Grab Them By The Rupee

Governments around the globe fight a constant battle to obtain as much data as possible pertaining to their subjects’ wealth. For governments and banking systems that are viewed as corrupt and unsafe, this battle is even tougher.

The majority of Indians are very poor. However with a population approaching 1.3 billion, the amount of wealth in aggregate held by the poor is substantial. Indians do not trust banks. They trust gold. India consumes the most gold of any nation globally.

The poor aren’t stupid. Depositing their hard earned Rupees at the bank will yield 4.00% per annum. Unfortunately, September 2016 YoY CPI inflation totalled 4.31%. [Trading Economics] If Indians leave their money with the bank the yield is negative. It is much better to hold cash in the form of banknotes and gold outside of the banking system.

As a result of Indian’s propensity to save wealth outside of the formal banking system, the vast majority of plebes are unbanked.

Bloomberg reports:

“In a surprise announcement late Tuesday, Prime Minister Narendra Modi banned 500-rupee ($7.50) and 1,000-rupee notes effective midnight, sweeping away 86 percent of total currency in circulation.”

The party line is that this will help fight corruption and tax evasion. That may be the case, but the vast majority of this money is held by poor Indians trying to save outside of a banking system they don’t trust. Now they must register with a bank, and subject their meager wealth to constant surveillance and the threat of taxation.

In India you need a license to do almost anything. Licenses cost time and money. For those who survive in the informal economy, they may no longer be able to accept payment for their services without rubbing up against mafioso government officials.

Payments companies are overjoyed.

“This is the golden age to be a tech entrepreneur in India. Specially a fintech one,” tweeted Vijay Shekhar Sharma, the founder of Paytm, whose investors include Alibaba Group Holding Ltd. “Keep the money digital.” [Bloomberg]

Keeping the money digital is a laudable goal if it increases financial freedom. The silver lining to this gambit is that awareness surrounding other forms of digital money will rise in India. If one cannot deal in cash, what forms of digital money can achieve the same effect? Regular readers of this newsletter know the answer to this question is obviously Bitcoin.

Bitcoin in India is growing quickly. The Reserve Bank of India has softened its stance on Bitcoin, and small exchanges are beginning to operate. Once the masses are comfortable accessing their wealth via a mobile device, they will begin to question how they can save and accept payments electronically outside of the banking system.

This action should also serve as a wakeup call to savers globally. Governments hate cash. Now that it can feasibly be eliminated, expect similar actions from other developed and developing nations. The ECB ceased printing the 500 Euro note. Various American economists have called for a ban on $100 notes. [Washington Post] The war on cash is real.

Once a government bans cash, it is usually too late to begin the process of converting paper currency wealth into gold, real estate, or Bitcoin without facing some form of taxation. As always, keep calm, and buy Bitcoin.

SEGWIT: Alive Not Dead

The software for SEGregated WITness (SEGWIT) was finally released last week from Bitcoin Core with a proposal for a soft fork that could happen as early as December. Miners will be able to start signaling that they are pro-segwit from November 15th.

Since the announcement, Bitcoin has rallied almost 10% to its currently tradable figure of $745. The Yuan devaluation has sparked the rally, but this release has definitely added fire to it. As discussed in previous newsletters, any path where Bitcoin miners and devs can rejoin as a community and move on from the block size debate is a positive one, whether that be from Bitcoin Unlimited (BU), Bitcoin Classic, or segwit.

Segwit is seen as a better option given that it does not require a hard fork to be implemented, nor does it introduce a democratic hierarchy, which BU and Classic require to succeed. Furthermore, the software is backwards compatible meaning that miners / nodes who do not accept segwit (if it becomes activated) do not need to update.

The timeline is as follows:

  • After 15 November 2016, the first 2,016 block period will begin where miners can start signaling support for segwit.
  • If 95% of those 2,016 blocks show support, then segwit locks-in.
  • If not, then another 2,016 block round will occur.
  • This will keep repeating until a 95% support period has been reached or segwit will recede into the darkness after the last 2,016 block period concludes after 15 November 2017.

