On Friday 8 June 12:00 UTC we will be delisting the 110% strike UP contract, XBT7D_U110 and 90% strike DOWN contract, XBT7D_D90. These will be replaced with two new contracts: a 105% strike UP contract, XBT7D_U105 and a 95% strike DOWN contract, XBT7D_D95.
“Nothing happens. Nobody comes, nobody goes. It’s awful.”
― Samuel Beckett, Waiting for Godot
The crypto community has been waiting for a variety of Godots since its inception. For traders, our Godot is the mythical Institutional Investor. When they get involved in a big way, our bags will transform into Lambos, and we will live happily ever after. When they get involved, liquidity will magically improve and the market will “behave” as it is supposed to.
Many crypto commentators including myself, proclaimed 2018 as the year institutional investors get involved in a big way. This flood of new money would help support a Bitcoin price above $10,000; and take us to Valhalla in short order.
With northern hemispheric summer approaching, are institutional investors actually flocking to our new space? News of a Goldman and JP Morgan crypto trading desk aside, what is the best proxy for insto interest in crypto?
The CME and CBOE Bitcoin futures contracts trading volumes are the best proxy. Both of these contracts are USD margined and settled. Anyone who trades these contracts obtains Bitcoin price exposure without ever touching Bitcoin. At BitMEX, our contracts are margined and settled in Bitcoin. That means to trade, you must own Bitcoin. Most instos love the idea of Bitcoin, but are terrified of actually buying, storing, and transferring it.
The above graphs show the USD trading volumes of the CME, CBOE, and BitMEX Bitcoin / USD contracts YTD.
The first takeaway is that BitMEX dominates. BitMEX’s retail client base, trades multiples of the insto client base of the CME and CBOE. BitMEX retail traders for the most part would find it very difficult to open an account with a broker that offers connectivity to the CME and CBOE. These brokers will require relatively high account minimums. The lower leverage offered and higher contract notionals at the CME and CBOE mean that even if a typical BitMEX client had connectivity, they would not be able to afford to trade even one contract.
It is clear from this data that retail traders still dominate the flows. Anecdotally, if you hang out long enough in Telegram, WeChat, Reddit etc. you will hear traders talk about spot movements triggered by quirks of a particular derivatives market. Friday settlement for OKex quarts on many occasions has completely whipsawed the market. Trading behaviour is also affected by an upcoming large funding payment on the BitMEX XBTUSD swap. What there is scant mention of, are market changes in response to the CME or CBOE expiry.
Tomorrow Is Another Day
The CME and CBOE volumes point to tepid involvement by instos. The Jan to May MoM CAGR is 3.94%. However, that will change. As banks gin up their trading activities over the next 6 to 12 months, they will begin hand-holding their clients in their crypto baptism. If a bank is going to take the reputational risk by publicly announcing the creation of a trading desk, they will do whatever they can to generate business to justify the risk. The easiest product to trade is the one that doesn’t require anyone to actually touch the underlying asset.
An easy win for a newly minted trading desk is to provide risk pricing on CME and CBOE listed futures. A client wants to trade a chunky block immediately; the sell-side desk will quote a two-way and clear their risk on-exchange over the trading day. The client gets instant liquidity in excess of the screen, and the bank can take healthy bid-ask margins on meaningful flow.
As volumes and open interest grows, the interplay between the USD settled and Bitcoin settled derivatives markets will lead to profitable distortions in the market. Before that happens, interested traders should read the BitMEX vs. CME Futures Guide. The non-linear components of the BitMEX products complicates things, but ultimately means there will be profitable arbitrage and spread trades between the two universes.
For some, crypto-coins have a bad reputation: “it facilitates money laundering” is a common belief. Enlightened Hodlers retort that Bitcoin is a terrible way to launder money: it has a public ledger and relative illiquidity vs. the USD. While USD is the preferred method of account, which USD assets do money launderers favour? Pro-Tip: It ain’t Bitcoin.
In these modern times, washing $1 million of crisp cocaine-tainted Benjamins is no easy feat. If you walk up to a teller and attempt to deposit into a bank, they most likely will turn you away or call the police. You could call Saul in New York’s diamond district and attempt to wash it through precious stones; but, fencing those diamonds at close to par will prove difficult.
Governments always want more money parked in their jurisdictions. However, sometimes they have to play the coy mistress and profess their desire to stop terrorist financing (except for the Saudis). Below I will show that the property market is the preferred washing machine for the world’s unclean cash.
I will take a look at the real estate purchase and holding disclosures in Hong Kong, where China launders its money, and the United States where the world launders its money. I will look at both through the lens of the Common Reporting Standard (CRS). We will step into the shoes of our average USD millionaire Zhou from China. How would he clean his cash, and keep the eye Xi from knowing where his loot is?
Chinese people are under no illusion about the rapacious nature of their government. While many have benefited handsomely over the past 30 years, one wrong political misstep could send them back to the countryside penniless. The complete lack of financial freedom means that Beijing, if it wants to, can completely bankrupt you on a whim with no due process.
America, the home of the free, decided that it needed to know where all the financial assets of its tax donkeys globally reside. They required any financial institution to report on the assets of any American. China and many other countries also thought this was a great idea. Hence, the Common Reporting Standard was born. The CRS allows member countries to share financial data between themselves. Under the CRS, China can call up Hong Kong and request information on any Chinese national.
There were two very interesting developments in the history of the CRS:
- America failed to ratify the CRS. Which means, for example, that America is not obliged to share financial data on Chinese people with assets in America with China. Things that make you go ‘Hmmmm…’ for $200, Alex – America wants all countries to follow FACTA and inform on Americans, but it won’t return the favour. I wonder where all those assets held by non-Americans will end up?
- Hong Kong exempted property from the assets deemed reportable.
As this SCMP article notes, Chinese people rushed to convert bank deposits into property. Property is one of the best generators of economic activity. Many jobs are created on the back of a property boom. From a policy perspective, anything a government can do to encourage an increase in the property stock will make it look like it knows how to run a successful economy.
That’s the date the country falls in line with the Common Reporting Standards, or CRS – a Foreign Account Tax Compliance Act (FATCA)-type regime developed in response to a G20 request, aimed at combating cross-border tax evasion and protecting the integrity of the international tax system. The Chinese government pledged to join in with CRS in 2014.
Details on financial assets held by foreign individuals within mainland China will also start being collected.
The agreement means information will be exchanged with tax authorities in 100 countries and regions from next year, including Hong Kong.
The city has been considered a tax haven for many mainland investors, as there is no capital gains tax levied here. But now they are being forced to convert those financial investments into property, prior to the July deadline to avoid declaring any financial assets held abroad, to the Chinese authorities.
When it comes to the US, the National Association of Realtors is hell-bent on property purchases being exempt from KYC / AML regulations. FinCEN recognised that property became a blatant cash washing machine in certain hot markets, and imposed some disclosure requirements in August 2017.
Set to expire on February 23, 2017, FinCEN discovered that a significant portion of the reported covered transactions in the latest GTOs were linked to possible criminal activity by the individuals revealed to be the beneficial owners of the shell company purchasers. As a result, FinCEN is extending the current GTOs for an additional 180 days, until August 22, 2017, and may consider permanent data collection requirements later this year for more cities.
