I was staring at my plush toy cactus, and I thought has anyone tried to decentralise zero? Later, I was messaging Meltem and through our conversation, the following ideas manifested themselves about the absurdity of 2018.
I dedicate this newsletter to the concept of zero. I have seen the future, and many crypto investors will become familiar with this round number, although they might not know it yet.
Abstract: Bitcoin Cash successfully split into two coins on 15th November 2018, Bitcoin Cash ABC and Bitcoin Cash SV. BitMEX Research sponsored a website, forkmonitor.info to track the two chains. There is now a “hashrate war” between the two coins and the hashrate is higher than one would expect given the price of the coins, such that miners are making large losses. The website has now been updated to help estimate the value spent mining on each side of the split and the loses miners may therefore be making.
(Notes: Screenshot of updated forkmonitor.info website)
Estimating the accumulated mining losses so far
Based on the mining spend since the split figure provided, one can estimate the total expected losses, based on the price of the respective coins, as the table below shows:
| Bitcoin Cash ABC | Bitcoin cash SV | |
| Mining spend since the split | US$887,963 | US$520,115 |
| Coins mined | 2,337.5 | 2,012.5 |
| Coin price | US$261 | US$97 |
| Potential mining revenue | US$610,087 | US$195,212 |
| Total Net profit/(loss) | (US$277,875) | (US$324,904) |
| Profit Margin | (45.5%) | (166.4%) |
(Source: Forkmonitor.info, Poloniex price data)
(Notes: Data as at 18:30 UTC on 16 Nov 2018. Mining spend calculated assuming standard Bitmain S9 miner performance and electricity cost of US$50 per MWh)
Although the table above shows that both sides are making losses, it illustrates why the ABC side may be in a stronger financial position than SV. Not only is ABC in the PoW lead (both with respect to the number of blocks and accumulated work), but the SV miners have larger expected losses than ABC miners, due to the lower price of the SV coin. The SV losses are also larger relative to the potential revenue, with a profit margin of minus 166.4% compared to ABC on minus 45.5%.
Despite this situation, one should of course be aware that the prices of these coins are volatile and highly uncertain. There is no guarantee that either side will be able to sell the coins they mined. However, the ABC side does have a reasonably liquid futures market.
What will happen next?
Mining is currently continuing on both sides, with neither side willing to back down over the fight for the most work chain. Despite the bleak financial situation, the rhetoric on the SV side remains strong, with Coingeek stating that they may be prepared to keep this up for “months and months”.
This will bleed Bitmain’s cash and cryptocurrency reserves, because we are prepared to fight for months and months. If I were a shareholder or investor in Bitmain, I’d be asking why Jihan Wu is spending all your money to control BCH when Bitmain’s business supports multiple cryptocurrencies.”
(Source: Coingeek)
However, with just around 24 hours passing since the split and SV miners already US$324,904 in the red, using our conservative assumptions, we would be surprised if the situation continues like this for months.
Conclusion
While the rhetoric from either side is strong, in a way the hashrate battle is totally pointless. Users and investors are free to choose the ABC or SV side of the split no matter which chain has the most blocks or highest accumulated work. The narrative of being the higher work chain appears important to proponents of the two coins, but the prudent think to do would be to step back and mine the most profitable coin.
In our view, as the accumulated losses gradually start to increase, it is inevitable that the parties involved step back and allocate the hashrate such that its distributed in a proportional way to the prices of each coin. How long this will take, we do not know, but the forkmonitor.info website should provide a useful tool. It can help asses the extent to which financial pressure is building on each side in this somewhat pointless hashrate war.
At 16:00 UTC November 16th 2018, the BitMEX Bitcoin Cash / Bitcoin 28 December 2018 futures contract, BCHZ18, will revert to using the Fair Price marking method.
At 18:30 UTC November 15th 2018, the BitMEX Bitcoin Cash / Bitcoin 28 December 2018 futures contract, BCHZ18, will use the Last Price Protected marking method until further notice.
The Perpetual Swap derivative structure is a beautiful thing. Trading is simple, as it mimics the action of margin trading. Most retail traders are familiar with how to trade on margin. Using this wrapper, we can allow anyone to trade exotic derivatives.
“A quanto is a type of derivative in which the underlying is denominated in one currency, but the instrument itself is settled in another currency at some rate. Such products are attractive for speculators and investors who wish to have exposure to a foreign asset, but without the corresponding exchange rate risk.” – Wikipedia
The ETHUSD swap has become the most liquid ETH/USD trading instrument globally. It allows speculators to trade ETH/USD risk, without ever touching Ether or USD. Like all BitMEX contracts, the margin and settlement currency for ETHUSD is Bitcoin. This keeps things simple from a trading perspective.