Summarising the main benefits of segwit:

  1. Elimination of unwanted transaction malleability – the segregated witness. Essentially this helps hardware wallets that aren’t connected to a blockchain and don’t have the block history to avoid a “fee attack” whereby a transaction can be split up and spend more in mining fees than initially thought. Read this Bitcoin Magazine article to learn more.
  2. Capacity increase – The network will be able to support 70% more transactions. In other words, a Blocksize increase to 1.7MB.
  3. Lightning Network capabilities will available in the future.

There is still a large part of the community unhappy with segwit given that BU and Classic both can support larger than 1.7MB blocks. Initially a 4MB block increase was planned, but that has since been scrapped.

Some people have mentioned that the amount of complexity offered in this soft fork makes it technically difficult for anyone other than the core devs to work on it. Effectively segwit locks out other Bitcoin developers from participating.

If ViaBTC manages to hold its hashrate above 5%, and effectively blocks segwit by choosing to run BU nodes, then Bitcoin could perhaps be stuck in limbo for another year or so.

The percentage acceptance rate during the first 2,016 block period will be interesting to watch come November 15th. Traders anticipating a failure to lock-in segwit will close long positions. If we see a large amount of support, then we could revisit $1,000 by the end of the year.

ZEC Post Mortem

Figure 1

polo zec price.png

October 28, 2016 has set its place in the Cryptocurrency History books with what must be the record for the largest Pump and Dump. (See Figure 1)

While watching the live stream out of the Zcash headquarters for the Genesis block, ZEC futures prices on BitMEX pushed past 1 XBT, from a listing price of 0.025 XBT. As the first block was mined and subsequent blocks followed, the hype was real. Bitfinex started to publish bids for ZEC in an early attempt to gain liquidity; however, their capped prices at 0.55 XBT weren’t as attractive when Poloniex launched the ZEC/BTC market and bids started to pour in at around 10 XBT.

There was chatter about trying to post a high price in an attempt to honeypot BitMEX traders to bid up from the current 1 XBT price, which they initially did. Prices moved up to 2 XBT, and then back down to 1.2 XBT. Around this time ludicrous bids for 1 ZEC were being made on Poloniex: 100 XBT, 1,000 XBT, 2,000 XBT, 2,600 XBT etc.

And then the first few ZEC started to arrive at Poloniex.

Early miners saw an opportunity to capitalise on the hype, and started to offer their precious ZEC at levels up to a high of almost 3,300 XBT.

That is 3,300 Bitcoin for 1 ZEC.

Prices then bounced between 3,000, 2,000 and 1,000 with no end in sight. Having said that, given the amount of supply at this time was less than the age of consent in Japan, the same ZECs were being passed around more than Sasha Grey in Black Power 3.

BitMEX shortly followed, with prices rising up to the self-imposed 10 XBT limit. The hangover set in, and prices crashed on both Poloniex and BitMEX. Poloniex crashed down to a low of 15 XBT, with BitMEX falling to 1 XBT.

In a short survey, some successful traders on BitMEX opined that they were bullish on Zcash from the very beginning. Those who got Auto-Deleveraged kept re-entering positions and played into the hype of it, taking profit close to the top. Some traders made stupendous sums in under 10 minutes. Although the more honest of them acknowledged this was “pure gambling”.

Prices have somewhat stabilised. Poloniex trades between 1.2 and 1.5 XBT, and the December BitMEX futures contract, ZECZ16, trades much cheaper at 0.5 to 0.6 XBT. The spot over futures premium has stabilised at around 250%, down from 500% earlier this week. Figure 2 displays these numbers over the past 3 days.

Figure 2

We can estimate a “fair value” for ZECZ16 based on the spot price and the currency’s inflation rate. Currently there are approximately 4,516 ZEC. By 30 December 2016, 333,800 ZEC will be in circulation. That is an outright inflation rate of 7,292%. Spot ZEC/XBT currently trades at 1.25 XBT on Poloniex. If we discount that by the inflation until 30 December 2016, we get an implied ZECZ16 price of 0.016911 XBT. ZECZ16 currently trades at 0.4422 XBT. By this analysis it is 26x overvalued.

