Libra: Zuck Me Gently



The event horizon has passed. With Libra, Facebook begins its foray into the digital asset industry. Before I begin my analysis, let’s get one thing straight; Libra is not decentralised nor censorship resistant. Libra is not a cryptocurrency. Libra will destroy all stablecoins, but who gives a fuck. I shed no tears for all those projects that somehow believed there was value in a an unheard-of sponsor creating a fiat money market fund that rode on a blockchain.
 
Libra could lay commercial banks and central banks low. It might reduce their usefulness to a dumb regulated warehouse for digital fiat money. And that is exactly what should happen to these institutions in a digital age.

Why Do Commercial Banks Exist?

Banks came about during a time of great danger for members of the human society. In feudal Europe you most likely worked dawn-till-dusk on the farm. Any meagre savings you or your feudal lord amassed were constantly under siege. Given that money was physical in nature, if you or your lord left the protection of the town, theft was likely.
 
Safety of assets has been the most important value proposition for traditional banks. They could store physical assets and records safely in their vaults. Therefore, governments and wealthy individuals stored money and assets with banks. Banks were and are engaged in a massive confidence game. That is why bank building edifices portray a certain fortified grandeur. In a generation, your assets will still be there, intact and ready for use.
 
Through their partnership with the government, banks obtain a license to issue credit and expand the money supply. They also rely on the legalised violence of the government to enforce contracts. Don’t pay the bank back, they will confiscate the encumbered asset. Should you defy the courts, a government goon will happily press boot to neck, and ensure your compliance.
 
In the last decade, human civilisation’s money and assets quickly transitioned from analogue to digital representations. Money and representations of ownership travel electronically rather than on the back of a horse. If assets and money are now digital, do we need institutions that provide physical rather than digital security?
 
As we have seen, commercial banks are terrible at securing digital information. Pick your large too-big-to-fail bank, and there will be a story about the “leakage” (euphemism for “we have no fucking clue how to safeguard your digital property”) of customer data.

Whoever has the customer, has the value

Previously banks held the most valuable information about customers. They had your whole financial history, and information about where you lived and what you bought.
 
In the past ten years, social media companies through voluntary actions of their users, amassed the most amount of personal information in human history. We share every detail of our lives on Facebook, Instagram, Google, Twitter, WeChat, LINE, Kakao Talk etc. We send billions of messages on centralised chat programs controlled by those same institutions as well. They now own the customer.
 
The modern consumer technology companies own billions of the wealthiest customers’ data. Previous to now, these companies made money on advertising and selling a product. But as with all businesses, once you are successful capturing customers, you start offering financial services.
 
Facebook has almost 2 billion daily active users. It makes complete sense to own the financial existence of their chattel. That is Libra.

Libra Deconstructed

Libra is a stablecoin backed by a basket of fiat currencies. The fiat currencies sit in a dumb regulated commercial bank. Libra allows a privileged few the ability to create and redeem Libra at its Net Asset Value (NAV). Libra rides on a blockchain where certain parties operate permissioned nodes. These parties included VC firms, technology companies, retail merchants, cryptocurrency exchanges, and most importantly commercial banks and credit card processors.
 
Libra may invest into short term government bonds, or into anything the Foundation board allows. The income earned is not passed onto the pleb Libra users, but the node operators and Libra investment token investors. The Foundation is the governing body of the Libra ecosystem. The members are selected based on the industries they represent, and their economic investment into the ecosystem. 
 
Libra does not connect real-world identities to addresses. However, you can bet that converting assets into Libra will encounter KYC. And let’s be clear, any request from a government agency to freeze a transaction will be met with compliance. Therefore, do not use Libra to buy your mood-altering substance(s) of choice.

Impact on Consumers

Many of Facebook’s users reside in places with low financial services penetration. Imagine a world where a Filipina helper can purchase goods sold in Europe with Libra. She most likely does not have great banking services where she works as an overseas foreign worker. Therefore, purchasing goods from foreign countries over the internet is difficult. With Libra, there is no issue.
 
The merchant in Europe receives payment in a basket of fiat currencies they already deal with. This transaction can happen completely inside of one of Facebook’s social media properties like Instagram or Whatsapp.
 
Facebook or a new financial services company it creates, can issue loans at the point of sale denominated in Libra. A user can opt-in to allow Facebook to use all its data on the individual to compute a credit score. Using that credit score, Facebook will lend Libra at a rate to purchase goods from merchants selling on the Facebook platform. Voila, the poorest members of our global society can experience the joys of purchasing mass-produced Chinese knick-knacks on credit. Welcome to Pax Americana!

Impact on Commercial Banks

Commercial banks make money lending. They use retail deposits to make these loans. Unfortunately, in this digital age, they no longer have the best information set about these retail depositors. The social media companies do.
 
Therefore, the Facebook, Google, and Alibaba’s of the world can originate a loan cheaper and offer a lower interest rate than a commercial bank. Libra and the plethora of copycats to come, allow technology companies to use a digital fiat representation in their ecosystems to extend credit and offer all of the most profitable banking products at a much lower cost. These global tech behemoths have billions of free cash flow on their balance sheets to lend.
 
Commercial banks can become node operators or regulated warehouses for the reserve assets of the stablecoin in question. There is still economic value in both of these verticals, but consumer technology companies will now sell the most profitable financial products themselves.
 
Any bank should be on notice, Libra and its clones are existential threats to their business models. Many will cheer as banks’ profit centers are eviscerated. But maybe society is trading one devil for another.

Impact on Central Banks

Commercial banks are not needed at their current largesse in a digital economy. With Libra, Facebook is assuming the role of a central bank. The Libra reserve is managed by a third-party foundation. The reserve managers choose the fiat currency weights, and how funds are invested. Sounds a lot like the job scorecard of a central bank governor.
 
Consumer tech companies can now issue, from their own balance sheet, credit directly to consumers. The only difference with this model is that they, for now, are not able to actually create money like commercial banks. This is the flow:
 
1.     Take retained fiat earnings, and exchange for Libra with an authorised primary dealer.
2.     Lend Libra to your customer in exchange for a good or service you offer.
3.     Obtain Libra + interest in Libra back from your customer.
4.     Sell Libra in exchange for fiat with an authorised primary dealer.
 
The money supply does not expand. That is the one major divergence from how a central bank issues credit into an economy. Central banks’ lending in most cases increases the aggregate supply of money.
 
Why trust a few crusty old men and women to manage the monetary health of the global economy. Let’s trust Zuck!
 
I have no love lost for US Representative Maxine Waters’ idiotic statements and actions on the US House Financial Services Committee. But her and other government officials’ outbursts of concern are not driven by altruistic feelings towards their subjects, but rather a fear of the upending of the financial services industry that lines their pockets and keeps them in office. The speed at which government officials rushed to admonish Libra tells you there is some potential positive value to human society embedded in the project.

Libra and Financial Privacy

It is amusing to see how many people rushed to complain about the potential loss of financial freedom Libra could represent. This fear is misplaced, financial privacy is already non-existent, nor will it ever exist in a digital fiat money system. Whether it be Facebook, The Fed, or The PBOC, centralised electronic fiat money is coming – cash will be outlawed.
 
The great thing about the launch of Libra is that it forces those concerned about the loss of financial privacy to explore alternatives. Bitcoin and other cryptocurrencies will benefit as curious plebs contemplate how secure financial privacy in this new digital age.
 
Libra and the conversations it sparked, is the best news for Bitcoin. Two billion people will now embrace and potentially be frightened of a corporate overlord controlling their financial wellbeing. Curiosity is the best food for the Bitcoin bull market.