When the ETHUSD product listed, I walked readers through the mechanics of a quanto derivative. Please read Why Quanto and Hedging a Perpetual Swap for a refresher.
Subsequent to the launch of ETHUSD, the price of Ether took a digger. In such a bear market, many traders expected the funding rate to stay negative. Logically that makes sense.
The market is falling, so the pressure on the margin should be on the sell side. However, the cumulative funding rate from launch till the present is positive. A positive funding rate means longs pay shorts.
My hypothesis was that the positive funding rate represents the quanto risk premium. I then tasked one of the BitMEX Research analysts to conduct a test:
Step 1
Starting on the 9th of August and ending on the 22nd of October, to capture the funding income, you sold ETHUSD (100 XBT notional), and hedged by purchasing Ether with USD.
Step 2
Every hour, you recalculated your net Bitcoin PnL, hedging that exposure into USD.
Step 3
Compute the net returns in USD terms on your portfolio for the period.
Step 4
Add net total funding you received (paid) from being short the ETHUSD swap over the period.
Results
Absent the positive funding, you would have lost $46,779.73 hedging your Bitcoin PnL. This is expected because you are short correlation. Over the past few months, the XBTUSD and ETHUSD correlation has risen.
When the net funding payments received, $46,010.85, are added, your trade essentially breaks even. Along the way you bought 31.94 ETH to delta hedge and accumulated a 43.83 XBT short position to PnL hedge. The conclusion is that even though the funding rate has stayed positive, this funding compensates for the quanto risk premium.
Correlation is rising, therefore traders will bid up the ETHUSD swap over the spot price to profit from the quanto PnL. A positive funding rate results, and brings the market into equilibrium.
This is true over a long holding period. There were times where your net PnL was positive or negative. The chart above provides a time series of the cumulative PnL from this trade. As we can see, the market does misprice this swap occasionally.
It is quite amazing that in under six months, the ETHUSD swap has been priced to perfection. However, the volatility of both Bitcoin and Ether has fallen. When we return to a normal level of volatility, I expect fearful and greedy traders to push the ETHUSD swap away from the quanto adjusted fair price.
The trend is your friend until it ain’t. Humans are very bad forecasters. We take yesterday’s returns and extrapolate them linear and non-linearly into the future. We believe the world works in perfectly-fitted curves.
When the market reverses, as it always does, a coterie of sad pandas are left in its wake. 2017 was the year of jubilation; 2018 is the year of melancholy. The worst part is knowing your 2018 bonus, should you receive one, will barely buy you a Swatch.
We crypto traders should know better by now, but we never learn. The market may be down 70% from the $20,000 high, but from the mood of traders, Bitcoin might as well be worth bupkis.
When traders lose money, they lash out. They lash out on Twitter, Telegram, Reddit, and other social media platforms. The smallest perceived slight, triggers them worse than a Hillary supporter after the Trump coronation.
This is the Bear Market Blues.
We Have Been Here Before
The talented individuals at BitMEX Research did some analysis of the previous Bitcoin bull and bear markets.
They made a distinction between two measurements:
1. The peak-to-trough decline: A peak-to-trough decline is measured by taking the low of a bear market and dividing it by the high of a previous bull market.
2. The intra-market phase increase/decrease: This is calculated by taking the high (low) of the bull (bear) market and dividing it by the price at the start of that market phase.
They conclude that we have more to go in this current bear market. Due to the collapse in Bitcoin price volatility, I agree with this sentiment.
The Double Whammy
Wham, bam, thank you ma’am. Bitcoin volatility and price collapsed this year.
Traders hate sideways markets. Traders can go long and short, not sideways. The chop will eat you alive in a sideways market.
Contrary to popular belief, Bitcoin requires volatility if it is ever to gain mainstream adoption. The price of Bitcoin is the best and most transparent way to communicate the health of the ecosystem. It advertises to the world that something is happening–whether that is positive or negative is irrelevant.
The Bitcoin price volatility is the gateway drug into the ecosystem. The media writes about things that move; therefore no movement, no coverage. The diehard traders and engineers will always hear about a new asset class or technology in advance of popular media outlet coverage. However, their efforts will only be amplified if many more people discover El Dorado. That requires the lazy mainstream financial press to write.
If volatility stays at these depressed levels, the price will slowly leak lower. For those of us who lived through the 2014-2015 bear market, we all await that nasty ass candle that breaks the soul of the bulls. Then, and only then, will volatility and the price ratchet higher.