Is the hype over? Perhaps, but the fundamentals behind ZEC have not changed. This crypto is definitely a heavyweight when it comes to anonymity. It created panic in what was thought the market leader Monero, which is down 75% off its highs back in early September when Alphabay decided to adopt the currency for usage on its platform.

ZEC may not be worth 3,300 Bitcoin (or approx $2.5m per coin), but with Bitcoin fungibility concerns, anonymous transactions are the way forward for online gambling and darknet markets. It is estimated that over $1 trillion worth of bets and products are offered on these types of platforms globally.

My Xmas Wishlist: President Trump and a Fed Rate Hike

I am structurally long Bitcoin via my ownership stake in BitMEX, as such I want to see more volatility and more people turn to Bitcoin. I believe that a Trump win, and a Fed rate hike will add fuel to Bitcoin’s price rally.

Anthony Weiner’s wiener pics may land both himself and Hillary Clinton in the slammer for the rest of their natural lives. Due to emails recovered on his computer, the FBI is ‘reopening’ its investigation into Clinton. That bombshell was dropped last Friday night, and has caused a complete reversal of the American presidential race polls.

Trump who only weeks ago was behind by double digits, has pulled even. The spectre of a possible criminal indictment for obstruction of justice, and the mishandling classified material has all but finished Clinton’s chance of becoming the nation’s first female president.

I don’t believe that either of these clowns would alter Pax Americana’s crash course. However, a Trump presidency has spooked the markets and it will hasten the inevitable. There are a litany of economic, political, demographic, and social problems afflicting all developed and developing nations.

When traders become afraid, they begin to recognise all the ills of the world. That is how global financial crises begin. After ignoring all these issues for the past 7 years, a good old meltdown is on the cards.

Anything that gold likes, Bitcoin loves. Bitcoin and other digital currencies benefit from market volatility. The rise of Trump has caused gold to retake $1,300, bond yields to rise, and equity markets globally to slide. If he enters the soon to be gold-plated Trump House, I anticipate a Brexit style market meltdown.

The Federal Reserve met on Wednesday this week. As expected, they left rates unchanged one week prior to the election. They did however reiterate their stance that a December rate hike is extremely likely. Trump in various speeches has called the Fed’s policy of money printing irresponsible. Grandma Yellen will grant Trump his wish and hike. It would be just deserts for Trump to watch the S&P 500 freefall below 2,000 after his victory.

The election takes place next Tuesday, November 8th. Given how close the race is, I do not expect a clear winner announced for many days after the polls close. The 2016 election will be very similar to the 2000 election where the United States Supreme Court effectively crowned George W. Bush consul.

This uncertainty will do more damage to the markets than a clearcut Trump victory. During this vacuum, I expect Bitcoin and gold to perform tremendously. Add in the threat of a Fed rate hike, and continued devaluation of the Chinese Yuan, and you have the recipe for a $1,000 Bitcoin.

Bitcoin to $700 and Beyond

Figure 1.

Bitcoin has started to gain a significant amount of traction this past month with the devaluation of CNY. Previous blog articles (USDCNY 7.00 Equals Bitcoin $1,000 and Yuan Internationalisation and Bitcoin) have discussed why the Yuan is currently going through a devaluation process, where it is headed, and what it means for Bitcoin. If you want to save time, just look at Figure 1.

Figure 1 above shows Bitcoin / USD (an average comprised of Bitstamp, Coinbase and OKCoin USD), Trading Volume, and the offshore CNH and the onshore CNY exchange rates. The trend is up and to the right. CNY had the first large official devaluation on the 10th October (CNH surged higher the week prior), and in less than 20 days it has moved 10 fen or about 1.5%. Bitcoin has gone from trading at $605 at the start of this month, past the ominous level of $666, and through $680 towards $700.

Figure 2 below shows the same Bitcoin spot price against its Volatility and the China Premium (scaled up 15x). When Bitcoin / USD is viewed against these variables, a similar up and to the right trend appears. Below is a table with the observed correlations.

Correlation CNY Trading Volume Volatility
Spot USD 0.25 0.16 0.71

Figure 2.

