Bitcoin / USD Swap Funding Rate Calculation Changes

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

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

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

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

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

New Protections for BitMEX Indices

Traders,

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

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

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

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

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

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

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

Example 1 (3-Exchange Index):

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

Example 2 (2-Exchange Index):

Tolerance: 25%

Time 0:

Exchange A Price: 100

Exchange B Price: 100

Published Index Price: 100

Time 1:

Exchange A Price: 100

Exchange B Price: 50

New Calculated Index Price: 75

Last Published Index Price: 100

New Published Index Price: 100

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

Time 2:

Exchange A Price: 50

Exchange B Price: 50

New Calculated Index Price: 50

Last Published Index Price: 100

New Published Index Price: 50

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

Example 3 (1-Exchange Index):

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

Example 4 (Downtime):

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

The Rock Is In The Building

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

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

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

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

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

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

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

Baby Got BOOST

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

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

TLDR

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

Let’s Assume It’s True

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

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

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

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

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

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

The Market Hath Spoken

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

无限期拘留

对冲基金兄弟1号徐翔,如上图所示,曾经是一个高飞的对冲基金经理,从来没有输过。有一天,他失踪了。他被控证券欺诈后,现在坐在监狱,并在他几个月后复出。一些人担心比特币交易所负责人可能面临同样的命运。 但是,人民银行显示了怜悯。

另一周,中国人民银行和中国大型比特币交易所负责人之间的另一次“会晤”。 3月7日会议后不久,人民银行发表声明,重申他们有权关闭他们认为不当的交易所。

几天后,财新上就出现了可采取行动的罪行清单。 [News.bitcoin.com]

禁止以下活动:

  • 提供杠杆和保证金交易。
  • 使用零手续费操控市场及假冒交易。
  • 违反反洗钱法律。
  • 违反关于外币管理和跨境资本转移与比特币的规定。
  • 通过使用比特币代替商品购买商品。
  • 逃税。
  • 参与诈骗广告或参与庞氏计划。
  • 提供没有许可证的金融服务,包括信贷,证券和期货交易。

在“友好”会议后,宣布无限期暂停比特币提款。 没有进一步提示何时恢复比特币提款。 价格下跌了一点,然后就被忘掉。 到上周末,比特币将以美元计算,创下新高。

中国监管机构认识到,他们不能关闭交易所。 关于上述交易所,一位监管机构注意到:

如果采取过度简化的措施,如关闭它们,投资者将被带入更难以控制的地下黑市或 OTC市场。 因此,有必要探索建立长期监管机制。[News.bitcoin.com]

新的战略是饿死弱者,规管强者。这个典型的中国式策略。政府允许行业在一段时间内不受阻碍地竞争,然后他们挑选最强的公司,通过拒绝批准关键许可证或执行不透明的法规来破坏其余的公司。

通过取消杠杆和零费用交易的灵丹妙药,只有具有多元化业务线的交易所才能生存。 现货收益比特币交易只对最大的交易所(BTCC,Huobi 和 OKCoin)有利。 不在该列表上的交易所将很可能 2018 年前消失。

所有这三个交易所都有采矿业务,支付解决方案和或离岸衍生品交易市场。 一旦弱势重叠,中国人民银行将保护大型在职者,并对他们进行严格监控。

从较长的时间来看,过去三个月的发展是积极的。但是比特币不会被监管机构“禁止”。 他们认识到底层技术的力量,并试图在现有的中国货币体系目标范围内使比特币合理化。

中国央行行长周在最近的一次采访中表示,中国比特币交易平台不是交易所,而只是“网站”。

(交易平台/网站)只能在被部门允许之下称为交易所。 许多人认为比特币在线交易平台作为交易所。 这些实际上是两个不同的概念。

[News.bitcoin.com]

目前的炼狱将会在中国人民银行的调整过人民币后结束。平静必须保持到10月全国代表大会。10月以后,北京将开放中国人民银行,缓解压力和贬值。在大幅贬值后,中国人民银行可以放松资本管制,届时逃离的中国资本控制的动力就会减少。 届时比特币提款将重新启用。

向前和向上

“如果你惹到公牛,他的角将会迎你而来!”