Through their investments in augmented and virtual reality, it appears that Facebook wishes to create a completely new digital world. Libra could be the financial mana that powers this virtual existence. Let’s hope that while we are vegetating in our haptic pods, our physical shells don’t get Zucked too hard. Please Zuck me gently, and Zuck me long time.

凸性——几乎致命

自 BitMEX 于 2014 年 11 月 24 日推出以来,加密货币衍生品交易出现了爆炸式的增长。 我曾试图吸引各种风险投资公司,说服他们相信衍生品交易的未来愿景,但都徒劳无功。 尽管那时他们没有伸出援手,但是在 2019 年的现在回首过去,我对曾有过那段失败的经历感到很欣慰。
 
不管是 BitMEX 的比特币/美元永续掉期合约还是 OKEx 或者 Deribit 上的其他几种合约都是同出一辙。这些合约都能使您可以交易固定金额的比特币。我们称这些为反向衍生品合约。许多大师级交易者听过我详细讲述这种合约结构微妙但深刻的含义。 不过,由于现在出现许多新交易者尝试进行衍生品交易,因此有必要复习课程。
 
和大家想的不一样,当我看到 BitMEX 上出现疯狂爆仓时,我并没有那么开心。 因为我目光长远。 我希望您享受一个能够赚取利润并一直支付 BitMEX 交易费用的长期交易生涯,而不是被强平然后亏掉本金。 因此,充分教育我们的交易者什么是最佳的交易行为,对我以及 BitMEX 都是最好的。

我爱我们的交易者,但是当听到人们在被强平依然欢笑时,却让我非常难堪。 真正的交易者会实行适当的风险管理,这意味着永远不会被强平。
 
失败乃成功之母
 
凸性或 gamma 是合约价值相对于价格的二阶导数。 正确使用凸性可以增加投资组合的回报。 但是,如果您不理解凸性如何影响您交易的衍生品,您将反复被爆。
 
对于反向合约,保证金和本币使用相同货币。在这篇文章中,我会使用比特币/美元合约作演示。
 
本币: XBT(比特币)
外币: 美元
保证金货币: 比特币
美元价值: 1 美元
比特币价值: 1 美元/价格(比特币/美元汇率或 .BXBT 指数)
 
我将详细说明多头 100,000 张合约持仓的比特币风险敞口相对于价格( .BXBT 指数)如何发生变化。

首先,让我们看看多头。不管在牛市还是熊市,他们更多可能是投机者。这样说的原因是,做多比特币和做空比特币所能获得的收益是不对称的。 比特币可以上涨至无穷大,但下跌至多只能到零。 从股本回报率的角度来看,最好是在底部做多,然后在顶部做空。 那些在以太坊低于 100 美元买入的人感受最为深切。因为可以在保证金基础上运用杠杆,所以在大多数的市场环境中多头主要都是投机者。

第一个图表显示比特币的盈亏状况和曲率。直线代表线性合约所能获得的盈亏 %,而曲线代表反向合约持仓所能获得的盈亏 % 。您马上可以注意到,当市场下跌时您将损失更多资金,而当市场上升时赚得更少。 在这种不理想的情况下,你需要增加 XBT 保证金。 因此,您的保证金要求以非线性方式增加,这就是多头在市场下跌时迅速爆仓的原因。 

现在让我们来看看空头。不管在牛市还是熊市,他们更多可能是对冲者和做市商。 在这两种情况下,这些市场参与者都希望锁定比特币的美元价值。 通过反向合约,持有实物比特币加上等值的空头比特币/美元持仓形成了合成美元持仓。 如果 100% 的实物比特币在 BitMEX 以全仓进行对冲,您是不会被强平。

与多头不同,空头受益于正比特币凸性。随著价格下跌,空头获得越来越多比特币,而随着价格的上涨,空头损失也越来越少。

从这两个例子中可以看出,多头投机者在下跌过程中会更快地被强平。 这就解释了为什么现在在这些衍生品主导的市场中砸盘比拉盘更加极端,并且只要反向式衍生品仍然主导加密货币衍生品市场,这种情况将继续。

无论价格如何,芝商所合约的比特币风险敞口都是固定的,而美元风险敞口与价格呈线性关系。 虽然这对美元本位的投资者来说非常有利,但对于那些对冲其风险敞口的人来说,这会成为问题。为对冲芝商所持仓而购买的比特币不能用作芝商所的抵押品。这给持有实物比特币的对冲者,以及必须将宝贵的资本分散在不能交叉抵押衍生品和现货市场的做市商带来了一些挑战。

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BitMEX (www.bitmex.com)

Convexity: Rektum? Damn Near Killed ‘Em

Since BitMEX launched on 24 November 2014, cryptocurrency derivatives trading exploded. I tried in vain to seduce various venture capital firms with the vision of the future that was all about derivatives trading. At that time, succour was not forthcoming; however, I could not be more pleased with my failures now standing in 2019.
 
The BitMEX XBTUSD perpetual swap and various other contracts traded on OKEx and Deribit are of the same ilk. These contracts all allow you to trade a fixed USD amount of Bitcoin. We call these inverse derivatives contracts. Many OG traders have heard me speak at length about the subtle yet profound implications of this contract structure. However, as many new traders now try their hand at derivatives trading, a refresher course is necessitated.
 
Contrary to popular belief, I don’t delight when I see the BitMEX Rekt twitter feed going bananas. I’m long-term greedy. I would rather you enjoy a long trading career earning a profit and paying BitMEX trading fees along the way, than blow up your equity capital during a liquidation. Therefore, it is in mine and BitMEX’s best interest that our traders are sufficiently educated about best trading practices.
 
I love our traders, but when I hear people smile and laugh about getting liquidated it makes me cringe. A real trader practices proper risk management, and that means never being liquidated.
 
You Gotta Go Down, To Go Up
 
Convexity or gamma is the second derivative of a contract’s value with respect to price. Used correctly convexity can supercharge your portfolio’s returns. However, if you do not understand how convexity affects a derivative you trade, you will get rekt repeatedly.
 
With inverse contracts, the margin currency is the same as the home currency. I will use the XBTUSD contract throughout this post.
 
Home Currency: XBT (Bitcoin)
Foreign Currency: USD
Margin Currency: XBT
USD Value: 1 USD
XBT Value: 1 USD / Price (XBT/USD exchange rate or .BXBT index)
 
I will dwell on how the XBT exposure of a long 100,000 contract position changes with respect to the price (.BXBT Index).

First, let’s look at the long side. In bull and bear markets, these will most likely be speculators. This makes sense because being long Bitcoin offers asymmetric returns. Bitcoin can rise to infinity, but can only fall zero. It is better from a return on equity perspective to go long the bottom, then go short the top. Those who picked up ETH below $100 know this acutely. Therefore, coupled with leverage, on the margin, longs in most market environments will be predominately speculators.

The first chart shows XBT PNL profile and curvature. The straight line is the PNL %  return if the contract moved in a linear fashion, the curved line is the long inverse contract position’s PNL % return. What you immediately notice is that you will lose more money when the market falls, and make less money as the market rises. This is suboptimal as you must post margin in XBT. Thus, your margin requirements increase in a non-linear fashion, and this is why longs get rekt quickly in a falling market. 

Now let’s examine the short side.  In bull and bear markets, these will most likely be hedgers and market makers. In both cases, these market participants want to lock in the USD value of Bitcoin. With inverse contracts, a long physical Bitcoin position coupled with an equivalent short XBTUSD position creates a synthetic USD position. If 100% of the physical Bitcoin is placed at cross-margin with BitMEX, you cannot be liquidated.