What’s happening with the rest of the world outside of Bitcoin? In spite of the continued devaluation of the Yuan, financial markets remain in risk-on mode. When viewed against the USD Index which strenghtened 3.6% in the past month, the Yuan is still relatively overvalued. [WSJ]

December presents the perfect time for the Fed to raise said Federal Reserve Bank of San Francisco President John Williams. [WSJ] The US election circus concludes in under two weeks. In addition, US economic data contiues to improve. That is why the odds of a rate hike are north of 70%.

Will the financial markets crash if the PBOC devalues CNY above 7.00 by December? It might take much more muscle this time around to force Gradma Yellen to duck and cover.

To take advantage of this, buy XBTZ16 futures contracts expiring 30 Dec 2016 at 12:00 UTC. Currently the annualised premium is trading at 28%. By historical standards, this is quite low for a contract with 2 months of remaining time value. Expect this to blow out if we see continued price appreciation in Bitcoin due to a weaker Yuan.

Need to Hide 200 Million Yuan? Use Bitcoin Instead


Since October 10th, the first trading day in China after Golden Week, the PBOC has weakened the Yuan by over 1.00%. USDCNH is approaching 6.80. CNH is the offshore and freely tradable version of the restricted onshore CNY.

China recently published its 3Q16 GDP. Surprise, GDP grew at 6.70% exactly what analysts expected. If you believe any economic data from any government globally, I have some Paycoin to sell you. The data point of most interest is China’s monthly FX reserves. Goldman Sachs analyst MK Tang estimates that capital outflows in September accelerated to US$78 billion up from US$32 billion in August. He also stated that the official number released by China was bogus.

The PBOC needs to sequester as much capital inside China as possible to mitigate the massive amount of credit being extended by the nation’s banks. As of September the Banking Regulatory Commission reported China’s domestic banking assets totaled CNY217.3 trillion (US$32 trillion), which is up 14.7% YoY. [Zerohedge] They have been closing the gates since August 2015. SCMP reports that SAFE closed 56 illegal underground banks involving more than CNY1 trillion.

To make matters worse, Xi Jinping’s anti-corruption drive has rich comrades running scared. If they look hard enough, almost every wealthy person could be convicted of some sort of graft. What is worse is that the “law” changes to fit the prerogatives of the party. If you do not fall in line with Xi Jinping, you will be made an example of. As a result, government officials and wealthy citizens desperately try to spirit their capital outside of China.

A recent story illustrates the plight of rich Chinese officials. Wei Pengyuan, the former vice chairman of the National Energy Administration’s coal department, was charged with accepting bribes. Police seized CNY200 million (US$29.5 million) worth of cash from his apartment. [Zerohedge]

The conduits through which cash moves abroad are being shuttered. Desperate officials have turned to hiding vast amounts of cash in their primary residence. One problem in China is is the largest denomination bill is worth 100 CNY. This was deliberately done to make it very hard to hold large amounts of wealth outside the government controlled banking system.

Wei’s stash of cash weighed an estimated 1 ton. Wealthy Chinese need a store of wealth that is outside governmental control, and easily portable. Enter Bitcoin. Many people perceive China’s appetite for Bitcoin to be predicated on a desire to get money out of the country. Getting the wealth out of the country is proving to be very tough, therefore the more important concern is hiding in plain sight.

Bitcoin is weightless, and can be accessed using any internet connected device. As of December 2015, China had 620 million users of internet connected mobile devices. Bitcoin can be purchased in as little as 30 minutes from one of the large Chinese Bitcoin exchanges. Bitcoin / CNY is the most liquid pair globally. Put all these factors together, and it is a no brainer for wealthy individuals to store a portion of their wealth in Bitcoin.

Bitcoin purchased need not ever be converted into USD. Bitcoin can be the final destination of wealth for Chinese citizens. When viewed in this light, the China premium for Bitcoin could rise to levels not seen since 2013. In 2013, the China premium reached a high of 40%.

The main stumbling block is education. However, with more and more wealthy comrades meeting a bullet for economic graft related offenses, their life could depend on learning.


Can You Survive An Interest Rate Hike?

This week I attended a Bitcoin meet-up in Hong Kong where a serial Bitcoin / Blockchain angel investor gave a talk. His investment framework consisted of investing in companies that had low margins but could scale easily.