德意志银行(Deutsche Bank)销售交易柜台的总经理曾经在每次市场走高时尖叫。就算工资不够固定收入部门的多,因为股票部门聘用了这些行业大牛, 在投行里还是很吸引的。

你会怎样看没有中国及 ETF 支持的比特币?历史新高。两个最核心看涨的因素跑了,但比特币仍然在 1200 美元以上交易。

可能导致价格下跌的下一个议题是正在进行的辩论。Segwit 与 BU 的内战不仅在网路小白间口耳相传,而且走到主流金融新闻网站如彭博上。 但无论如何,价格继续缓慢攀升。

在 Mt. Gox 的历史高位之后,我们正处于慢牛行情的序幕。这个慢牛行情将完全重新评估整个加密货币的币值。以太币的市值已经超过 20 亿美元,达世币也将会继续创新高。三个共超过 10 亿美元市值的山寨币是值得关注的。为山寨币喝采。

令人鼓舞的是,在2017年的比特币上涨中,实现波动性是减弱了。 上图显示了 30 天实现的波动率和 比特币/美元 价格。当中国人民银行首次打击时波动增强,但当比特币价格站稳 1200 美元后,波动率就继续下跌。

对于比特币,这个牛市是平静的。不少投资者仍缺乏信心。当价格继续攀升,怀疑论者会因为中国,监管机构扩大和缺乏合法性继续质疑着比特币。但当他们蓦然回首的时候,别人已经发财了。所以,错过几个亿(追多情绪,也称为 Fomo)的阶段其实言之尚早。

另一个令人鼓舞的是期货合约所反映的相对较低的基差水平。 在第一季度,BitMEX 比特币/美元 期货合约 XBTH17 (2017 年 3 月 31 日到期),曾以高达 10% – 13% 的基差水平来交易。

在 2013 年泡沫期间,ICBIT 的 2014 年 3 月季度期货,尽管只有3倍的杠杆,在 2013 年 12 月底居然以 100% 的基差交易。之后旋即崩盘,价格跌破 1000 美元,然后 800 美元,直到 600 美元,进入了整整两年的寒冬。

自那时起,市场已经成熟。然而,追多情绪将在 2017年 6 月 30 日 期货合约 XBTM17 的基差反映。即使有正向套利者持续的抛压,这个基差还是可以变的非常高,因为多军会使用 100 倍杠杆。

30 天实现波动率持续地超过 100%,加上在 XBTM17 超过 30% 的基准水平,将会是比特币能否在第二季度打下稳定基础的指南针。随着价格波动上涨,我们下一个的上行心理关口是 2,000 美元。

不就是不

零售比特币 ETF 被证明是难以进入监管领域。美国证券交易委员(SEC)会发出了严厉的斥责,解释他们为什么不允许 Bats 改变交易所规则以允许 COIN ETF 挂牌。美国证监会给出的拒绝理由显示出比特币市场结构上的根本问题。

阅读文档后,很明显,SolidX 和 GreyScale ETF 的申请也会直接发往垃圾箱里。要改变一个监管机构的思维不是一朝一夕。 所以在美国挂牌的比特币 ETF 不会在短期内出现。

 

各国比特币交易所及其交易量

COIN ETF 每日的资产净值是使用每日 Gemini 比特币拍卖价格计算。要申购和赎回单位,授权参与者(AP)必须在拍卖中交易。

美国证监会主要的质疑是该平台的拍卖交易量并不足以维持交易。

转载自美国证监会:

此外,Gemini 交易所的自我报告统计数据显示,Gemini 交易所拍卖的数量相对于比特币的每日交易量以及信托基金申购或赎回篮子中所需要的比特币数量都小。截至 2017 年 2 月 28 日,Gemini 交易所自2016 年9 月21 日成立以来拍卖的平均每日交易量为 1195.72 比特币,而截至 2017 年 2 月 28 日前的 6 个月内,每日全球平均交易量却为 340 万比特币。截至2017 年2 月28 日,在一个工作日的Gemini 拍卖的比特币交易额中位数只有 1,061.99 比特币(如果需要向信托基金提交一个申购或赎回的要求),相比在申购或赎回篮子里 1000 比特币仅多出 129 个。