Unlike the long side, shorts benefit from positive XBT convexity. Shorts make more and more XBT as the price falls, and lose less and less as the price rises.

The take away from these two examples is that long speculators will be liquidated faster on the way down. This explains why dumps in these derivatives dominated markets are now more extreme than pumps and will continue so long as inverse style derivatives dominate the cryptocurrency derivatives markets.

The CME contract has a fixed XBT exposure regardless of the price, and the USD exposure varies linearly with respect to price. While this is great for USD benchmarked investors, it becomes problematic for those hedging their exposure. Bitcoin purchased to hedge a short CME position cannot be used as collateral with the CME. This presents some challenges for hedgers who hold physical Bitcoin, and market makers who must divide precious capital between derivatives and spot markets with no cross-collateral relief.



 

볼록성: 청산을 방지하는 방법

2014년 11월 24일 비트멕스가 출시된 이래 암호화폐 파생상품 거래가 기하급수적으로 증가했습니다. 저희는 파생상품 거래에 관한 미래 비전을 가지고 다양한 벤처 캐피탈 회사들을 접촉했지만 허사였습니다. 그 당시에는 지원이 준비되어 있지 않았습니다; 그러나 저희는 2019년에 겪은 실패에 대해 더할 나위 없이 기쁩니다.
 
비트멕스의 비트코인 무기한 스왑 계약과 OKEx 및 Deribit에서 거래되는 다양한 기타 계약들은 동일한 유형입니다. 이러한 계약들을 통해 일정 미화 금액의 비트코인을 거래할 수 있습니다. 저희는 이를 역 파생상품 계약으로 부르고 있습니다. 많은 본래의 암호화폐 거래자들은 제가 본 계약 구조의 미묘하면서도 심오한 의미에 대해 이야기하는 것을 본 적이 있습니다. 그러나 많은 신규 거래자들이 이제 파생상품 거래를 시도하기 때문에 이와 관련한 재교육 과정이 필요합니다.
 
일반적인 통념과는 달리 저희는 비트멕스 Rekt 트위터 피드 (블로그의 글을 트위터로 자동 전송해주는 기능)가 큰 소란을 일으킬 때 반갑지 않습니다. 저희는 장기적인 입장으로 욕심을 부리고자 합니다. 저희는 차라리 장기간의 거래 경험을 통해 수익을 얻으면서 비트멕스의 거래 수수료를 지불하는 편이 청산 절차가 진행되는 중에 자기 자본을 잃는 것보다 낫다고 믿습니다. 따라서 당사의 거래자들이 모범 거래 관행에 관한 충분한 교육을 받을 수 있도록 하는 것이 저희의 가장 큰 관심사입니다.
 
저희는 모든 거래자들을 소중하게 여기고 있지만, 사람들이 청산이 이루어지는 것에 대해 웃음거리로 만든다고 할 때 당혹스럽기 그지 없습니다. 진정한 거래자는 적절한 위험 관리를 실천하며 이는 결코 청산되지 않는다는 것을 의미합니다.
 
위로 더 도약하기 위해서는 아래로 내려갈 줄도 알아야 합니다
 
볼록성 혹은 감마는 가격과 관련하여 계약 가치의 두 번째 파생상품입니다. 이는 올바르게 사용되면 포트폴리오의 수익을 극대화할 수 있습니다. 그러나 만일 거래하고 있는 파생상품에 볼록성이 어떻게 영향을 미치는지 이해하지 못하는 경우, 반복적으로 청산을 당할 수 있습니다.


역형 계약의 경우 마진 통화는 자국 통화와 동일합니다. 저희는 본 기사 전체에 XBTUSD 상품을 표시할 예정입니다.
 
자국 통화: XBT (비트코인)
외국 통화: USD (미화 달러)
마진 통화: XBT
미화 달러 가치: 1 미화 달러
XBT 가치: 1 USD / 가격 (비트코인/미화 환율 혹은 .BXBT 지수)
 
저희는 가격 (.BXBT 지수)과 관련하여 10만개 수량의 공매수 포지션이 어떻게 변화하는지 살펴 볼 예정입니다.

먼저 공매수 포지션 측을 살펴보도록 하겠습니다. 상승장과 하락장에서 이들은 대부분 투기자가 될 가능성이 높습니다. 이는 공매수 포지션의 비트코인이 비대칭적인 수익을 제공하기 때문에 이치에 맞습니다. 비트코인은 무한대로 상승할 수 있지만 0으로 하락할 수 밖에 없습니다. 자기 자본의 수익률 관점에서 볼 때, 시장의 밑바닥에서 공매수 포지션을 취한 후 시장의 꼭대기에서 공매도 포지션을 취하는 편이 낫습니다. 이더리움을 100달러 이하에서 매수한 거래자들은 이에 대해 절실히 인지하고 있습니다. 따라서 레버리지를 사용하여 증거금으로 공매수 포지션 취한 거래자들은 대부분의 시장 환경에서 주로 투기자로 남을 것입니다.

첫 번째 도표는 비트코인 수익 및 손실에 대한 개요와 곡률을 보여줍니다. 직선은 계약이 선형으로 이동된 경우에 따른 수익률이며 곡선은 공매수 역방향 계약 포지션의 수익률입니다. 이로 인해 여러분은 시장이 하락할 때 더 많은 돈을 잃고 시장이 상승함에 따라 더 적은 돈을 벌게 된다는 사실을 즉시 알 수 있습니다. 이는 비트코인에 마진을 게시해야 되므로 차선책에 불과합니다. 따라서 증거금 요건은 비선형적으로 증가하며 이는 하락장에서 공매수 포지션이 빠르게 청산되는 이유입니다.

이제 공매도 포지션 측을 살펴보도록 하겠습니다. 상승장과 하락장에서 이들은 위험 회피자와 시장 조성자가 될 가능성이 높습니다. 두 경우 모두 이러한 시장 참여자들은 비트코인의 미화 가치를 고정시키고자 합니다. 역방향 계약의 경우, 동등한 XBTUSD 상품의 공매도 포지션과 결합된 실물 기반의 공매수 비트코인 포지션은 통합된 미화 가치를 생성합니다. 실물 비트코인의 100%가 비트멕스의 교차 마진에 투자되는 경우 청산이 불가합니다.

공매수 포지션 측과 달리 공매도 포지션 측은 양수의 비트코인 볼록성에서 이점을 얻습니다. 공매도 포지션은 가격이 하락함에 따라 점점 더 많은 비트코인 수익을 얻고 가격이 상승함에 따라 점점 더 적은 손실을 입습니다.

이 두 가지 예에서 시사하는 바는 공매수 포지션의 투기자들이 하락장에서 더 빨리 청산될 것이라는 점입니다. 이는 왜 파생상품이 지배하는 시장에서 투매는 매집보다 더 극단적이며, 역방향 파생상품이 암호화폐 파생상품 시장을 지배하고 있는 한 지속될 이유를 설명해 줍니다.

시카고 상품거래소의 계약은 가격에 관계없이 고정된 비트코인 수량을 공개하고 있으며 미화 달러 공개는 가격에 따라 선형적으로 변화합니다. 이는 미화 달러화를 벤치마킹하는 투자자들에게 이로울 수 있는 반면, 노출을 회피하려는 사람들에게는 문제가 될 수 있습니다. CME 계약의 공매도 포지션을 헤지 (위험 분산)하기 위해 매수된 비트코인은 담보로 사용될 수 없습니다. 이는 실물 비트코인을 보유한 위험 회피자들과 상호 담보적인 구제 없이 파생상품과 현물 시장 사이에 귀중한 자본을 나눠야 하는 시장 조성자들에게 해결해야 할 몇 가지 과제를 제시합니다.