One audience member asked what he would do in a situation where margins went to zero or even negative. Many blockchain application businesses fall into this category. Part of his response was that due to quantitative easing (aka money printing) money was free, so investing in businesses with zero or negative gross margins can be done. If rates are more negative than the cash flow burn of the company, in our bizarro world that actually is outperforming.

I then followed up with a question on how his thesis would be impacted if interest rates rose. He responded that in the near future that wouldn’t happen, and even if it did policy makers would realise their errors and quickly revert back to printing gobs of money.

Whenever someone completely dismisses the possibility that a central tenet of their investment thesis cannot be invalidated, alarm bells ring. During the 2003 to 2007 US subprime housing bubble, the common refrain was that housing prices NEVER went down. By 2008, that central tenet of faith was proven grossly erroneous.

Central banks over the past 25 years have conditioned investors to expect lower interest rates every time there is a financial hiccup. In 1990 the US 10-Year Treasury Bond yielded 7.94%, today it yields 1.75%. The effect of falling interest rates has pushed investors further out on the risk curve to generate stable income.

Bitcoin / Blockchain startups primarily fund themselves by selling equity to investors, by issuing tokens through Initial Coin Offerings (ICO), or through retained earnings (assuming the company is profitable). Most startups in the early stages sell equity.

A Thought Experiment

Assume you are an angel investor and you share the worldview of the speaker I spoke about earlier. Essentially you invest in scalable Bitcoin / Blockchain businesses with the hope that a greater fool will emerge, allowing you to exit your investment. Remember it’s the 4th Industrial Revolution; you don’t want to miss out. You have a pool of capital that you will spread amongst various startups. Here are some assumptions about your investing strategy:

Initial post-money valuation: $5 million
Years to exit: 7

Your portfolio’s performance is benchmarked against owning high-yield US corporate bonds. While many think that money is “free”, it definitely is not unless you are an AAA-rated developed market corporation. Everyone else must pay to play.

I chose the BofA Merrill Lynch US High Yield Effective Yield as a proxy for what an investor can earn buying riskier corporate bonds. Investing in startups is infinitely riskier than buying high-yield corporate bonds, as these companies produce actual cash flow.

The Federal Reserve Bank of St. Louis publishes the historical effective annualised yield. The below table lists current and historical annualised yields for the index.

Annualised Yield 7-Year Compounded Return
Current 6.14% 51.76%
Minimum 5.16% 42.22%
Maximum 23.26% 332.27%
Average 9.28% 86.12%

The majority of the startups that you invest in will die within 7 years, and you will lose 100% of the money invested. A small percent will exit at a valuation that is multiples higher. Your performance depends on your ability to pick winners.

Break-even Success Rate = (1 + Opportunity Cost) / (1 + Exit Return)

Break-even Success Rate: The success rate at which you are indifferent to investing in startups vs. buying high-yield US corporate bonds

Success Rate: Defined as the % of startups in your portfolio that complete a successful exit

Opportunity Cost: The 7-year compounded return of the high-yield index

Exit Return: The return generated after the startup has completed an exit

Exit Return = (Initial Valuation / Final Valuation) – 1

The below table lists the Break-even Success Rate under different scenarios

Current Minimum Maximum Average
Avg Exit Valuation vs. High-Yield Returns 6.14% 5.16% 23.26% 9.28%
$50mm 15% 14% 43% 19%
$100mm 8% 7% 22% 9%
$250mm 3% 3% 9% 4%
$500mm 2% 1% 4% 2%
$1bn 1% 1% 2% 1%

It is hard to pin down the global average exit valuation for startups. From various articles I have read, startups on average exit with valuations between $50mm to $100mm. If we assume bond yields normalise near 10% per annum, 9% to 19% of your startup portfolio must successfully exit. Even in the current “low” interest rate rate environment, you still must be a very skilled investor to break-even (8% to 15% success rate).

Achieving a $50mm+ exit valuation is no easy task. Most likely after your angel / seed investment, the company will subsequently attempt to raise a Series A and then B to grow into a juicy acquisition target. Most likely after each round, your equity stake will be diluted.

The below table reproduces the Break-even Success Rate assuming each successful startup does two subsequent financing rounds and existing investors are diluted 20% in each round.