The GTOs require certain title companies to identify natural persons with a 25 percent or greater ownership interest in a legal entity purchasing residential real property without a bank loan or similar external financing in the following geographic areas meeting specific transaction thresholds:
- $500k and above – Bexar County, Texas
- $1m and above – Miami-Dade, Broward, and Palm Beach Counties, Florida
- $1.5m and above – New York City Boroughs of Brooklyn, Queens, Bronx, and Staten Island
- $2m and above – San Diego, Los Angeles, San Francisco, San Mateo, and Santa Clara Counties, California
- $3m and above – New York City Borough of Manhattan
This is a step in the right direction to fight those evil money launders at the very high end of the market, but for your average Zhou with a few million big ones to stash, it is still business as usual.
America remains the favoured place to stash cash away from Beijing’s prying eyes, or, indeed, those of any other government bent on stemming capital flight. As long as someone stays below those investment limits, he or she can expect to have little difficulty obtaining a clean bank account and making a property purchase with cash.
Let’s Try With Bitcoin
It is clearly easy to wash and hide a few million USD in the liquid property markets of Hong Kong and America. What about using the favourite monetary boogeyman, Bitcoin?
Assume you want to move $1 million in cash into Bitcoin.
There are two options: either you can open an account on an exchange, or trade over-the-counter (OTC) with a dealer.
Any exchange that can handle this sort of volume has a serious banking relationship. Their bank will require extensive KYC / AML checks on all accounts. If the purpose is to hide the flow of funds, this is suboptimal. Presented with a subpoena, the exchange will be obligated to present the customer details.
If you can’t use an exchange, perhaps an OTC dealer would trade with you. Unfortunately the large dealers also must follow KYC / AML regulations. They again have banking relationships to maintain.
The major liquidity sources are exchanges and compliant OTC dealers. There are dealers who will onboard a client without KYC checks; however, their spread vs. the market will be extremely aggressive. A 20%+ vig to clean your money, assuming they can handle your size, is to be expected.
Washing money through the crypto capital markets is very difficult if you are unwilling to provide KYC information. Property is much easier, and vested interests from the government to the real estate brokers want you involved. They will do all they can to alleviate KYC / AML reporting requirements. Satoshi ain’t the biggest illegal finance enabler: no, it’s Uncle Sam.
This report is the third in a three part piece on Bitcoin economics. In the first piece, we looked at common misconceptions with respect to how banks make loans and the implications this has on the ability of banks to expand the level of credit in the economy. We analysed the inherent properties of money which ensure that this is the case and evaluate the impact this could have on the business cycle. In part two, we considered why Bitcoin might have some unique combinations of characteristics, compared to traditional forms of money. We explained the implications this could have on the ability of banks to engage in credit expansion. In this piece (part three), we examine the deflationary nature of Bitcoin and consider why this deflation may be necessary due to some of Bitcoin’s weaknesses. We also look at how Bitcoin could be more resilient to some of the traditional economic disadvantages of deflation than some of Bitcoin’s critics may think.
Bitcoin’s Deflation Problem
One of the most common critiques of Bitcoin and related crypto-coin systems, is the supply cap (in the case of Bitcoin 21 million) and the associated deflationary nature of the system, which could be damaging to the economy. Critics have argued that history has taught us that a finite monetary supply can be a poor economic policy, resulting in or exacerbating, economic crashes. Either because people are unwilling to spend appreciating money or because the real value of debt increases, resulting in a highly indebted economy. Bitcoin proponents are often called “economically naive”, for failing to have learnt these economic lessons of the past.
In this third piece on Bitcoin economics, we explain that the situation may be more complex than these critics think, as Bitcoin is fundamentally different to the types of money that came before it. There may be unique characteristics about Bitcoin, which make it more suited to a deflationary policy. Alternatively, limitations or weaknesses in Bitcoin could exist, which mean that too much inflation could have negative consequences not applicable to traditional forms of money. In our view, these issues are often overlooked by some of Bitcoin’s economic critics.
A selection of quotes about Bitcoin’s inflation problem
The supply of central bank notes can easily expand and contract. For a positive demand shock to bank notes (shifting from consumption/investment to money: i.e. it is a deflationary shock), the central bank increases money supply by buying securities and foreign currencies. For a negative demand shock to bank notes, the central bank absorbs money in circulation by selling securities and other assets. In case of [Bitcoin], the latter operation is not included in its protocol. That is to say, the cryptocurrency protocol usually includes the currency supply rule, but does not have a currency absorption or write-off protocol. Can we reduce this irreversibility?
The point is that by not building in an inflation, of say 2% per annum in the global supply of Bitcoins, you almost doom it as a currency, because people will start hoarding it, knowing that it’s going to be worth more next year than it is this year
More broadly, a hard supply cap or built-in deflation is not an inherent strength for a would-be money. A money’s strength is in its ability to meet society’s needs. From my perspective, Bitcoin’s built-in deflation means that it does a poorer job than it might at meeting society’s needs. Maybe I will be proven wrong. We shall see.
The currency’s “money supply” will eventually be capped at 21m units. To Bitcoin’s libertarian disciples, that is a neat way to preclude the inflationary central-bank meddling to which most currencies are prone. Yet modern central banks favour low but positive inflation for good reason. In the real world wages are “sticky”: firms find it difficult to cut their employees’ pay. A modicum of inflation greases the system by, in effect, cutting the wages of workers whose pay cheques fail to keep pace with inflation. If the money supply grows too slowly, then prices fall and workers with sticky wages become more costly. Unemployment tends to rise as a result. If employed workers hoard cash in expectation of further price reductions, the downturn gathers momentum.
Our current global system is pretty crap, but I submit that Bitcoin is worst. For starters, BtC is inherently deflationary. There is an upper limit on the number of bitcoins that can ever be created (‘mined’, in the jargon: new bitcoins are created by carrying out mathematical operations which become progressively harder as the bitcoin space is explored—like calculating ever-larger prime numbers, they get further apart). This means the cost of generating new Bitcoins rises over time, so that the value of Bitcoins rise relative to the available goods and services in the market. Less money chasing stuff; less cash for everybody to spend (as the supply of stuff out-grows the supply of money).
Nevertheless, there is still the 21m limit issue. If the limit is reached, the future of Bitcoin supply has to go down the path of fractional reserve banking, since only re-lending existing coin, or lending on the basis that settlement can one day be made in Bitcoin — a la conventional banking practice — can overcome the lack of supply
So to the extent that the experiment [Bitcoin] tells us anything about monetary regimes, it reinforces the case against anything like a new gold standard – because it shows just how vulnerable such a standard would be to money-hoarding, deflation, and depression.
While Bitcoin has managed to bootstrap itself on a limited scale, it lacks any mechanism for dealing with fluctuations in demand. Increasing demand for Bitcoin will cause prices in terms of Bitcoin to drop (deflation), while decreasing demand will cause them to rise (inflation). What happens in each of these cases? Let’s start with deflation, because right now demand for Bitcoin is on the rise. What do people do when they think something’s value will be higher tomorrow than it is today? Well, they acquire and hold on to it! Who wants to give up money that’s constantly rising in value? In other words, rising demand causes demand to rise further. Irrational exuberance at its finest. Deflation begets deflation, ad infinitum, or at least until something breaks.
Deflation and the deflationary debt spiral
Many economists have been debating the advantages and disadvantages of inflation for decades. Nevertheless, this primary point of contention is one of theory; economists, from differing schools of thought have a variety of views on the topic. It is fair to say that the current economic consensus is that deflation is an undesirable economic phenomenon, while moderate inflation of around 2% per annum is desired. Those with Austrian school leanings, who oppose centrally managing inflation towards a certain positive target, tend disproportionality to support Bitcoin and gold’s somewhat deflationary nature.
