113,345) (1,560)
Total ETH transferred out/sold (11,325,121) (5,452)
ETH Balance remaining (Sept 2018) 3,858,659 830

(Source: Ethereum Blockchain, BitMEX Research, TokenAnalyst, Token Data, Price data from Etherscan)

Overall profits & losses caused by changes in the price of Ethereum – US$ million

Realised gains
EOS project gains 68
Gross realised ETH gains by other projects 692
Gross realised ETH losses by other projects (34)
Net realised gains 727
Unrealised gains
EOS unrealised gains n/a
Gross unrealised ETH gains 403
Gross unrealised ETH losses (311)
Net unrealised gains 93
Total net gains 819

(Source: Ethereum Blockchain, BitMEX Research, TokenAnalyst, Token Data, Price data from Etherscan)

Notes:

  1. This analysis only considers the Ethereum balances of the ICO projects, which we have tracked on the Ethereum blockchain. Funds raised in currencies other than Ethereum are not considered nor is the balance of the new token created by the project. Our reported totals are therefore lower than some other sources. Therefore while our figures may be an underestimate, one at least has a degree of assurance that the balance is calculated independently of the project. At the same time we are missing several projects such as Tron, as we have not identified a treasury address or an address cluster.
  2. The estimate of the value of Ethereum raised is calculated by taking the highest value of Ethereum inside the address cluster of each project at any point in time (with the exception of EOS). This will result in some inaccuracies.
  3. The estimate of the value of US$ raised is calculated by using the average ETH price during the ICO period. This should therefore be considered as a rough and unreliable estimate.
  4. The estimate for the realised gains was calculated by taking the month end Ethereum balance for the address cluster of each project every month and then looking at the reduction in the Ethereum holdings. The average Ethereum price for each month was then used to estimate the US$ value of Ethereum that was sold. This is likely to be inaccurate and it is possible the project retains ownership of the Ethereum or that the Ethereum was not sold for US$.
  5. While we believe our estimates at the macro level may be reliable, at the individual project level our figures are likely to be unreliable. We apologise for any errors or inappropriate assumptions.

Commentary on the overall Ethereum holdings and sales

The Ethereum price has fallen almost 85% from the US$1,400 peak price in around December 2017. As we mentioned back then, the value of Ethereum and the associated crypto-currencies was high and there was significant downside risk. The large fall in the value of Ethereum led some to question if there could be a “downward price spiral” due to the concentrated Ethereum holdings of the ICO projects. The theory being that many ICO projects were sitting on a large treasure trove of Ethereum and that as the price of Ethereum fell, these projects were going to “panic sell’, fearful of being the last project holding their Ethereum bags. Read more “Ethereum holdings in the ICO treasury accounts”

Unboxing Bitmain’s IPO (Part 2)

Abstract: Following on from our August 2018 piece on Bitmain’s IPO, in this note we look at new information made available in Bitmain’s IPO prospectus, which was published in the last few days. The new filing confirms our suspicion that Bitmain has been making large losses recently, with a net loss of US$395m in Q2 2018. The magnitude of wasted production costs is also revealed, with almost US$0.5 billion spent on failed chips in the last 18 months. However, the document also confirms that Bitmain successfully raised US$442m from investors in August 2018, significantly strengthening their balance sheet. At the same time, this brings the IPO closer, which is good news for Bitmain and something its rivals should be concerned about.

The Income Statement to June 2018

The prospectus discloses financials up to June 2018, one extra quarter compared to what had previously been available. The new income statement confirms our suspicion (driven primarily by lower sales prices) that Bitmain has been making losses recently. As the below table shows, the company lost US$395m in Q2 2018. The IPO prospectus document shows the company making a net profit of US$742m in the first half of 2018, however since we know from the “leaked” pre-IPO presentations that Bitmain made a $1,137m net profit in Q1, we can tell that Q2 was a loss making period.

2015 2016 2017 2018 Q1 2018 Q2
Sales 137.3 277.8 2,529.3 1.896.4 949.1
Gross Profit 71.5 158.1 1,447.1 1,137.3 (107.3)
Net Profit 48.6 118.9 1,249.4 1,137.7 (395.0)

(Source: Bitmain IPO prospectus, BitMEX Research)

However, the losses only relate to a period of one quarter and business conditions may change. One quarter of losses should not be a significant concern to long term investors, especially in a volatile business like crypto-currency mining. Although mining machine prices remain low and Q3 is also likely to be a loss making period, therefore moving back into the black may be challenging. Bitmain may need to raise prices to return to profitability, in our view.

In the document, Bitmain do acknowledge some potential strategic mistakes which may have contributed to the losses, and how they plan to address these issues going forwards:

In early 2018, we anticipated strong market growth for cryptocurrency mining hardware in 2018 due to the upward trend of cryptocurrencies price since the fourth quarter of 2017, and we placed a large amount of orders with our production partners in response to the anticipated significant sales growth. However, there had been significant market volatility in the market price of cryptocurrencies in the first half of 2018. As a result of such volatility, the expected economic return from cryptocurrency mining had been adversely affected and the sales of our mining hardware slowed down, which in turn caused an increase in our inventories level and a decrease in advances received from our customers in the first half of 2018. Going forward, We will actively balance our business growth strategy, inventories and cryptocurrencies assets levels to ensure a sustainable business growth and a healthy cash flow position, and we will adjust our procurement and production plan to maintain an appropriate liquidity level.