Current Minimum Maximum Average
Avg Exit Valuation vs. High-Yield Returns 6.14% 5.16% 23.26% 9.28%
$50mm 24% 22% 68% 29%
$100mm 12% 11% 34% 15%
$250mm 5% 4% 14% 6%
$500mm 2% 2% 7% 3%
$1bn 1% 1% 3% 1%

Instead of achieving a 9% to 19% success rate, you now must achieve a 15% to 29% success rate if interest rates normalise. Remember, you are only breaking-even. For all the hard work of identifying promising startups and mentoring them, you have not generated outsized returns. Wouldn’t it be much easier to log onto Interactive Brokers and buy a high-yield bond ETF?

Because you invest in companies with low to zero gross margins, your only hope is to pass the hot potato onto investors who are more risk seeking than yourself. You have no expectation of dividend income. As interest rates rise, the universe of assets that yield high returns with less risk grows. The pool of fools will decline, and your portfolio will struggle to break-even vs. investing in a basket of high-yield corporate bonds.

There are many Bitcoin / Blockchain businesses and business models that generate real revenue, and are defensible. One only has to look at Bitfinex to see how profitable a “properly” run Bitcoin exchange can be. For the full year 2015, Bitfinex generated US$7.03 million of Net Income on US$9.35 million of revenue.

Do The Twist

The BOJ was the first central bank to explicitly target a steeper yield curve. In a recent speech, Federal Reserve Governor Eric Rosengren stated that the Fed should engineer a steeper yield curve. Many financial analysts are calling this new form of yield curve targeting a “Reverse Operation Twist”. The original “Operation Twist” involved the Fed buying long-dated bonds and sellings short-dated ones in order to lower long-term interest rates.

Banks need a steep yield curve to make money. After printing money to stave off insolvency of commercial banks, central banks must now steepen the yield curve so that their stakeholders can return to profitability. The effects of a steeper yield curve are already working. JP Morgan, Bank of America Merrill Lynch, and Goldman Sachs have all reported impressive 3Q16 earnings.

As yields on the long-end rise, it will be easier to find positive yielding investments that are not as risky as punting startups that have no plan to ever generate a profit.

Fork Me Baby One More Time

The Ethereum Foundation successfully completed another hard fork of Ethereum (ETH) at block 2,463,000, which occurred Tuesday October 18, 2016. A second (well technically third) fork is due later this month. The original and “immutable” Ethereum Classic (ETC) chain is also due for a hard fork on October 25th.

What The Fork Is Going On?

Since September 18th, the Ethereum network has been constantly under attack by a person or group attempting denial of service (DoS) attacks on the Ethereum blockchain. This resulted in the network becoming “bloated” and filling up with a large number of pending transactions, increasing network confirmation times. They were able to achieve this by introducing an operation code (opcode). EXTCODESIDE opcode is the most well known, which caused miners and nodes to spend more energy processing the blocks than the reward they received.

Every operation that an Ethereum contract performs on the network pays a fee (called the gas fee). The attacker called the computationally expensive opcode, while paying low gas fees. Take a look at some of the transactionshere.

The introduction of Geth by the Ethereum Foundation is being hindered by the network bloat. That is why a hard fork was deemed necessary. This fork is known as the Ethereum Improvement Project 150 or EIP150. The next fork will attempt to remove empty accounts the attacker used to flood the network.

Since Ethereum Classic has the same code as Ethereum, the same attacks are happening. ETC devs have also introduced a fix, raising questions about the immutability of the chain and where the line in the sand is drawn for hard forks. Under what circumstances is a hard fork deemed necessary for a chain that markets itself as immutable?

What’s the point of the attacks? Is someone sending thousands and thousands of empty transactions, paying gas fees, just so they can get the Ethereum Foundation to enhance the network? Unless they intend to destroy the network (and fail to think the devs will fix it), then I think the below chart illustrates the main reason.

Both ETH and ETC have dropped more than 20% since the attacks started. Any shorts during this time have become extremely profitable, perhaps more so than the gas fees the attacker has been paying.