One of the primary drivers for the negative view on deflation appears to be the 1929 great depression and the idea of a deflationary debt spiral. The theory is that during a period of economic recession and deflation, the real value of debt increases. Such an increase compounds the misfortunes of an already weak economy. Economist Irving Fisher is often credited with formulating this theory, as a response the financial crises of 1837, 1873 and the 1929 great depression.
Then we may deduce the following chain of consequences in nine links:
- Debt liquidation leads to distress setting and to
- Contraction of deposit currency, as bank loans are paid off, and to a slowing down of velocity of circulation. This contraction of deposits and of their velocity, precipitated by distress selling, causes
- A fall in the level of prices, in other words, a swelling of the dollar. Assuming, as above stated, that this fall of prices is not interfered with by reflation or otherwise, there must be
- A still greater fall in the net worths of business, precipitating bankruptcies and
- A like fall in profits, which in a “capitalistic,” that is, a private-profit society, leads the concerns which are running at a loss to make
- A reduction in output, in trade and in employment of labor. These losses, bankruptcies, and unemployment, lead to
- Pessimism and loss of confidence, which in turn lead to
- Hoarding and slowing down still more the velocity of circulation. The above eight changes cause
- Complicated disturbances in the rates of interest, in particular, a fall in the nominal, or money, rates and a rise in the real, or commodity, rates of interest.
Evidently debt and deflation go far toward explaining a great mass of phenomena in a very simple logical way
Is deflation as bad as these critics claim?
To the extent that critics accuse Bitcoin supporters of being economically naive, they may not always be entirely correct or they could be missing some nuances. Firstly, one does not need to be an Austrian economist to question whether deflation (supply cap) is always undesirable. Deflation could be bad in some circumstances, but it may depend on the characteristics of the economy and the type of money used in society. The social sciences are not like maths of computer science, nobody really knows the right answer to a high degree of certainty and opinions in the academic community change over time. Furthermore, economic circumstances can change over time, which can result in a different set of dynamics, where different inflation policies are optimal. Therefore a hard rule, fixed for all time, such as “deflation is always bad”, may not be the correct philosophy. For example, maybe Fisher’s view on inflation was correct for the economy in the 20th century, however by 2150 technology may have fundamentally changed to such an extent, such that another inflation policy may be more appropriate for society.
Bitcoin has different characteristics and the deflationary debt spiral argument may be less relevant
As we explained in part 1 and part 2 of this piece, Bitcoin possesses properties which are fundamentally different to the traditional money used in the economy such as the US Dollar or gold backed systems. Traditional money, such as the US Dollar are based on debt, which is an inherent property of fiat money. Alternatively Bitcoin may have properties which make it resilient to credit expansionary forces, such that the money is not inherently linked to debt. Therefore in the event of an economic crash and deflation, in a Bitcoin based economy, the impact of increases in the real value of debt could be less significant than one may think. This could make the deflationary debt spiral argument less relevant in a Bitcoin based economy. In our view, it is likely that many of the Bitcoin critics may have overlooked this point when evaluating the disadvantages of Bitcoin’s deflationary monetary policy.
Disadvantages of inflation unique to Bitcoin
In addition to Bitcoin having some potential advantages, which could make it more resilient to the disadvantages of deflation, Bitcoin’s critics may also have overlooked some of Bitcoin’s weaknesses, which may make it more vulnerable to inflation:
- Arbitrary Environmental Damage – Another common criticism of Bitcoin is the environmental damage caused by the energy intensive mining process. Although as we explained in the second part in our series on mining incentives, this issue could be overestimated since miners have a uniquely high level of choice with respect to the geographic location of their mining operations. This flexibility could reduce environmental damage as miners may use failed energy projects rather than investing in new ones. However, it is still important to note that, the negative environmental damage caused by Bitcoin does seem to be a significant negative externality. Mining incentives are made up of transaction fees and the block reward (inflation). Therefore increasing inflation increases the level of environmental damage and increases the negative externality. If a 2% inflation policy is decided upon, this could mean at least 2% of the value of the system is spent “damaging” the environment per annum. The inflation policy decision is somewhat arbitrary and the more inflation is selected the greater the extent of environmental damage. There may even be parallels here with the existing financial system. The policy of central banks to stimulate the economy, to achieve their inflation targets, could also be said to cause an arbitrarily high level of environmental damage, at least in the eyes of some critics. Although the link between inflation and environmental damage in a Bitcoin based system is more direct and measurable. Instead of continued inflation, in Bitcoin the block reward halves every four years until mining incentives are driven entirely by transaction fees. This means that the level of environmental damage will be driven by the market, in that it could represent the amount that users are willing to pay for security, rather than an arbitrarily high level of environmental damage which would be the result of an inflationary monetary policy.
- Aligning the interests of miners and users – Miners are currently primarily incentivised by the block reward rather than transaction fees. This results in a number of potential problems in the ecosystem, for example perhaps the interests of miners and users are not well aligned. Miners could, for example, exclude transactions from blocks, against the interests of users. Miners may be less likely to take this kind of action if they are primarily incentivised by transaction fees, something Bitcoin’s deflationary policy ensures will eventually become reality.
- Inability to generate coin value – The supply cap can be considered as a key selling point of Bitcoin for investors and is likely to have helped generate investor interest which may have been necessary to bootstrap the system. If a perpetual inflationary policy was chosen, Bitcoin may not have been able to succeed to the extent it has, even if the deflationary policy is inferior from an economic perspective.
The irony of this debate – economic criticisms are only relevant if Bitcoin is a tremendous success
Much of this discussion focuses on the economics of Bitcoin, assuming Bitcoin is widely adopted, such that the inflationary dynamics have an impact on society. In our view this is an unlikely outcome and perhaps should be considered even more unlikely by Bitcoin’s critics. In our view, Bitcoin may satisfy a useful niche, that of making both censorship resistant and digital payments, but it’s unlikely to become the main currency in the economy. Therefore the debate about Bitcoin’s deflationary nature should be considered as largely irrelevant anyway. Hence it is therefore somewhat odd that some critics use this as an argument against Bitcoin.
This point is similar to one Paul Krugman made in his 2013 “Bitcoin is Evil” piece. Although Mr Krugman is widely derided in the Bitcoin community, most notably for his 1998 comment that “by 2005 or so, it will become clear that the Internet’s impact on the economy has been no greater than the fax machine’s”, we consider the distinction he draws in the quote below as both accurate and sensible:
So let’s talk both about whether BitCoin is a bubble and whether it’s a good thing — in part to make sure that we don’t confuse these questions with each other.
Perhaps Satoshi thought that having a finite supply cap and a deflationary bias, may help the system succeed, even if from society’s point of view, moderate inflation would be more utilitarian. From a system design perspective, producing a working payment system should be the priority, since a system which does not succeed, even if it’s hypothetically beneficial to society, is ultimately useless.
We conclude that rather than being driven by economic naivety, some Bitcoin supporters may have had a more nuanced understanding of the relationship between debt, deflation, the properties of money and credit expansion than the critics think. In contrast one could argue it’s the economic mainstream’s lack of understanding of the relationship between money and debt, and the potential ability of Bitcoin to somewhat decouple the two, which is the most prevalent misunderstanding. Indeed to many, Bitcoin’s ability to decouple debt from money and thereby result in a deflationary climate without the deflationary debt spiral problem is the point, rather than a bug.
However, even if Bitcoin has solved this economic problem, perhaps it’s naive to think Bitcoin would result in a more prosperous economic system. Bitcoin is a new and unique system, which is likely to cause more economic problems, perhaps unexpected or new ones. After all there is no perfect money. It just may not be correct to apply the traditional economic problems of the past, to this new type of money. Although it may be more difficult, identifying Bitcoin’s potential economic problems may require more analysis and a stronger understanding of the underlying technology.