BitMEX Leverage Statistics, April 2019

One of BitMEX’s claims to fame is the ability for clients to use 100x leverage while trading the Bitcoin / USD price. We often get asked to what extent traders use the maximum leverage offered. I asked our data science team to pull up historical data on leverage usage for the XBTUSD perpetual swap from May 2018 to April 2019.

The first chart and table combo shows the weighted effective leverage at month end for XBTUSD longs and shorts.

It appears traders are quite “responsible” in that they do not on average use the maximum amount of leverage.

Definitions
aggregation grouped by month, side, and symbol

Methodology for Calculating Percentiles

  • Pick the last available timestamp for each of the prior 12 months (i.e. ‘month-end snapshot’), and calculate the effective leverage for every position across all accounts rounded to the nearest integer
  • Create a sorted list from the resulting values, flattened by expanding each position’s resulting effective leverage by the number of contracts held (e.g. if an effective leverage of 3 was used by an account with a position quantity of 4, it’s a contribution to the list is '3 3 3 3')
  • Any given percentile of this list can be found by taking the value at the index given by: (Count of the list) * (Desired percentile)

Using the mean is crude because traders who hold large positions must use less leverage than smaller traders. This is due to the risk limit feature of BitMEX. Traders may use 100x leverage up to a position size of 200 XBT. After that, the initial and maintenance margin requirements step up 0.5% per 50 XBT.

To understand the distribution of leverage respective to the number of contracts, we looked at a histogram of XBTUSD long and shorts averaged over the 12 month-end snapshots from May 2018 to April 2019. The above two charts display this data. As we expected, the largest traders use the least amount of leverage.

While the maximum leverage allowable for opening a position in XBTUSD is 100x, the effective leverage can then increase to 200x (i.e. the reciprocal of the 0.50% maintenance margin requirement), at which point liquidation occurs.

Methodology for Creating Histogram

  • Calculate the sum total number of contracts at each effective leverage for all 12 month-end snapshots, then divide each total by 12 (i.e. average month-end snapshot)

I hope this data allows traders to better understand the BitMEX market microstructure. I will continue to periodically post backward looking statistics in the near future.

The Road to $10K

Did you take your losses like a champ, or bottom tick the market with your market close order? The first quarter of 2019 witnessed depressed volumes, volatility, and price. The local lows of late 2018 have not been retested; however the market chop makes me feel like I’m at the Saudi embassy.

The repair of crypto investors balance sheets is not done yet. Losses must be digested, and the unlucky masses must wage cuck a bit longer to get back in the game.

All is not lost; nothing goes up or down in a straight line. 2019 will be boring, but green shoots will appear towards year end. The mighty central bank printing presses paused for a while, but economic sophists could not resist the siren call of free money. They are busy inventing the academic crutches (here’s looking at your MMT), to justify the next global money printing orgy.

Do not despair. CRipple is still worth more than zero. And Justin Sun’s new age religion TRON, paired with the Pope CZ, tells us there are those still willing to eat shitcoins with a smile.

Electric Cars and Sand Schmucks

While Bitcoin is an innovative technology, the technical merits of the protocol do not exist in a vacuum. The world’s monetary situation is very important. It determines how willing investors are able to suspend disbelief and believe crypto fan boys and girls.

Throughout 2018 the omnipotent Fed began reducing the size of its balance sheet and raising short term interest rates. The world still beats to the tune of the USD. Financial institutions and governments require cheap dollars, and the Fed happily obliged since the 2008 GFC.

Tech VC funds won’t admit it, but cheap dollars are key to their business. How else can you convince LPs to continually fund negative gross margin businesses, until they “scale” and achieve profitability? Everyone wants to become the next Facebook.

When investing in government bonds yields zero or negative, desperate investors will do whatever it takes to obtain yield. Tesla is a perfect example. Lord Elon is a master at creating open-faced pits, and torching his investors’ money in them. Tesla does not belong on the Nasdaq, but rather as a speciality flavour at the New York Bagel Co.

The market disagrees with my Tesla melancholy, investors continue to line up to eat Elon’s sexy Tesla hot shit cakes. Can you blame them, after you are fully invested in the S&P500 where else will you be able to show alpha to your investors?

Another example of this free money folly is the Vision Fund.

  1. Top tick the “Value” your investments while still on the Softbank’s books.
  2. Find a group of schmucks from the sand (That’s where the former Deutsche credit boys come in, “Be Bold”)
  3. Sell your mark-to-fantasy private Unicorns into the vehicle populated by your sand schmucks
  4. Take your cash and payout to your Japanese investors as dividends.

These entities thrived while the Fed held rates at 0% and reinvested their treasury and MBS roll off. TSLA hit its all-time high in mid-2017. Since then Elon has struggled to generate enough buzz to keep his stock elevated. I’m sure he isn’t thrilled that bondholders are due close to $1 billion in cash because the stock price failed to scale $360.

The Vision Fund’s sand schmucks also got cold feet. They baulked when the fund proposed to invest an additional $20 billion into the We-Broke company. The check size got sliced down to $2 billion.

When dollars get scarce suddenly investors discover value investing all over again.

The height of crypto silliness in December 2017 occurred just before the Fed embarked on its quantitative tightening. The 2018 pain train spared no crypto asset or shitcoin.

But things are a changin’. The Fed couldn’t stomach a 20% correction in the SPX. In the recent Fed minutes, the dot plot now shows no rate increases for the rest of 2019. The Fed will start reinvesting its runoff in the third quarter. We are only a hop, skip, and a jump away from an expanding Fed balance sheet.

Beijing knows China must rebalance its economy away from credit-fueled fixed asset investment. However, Xi must not have the political cojones to push this sort of painful change through. Therefore, the PBOC said “fuck it” to any attempt to reign in credit growth. The two most important central banks are creepin’ back into a super easy credit regime.

Easy money will manifest itself in other higher profile and more liquid dogshit before crypto. 2019 will feature an IPO beauty pageant of some of the best cash destroying businesses. Uber, Lyft, AirBnB, and possibly the We company all are rumoured to IPO this year.

Lyft is apparently oversubscribed for its upcoming IPO. Oh baby, this is going to be a fun year.

If these beauties can price at the top of the range, and trade above the IPO price, we know that party time is back. Crypto will be the last asset class to feel the love. Too many people lost too much money, in too short a time period, to immediately Fomo back into the markets.

Get Excited

Green shoots will begin to appear in early Q4. Free money and collective amnesia are powerful drugs. Also after two years of wage cucking, punters should have a few sheckles to rub together.

The 2019 chop will be intense, but the markets will claw back to $10,000. That is a very significant psychological barrier. It’s a nice round sexy number. $20,000 is the ultimate recovery. However, it took 11 months from $1,000 to $10,000, but less than one month from $10,000 to $20,000 back to $10,000.

Melissa Lee peep this. $10,000 is my number, and I’m stickin’ to it.