This presents an interesting opportunity. Let’s assume the attacks caused the price drop, and the subsequent forks fixed the underlying issues. This sets up ETH and ETC for a sharp move upwards.

Trade Idea: Go long ETH by buying ETHXBT; go short ETC by selling ETC7D. Hold the spread trade until the ETC hard fork on October 25th.

Can’t we all just get along? Scaling Bitcoin


Scaling Bitcoin had another conference in Milan over the past weekend. Sparing the devaluation of the Yuan, the price has shot up given a few developments (or lack there of) that have come out of it. 

If you will recall the last time devs and miners met back in early August (as written about here), the price moved down from the auspicious $666 to $610.
News about the meeting was the last thing people spoke about as Bitfinex stole the headlines with its hack the very next day.

Now the topic of scaling Bitcoin is back on the table with Segwit, Core, Classic and Unlimited all attempting to solve Bitcoin scalability issues. For those needing a gentle reminder about the ongoing debate, it comes down to the block size increase.

Right now Bitcoin has a 1MB cap and currently can process around 3 to 7 transactions per second, compare that with the VISA network, which can process hundreds of thousands per second.

To increase the number of transactions per second, Bitcoin must increase its block size. Here are the main schools of thought on how to achieve this:

Segwit and Core: The Segregated Witness soft-fork (Segwit) is a software update that has been in the works since the start of this year.

Spearheaded by Bitcoin Core Devs, it includes a wide range of features such as Malleability Fixes (the large transaction signature verification Denial of Service attack), Linear Scaling of Sighash Operations, and a Block size increase to around 1.6MB.

To be activated, this method requires 95% consensus. Further details can be found here.

In the future, Segwit will move to a second-layer chain technology called the Lightning Network. Lightning purports to process more transations quicker, but some doubt its readiness [Twitter].

Segwit’s main problem is that it requires an alteration of the structure of Bitcoin transactions and require all nodes, mining pools, wallets, exchanges, etc to update their software. There have also been questions surrounding why it will not increase the block limit to 4MB.

Classic (aka BIP 109):Classic is supported by Gavin Andresen and another team of Bitcoin devs. Classic would increase the block size to 2MB. Additionally it would introduce a democratic decision-making process surrounding future code changes.

Bitcoin Unlimited (BU): Advocates for no hard block size limit.
Instead, it allows users to manually set their limit on their own nodes. It also introduces a form of democracy. Lead devs will be elected every two years by BU members, and a president / secretary will be elected to handle high level management and administration issues.

After the end of the Scaling Bitcoin conference, the ViaBTC mining pool announced support for BU. [Medium] They dedicated all of their hash power to BU, approximately 10%, and thus effectively stopped Segwit in its tracks.

ViaBTC’s announcement directlyu preceded a price pop from $615 to $640.

Will Bitcoin Unlimited win the scaling debate? Who knows but this announcement is certainly causing waves in the Bitcoin community.

We have finally reached a point where miners are taking definitive action. That is price positive.

What Bitcoin needs most right now is certainty. Any generally accepted path towards more transactions being processed faster is better than wallowing in a sea of doubt as to how Bitcoin will scale.


Altcoin Mean Reversion Basket


It’s a testament to the increasing maturity of the Bitcoin market that traders get excited for only a 4% upward movement. Bitcoin’s breakout above $600 has reawakened trader interest. Over the past few months, many crypto traders focused solely on altcoins.

The chart above lists the weekly % return of Bitcoin and a few of the most popular altcoins in USD terms. Usually as Bitcoin rises, altcoins will get dumped aggressively. This time around the results are mixed.

The worst performer, Augur (REP), is down over 30%. This can mostly be attributed to mean reversion. REP still trades at multiples higher than it’s ICO price. For initial investors, REP is still a home run. It is to be expected that some of the air seeps out of that bubble as traders take profit. If Augur can successfully facilitate the creation of bets on anything in a decentralised fashion, I expect a resumption of the rally.

Ether (ETH) and Ether Classic (ETC) were the other dogs of the basket. ETH has experienced multiple DDOS attacks, and now it appears another hard fork is needed. Many traders are fleeing to the safety of Bitcoin in preparation of what could be another volatile event. I feel traders are losing interest in ETC. They are cashing in their free money and moving on. But with such a low nominal price, the price could quickly spike higher if a small amount of hashing power is added.