Ironically, if one thinks these economic problems associated with deflation have a remote chance of being relevant, like the critics indirectly imply, that would mean Bitcoin has a significant chance of becoming widely adopted and hugely successful. In that case, perhaps the sensible thing to do is buy and “HODL”.
Abstract: Although in 2018 Bitcoin may have somewhat moved on beyond this issue, in this sixth piece on consensus forks and chainsplits, we provide a list of 44 tokens which seem to have forked away from Bitcoin since the Bitcoin Cash split.
From late 2015 to the end of 2017, there was significant focus and analysis in the Bitcoin community about a chainsplits, finally resulting in the launch of Bitcoin Cash and then a plethora of other tokens. We have already covered some of topics related to these splits, in the five articles below:
- Bitcoin Cash: Potential Price Implications of Investment Flow Data
- The SegWit2x (B2X) Hardfork – Protecting Yourself and Your Coins, Part 1: Coin Splitting
- The SegWit2x (B2X) Hardfork – Protecting Yourself and Your Coins, Part 2: Investment Strategies
- The Bitfinex chain split tokens
- A complete history of Bitcoin’s consensus forks
In this sixth piece we list 44 Bitcoin forked tokens.
List of Bitcoin forked coins since Bitcoin Cash
|Bitcoin Clashic||http://bitcoinclashic.org||(Forked from Bitcoin Cash)|
|Bitcoin Candy||http://cdy.one||(Forked from Bitcoin Cash)|
|Bitcoin Cash Plus||https://www.bitcoincashplus.org||501,407|
|Bitcoin Hush||https://btchush.org||1st February 2018|
(Source: BitMEX Research, Forked coin websites, findmycoins.ninja)
Please note it is very important to handle these new fork tokens with caution. In particular, we would strongly advise you not to import your Bitcoin private key into any new fork token wallets without first spending the Bitcoin to a new output associated with a different private key after the token snapshot point, so that your Bitcoin is not at risk.
Today, May 17, 2018, the BitMEX trading engine encountered several separate and heretofore unpredictable problems, causing feed latency and downtime in spurts throughout the day.
Disks mounted to the main trading engine hardware degraded sharply in performance at roughly 10:00 UTC. This degradation caused feed latency during scheduled archive and reindex jobs, which caused significant backpressure. Disk I/O operations were running at roughly 1/20 of their expected rate.
BitMEX runs redundant drives, but in this case, both drives were simultaneously exhibiting this degraded behavior. We had no choice but to schedule a maintenance downtime to replace them. Unfortunately, backpressure reached critical levels faster than we expected and we moved up our timetable.
At no point was data integrity compromised by this problem, but restoring the machine to a functional state with nominal disk performance took longer than expected to execute and verify.
After this action was complete, we restarted trading. Unfortunately, another problem was uncovered during the next archive, where a reindex job combined with a previously rare request pattern led to unexpected index regeneration and symbol revalidation on specific tables. This led to another backpressure scenario, with similar symptoms.
We have identified and fixed multiple contributing factors to the above behavior. The trading engine team will be closely monitoring engine performance throughout the day while continuing root cause analysis for the slowdowns.
BitMEX is proud to launch its first optionality products: UPs and DOWNs. This marks a very significant milestone in the product development history of the platform. With futures, swaps, and now options, BitMEX is inching closer to the goal of offering all manner of derivative products for the crypto-coin industry.
Why UPs and DOWNs?
UPs or Upside Profit Contracts, and DOWNs or Downside Profit Contracts are similar to call and put options. One of our biggest strengths at BitMEX is in engaging with the community and listening to our customers, and we have heard the roar for such products as the level of sophistication grows in this industry.
The liquidity profile of Bitcoin derivatives trading has changed dramatically over the past 12 months. The BitMEX XBTUSD Perpetual Swap is now the most heavily traded instrument in the entire crypto trading industry. Average daily trading volumes are in the billions of USD notional.
Before non-linear products like options are viable, linear products (Perpetual Swaps and Futures) must be sufficiently liquid. Given the liquidity profile of XBTUSD and the quarterly Bitcoin / USD futures contracts, we now believe there is sufficient liquidity in order to launch a successful options product.
What’s the Use Case?
Imagine Bitcoin is currently trading at $10,000 and you believe that by the end of the week, it will move 10% higher to $11,000. However, you don’t want any exposure to the price unless it hits your target. Also, you do not want your position to be liquidated before your target is reached, irregardless of the intra-week spot movements. For example, if the price drops to $5,000 but recovers to $12,000 by the settlement date, you will still profit and will not be liquidated.
Hence, you want the ability to participate above your target of $11,000 on the long side. The UPs product allows you to express this view, however this “optionality” comes at a cost which is the premium you pay to the seller of the option.
Why Can You Only Buy?
Selling naked (i.e. unhedged) options is one of the fastest and easiest ways to financial ruin given the potential for unlimited losses. On BitMEX, traders are limited to the margin they deposit on the platform, hence if the seller of the option cannot make good on potential losses, then socialised loss systems will need to be put in place which we want to avoid. As a result, we require sellers of the options to post the full notional value of the UP or DOWN contract.
Because no leverage is offered to sellers, it is very expensive from a capital perspective to make a market. In order to guarantee tight spreads at sufficient size, the BitMEX affiliated anchor market maker will be the only entity allowed to sell options initially.
Many of you may have concerns that the BitMEX affiliated entity is the sole market maker, however here are some points to consider:
- As further discussed below, one cause of the engine overload issue is that we have many market makers constantly updating quotes on currently listed products. This consumes a vast amount of precious engine capacity. Until our engine performance is fixed, we refrain from listing any new product that exacerbates the issue. (E.g. this is one of the reasons why we delisted a number of our quarterly altcoin futures contracts, since the volumes they generated did not justify the engine resources consumed.) Hence, if only one market maker quotes on the UPs and DOWNs product, then the impact will not be meaningful on the engine.
- The UPs and DOWNs products need to be fully margined. That is, buyers must pay the premium in full and sellers must post the full notional of the option in margin. That means that irregardless of where the price settles, neither buyers nor sellers will ever be liquidated. If the contract settles in the money, buyers are assured they will always receive their profit. Furthermore, this means that the anchor market maker cannot manipulate the UP or DOWN market in any way to liquidate any customer.
- The anchor market maker is tasked with keeping a tight market so that buyers can enter and exit trades as they wish throughout the contract’s length. We want to increase liquidity, having wide markets or an empty order book is not in BitMEX’s interest.
- As we respond to customers’ feedback about the products, changes will be made to the UPs and DOWNs contracts. The anchor market maker will be able to adjust to the new product structure faster than any third party. That means that we can fail fast, and relaunch the product quickly with guaranteed liquidity.
What Are We Doing About Engine Performance?
At BitMEX, our top priority is improving the performance of our engine. In a detailed blog post, BitMEX Technology Scaling: Part 1, our CTO Samuel Reed explains in detail the issues we face and what we are doing to resolve these issues. However I will reiterate some points here.
The solution is not as simple as adding more servers or more engineers. The engine has a maximum throughput that is constrained by risk checks and calculations which are performed on each order, position, trade or price change so that we can maintain mathematical consistency on a platform that allows for 100x leverage. We have a two-pronged strategy to solve for this unique problem that BitMEX experiences:
- Optimise as many existing functions as possible to obtain efficiency gains. We have been rolling out improvements weekly; however, that extra capacity is consumed very quickly as the demand increases to match engine performance improvements.