コインの両面:近未来の分岐型マネー

著者:アーサー・ヘイズ 原文はこちらです。

 

少しの譲歩で膨らむ政府の思惑

新しいマネーの最初のタイプと考えられるのが、中央集権型の電子マネーである。その起源は現行システムに直結し、デジタル時代における法定通貨(Fiat)のアップデート版といえる。それは既存の中央銀行制度と急速に大企業化している経済にとって自然(筆者の意見では必然でもある)な合成体である。 

電子マネーが可能になる背景として、消費者が社会的に私生活全体を企業に委ねることに慣れてきたという現象が大きく影響している。その引き換えに、消費者は娯楽や便利さを潤沢に手に入れている。ただし、現時点では、企業によるマネーの発行とそれに伴うプライバシーのさらなる低下を消費者が自主的(または強制的)に受け入れる動きはごく限定的に見られるのみである。

電子マネーの将来の方向性を最も明確に示していると考えられるWeChat Payは、中国内の現金を実質的に消滅させている。WeChat Payのシステムの仕組みを説明しよう。マーチャントはQRコードと携帯電話を使用して、消費者の銀行口座に直接接続しているWeChatウォレットから請求額を減額する。消費者がマーケットのレジに並んでいる間、人民元(CNY)が口座から即座に減額され、マーチャントの口座に加算される。マーチャントは代金を、消費者は商品を受け取り、現金を物理的にやりとりする手間は消滅している。

WeChat Payは、中国に頻繁に旅行する人々から大変好評を得ている。ただ、銀行業界でキャリアを築き、現在、ビットコインで生計を立てている筆者は、中央集権型決済システムのプライバシー面での制約もよく認識している。

世界各国の大手業者が現在運営している多様なモバイル決済システムは細部が異なる。購入した商品やサービスから購入した場所と日時まで、運営業者が消費者に関してほぼすべてを把握しているケースがある。こうしたデータは恐らく消費者に関して入手した他のすべてのデータとリンクさせることができる。

同時に、西欧諸国政府が、気の向くままに、消費者の個人情報を引き渡すよう企業に圧力をかけてきたケースもある。当然、企業はこうした要請に従う傾向にある。民間セクターの決済ネットワークやクラウドファンディングプラットフォームでも、問題のある考えや発言との関連性が深すぎるため、あるいはトラブルメーカーであるという理由で特定の人を排除するケースが発生している。これらすべてが必ずしも不当であるとは限らないが、不当であるかどうかを判断するのは、運営元自身である。

さらに、財政的な面からこの行く末を考えると、中央銀行や政府は、突然、または段階を追って企業の財政機能についてより実践的な方法で指示し始める可能性がある。例えば、商業銀行や大手ソーシャルメディア企業を代理人に任命し、決済ネットワークの中心点として、電子マネーシステムに参加し、処理手数料を稼ぐ権限を付与する方法が考えられる。

重要なのは、決済ネットワークのルールはコードを介して即時かつ完璧に強制可能である点だ。非効率で不正を犯しがちな人間がシステムに参加できる唯一の場所は、ネットワークの頂点である。ここでは、当局者がクレジットを直接利用者に発行し、各トランザクションを即座に課税し、ネットワーク加入者審査を行う。理論上、消費者の財政はこのように規律されることが可能である。

 

ここで、救世主ビットコインが登場

上述した金融システムはブロックチェーンに類似するネットワーク上で展開される場合もされない場合もあるが、誤解しないで欲しいのは、中央集権化(トップダウン)され、検閲の対象となる(中央集権化勢力と対立した場合、使用を禁止され得る)という点である。

対照的にビットコインはピアツーピアの分散型であり、耐検閲性がある。ビットコインは自主的な独立した私利に基づく参加者によるネットワークを通じて運営されている。参加者は何らの便宜も許可も要求せず、数ベーシスポイントのトランザクション手数料が他人から求め、受領を許可される唯一の対価である。ビットコインウォレットの公開アドレスとトランザクション履歴は全員に表示されるものの、個人の身元を特定する情報はトランザクションに一切含まれない。

つまり、ビットコインやその類似物は、社会が理想とする電子マネーのプライベート形態である。そしてプライバシーはうまく機能している社会の重要な構成要素である。道義的そして心理的理由から、市民は自分の生活に関する特定の情報を内密に保つ能力を重視する。

要約すれば、物理的現金は長期にわたりプライバシーに関して最適な貨幣形態となってきた。ところが、電子マネーは効率性と透明性に優れていることから、各国政府は次々と物理的現金を徐々に時代遅れにしていくものと見込まれる。消費者が考えるより早い時点で、プライバシーあるいは他の要因で現金は選択肢にならなくなるだろう。 一方で、ビットコインは、現金が駆逐された暁には、内密に価値を保持し移転できる特質から、民間市民からその内包する価値により高く評価されるようになると予想される。

 

全般的楽観論の根拠

ビットコインはまだ実験の初段階にあるが、運用開始から10年を経て、ビットコインのプロトコルはハッキングされていない。ソフトウェアの歴史上、実質的に最大の「バグ報奨金」を提示しているにもかかわらずだ。ビットコインは、まったく無関係の民間人が共通の目標に向かって協力するという素晴らしい成果物である。

参加者が代替的貨幣システムを共同でいかに構築してきたかを考えると、個々による分散的な共同の取り組みを通じて国際社会の他の側面において改善できることに対して大いに楽観している。

しかも、多様な中央集権的力が集結されている現在の状況下でそう断言するのである。 

人類の分岐型マネーの未来は、過去の独占的貨幣より明るいだろう。利便性の高いマネーもあれば、プライバシーが顕著に強化されているマネーもあるからである。

코인의 두 얼굴: 두 갈래로 나뉜 돈의 미래

디지털 사회는 디지털 화폐를 필요로 합니다. 여러분들께서는 암호화폐라는 단어를 많이 들어보셨을 것입니다. 하지만 비트코인과 같은 탈중앙화된 암호화폐와 중앙화된 전자화폐 일명 ‘e-머니’ 간에는 큰 차이점이 존재합니다.

비트코인은 현재 공식적으로 출시 20주년을 향해 가고 있으며, 이는 여러분 스스로가 현대적인 화폐 제도로의 변화에 익숙해질 적절한 시기이기도 합니다. 저는 사람들이 가치를 저장하고 전달하는 이 방식의 변화를 가까운 미래에 볼 수 있을 것이라 생각합니다.

원하는 것을 주면, 더 많은 것을 원하게 되는 법입니다

여러분이 앞으로 보게 될 첫 번째 유형의 새로운 돈은 중앙집중화된 전자화폐 (e-money)입니다. 이것은 현재 시스템에서 생겨난 것으로 정부 (실물화폐)가 발행한 통화를 디지털 시대에 맞게 업데이트합니다. 이는 기존의 중앙 은행 시스템과 갈수록 조직화되는 경제의 자연스럽고 불가피한 통합이라고 생각합니다.

전자화폐를 만들어내는 핵심적인 현상은 우리 사회가 사생활 전체를 기업에 넘겨주는 데 익숙해진 방식과 동일합니다. 우리는 오락과 편의의 대가로 그렇게 해왔고, 우리는 두 가지 모두를 충분히 누려왔습니다. 하지만 현재 기업의 자금 발행과 그에 따른 사생활 침해를 받아들이는 (또는 받아들이도록 강요 받는) 것은 아주 사소한 단계에 지나지 않습니다.

전자화폐가 어디로 향하고 있는지를 가장 분명하게 보여주는 것은 아마도 중국에서 실질적인 현금 사용을 뿌리뽑은 위챗 페이일 것입니다. 위챗 페이 시스템의 작동 원리는 다음과 같습니다: QR 코드와 휴대 전화를 사용하여, 판매자가 여러분의 은행 계좌와 직접 연결된 위챗 지갑에서 잔고를 공제합니다. 즉시, 시장 진열대 앞에 서있는 동안, 중국 위안화 (CNY)가 여러분의 계좌에서 인출되어 판매자의 계좌로 송금됩니다. 이 같은 방식으로 판매자는 돈을 받고 여러분은 구입한 만두를 손쉽게 가져갈 수 있으므로 물리적 현금을 사용함에 있어 발생하는 마찰과 성가심은 사라지게 됩니다.