(Source: Bitmain IPO prospectus, BitMEX Research)

Cash injections

The balance sheet position improved significantly in Q2 2018, mainly due to new cash injections from new investors. The net cash balance improved from US$104.9m to US$343m in Q2. Investors essentially rescued the company as it neared a cash crisis. As the table below shows, Bitmain raised even more money in Q3, which is likely to improve the cash position even further going forward.

Bitmain issuances of shares

Date Amount raised
August 2017 US$50.0m
June 2018 US$292.7m
August 2018 US$442.0m
Total US$784.7m

(Source: Bitmain IPO prospectus, BitMEX Research)

Inventory

The inventory balance fell to $887.2m in Q2, compared to the $1,243.8m in Q1 2018. This reduction is likely to be primarily driven by impairments. In H1 2018 Bitmain suffered an inventory write-down of US$391.3m. Therefore a significant proportion of the pain related to the overproduction could have already occurred.

Pre-payment to TSMC & the current mining industry outlook

Worryingly the TSMC pre-payment situation has not materially improved as a drain on working capital, with the balance as at Q2 being US$652.9m, only down slightly from US$666.0m in Q1. This could relate to Bitmain’s new 7nm mining product, which was recently announced. The fact that this was officially announced by the company is a positive, since the failed chips were not announced and therefore this product could finally be successful. This could rescue Bitmain from a difficult business enviroment. However, skeptics would point to the following:

  • This new 7nm project could also be a failure, the company is only announcing it as they are under more pressure (in our view this is unlikely)
  • Moving to 7nm is very challenging and it could take around 12 to 18 months until these devices are as reliable as the 14nm and 10nm products on the market
  • Producing at the 7nm level is too expensive and Bitmain’s rivals, Innosilicon, Ebang, Bitfury have out-smarted Bitmain by selecting the cheaper and larger wafer size in their new products, which have also all been announced in the last few weeks.

Impairments related to failed chips

As we mentioned in our previous piece, “Bitmain has tried to release at least three new more efficient Bitcoin mining chips, one at 16nm, one at 12nm and more recently 10nm in March 2018. Each of these releases failed, costing Bitmain hundreds of millions of dollars”. The disclosure in these documents may reveal that our assessment may have been accurate and the scale of the cost of these failures can now be determined.

Provisions for impairments related to TSMC prepayments & inventory write-downs

Period Value
2017 US$240.4m
2018 H1 US$252.7m
Total US$493.1m

(Source: Bitmain IPO prospectus, BitMEX Research)

The above illustrates just how risky and potentially financially costly it is to produce new chips. Bitmain have paid a high price for some of the failures.

Bitcoin Cash & the crypto-currency holdings

The prospectus does not reveal any significant new information compared to our previous report, individual holdings by coin were not disclosed. The value of crypto-currency on the balance sheet fell to US$886.9m in Q2, compared to US$1,172.4m in Q1. This is likely to be driven by a fall in value in Bitcoin Cash and the other coins. Bitmain disclosed an impairment of its crypto-currency holdings of US$102.7m in Q2, which is likely to have accelerated further into Q3.

Conclusion

The prospectus enables us to quantify the financial impact of mistakes we already suspected that Bitmain had made.

  • Bitmain lost US$0.5 billion on production costs associated with mining chips that failed (or other inventory write-downs)
  • The company was dependent on US$784.7m on new investment to retain a positive cash position
  • Bitmain incurred a net loss of almost US$400m in the most recent quarter, due to having too much inventory and needing to lower sales prices

Obviously many of these mistakes could have been avoided, but all they really show is that Bitmain take risks. If Bitmain didn’t take such risks the company would not have built $1,617m of shareholder equity in the last few years and Bitmain would not have been the largest and most profitable mining company in 2017.

We now know the IPO is close and could occur within a few months. This could provide Bitmain a substantial cash war chest. Although Bitmain’s rivals have very recently successfully began releasing a wave of new more efficient mining products, Bitmain’s new large cash reserves is something they should worry about. Even though Bitmain obtained this money from investors, rather than generating it from free cash flow.

(The timeline of the IPO or number of shares which will be sold has not been disclosed in the filling)

 

BitMEX Altcoin / Bitcoin Futures Contracts Index Change

Effective 26 September 2018 at 12:00 UTC the December Altcoin / Bitcoin Futures contracts indices will include the last price of Binance and Kraken (where possible) in efforts to further strengthen the underlying stability of the reference price. Existing Altcoin / Bitcoin September Futures contracts will remain under their current indices until expiry.

Contracts Affected

ADAZ18

BCHZ18

EOSZ18

ETHZ18

LTCZ18

XRPZ18

New Index Creation For Affected Contracts

.BADAXBT will be (0.5 * Bittrex + 0.5 * Binance)

.BBCHXBT will be (⅓ * Poloniex + ⅓ * Kraken + ⅓ * Binance)

.BEOSXBT will be (⅓ * Poloniex + ⅓ * Kraken + ⅓ * Binance)

.BETHXBT will be (⅓ * Poloniex + ⅓ * Kraken + ⅓ * Binance)

.BLTCXBT will be (⅓ * Poloniex + ⅓ * Kraken + ⅓ * Binance)

.BXRPXBT will be (⅓ * Poloniex + ⅓ * Kraken + ⅓ * Binance)