Gemini 的交易量非常低,他们仅能处理一个申购或赎回篮子。 AP 在 Gemini 无法得到流动性,就被迫在其他交易所交易。这些 “其他” 交易所的所在地却使美国证监会犹豫。

注册于以及受美国监管的交易所占全球比特币/美元现货交易量比较小。流动性最大的交易所都在亚洲或欧洲。不过,Bitfinex 作为最大的比特币/美元现货交易所现在资不抵债。这些事实使美国证监会感到困扰。

当局担心大多数交易量发生在“不受监管”(即:非美国的)交易所,会对 ETF 投资者构成危险。当局提及他们没法对这些主要交易所进行监测。

即使 Gemini 交易所拥有由纽约州金融服务局监管的信托牌照,美国证监会发现 Gemini 交易所的交易其实并不符合国家交易所(如纽约证券交易所或纳斯达克)规则和程序。

转载自美国证监会:

交易所表示,它已经与 Gemini 交易所就基金信托的比特币资产交易达成了全面的监督共享协议,Gemini 交易所会由纽约州金融服务局监督。此外,交易所在其评论信中声明,“同意流动性较低的市场,比如比特币市场,可能更容易被受操作,但认为…这些担忧被减轻,因为它涉及 Gemini 交易所基金信托的股票以及其交易活动“。然而,如下所述,委员会不认为这种监督共享协议是足够的,因为 Gemini 交易所只占世界比特币交易里的一小部分,而且 Gemini 交易所也不是相对于国家证券交易所或与迄今已批准的商品信托ETP 标的资产相关的期货交易的一个 “监管市场”。

 

下一步

要再一次申请,ETF 申请人必须证明他们的现货比特币交易所的监管是如何能够与大型及公认的交易所如纽约证券交易所相提并论,并在全球拥有显着的市场份额。这几乎是不可能的。

如果比特币交易员希望看到一个监管严格的交易所,他们就会选择纳斯达克,而不会选择一个资不抵债的机构进行交易。许多大型比特币交易者交易比特币主要原因正是因为交易平台的监管相对较少。 他们相信运营商被可以更多地关注客户体验,准确地提供交易者期望的,而不是烦人的监管机构。

一个被严格监管的美国交易所,既没有保证金制度,也缺乏其他杠杆交易产品,意味着他们的交易将永远屈居亚洲和欧洲。考虑到美国国家监管机构的 “美国是最好的” 心态,说服他们允许一个资产的价格是由“诡诈的中国”设定的是一个艰巨的任务。

然而,这不是末路。其实美国证监会和其他组织只是大型金融参与者的木偶。当比特币成长到不能被忽视,每日交易量也是稳健的时候,ETF 基金管理行业的 iShares,Vangaurd 和 SPDR 将支持比特币 ETF。

这些大型公司只关心赚钱,并不会考虑其标的资产。当比特币足够支持一个稳健的 AUM (资产管理规模) 并产生大量管理费的时候,他们将会加入比特币。

不幸的是,Winklevoss申请最大的问题是它的局外人状态。美国证监会提出的反对意见很容易适用于任何当前上市 ETF。 如果基金经理老老实实,这个 ETF 其实是有机会获得批准。

投资者交易所有限责任公司(IEX)曾经申请并获得美国证监会批准成为指定国家交易所。这不是一个容易的过程。 IEX,在 Michael Lewis 的书 “Flash Boys” 中写道,旨在通过制定政策以平衡低和高延迟交易者之间达到公平竞争。当时高频交易 (HFT) 大厅马上跑到美国证监会去阻止 IEX 的申请。

IEX 提供散户投资者在 HFT 公司面前一个公平的竞争环境。谁不想帮助老婆婆老爷爷?然而,这曾经是一个非常激烈和漫长的批准过程。最后, 美国证监会做了正确的事情, 却惹怒了一群金融大亨。

但试想象一下,如果这群金融大亨希望比特币 ETF 出现,是垂手可得的。

美国证监会裁决

 

 

Onwards and Upwards

“If you mess with the bull, You get the horns!”