중국을 자주 여행하는 사람으로써, 실제로 저는 위챗 페이를 애용합니다. 그러나 은행에서 경력을 쌓고 현재 비트코인 업계에서 종사하는 사람으로써 저는 중앙집중형 결제 시스템의 사생활 제한에 대해서도 잘 알고 있습니다.

세계 각지의 주요 업체들이 현재 제공하고 있는 다양한 모바일 결제 시스템은 디테일에서 차이가 납니다. 하지만 몇몇의 경우, 이들은 여러분에 대한 거의 모든 것을 알고 있습니다: 예를 들어, 여러분이 어떤 상품과 서비스를 구매하는지, 그리고 이를 구매하는 장소와 시기에 대한 정보는 여러분에 대한 다른 모든 데이터와 연결될 수 있습니다.

동시에 우리는 서부 지역의 정부들이 마음 내킬 때마다 개인 정보를 얻기 위해 기업들에 크게 의존하는 것을 보아왔습니다. 놀랄 것도 없이, 기업들은 이러한 요구를 순순히 따르는 경향이 있습니다. 또한, 우리는 민간 부문의 결제 네트워크와 크라우드 펀딩 플랫폼이 불쾌한 발상 또는 발언과 너무 밀접하게 관련된 사람들, 혹은 부적절한 행위자들을 쫓아내는 것을 목격해왔습니다. 이 모든 것이 반드시 불합리하지는 않지만 누가 잘잘못을 구분 지을 수 있을까요? 바로 이들입니다.

더 나아가, 여러분은 이것이 금전적으로 무엇을 초래하는 지를 알 수 있습니다. 이것이 단계적으로 혹은 갑자기 발생하든지 간에 특정 시점에서 중앙 은행과 정부는 이들의 본성에 따라 기업의 통화 기능을 보다 직접적으로 지시하기 시작할 수도 있습니다. 제가 예상하기에 이들이 위에서 언급한 내용을 실현하기 위한 방법은 결제 네트워크의 노드로 자리매김 할 시중 은행들과 대형 소셜 미디어 회사들에게 전자화폐 시스템에 참여하고 거래 수수료를 벌 수 있는 권한을 부여하는 것입니다.

중요한 것은 결제 네트워크의 규칙이 코드를 통해 즉각적이고 완벽하게 실행될 수 있다는 것입니다. 비효율적이거나 부패한 사람들이 참여할 수 있는 유일한 장소는 당국이 사람들에게 직접 신용을 발급하고, 모든 거래에 즉시 세금을 부과하며, 누가 네트워크의 일부가 될 수 있는지 결정할 수 있는 네트워크의 꼭대기 즉, 정점일 것입니다. 이론적으로는 여러분의 전체 금융 생활이 이와 같은 방식으로 통제될 수 있습니다.

다행스럽게도, 비트코인은 바로 이 대목에 등장합니다

저희가 앞서 설명한 통화 시스템은 블록체인처럼 보일 수도 있고 그렇지 않을 수도 있지만, 헷갈리지 마십시오: 이는 중앙집중형, 하향식 및 검열형 시스템입니다 (이는 중앙집중화된 권력에 위배되면 해당 통화를 사용하지 못하게 됨을 의미합니다).

이와 대조적으로 비트코인은 탈중앙화되어 있고, 개인 간 거래 방식이며, 검열 저항적 (censorship resistant) 특성을 지니고 있습니다. 비트코인은 자발적이고 독립적이며 사익을 추구하는 행위자들로 구성된 네트워크를 통해 운영됩니다. 이들은 어떠한 호의나 허가도 요구하지 않으며, 거래 수수료의 베이시스 포인트가 말 그대로 이들이 원하는 전부일 뿐만 아니라, 취할 수 있는 전부입니다. 그리고 비트코인의 공개 주소와 거래 내역은 모두가 볼 수 있지만, 모든 거래에는 어떠한 개인 식별 정보도 포함되어 있지 않습니다.

즉, 비트코인 또는 그와 유사한 암호화폐가 사적인 형태의 전자화폐에 대한 우리 사회 최고의 희망일 수도 있습니다. 그리고 저희는 사생활이 건전하게 기능하는 사회의 중요한 부분이라고 생각합니다. 도의적, 심지어 심리적인 이유로 시민들은 자신의 삶에 대한 세부 사항을 스스로 보관할 수 있는 능력을 가질 자격이 있습니다.

요약하자면: 오랜 시간 동안 개인의 사생활과 관련해 실물화폐 (physical cash)는 가장 적합한 유형의 돈이었습니다. 그러나 보다 효율적이고 투명한 형태의 전자화폐로 무장한 정부는, 실물화폐를 점차 무용지물로 만들 것입니다. 여러분이 생각하는 것보다 더 빨리, 현금은 사생활이나 다른 어떤 것에도 선택의 여지없이 무용지물이 될 것 입니다. 그리고 개개인의 시민들은 현금이 쇠락의 길을 걷게 되면 신중하게 가치를 유지하고 이전하는 능력이 사라지기 때문에 비트코인의 내재적 가치를 인식하게 될 것입니다.

일반적인 낙관론에 대한 근거

비트코인은 여전히 매우 실험적입니다. 하지만 10년 동안의 운영 후에 비트코인 프로토콜은 소프트웨어 역사상 가장 큰 ‘버그 현상금’을 제공 했음에도 불구하고, 해킹 당하지 않았습니다. 비트코인은 공통의 목표를 위해 함께 일하는 서로 다른 개인들의 놀라운 업적입니다.

저는 사람들의 공동체가 어떻게 집합적으로 대체 화폐 시스템을 만들어냈는지 생각해보면서, 집합적이고 탈중앙화된 노력을 통해 우리가 사회의 다른 측면을 개선할 수 있다는 점에 대해 매우 낙관하고 있습니다.

그리고 저희는 심지어 현재 다양한 중앙집중형 세력들이 결집되고 있음에도 불구하고: 두 갈래로 나뉜 인류의 금전적 미래는 몇몇의 화폐는 더 편리해지는 반면 다른 몇몇의 화폐는 훨씬 더 개인화될 것이므로 독점적이었던 과거보다는 나을 것이라고 말하는 바입니다.

Two sides of the coin: the bifurcated near-future of money

 

A digital society requires digital cash. You hear the word cryptocurrency a lot. But there’s a very big difference between a truly decentralised cryptocurrency like Bitcoin and what could be called centralised ‘e-money.’

As Bitcoin today officially heads into its second decade of existence, this is a ripe moment to familiarise yourself with some of the fundamental changes in modern money, including the ways people store and transmit value, that I think you can expect to see in the near future

We Gave Them an Inch, Now They’re About to Take a Mile

The first type of new money I believe we’re going to see is centralised e-money. This descends directly from the current system, taking government (fiat) currency and updating it for the digital age. It’s a natural — and I imagine inevitable — synthesis of the existing central bank system and our increasingly corporatised economy.

The keystone phenomenon that makes e-money possible is the way in which we as a society have grown accustomed to handing over our entire private lives to corporations. We’ve done so in exchange for entertainment and convenience, and we’ve certainly received ample supplies of both. It’s only a small step now, however, to our accepting (or being forced to accept) the corporate issuance of money and the further diminution of privacy that comes with that.

The clearest glimpse into where e-money is heading is probably WeChat Pay, which has now practically eradicated cash in China. The WeChat Pay system works like this: using QR codes and mobile phones, merchants deduct credits from your WeChat wallet, which is connected directly to your bank account. Instantly, while standing at a market stall, Chinese renminbi (CNY) is debited from your account, and credited to the merchant’s account. They get their money, you take your dumplings, and the friction and annoyance of using physical cash evaporates.