Monero (XMR) managed outsized gains when compared with Bitcoin. XMR appears to have bottomed and is now retracing its fall from grace. Over the last two weeks, XMR fell over 28%. With Zcash launching in under a month, will Monero be able to hold its own against another anonymous coin competitor?

Mean reversion is a powerful thing. Altcoin returns all over the map. An equally weighted basket where you buy the dogs and sell the stars, could prove profitable over a one to two week time period. This basket can be constructed entirely with BitMEX products, and using only Bitcoin as margin.

Example Basket:

Spread 50 Bitcoin of risk equally amongst the dogs, and buy each name. Spread 50 Bitcoin of risk equally amongst the stars, and sell each name. If the dogs rise and the stars fall, the basket will show a positive return.

Buy, The Dogs

Augur, REP7D


Ether Classic, ETC7D

Sell, The Stars

Ripple, XRP7D

Monero, XMR7D

USDCNY 7.00 Equals Bitcoin $1,000


As I predicted last week in my article entitled “Yuan Internationalisation and Bitcoin”, the PBOC resumed the depreciation of the Yuan after the Golden Week holiday. Throughout 2016, the PBOC defended USDCNY 6.70. On Monday, they weakened the yuan to 6.7008 and in the following days continued slicing and dicing.

The next psychological level for USDCNY is 7.00, which is 4.47% higher than current levels. Central banks are organisations committed to conning the market into believing their version of economic reality. All eyes are on the PBOC, and any action or non-action it takes will provide summary judgement on the health of the Chinese economy.

The China credit fuelled growth miracle has stalled. The politics of rebalancing the Chinese economy will prove very tough. Just like any other government, China is attempting to forestall tough decisions by continuing to pump enormous amounts of credit into the economy.

All these newly printed Yuan will find a home either domestically or internationally. If the PBOC continues to keep the Yuan relatively strong, inflation will rise dramatically at home. Food and housing inflation are already rising, and at some point the population will become more vocal about the raw deal they are receiving. They are losing their heavy industry jobs by the millions. At the same time, rent and property prices are skyrocketing in cities. Add food, in particular pork, price inflation to the mix, and you have a recipe for social unrest.

The Party cannot allow social unrest, so the other option is to export Yuan abroad. That will be done through currency debasement. Given the amount of new Yuan that must find a home, the currency will fall. The question is how fast and by how much. Up until the IMF Special Drawing Rights (SDR) inclusion, the process was slow and orderly. Now that China is through the velvet rope, they will become more aggressive.

Many financial analysts are calling for USDCNY at 7.00 by year end. Given the gyrations that currencies are experiencing these days, a 5% deprecation in three months is not extreme. After that physiological level is breached, will that launch a full scale flight to safety by anyone holding CNY?

I believe the answer is yes. And as the CNY approaches 7.00, Bitcoin will approach $1,000. The CNY knife party started last August. From August 2015 until this week, CNY depreciated by 8%. Bitcoin over the same period rose 128%. There are obviously other factors at play, but Chinese monetary policy is driving a substantial part of the Bitcoin rally.

Using a simple linear extrapolation, if CNY weakens further to 7.00, Bitcoin should rise to $1,050. Chinese monetary policy will not be the only ingredient needed for Bitcoin to pop through its all time high. But if Bitcoin can take out $700 then $800 on the back of a weaker Yuan, a positive feedback loop will form and help propel Bitcoin higher.

New Product Futures Added, REP and XRP

Augur Product Details:

Symbol: REP7D
Underlying: REP/XBT
Contract Value: 1 REP
Quote Currency: XBT
Expiry Date: Every Friday at 12:00 UTC
Settlement Currency: Margin and PNL are denominated in Bitcoin
Leverage: 10x

Ripple Product Details:

Symbol: XRP7D
Underlying: XRP/XBT
Contract Value: 1 XRP
Quote Currency: XBT
Expiry Date: Every Friday at 12:00 UTC
Settlement Currency: Margin and PNL are denominated in Bitcoin
Leverage: 20x