A managing director on the sales trading desk at Deutsche Bank used to scream that out when the market ripped higher. Equities almost makes up for the lack of pay vs. fixed income by employing some of the most colourful characters.

What do you call Bitcoin sans China or an ETF approval? All Time High. Two of the most central bullish tenants have been removed, yet Bitcoin still trades above $1,200.

The next issue that could crater the price is the ongoing scaling debate. The Segwit vs. Bitcoin Unlimited civil war is spoken of not only where internet trolls hide, but also in mainstream financial news outlets such as Bloomberg. No matter, the price continues to slowly grind higher.

With the Mt. Gox all time high surpassed, we are in the beginning stages of a secular rally. This rally will completely re-rate the entire cryptocurrency complex. The Ether market cap is now over $2 billion. DASH continues to rip higher. Three cryptocurrencies with >$1 billion market caps would be something to behold. All hail Shitcoins.

What is encouraging about the 2017 Bitcoin rally is that realised volatility is muted. The above chart displays the 30 day realised volatility and the XBT/USD price. Volatility rose during the initial PBOC crackdown, but then continued to fall as the price surpassed $1,200.

For Bitcoin, this rally was calm. Traders are still in disbelief. While the price continues to crawl higher, haters keep hatin’ because of China, scaling, and or lack of legitimisation by regulators. While they wait, others get rich. As a result, the crack up boom (aka Fomo) phase has yet to begin.

Another encouraging sign is the relatively low basis level exhibited by futures contracts. During the first quarter, the BitMEX Bitcoin / USD 31 March 2017 Futures Contract, XBTH17, traded with a maximum outright basis of 10% – 13%.

During the 2013 bubble, the ICBIT March 2014 quarterly future, featuring only 3x leverage, traded at a 100% outright basis at the end of December 2013. Shortly thereafter, the price crashed below $1,000 then $800 then $600, and finally we entered a nuclear winter for two years.

The market has matured since then. However, the market fomo will manifest itself in a sky high basis for the soon to be listed 30 June 2017 futures contract, XBTM17. Basis even with constant selling pressure from cash and carry arbitrageurs, can and will go substantially high due to 100x leverage engjoyed by longs.

A sustained 30 day realised volatility over 100%, and elevated outright basis levels of over 30% on XBTM17, will provide clues during the second quarter as to whether Bitcoin’s run is nearing completion. As the intensity of price action accelerates, the next upside physiological barrier is $2,000.

No Means No

A retail Bitcoin ETF is proving as elusive as entrance into the Elysian fields. The SEC issued a scathing rebuke as to why they disapproved a Bats exchange rule change that would have allowed the COIN ETF to list. The reasons for denial given by the SEC display a fundamental problem with the market structure of Bitcoin.

After reading the document, it is clear that the SolidX and Greyscale ETF applications are destined for the dustbin as well. Changing the thought process of a regulatory body takes years. A US-listed Bitcoin ETF will not be forthcoming any time soon.

Bitcoin Exchanges and Trading Volume

The COIN ETF daily Net Asset Value is calculated using the daily Gemini Bitcoin auction price. To create and redeem units, Authorised Participants (AP) must trade in the auction.

The SEC’s major issue with the application was that the auction volume was insufficient to support trading.

From the SEC:

Moreover, self-reported statistics from the Gemini Exchange show that volume in the Gemini Exchange Auction is small relative to daily trading in bitcoin and to the number of bitcoin in a creation or redemption basket for the Trust. As of February 28, 2017, the average daily volume in the Gemini Exchange Auction, since its inception on September 21, 2016, has been 1195.72 bitcoins, compared to average daily worldwide volume of approximately 3.4 million bitcoins in the six months preceding February 28, 2017. Also, as of February 28, 2017, the median number of bitcoins traded in the Gemini Exchange Auction on a business day (when a creation or redemption request might be submitted to the Trust) has been just 1,061.99 bitcoins,129 barely larger than the 1,000 bitcoins in a creation or redemption basket.