As someone who travels around China frequently, I actually love WeChat Pay. However, as someone who built a career in banking and now makes his living in Bitcoin, I also know the privacy limitations of centralised payment systems.

The various mobile payment systems now offered by major players in different parts of the world differ in their details. But in some cases, they know almost everything about you: what goods and services you purchase, as well as where and when you purchase them, which can presumably be linked to all the other data they have on you.

At the same time, we’ve seen our governments in the West, when the spirit moves them, lean hard on our corporate friends to cough up our personal information. Unsurprisingly, the corporations tend to comply with these requests. We have also witnessed private sector payment networks and crowdfunding platforms kick people out for having too close an association with offending ideas or speech, or for being bad actors. Not all of this is necessarily unreasonable, but who gets to draw the line? They do.

Furthermore, monetarily, you can see where this leads: whether it happens gradually or suddenly, at some point central banks and governments, in accord with their nature, may start directing the monetary functions of corporations in a more hands-on way. The way they would do it, I expect, is by deputising commercial banks and large social media companies, who shall become nodes on a payment network, with the authority to participate in the e-money system and earn transaction fees.

Significantly, the payment network’s rules can be enforced instantly and flawlessly via code. The only place left in the system for inefficient or corruptible humans to participate will be at the apex of the network, where the authorities can issue credit directly to people, tax every transaction immediately, and determine who can and can’t be part of the network. In theory, your entire financial existence can be governed this way.

Thankfully, That’s Where Bitcoin Enters the Conversation

Although such a monetary system as I’ve just described may or may not be warehoused on a blockchain look-alike, make no mistake: it is centralised, top-down, and censored (meaning you can be barred from using it if you fall afoul of the centralised powers).

Bitcoin, by contrast, is decentralised, peer-to-peer, and censorship resistant. Bitcoin runs via a network of voluntary, independent, and self-interested actors, who neither demand nor require any favours or permissions; a few basis points in transaction fees is literally all they want from anyone — and all they’re allowed to take. And while the public address of any Bitcoin wallet, and its transaction history, are visible to all, no personally identifiable information is contained in any transaction.

Which means that Bitcoin, or something like it, is perhaps society’s best hope for a private form of electronic money. And privacy, I argue, is an important part of a well-functioning society. For moral and even psychological reasons, citizens deserve the ability to keep certain details about their lives to themselves.

To sum up: for a long time, physical cash has been the best form of money with respect to privacy. But armed with a more efficient and transparent form of e-money, government after government will gradually make physical cash obsolete. Sooner than you think, cash will not be an option for privacy, or for anything else. And private citizens will come to appreciate the inherent value of Bitcoin, as their ability to discreetly hold and transfer value evaporates once cash goes the way of the dodo.

Grounds for Optimism in General

Bitcoin is still very much an experiment. However, after 10 years of operation, the Bitcoin protocol has not been hacked — despite offering what’s effectively the biggest ‘bug bounty’ in software history. Bitcoin is an amazing achievement of disparate private individuals working together towards a common goal.

As I consider how a community of people collectively created an alternate monetary system, I am greatly optimistic about what other aspects of our global society we can improve through a collective, decentralised effort.

And I say this even in the face of the various centralising forces currently being marshalled: humanity’s bifurcated monetary future will be better than our monopoly monetary past, as some money becomes more convenient while other money becomes far more private.

The Price Crash & The Impact On Miners

Abstract: Cryptocurrency prices have fallen significantly in the past few weeks. In this note, we analyse the impact this price decline may have on the mining industry. The Bitcoin hashrate has fallen around 31% since the start of November 2018, equivalent to around 1.3 million Bitmain S9 machines. We conclude that many miners are struggling; however, we point out that not all miners have the same costs and that it’s the higher cost miners who switch off their machines first, as the price declines.

 

Overview

Since the start of November 2018, the Bitcoin price is down around 45%, while in the same period the amount of mining power on the Bitcoin network has fallen by around 31%. According to our estimates, this represents around 1.3 million Bitmain S9 miners being switched off. The mining industry may therefore be under considerable stress right now, due to the falling prices of cryptocurrency.

The prices have so far caused two large downward difficulty adjustments to Bitcoin, 7.4% and 15.1%, on 16th November and 3rd December, respectively. The 7.4% adjustment was the largest since January 2013 and the 15.1% adjustment was the largest since October 2011. The charts below are based on the daily chainwork and therefore reflect changes in network difficulty.

Bitcoin Daily Work Compared to the Falling Price

(Source: BitMEX Research, Poloniex)

Daily Mining Revenue and Cost

As the chart below illustrates, Bitcoin mining industry revenue has fallen from around $13 million per day at the start of November to around $6 million per day, at the start of December. This drop in incentives was even larger than the fall in the Bitcoin price, due to a delay in the way difficulty adjusts. In the six-day period ending 3rd December, 21.8% fewer blocks than the expected 144 per day were found, as miners left the network before the difficulty adjusted, and as a result, fewer blocks were found. Therefore in the short term, there was a 21.8% fall in mining incentives on top of the impact of the declining price.

Bitcoin Daily Mining Revenue and Expected Electricity Spend – US$m

(Source: BitMEX Research, Poloniex)

(Notes: Assumes an electricity cost of US$0.05 per KWH, assumes advertised Bitmain S9 specification)

 

Bitcoin Cash ABC Daily Mining Revenue and Expected Electricity Spend – US$m

(Source: BitMEX Research, Polonies)

(Notes: Assumes an electricity cost of US$0.05 per KWH, assumes advertised Bitmain S9 specification)

 

Ethereum Daily Mining Revenue and Expected Electricity Spend – US$m

(Source: BitMEX Research, Polonies)

(Notes: Assumes an electricity cost of US$0.05 per KWH, assumes 32Mh/s at 200W)

Miner Profit Margins

The chart below shows that prior to the recent crash, the industry was making gross profit margins of around 50% (these figures assume electricity is the only cost included in gross profits), while after the price crash, this fell to around 30% for Bitcoin and 15% for Ethereum.

Miner Profit Margin

(Source: BitMEX Research, Poloniex for prices)

Ethereum Mining Profitability

In the period, the Ethereum hashrate has only fallen by 20%, much lower than Bitcoin, (representing around 1.5 million high-end graphics cards), while the price decline has been more significant than Bitcoin, at 54%. Therefore, gross profit margins have declined even more sharply for Ethereum, but it is not clear exactly why this is the case.

There are a few potential reasons. It could be that Ethereum miners are more hobbyist minded and less profit focused, or Ethereum miners could have started from a higher gross profit margin position than Bitcoin, so they are less inclined to monitor the network and switch the miners off when necessary. As the data shows, Ethereum miner gross profit margins now appear significantly lower than Bitcoin, falling to 15% in the last few days, so this could change (Note: This analysis only included electricity costs, when including other costs, mining may be a loss making operation).

Bitcoin Cash ABC Mining Profit Margins

As the above chart shows, the Bitcoin Cash ABC gross profit margin went negative during the split into two coins, Bitcoin Cash ABC and Bitcoin Cash SV. The two camps mined uneconomically in a race to have the most work chain. Ten days after the split, on 25th November, the profitability of mining Bitcoin Cash ABC rapidly climbed up to around the same levels as Bitcoin. This appeared to indicate the end of the “hashwar,” which proved to be almost completely pointless, as the war ending had no clear noticeable impact on either the coins or their value.

As the latest data in the below table shows, the two sides are getting closer again with respect to total work since the split and its possible uneconomic mining resumes.