- Re-architect the engine from the ground up so that the aforementioned issues can be scaled horizontally which will allow for more products and more users without overload issues. This work is ongoing, it won’t be solved overnight, but we are working towards this goal.
I want to emphasise that we will not list any products that worsen engine performance until we increase capacity sufficiently.
Additionally, we are scrutinizing which API users cost us the most in resources. Further API rate limits on traders with non-optimal Quote / Trade ratios are forthcoming. I remember how hard I fought as a CEO to convince traders to provide liquidity on our platform. This action pains me deeply and further sharpens my focus on finding a solution to this problem so that anyone who desires to provide liquidity may do so.
Launching the UPs and DOWNs products does not mean that BitMEX has forgotten or ignored the overload issue. Rather, we must continue to launch and test new products within reason so that in a year’s time we have another wildly successful product like XBTUSD.
If you are a talented engineer who believes he or she has a solution to this problem, we want to hear from you / hire you. Please reach out to us via the careers page or email, and a senior member of staff will review your qualifications or suggestions.
– Arthur Hayes, CEO and co-founder
We have recently updated our Terms of Service to explicitly clarify the relationship between BitMEX the trading platform, and an affiliated entity that engages in market making.
BitMEX has a for-profit trading business that, among other things, transacts in products traded on the BitMEX platform. The trading business primarily trades as a market maker. The trading business is organised to be separate and distinct from the platform business. Specifically, no front office personnel are shared between the trading business and the platform, the trading business operates from a separate physical location, and the trading business does not have access to any platform order flow, execution, customer or other information on terms that are not otherwise available to any other platform user. In addition, unless otherwise set forth in the terms of a specific BitMEX product, the trading business receives access and trading privileges only on the same terms as are available to any other user.
Why Market Make?
Early on we discovered that market makers are very fickle. They only want to invest the time connecting to a trading platform that already has flow. What they don’t want to do is try out a new exchange where they must expend resources connecting only to have no takers. Given trades must be collateralised, this reduces their returns.
In order to entice others to provide liquidity, we funded an entity that would quote as soon as a new product listed. As the product became more liquid, this entity would scale back it’s quotes and focus on another product with lower liquidity on the BitMEX platform.
Right now the activity of this affiliated entity is concentrated on the altcoin contracts. XBTUSD and the quarterly Bitcoin / USD futures contracts have plenty of liquidity, and new market makers join every day to beef up those orderbooks. Mission accomplished … for now.
Being able to immediately support a new and illiquid product allows us to experiment with products that other platforms without an anchor market maker cannot. It also speeds up the process to obtaining other 3rd party liquidity providers.
How Do We Align Incentives?
The trading entity is a for-profit operation. However, their earnings are comprised of a service fee paid by the business, that is the BitMEX trading platform. In terms of trading PNL, the market making desk’s goal is to be breakeven.
If the desk is making too much trading PNL, the business will instruct them to tighten spreads and increase size. As a franchise, BitMEX succeeds because of greater trading volumes, not because of the market making desk’s trading PNL.
The market making desk earns the most if the exchange earns the most. That also means that dishonest and manipulative behaviour on the part of the market making desk is not tolerated. As you saw mentioned, the desk sits in a separate physical location. They also have no better information or access than any other trader on BitMEX. If traders feel that the platform is not fair, they will leave, and no one will get paid.
Our lead outside counsel is fully aware of the operation and advises us on best practices to ensure that we place the interests of BitMEX customers first.
What Activities Does The Desk Engage In?
The primary trading activity is providing two-sided liquidity on selected BitMEX products. The desk’s current focus is on increasing the liquidity on the altcoin contracts. The desk will also be the anchor market maker for the UPs and DOWNs products.
The desk also trades OTC with various counterparties globally.
As mentioned earlier, the desk does not engage in manipulative behaviour. The desk does not front-run customers. The desk does not manipulate either the market on BitMEX or the underlying exchanges for the purposes of stop loss hunting, or causing cascading margin calls.
None of this behaviour has occurred in the past, and if such behaviour is discovered, those responsible will be terminated immediately for cause.
Who Runs The Desk?
The head trader is Nick Andrianov. He is a former Deutsche Bank equity flow and exotics options trader. Nick and I have known each other for over ten years. His integrity is unquestionable.
Nick receives the business objectives from various senior members of BitMEX. The business and the market making desk work closely with the express goal to make every single BitMEX product as liquid as possible.
Trading losses incurred by the market making desk will not affect the solvency of the BitMEX trading platform.
As stated above, the market making desk sits within a separate entity. Their goal is to provide liquidity to BitMEX and the wider crypto capital markets.
– Arthur Hayes, CEO and co-founder
Hi there – I’m Samuel Reed, CTO of BitMEX.
It’s been an incredible journey over the last four years building BitMEX. When we started, I don’t think any of us could have imagined the success this platform would achieve or how it would come to dominate Bitcoin/USD trading in 2018.
From 2014 to today, the BitMEX platform has grown from zero to an average of $3B of trading volume per day. Our flagship product, XBTUSD, trades more than any crypto product in the world. We serve customers all over the world, in five languages, and have become the premier platform for Bitcoin price discovery and liquidity.
The BitMEX team has been hard at work improving capacity, building a solid mobile offering, and creating a tech team that is truly best-in-class. We are not resting on our laurels, enjoying this success for the sake of it. Quite the opposite: we’ve been busier than ever.
We’d like to let the community in on how we formed and how we’re moving forward. As was wisely said: “In order to defeat the bug, we must understand the bug.”1
I’ll begin with a true story.
In 2014, I was speaking at a web development panel in Hong Kong for General Assembly, a coding bootcamp. They wanted to give their soon-to-graduate students a taste of what it was like to work professionally. I took the opportunity to talk about my history: a career made of positions in several small businesses, startups, and government – with an emphasis on how incredibly in-demand software engineers are.
A rather loud personality in the back asked a question: “How do cash-poor startups looking for a CTO make a case? How do you attract great talent in such a competitive atmosphere?”
“Well, that’s a good question, and a tough answer,” I said. “Without funding, you have the challenge of a serious risk versus a sure thing. Why should any experienced developer forgo $200,000 or more at a large tech company, in a comfortable, resource-rich environment, to work 80 or more hours a week? You essentially have to find some bozo” – I really said this – “who believes in your idea so much he’s willing to take the risk despite so many better options.” I wished him good luck and we continued the panel.
He came up to me after the panel and told me he wanted to do a Bitcoin derivatives exchange. I knew then: I was that bozo, and Arthur Hayes and I were to become business partners.
Without any major funding, we brought an alpha online within six months and started with the BitMEX Trading Challenge, an no-rules trading competition where we put the exchange through its paces. And it really was no-rules (aside from multiple accounts) – hacking the site would win you the prize. We paid out a few Bitcoin in bug bounties in those days but we didn’t have any major failures.
Much to the annoyance of my wife, we launched BitMEX on during our honeymoon in Croatia, on November 24, 2014. Ben and Arthur celebrated separately, in Hong Kong. Notice the original trading interface in both photos. You can still read the original Trollbox messages from that day.
Building BitMEX, 2014
All projects are a product of the time in which they are built. In early 2014, the crypto ecosystem was reeling from the vacuum Mt.Gox left behind. The focus at the time was not “proof of work” vs. “proof of stake”, as it is today, but a forgotten term called “proof of reserves” – just Google it and look at the timestamps of all the popular posts. In fact, a question about this was the top-voted comment on our Reddit launch announcement.