Gemini’s volumes are so low they barely can transact one creation or redemption basket. Unable to obtain liquidity on Gemini, AP’s would be forced to transact on other exchanges. The location of these “other” exchanges gave the SEC pause.

US-based and regulated exchanges account for a relatively small percentage of global Bitcoin / USD spot trading volumes. The most liquid exchanges are based in Asia or Europe. Bitfinex, the largest Bitcoin / USD spot exchange by volume, is insolvent. These facts are troubling to the SEC.

The agency worries that the majority of trading volume occurs on “unregulated” (read: Non-US domiciled) exchanges and this could endanger ETF investors. The agency cited inadequate surveillance of the major trading centers.

Even though Gemini has a trust license and is overseen by the NYDFS, the SEC found that even Gemini’s exchange was not on par with national exchanges such as the New York Stock Exchange or Nasdaq in terms of trading rules and procedures.

From the SEC:

The Exchange represents that it has entered into a comprehensive surveillance-sharing agreement with the Gemini Exchange with respect to trading of the bitcoin asset underlying the Trust and that the Gemini Exchange is supervised by the NYSDFS. Additionally, the Exchange states in its comment letter that it “agrees that less liquid markets, such as the market for bitcoin, may be more manipulable, but believes that … such concerns are mitigated as it relates to the Shares of the Trust and trading activity on the Gemini Exchange.” As explained below, however, the Commission does not believe this surveillance-sharing agreement to be sufficient, because the Gemini Exchange conducts only a small fraction of the worldwide trading in bitcoin, and because the Gemini Exchange is not a “regulated market” comparable to a national securities exchange or to the futures exchanges that are associated with the underlying assets of the commodity-trust ETPs approved to date.

Next Steps

In order to be in the running again, an ETF sponsor must demonstrate how the proposed venue for the trading of physical Bitcoin is regulated on-par with large established exchanges such as the NYSE, and has a significant market share globally. That will be almost impossible.

If Bitcoin traders desired heavily regulated exchanges, they wouldn’t prefer trading on an insolvent exchange over one registered with various alphabet letter agencies. Many large Bitcoin traders trade Bitcoin expressly because the trading venues are less regulated. They believe the operators are allowed to focus more on the customer experience and provide exactly what traders desire instead of fluffing regulators.

The absence of margin or other leveraged trading products on heavily regulated US-based exchanges means they will forever play second fiddle to Asian and European exchanges. Given the “America is the best” mentality of its national regulators, convincing them to allow an asset whose price is set by the “shifty Chinese” (insert the international boogiemen of the year) is a tall order.

However, this is not a death sentence. The SEC and other organisations are puppets of the large vested financial players. At the point when Bitcoin is too large to ignore, and daily trading volumes are robust and healthy, the iShares, Vangaurd, and Spdr’s of the ETF fund management industry will sponsor a Bitcoin ETF.

These heavyweights only care about generating fees. The underlying asset is an afterthought. When Bitcoin is large enough to support a healthy AUM that generates large management fees, they will get behind Bitcoin.

Unfortunately the biggest problem with the Winklevoss’ application was their outsider status. The objections put forward by the SEC could easily apply to any number of currently listed ETFs. If the fund manager was one of the good ‘ole boys, the ETF would stand a chance of approval.

The Investors’ Exchange LLC (IEX) applied and was approved to be designated a National Exchange by the SEC. This was not an easy process. IEX, written about in the Michael Lewis’ book Flash Boys, aims to level the playing field by enacting policies that equalise trading between low and high latency traders. The HFT lobby went into overdrive to dissuade the SEC from approving the IEX application.

IEX gives retail investors a level playing field against HFT firms. Who doesn’t favor leveling the playing field for the grannies and grandpa’s. However, this was a very heated and drawn out approval process. The SEC did the right thing in the end, but the big boys brought out all the guns.

Imagine if the big boys wanted a Bitcoin ETF. They would get it.