Bitcoin Cash ABC Bitcoin Cash SV
Log2(PoW) 87.753365 87.747401
Blocks                          560,091                              560,081
Cumulative total since the split
Log2(PoW) 82.189 81.875
Blocks                                   3,325                                   3,315
Mining electricity spend $7,939,318 $6,389,264
Coin price (Poloniex) $108 $94
Estimated mining gross profit/(loss) ($3,450,568) ($2,494,139)
Gross profit margin (76.9%) (64.0%)
Assume leased hashrate
Estimated leasing costs $14,608,345 $11,756,245
Estimated mining gross profit/(loss) ($10,119,595) ($7,861,120)

(Source: BitMEX Research, Poloniex for prices)

Flaws in the Above Analysis

The above gross profit margin charts do not show a complete picture. While the revenue figures are likely to be accurate, the only cost included is electricity. Obviously miners have other costs, such as the capital investment in the machinery as well as maintenance costs and building costs. Therefore, although the charts below show that the industry is highly profitable when only considering electricity costs, given other costs, the recent price crash is likely to have sent almost all the miners into the red. This indicates that miners invested too much in equipment and have achieved large negative ROIs.

Electricity Cost is Not Uniform

Another crucial point not reflected in the above analysis is the variance in electricity rates. The charts above assume a flat cost of $0.05 cent per KwH; however, not all miners have the same electricity costs and there will be a distribution.

As we mentioned above, 31% of the hashrate was shutdown in the period, logically those with the highest electricity costs should turn off their machines first. Therefore the average electricity cost on the network should have fallen considerably in the past month.

The below chart is an illustration of the above, it assumes that electricity costs are normally distributed with a standard deviation of $0.01 per KwH and that higher-cost miners switch their machines off first. Although this assumption is likely to be highly inaccurate and energy prices will not be normally distributed across the mining industry, from a macro level it illustrates a point and it may be more accurate than the above chart.

According to this analysis, average Bitcoin mining gross margins have only declined from around 50% to 40%, implying a far more healthy situation for the remaining miners.

Bitcoin Mining Gross Profit Margin (Illustrative)

(Source: BitMEX Research, Poloniex for prices)

When evaluating the potential negative impact of price declines on Bitcoin, analysts sometimes forget that not all miners have the same costs. It is these cost variances that should ensure the network continues to function smoothly despite large sudden price declines and allows the difficulty to adjust.

What Caused the Price Crash?

There has been considerable speculation around the causes of the price crash, with some saying miners sold Bitcoin in order to finance a costly hashwar in Bitcoin Cash. The cryptocurrency intelligence monitoring platform Boltzmann flagged to us that their platform had detected unusually large miner selling of Bitcoin on 12th November, a few days before the Bitcoin Cash split.

Boltzmann detected that net Bitcoin sales from miners were “17.5 standard deviations below [the] 3-month trailing average.” On further analysis, it appears these miners may have been a member of Slushpool.

Bitcoin miner net flow & price

(Source: Boltzmann, 12 hour aggregation of miner net flow)

Conclusion and Price Commentary

While it may be true that mining pools selling Bitcoin to fund losses in the Bitcoin Cash hashwar may have been a catalyst for the reduction in the price, we think it’s easy to overestimate the impact of this. We are in a bear market and prices are falling regardless of the news or investment flows.

Furthermore, in a bear market prices seem to fall on non-news or bad news and ignore good news, while in a bull market the reverse appears true. We think it’s likely that prices would have been weak regardless of any miner selling prior to the Bitcoin Cash split. For cryptocurrency, trader sentiment is king.

This is likely to be a very tough time for the mining industry. However, for miners with lower costs, our basic analysis indicates that the situation may be better than people expect. If the miners acquired their equipment from Bitmain at below-cost prices, they could still be in the green, even when including depreciation and other administrative expenses.

BlockMEX STO

Remember BlockMEX? Well the firm has limped along for several years. They have tried various business models. None have made any money. But that doesn’t matter, VC firms continue to shower the company with cash, and its valuation continues to rise. The CEO now has a great new idea. Let’s listen in on the recent board meeting.


Billy – Billy is the CEO of the company. He just joined as the previous dude got ousted. The VC firm The Blind Fund, who supplies most of the cash, ousted the previous CEO in favour of Billy who they thought would play ball better.

Kaiser Soze – One of the general partners at The Blind Fund.

Kaiser Soze – So Billy, what are we going to do to get some traction? It’s been over four years, and BlockMEX still makes zero revenue. You guys need to do something new.

Billy – Well, I have a new idea. ICOs are toxic. The projects are trash, and the regulators hate them. What about STOs, Securities Token Offerings?

Kaiser Soze – Tell me more.

Billy – Ok, so imagine you want to buy a fraction of a piece of real estate. And then you could trade your fractional ownership, which is represented by a token.

Kaiser Soze – Call me old fashioned, but isn’t that just a Real Estate Investment Trust (REIT)? Most stock markets around the world already have those.

Billy – But do REIT’s ride on a Blockchain? Do they use Distributed Ledger Technology to hold the record of the title?

Kaiser Soze – No, but they trade billions of dollars a day already, and you can easily trade them with your local broker almost everywhere in the world.

Billy – You don’t get it. If the token rides on a Blockchain, like the Ethereum protocol, then they reach help anyone anywhere. Like those poor investors in North Korea who have nowhere to put their savings. Now they can own a token.

Kaiser Soze – Anyone, really?!! It’s pretty clear these are securities, right?

Billy – Yes.

Kaiser Soze – So that means they are regulated, and in most places the exchange needs some sort of license.

Billy – Yes, that’s correct.

Kaiser Soze – The same license the incumbent exchanges already possess?

Billy – Correct.

Kaiser Soze – And the technology stack that operates the matching engine must also be approved by the regulator, right?

Billy – Correct.

Kaiser Soze – So you are replicating the same technology, getting the same license, to go after the same client base?

Billy – Correct.

Kaiser Soze – Ok, sounds like a winner. We can keep pumping money in, and make it up on volume. [The Blind Fund never saw a negative gross margin business they didn’t like.]

Billy – Exactly what I was thinking. Everyone is talking about STOs and how they are the future. Another type of STO is an equity offering of a startup.

Kaiser Soze – So how would that be different than doing an IPO?

Billy – Well many companies these days are staying private, the cost of doing an IPO and all the regulatory and compliance costs, are daunting—-especially for smaller companies. There should be a way for smaller technology companies to raise funds by selling some type of equity.

Kaiser Soze – Would these companies pay dividends? I’m assuming these are unprofitable companies.

Billy – Not only would they not pay dividends, there would be no audited accounts, or any duty to really explain anything to their investors.

Kaiser Soze – Wow, that’s amazing. How would this STO thing fit in on the balance sheet?

Billy – Not sure on that one yet.

Kaiser Soze – Traditional financial theory would suggest that this token is worthless because there is no cash flow.

Billy – Come’on Kaiser. We have been through this before. Traditional finance is dead. We are in a new paradigm. Don’t be a luddite.

Kaiser Soze – I know, I know. But if you are selling equity like securities, wouldn’t that need to be registered with a national regulator?

Billy – Shhhhhh.. Don’t tell anyone. We are just going to shoe horn this one in. Because we use a Blockchain and or Distributed Ledger Technology, those rules don’t apply. The best part is, we can absolve ourselves of any legal liability by basically telling investors when they buy these things they actually have zero rights. ROFL.

Kaiser Soze – Man, this Blockchain shit is LIT! You can do anything.

Billy – I know, right? Maybe the only thing we can’t do is become revenue positive.

Kaiser Soze – Don’t worry about that. I know some people in the desert, who have more cash than brains. They won’t let us down.