The first rule of running a Bitcoin exchange is, and always has been, “Don’t lose the Bitcoin.”
This rule pervades everything we do at BitMEX. It permeates our policy, even today: we still use a 100% cold wallet where every transaction is multisig. Look up a 3BMEX transaction on the blockchain, and you’ll see it. For 1,250 straight days (!), at least two out of the three of us have gotten up, read the day’s withdrawals, done our risk checks, and signed, to be passed onto the next partner for signing and eventual broadcast.
At the time, I thought users would resist this. Yes, Bitcoin is better in so many ways than any monetary system that has come before it. But it is weaker too. Custodianship is an unsolved problem that requires constant vigilance. I think our customers know this and appreciate it. In our early days, we received a large number of complaints about withdrawal times. Today, where we are the largest exchange by volume in the world, we receive barely any. People get it – caring for your deposits this way is not easy. We do it not because it is convenient, but because it is safe.
The atmosphere in 2014 influenced how we built BitMEX. My frontend experience lead me to adopt ReactJS for the frontend. BitMEX was the first exchange to launch with it, a choice that has paid dividends well into 2018.
We were also the first – and likely still the only – exchange to build our matching and margining engine on kdb+/q, a technology traditionally used for querying of large-scale time-series data. It’s a natural fit. It’s fast (bear with me), using SIMD instructions to greatly boost throughput, it’s flexible, and it’s accurate. Kdb+’s flexibility and speed allowed us to pivot our product offerings twice: from low-leverage inverse and quanto futures to high-leverage ones, and from high-leverage futures to our flagship product, the XBTUSD Perpetual. We also pivoted loss-recovery mechanisms twice, from guaranteed settlement, to Dynamic Profit Equalization, to ADL.
BitMEX is a company known for listening to its customers and adapting. This required flexibility, innovation, and a lot of sweat equity from everyone on the team, and we’re so proud of how far it’s come.
Now, it wouldn’t be fair to come this far without addressing the title of this post. BitMEX now trades as much as US$6.5 billion per day. Our most recent 1-minute record was US$35 million, a number that is higher than the entire month of April 2016.
The following charts show monthly turnover in increasingly large timescales, to highlight detail completely lost in the overall view:
To understand why BitMEX is experiencing slowdowns, despite using a solid technology like kdb+, it’s important to understand what BitMEX does differently than other exchanges.
100x is a number that elicits a large number of reactions, ranging from “are you crazy?” to “how is this possible?” It is only possible due to incredible financial engineering from our co-founder and CSO Ben Delo. Ben is a diligent and brilliant mathematician. He built a perfect mathematical model for trading, a constantly-coherent system that continuously audits all trades and always sums to zero. Transactions don’t get lost in the BitMEX engine. A user’s balance never goes negative. There are entire classes of bugs that are common on other platforms that never occur on BitMEX, and it is that attention to detail that makes all the difference. Mark/Fair Pricing, the weighted ADL system, perpetual contract funding rates, and live isolated/cross remargining are all new, novel concepts that did not exist before BitMEX.
This consistent coherency inside the BitMEX engine makes 100x possible. Kdb+ has historically been fast enough that we can continuously remargin all positions upon each and every price change. This provides the safety and speed necessary to not only survive within the razor-thin requirements of 0.5% maintenance margin, but thrive. The BitMEX Insurance Fund, a fund that guarantees settlement of BitMEX contracts, contains (at the time of writing) an incredible 6,149 XBT, over US$50M. Competing firms have insurance funds in the single digits of Bitcoin, despite offering as low as only 20x leverage.
BitMEX won’t sacrifice safety for speed. The security of our users’ funds and confidence in their trades is paramount. But we hear all of you: you want to trade faster, you want freedom from “System Overload” messages, and we will give that to you.
Since late 2017, the BitMEX team has refocused on engine performance as our highest priority. We have built, and are continuing to build, a team full of the top professionals in the space. This team works hard, building capacity for the next 100x increase in trading volume.
In the second part of this series, I’ll explain in-depth:
- How the BitMEX engine processes orders and remargining
- How real-time messages flow through our system to your browser
- How BitMEX uses API-first design to provide the most powerful API in the business
- Performance charts showing hot-spots, peak versus baseline load, and corner-cases
- A breakdown of the dreaded “System Overload” message, and how it is generated
In the third part, I’ll also explain:
- Performance numbers showing how capacity has increased since 2017
- We have made large strides in the past months – but demand has increased to match
- Roadmaps and pending work for Q2
- BitMEX’s vision for the future of online derivatives trading
Thank you to all of you for being a part of BitMEX’s success. Ben, Arthur and I feel fortunate than to be a part of such a great company: our customers, team, and market opportunity are simply best-in-class.
Reach out to me directly on Twitter at @STRML_ and on Telegram at STRML. I also occasionally talk with traders on the Whalepool TeamSpeak, a fun community of traders that have given great feedback and encouragement to BitMEX for years.
1 – Starship Troopers was ahead of its time with its views on software development.
One of the most powerful and simple trading strategies is mean reversion. The XBTUSD swap features a funding rate that is exchanged between longs and shorts every 8 hours. The rate is calculated based the observed premium or discount of the swap over the spot index from the previous 8 hours. The lag between observation, announcement, and payment of funding gives this rate predictive power.
The intent of the funding rate is to entice traders to take the counter-trend position. If the market is falling, those trading with the trend will pay funding (shorts). If the market is rising, those trading with the trend will pay funding (longs). The trend is your friend until it ain’t. Anecdotally traders notice that the funding is elevated in absolute terms directly preceding a turn in the market’s direction.
Last September I presented a simple mean reversion funding strategy. If funding is high in positive terms, short XBTUSD right before funding is charged. Receive the funding payment, then cover the short position 8 hours later. If the funding is high in negative terms, go long XBTUSD right before funding is charged. Receive the funding payment, then close the long position 8 hours later. Depending on your criteria for when you put on this trade, there is a historically positive profit.
Armed with slightly longer than one year’s worth of data (March 2017 to April 2018), I have calculated the historical returns for this strategy. The trading triggers happen at one and two standard deviations away from the mean on the positive and negative side. The below are the results:
Sigma – This is the number of standard deviations away from the mean.
Count – For negative funding, this is the number of observations where the funding rate is below or above the Sigma for negative and positive funding rates respectively.
% Passes – This is the percentage of observations in the Count sample set where if the Sigma is negative, the next log 8-hour return is positive; or if the Sigma is positive, the next log 8-hour return is negative.
Cumulative Funding – This is the total amount of funding received from the observations in the Count sample set. If the Sigma is negative you will be going long XBTUSD and receiving funding. Therefore, even though the Cumulative Funding is listed as negative, you will receive this as income.
Cumulative XBTUSD Return – This is the sum of the next log 8-hour return of observations in the Count sample set.
Cumulative Return – This is how much you will earn from this mean reversion strategy. That is the funding income net of the return from the XBTUSD trades.
% of Total Observations – [Count / Total Number of Observations]
The most profitable range in this simplistic study is between the one and two Sigma absolute ranges. That fundamentally makes sense. If the funding is at the maximum, the counter-trend trade will very likely blow up in your face as the trend continues. Bitcoin, as readers know, is a very emotional market. The highs go higher and lows lower.
As the funding moderates during an extended rally or dump, that is when the tide is most likely to change. And that is when placing a counter-trend trade which receives the funding and direction change is the most profitable.
The more sophisticated statisticians amongst us can concoct much more advanced and nuanced mean reversion strategies centred around the XBTUSD funding rate. The data for the analysis I conducted are all freely available via our public API. This study is yet another proof that plenty of juice remains in the Bitcoin market for cool-headed analytical traders.