SEC Ruling

Indefinite Detention

Hedge Fund Brother No. 1 Xu Xiang, pictured above, was once a high flying hedge fund manager who never lost. Then one day he was disappeared. He resurfaced months later, after being convicted of securities fraud and now sits in jail. Some feared Bitcoin exchange heads could face a similar fate; however, the PBOC showed mercy.

Another week, another “meeting” between the PBOC and the heads of large Bitcoin exchanges in China. Shortly after the meeting held on March 7th, the PBOC released a statement reiterating that they have the authority to shut down errant exchanges. A list of actionable offences surfaced a few days later via Caixin. [News.bitcoin.com]

The following activities are prohibited:

  1. Offering leverage and margin trades.
  2. Producing fake volume and manipulating the market using zero fees.
  3. Violating AML laws.
  4. Violating regulations on foreign currency management and cross-border capital transfer with bitcoin.
  5. Replacing fiat by using bitcoin to purchase goods.
  6. Tax Evasion.
  7. Engaging in false advertising or participating in Ponzi schemes.
  8. Providing financial services without a permit, including credit, securities, and futures trading.

After the “friendly” meeting, exchange after exchange announced an indefinite suspension of Bitcoin withdrawals. No further guidance was given as to when Bitcoin withdrawals would resume. The price sagged a bit, then shrugged off the news. By the end of last week, Bitcoin would hit fresh all time highs in USD terms.

Chinese regulators recognise that they cannot shut down the exchanges. Regarding said exchanges, one regulator noted:

If oversimplified measures such as closing them down were taken, [investors] will be led into the underground black market or OTC markets, which are more difficult to control. Therefore, it is necessary to explore the establishment of long-term regulatory mechanisms. [News.bitcoin.com]

The new strategy is to starve the weak, and regulate the strong. This strategy is classic China. The government lets an industry compete unimpeded for a time, then they pick the strongest companies and destroy the rest through denial of critical licenses or enforcement of opaque regulations.

By removing the elixir of leveraged and zero fee trading, only exchanges with diversified business lines will survive. Earnings from spot Bitcoin trading will only be significant for the largest of exchanges (BTCC, Huobi, and OKCoin). Exchanges not on that list, will most likely not exist in 2018.

All three of those exchanges either have mining operations, payment solutions, and or offshore derivatives trading markets. Once the weaklings fold, the PBOC will bless the large incumbents and subject them to rigorous monitoring.

Viewed on a longer time frame, the developments over the past three months are positive. One of the Damocles swords hovering over Bitcoin slowly is being removed. Bitcoin will not be “banned” by the regulators. They recognise the power of the underlying technology and are attempting to rationalise Bitcoin within existing goals for China’s monetary system.

PBOC Governor Zhou in a recent interview stated that China Bitcoin trading platforms are not exchanges but rather only “websites”.

If it (trading platform/website) is called an exchange, it is not allowed unless a relevant department of our country permits it. Many people regard bitcoin online trading platforms as exchanges. These are actually two different concepts. [News.bitcoin.com]

That is encouraging that the PBOC permits mere “websites” to accept deposits like banks, and offer the trading of currency like an exchange. There is a bright future for Bitcoin in China for those who can survive. The PBOC tacitly approves Chinese people trading Bitcoin.

The current purgatory will end once the PBOC right sizes the Yuan. Calm must be maintained up until the October National Congress. After October, Beijing will greenlight the PBOC to relieve the pressure and devalue. After a large devaluation, the PBOC can loosen capital controls because once the damage is done the desire to flee is lessened. At that time Bitcoin withdrawals will be re-enabled.

Bitcoin Algo Trading and Market Making Seminar

BitMEX CEO, Arthur Hayes, will lead an interactive seminar on the basics of algo trading and market making in the Bitcoin markets.

Arthur will touch on API connectivity through the use of an example python trading bot. He will also talk about the basic principles of market making Bitcoin spot and derivatives.

Participants should bring a laptop, and visit this GitHub repository for the example trading bot.

Date: Wednesday 22 March 2017

Time: 7pm to 9pm

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

Cost: Free

Please RSVP on Eventbrite.