After a December to remember, crypto took a rough ride in the paddy wagon called the markets. The volatility was glorious, but for many, the gyrations negatively impacted their PNL. Bloodied traders, hedge funds, and ICO issuers litter the information highway. The El Dorado of uncorrelated returns still entices many to continue their journey in this new and exciting industry.
2, But No 20
Every day my LinkedIn inbox was filled with at least one new person announcing they were opening a crypto hedge fund. Various media outlets reported that by the end of Q1, a few hundred registered crypto hedge funds existed.
The vast majority of these funds are long only. Meaning these fund managers are overpaid beta chasers. Nothing wrong with the beta, but when you fool yourself into thinking you produce alpha, disastrous results ensue.
The investors who gladly handed over thousands and sometimes millions of USD, now stare at scarlet numbers that would make Hester Prynne proud. As I check in with some of my hedge fund manager friends, the fundraising process is going slower than expected.
The second class of slightly more sophisticated fund managers expected to arbitrage their way into Steven Cohen’s league. These managers proved more successful; however, some learned that your risk management in the crypto markets better be airtight or you will get REKT. All manner of bad luck greeted their lackluster returns. The inability to manage margin requirements on spread trades is one sure way to destroy a spread trade.
All in all, many newly minted John Paulson wannabe’s learned that it wasn’t so easy to trade crypto. The markets were volatile, seemingly random, and did not “behave” as they should or had.
ICO, A Dream Deferred
Every tech team now needs an ICO strategy. If the un-washed public will hand you hundreds of thousands of Ether on nothing more than a slick website and a plausible whitepaper you have to take their un-dilutive money. The flood of ICOs continues unabated, most of the 2017 vintage deals now trade below their ICO price.
I firmly believe that the ICO is a revolutionary way to fund technology projects. And the ICO should allow anyone with an internet connection and a few Satoshi or Ether to participate in the success of a project. However, the ICO has morphed into a private-placement orgy.
The ICO deals have gotten bigger, which necessitated the creation of the Sale of Future Tokens (SAFT) monstrosity. Teams bypass the small individual investors who used to participate in public ICO issuances for private deals conducted through SAFTs. Telegram has raised over $2 billion via SAFTs issued to professional investors. Good on them, but we should not consider that a real ICO.
Traditional VC investors love the SAFT because it closely resembles the traditional Series Alphabet soup. The SAFT achieves the liquidity event very quickly, meaning they can dump their paper on retail investors in the secondary market. However, there is just too much token toilet paper for the market to absorb. The ICO market slumped and took its god Ether with it.
Many newly minted token investors will find that without the support of retail, they are just passing a hot potato along Sand Hill Rd. Unfortunately for their bonuses, these hot potatoes are marked to market almost immediately and could end up costing them percentage points of returns.
This is not an “ICOs are dead” market call, but rather for ICOs to regain their former glory, they need to go back to basics. The teams that can say no to SAFT, and actually launch a fair and widely distributed public token sale, will revive the market. There are still projects that will do extremely well, but most of these tokens are and always will be dog turd.
Trading All Markets
The financial media loves crypto; there’s pathos and a cast of very interesting characters (I’m loving Brock Pierce’s hats). Readers searching for the next get rich quick investment devour any and all crypto coverage. PSA: if you need to read Bloomberg to figure out what happened in crypto, don’t quit your non-crypto day job.
There are any number of reasons why the market plunged from $20k to $6k in Q1. US tax-related selling, regulatory FUD, the ICO slump, weak hands capitulating, are all plausible reasons. These combined with the simple fact that an asset that goes up 20x in one year is certainly due for a meaningful correction.
No financial reporter will accept the simple reason that nothing goes up or down in a straight line. There must always be a reason, and they print all manners of gobbledygook if it sounds plausible to their editor.
The best crypto traders can trade both bull and bear, and furthermore both trending and choppy markets. However, I have encountered very few of these specimens. Most successful traders learn their style and if the current market structure doesn’t fit, they take a break.
The market is in chop mode. After $10,000 thunderously fell, the market traded in a $6k to $10k range. The beauty of Bitcoin is that the range is very large, and moves sudden. For disciplined traders, this chop is a gold mine.
For those who thought merely sitting in a Telegram chat room, or reading /r/bitcoinmarkets was sufficient to generate mad gains, SFYL. What keeps traders coming back to the market is that hard work is actually rewarded. This is truly the only real free asset market globally. That should excite any student of the markets, and student one must be if you want to drive a Lambo and order trains of Dom P.
P.S. If you don’t know what a train is, order one at the club, and watch your heart skip a beat when presented with the bill.
Onward to The Elysian Fields
Before one departs for the Hamptons, French Riviera, or Bali, another quarter awaits. Q1 was the carnage, Q2 will be the consolidation.
The regulators spooked us, the drops nuked us; but after all of that $5,000 was not breached. Bitcoin is still here, the markets are still volatile, and more people than ever before know what a cryptocurrency, digital token, and or ICO is. That is a net positive.
Many exchanges now have more registered users than the stock exchange in their domicile. The demand to trade these markets surpasses the capacity of exchanges. Crypto is not going anywhere, and those who are completely comfortable in the digital arena will continue to prefer crypto investments to equities and fixed income.
I don’t know where the price will be in the next three months, but my spidey sense tells me a sentiment shift is occurring. The next test will be $10,000. Can we hold, and for how long? Then the journey back to $20,000 can continue.
We look at Bitmain’s new Ethereum miner and notice that it may be less energy efficient than one might expect for an ASIC. We explore the possibility that this miner contains a new more advanced form of technology, which is less efficient than ASICs, but potentially partially immune to PoW algorithm changes. We then conclude that whether this particular Ethereum chip is capable of this or not, this type of technology may eventually end the era of anti-ASIC PoW changes designed to improve decentralisation, such that crypto-coin communities may have to accept the inevitability of ASICs.
Bitmain have recently launched a new Ethereum miner, widely believed to be an ASIC, and it is expected to ship in late July 2018. However, many in the Ethereum community oppose ASICs and prefer GPU mining, since GPU companies are primarily concerned with gaming rather than crypto-coins, which should mean that the hardware is distributed more widely and fairly, improving decentralisation. Therefore a risk to Bitmain could be that the Ethereum community decide to hardfork to change the PoW algorithm, which could devalue the Bitmain machines and result in a large wasted investment.
In this report, we speculate that Bitmain may already be one step ahead of the Ethereum community. Bitmain may have already learnt a lesson with Monero, two coins which recently conducted PoW changes, potentially resulting in large devaluations of Bitmain’s ASIC chips. Developing a custom chip requires a considerable financial investment and therefore we think Bitmain may have taken some countermeasures to avoid another loss. Bitmain could have designed a new type of mining chip, less efficient that ASICs, but immune to PoW changes. This could make an Ethereum hardfork PoW change mostly pointless.
The recent Monero anti-ASIC PoW change
At the start of April 2018 the Monero community decided to hardfork and change the PoW algorithm, in an attempt to “brick” ASICs and make Monero more GPU-friendly. Due to sharp increases in hashrate, illustrated by Figure 1 and 2 below, the Monero community believed that ASIC manufacturers had developed Monero ASICs, in secret, and were mining the coin.
As Figure 2 shows below, the rolling 90-day hashrate growth rate reached c. 300% in the early part of 2018 (based on 7-day rolling averages). Even after factoring in the sharp increase in value of the Monero coin, this is an extraordinary growth rate. After Monero developers announced plans for a hardfork, Bitmain began to sell Monero ASICs on their website, indicating that they could indeed have been mining in secret. After the PoW change, as Figure 1 shows, the Monero hashrate dropped off significantly.
After the hardfork, the Monero chain split into two, with the original rules coin being called Monero Original (XMO). Although this coin had a lower value than Monero, it had a higher hashrate, since there was little else for the Monero ASICs to mine. There was no replay protection implemented for the split, however Monero increased the ring signature limit, therefore one can split Monero and Monero Original by first initiating a transaction on the Monero Original chain with fewer ring signatures than are allowed on Monero (less than 7).
Figure 1 – Monero hashrate compared to Monero price
Source: Coinmarketcap, BitMEX Research
Figure 2 – Monero hashrate compared to Monero price – Rolling 90-day percentage growth of 7-day moving average
Source: Coinmarketcap, BitMEX Research
Note: In the 7 days following the PoW hardfork, the hashrate rolling average excludes the period prior to the hardfork
Bitmain’s new Ethash miner
As we mentioned above, Bitmain has recently launched a new Ethereum miner, which is expected to ship around late July 2018. Given the history with Monero and the fact that many in the Ethereum community, including those mining Ethereum at home on GPUs, are likely to be unhappy at a new Bitmain product, Bitmain may be concerned. One downside to the new miner could be increased miner centralization, but in addition to this, the product may also receive hostility from some in the Ethereum community due to their financial interests in the existing Ethereum miners, GPUs. Bitmain’s management is not stupid, and therefore in our view the company is likely to act with caution and may have taken measures to mitigate against some of these risks.
Figure 3 – Bitmain’s new Ethereum miner: the Antminer E3
- Power consumption: 800W
- Hashrate: 180MH/s
The advertised specification of the product is disclosed above. As the table below illustrates, a back -of-the-envelope calculation could imply this new Ethereum miner is less efficient than one would expect if it was an ASIC, based on comparisons with the efficiency gain measured on some of the other ASICs related to other coins. For instance a Bitcoin ASIC is c. 521x more efficient than an FPGA, while the Monero ASIC is c. 88x more efficient than a GPU. In contrast the new Ethereum miner is only c. 1.4x more efficient than a GPU. This could indicate that the new Ethereum miner is not an ASIC at all, but merely a new device more efficient than the existing GPU miners. However, we appreciate that the below table is a crude approximation which ignores many crucial variables and factors, such as the memory-intensive nature of the Ethereum mining algorithm. But although the calculation is inaccurate, the figures can still potentially illustrate a point:
Figure 4 – Approximate miner efficiency calculations
|Miner||Hash rate (GH/s)||Power (W)||Energy per hash (J/GH)|
|High end GPU||0.5||300||600|
|High end ASIC||14,000||1,340||0.096|
|High end GPU||0.032||200||6,250|
|High end GPU||0.0000001||200||2,000,000,000|
Source: BitMEX Research, Bitmain
Note: Figures are approximations
Mining chip types & Vector processors (VPs)
As Figure 5 below illustrates, when Bitcoin launched in 2009, mining was conducted using CPUs. However, the architectures of GPUs and FPGAs are more efficient at processing repetitive hash operations. Therefore the network shifted, first to GPUs and then to FGPAs. In 2013, ASICs designed for specific hash functions emerged. Compared to CPUs, GPUs and FPGAs, ASICs are far more efficient at running a particular algorithm, however excluding this, ASICs are far less efficient or actually totally useless.
Figure 5 – Crypto-coin chip type timeline
Source: BitMEX Research
Note: The inclusion of Vector Processors (VPs) towards the end of 2018 is speculative
It might be possible that Bitmain has developed a new type of chip, a Vector Processor. The architecture of this chip could be designed for PoW hash functions in general, but not for a specific hash function. These chips could then be more efficient than GPUs and FPGAs, but less efficient than ASICs. The advantage over ASICs is that they could be, in some respects, immune to PoW changes. It is possible that the new Ethereum miner falls into this category of chip, although this is mostly speculation on our part.
Figure 6 – The evolution of crypto-coin chip types
|Chip type||Central Processing Unit (CPU)||Graphics Processing Unit (GPU)||Vector processor (VP)||Application Specific Integrated Circuit (ASIC)|
|Example crypto-coins||Bitcoin (BTC) – 2009 to 2011||Bitcoin (BTC) – 2012 to 2013
Ethereum (ETH) – 2018 onwards
Bitcoin (BTC) – 2014 to present,
Global Foundries, SMIC
|Primary use||Computing||Gaming||Crypto-coin mining||Crypto-coin mining|
|Immune to PoW change||Yes||Yes||Potentially||No|
It is possible that Bitmain’s new Ethereum miner is tailored for Ethash, in that the components inside the miner such as the electric circuits, power control devices, memory and control modules could all be specifically calibrated for mining Ethereum. However the chip itself, which is the area that requires by far the most financial investment, could be more general and not specifically designed for Ethereum. Therefore if Ethereum conducts a PoW change, it could be possible to direct the chips into a new device as they leave the foundry or perhaps even recover the chips from the old device put them into a new Ethereum miner. Although again, at this point we are speculating.
Artificial Intelligence (AI) technology
At TSMC’s latest set of quarterly results on 19th April 2018, Co-CEO Mark Lie said the following:
[Bitmain] is doing a lot of things on blockchain technology, like AI. They are doing very well. We expect them to slowly move to the AI area.
Source: Q1 2018 earnings call
“AI” is a term with many meanings. Although at this point the situation is unclear, it is possible that any new Vector Processor chips could be what TSMC mean by AI technology. Since any such chip may be able to switch between hashing algorithms, at a stretch, one could argue this falls within the scope of AI. It remains to be seen if the chip is merely programmable, like modern GPUs, or if there is a trick up its sleeve that could give it an efficiency gain vs. GPUs in most cases. If present, this advanced technological capability is likely to be seen as a major achievement for Bitmain. Such technology may also be even more expensive to develop and more specialised than the technology in ASICs, which could make the decentralisation problem even worse.
Ethereum hashrate growth – No evidence of deployment of the new chips
Despite the above, we have not yet seen any strong indications of the deployment of the new chips on the Ethereum network. As Figures 7 and 8 below indicate, Ethereum’s hashrate appears, broadly speaking, to be following a normal trend given the price volatility.
Figure 7 – Ethereum hashrate compared to Ethereum price and NVidia GPU sales
Source: Bloomberg, Etherscan.io, Coinmarketcap, Nvidia, BitMEX Research
Figure 8 – Ethereum hashrate compared to Ethereum price – Rolling 90-day percentage growth of 7-day moving average
Source: Bloomberg, Etherscan.io, Coinmarketcap, BitMEX Research
When discussing the possibility that Bitmain’s new Ethereum miner isn’t an ASIC and that the new chip may be somewhat immune to PoW changes, Vitalik Buterin told us:
I have a very similar impression myself
Despite what we have said above, most of the content in this article should be considered guesswork. However, even if we are wrong about this particular chip, we still think it is reasonably likely that at some point in the future, Bitmain or another company, will develop a general-purpose hashing chip, which is more efficient than GPUs for almost all hashing algorithms. At this point the era of anti-ASIC PoW changes could be over, with crypto-coin communities having to make a choice between two potentially unfavourable outcomes:
- Allowing ASICs, or,
- Allowing general purpose hashing chips, where technologies and production capabilities could be even more concentrated.
Unless of course proof-of-stake systems prove robust enough.
Whilst many claims made in this note are cited, we do not guarantee accuracy. We welcome corrections.