Limbo Time
How low can we go?
A 75% fall from $9,152 takes us close to $2,000. $2,000 to $3,000 is my new sweet spot but don’t tell Michelle Lee just yet.
The key consideration to “calling the bottom” is the price action around the last gasp of the bears. You will know it when you see it. And the best part is, you probably will be too chicken to click that oh so scary Buy button.
After 10 years, Bitcoin lives on, but the ecosystem still suffers from a critical weakness. Obtaining and maintaining a bank account that can process and clear USD is very difficult for any crypto-related business. The outcrop of this weakness is the industry’s clamour for all things Stablecoin.
Stablecoins fall into two camps. One subsect, of which Tether is the leader, are thinly- disguised USD money market funds. The other subsect are “coins” (Maker / Dai, Haven, Basecoin, etc.) that attempt to do an end runaround holding actual USD by using fancy math and pseudo behavioural economics.
USD Banking
The ongoing Tether melodrama highlights the difficulties of obtaining and maintaining USD banking facilities. Traders want to trade Bitcoin and other shitcoins vs. the USD. The crypto- to-crypto pairs are liquid at times, but we all still think in dollar terms. Therefore, exchanges that can offer these pairs will outperform their peers who cannot.
Tether is novel because it is a USD money market token transferred across the Bitcoin and Ethereum blockchain. The Tether organisation supposedly holds sufficient USD such that 1 Tether = 1 USD for those who can create and redeem Tether. Exchanges that previously only offered crypto-to-crypto pairs could offer a Coin to USD pair and externalise the hassle of dealing with banks onto Tether.
The demand was there, but the hard part is where to stash the cash. Tether acquired and lost banking relationships in a variety of jurisdictions. Others looking in at the Tether saga, concluded that using their connections they could offer a better alternative. Now we have Tether clones offered by various exchanges such as Gemini, Circle, and itBit.
Money Market Funds In All But Name
Money market funds are extremely important to a well functioning banking system. Individuals and institutions park their excess cash on a short-term basis and pick up yield. The money market funds invest in highly-liquid debt instruments. Short-dated government bonds, commercial paper issued by creditworthy corporates and short-dated bank loans, are some of the securities that a money market fund will hold.
Money market funds aim to be very low risk. Their most important aspect is they maintain a par value at all times, such that 1 unit = 1 USD. During the 2008 GFC, some money market funds were at risk of “breaking the buck.” Low risk debt became high risk; liquidity dried up, and investors rushed for the exits.
Today, Tether and clones thereof promise there is 1 USD for one coin in a bank somewhere. Some promoters are able to name their banking partners, some are not. The level of transparency pales in comparison to traditional money market funds.
The other key difference in the crypto sphere is these Stablecoins do not pay interest. The real profit driver of money market Stablecoins is their net interest margin. Why go through all the hassle of hosting USD banking for the crypto ecosystem if there wasn’t a massive future profit potential?
As interest rates rise, that becomes pure profit to the Stablecoin operator. Unscrupulous operators will claim to hold USD cash, while investing in riskier debt instruments. The worst scallywags will pull a Jon Corzine, lever up, and purchase the dodgiest credits to be had.
If you hold any of these money market Stablecoins, you must ask the following:
Wannabe Central Bankers
Another group of promoters asked the question, can you create a coin pegged to the dollar without holding any dollars as a backstop?
The substitute for physical dollars is math, behavioural economics, and cryptocurrencies. The reason why these projects need a shit-ton of non-dilutive suckers’ cash is because when shit hits the fan and their shitcoin trades less than par, the promoter must spend hard dollars, Bitcoin, or Ether to restore the peg.
Many of these projects wish to create a rules-based digital central banker; however, all they have done is obfusticate the need for physical cash by using complicated and boring whitepapers.
The central fact is that they are raising funds to act as the buyer of last resort. Otherwise, there is no need for hundreds of millions of dollars worth of investor money into any of these projects. If the math and behavioral modeling goes to plan, the coin should slowly accrue AUM and over time the peg should hold.
I challenge any project to return all the money they raised, and launch their coin purely based on its mathematical merits. I highly doubt I will have any takers.
I bet there are crypto George Soros imitators licking their lips at the chance to break the peg of these coins at the opportune moment. It will be glorious to watch.
Gresham’s law will hold. Money market Stablecoins with honest and transparent operators will accrue the vast majority of the AUM. Their wannabe central banker cousins will flounder under the weight of pseudoscience and hubris.
BitMEX Policy
Bitcoin Cash is expected to conduct a hardfork upgrade on 15 November 2018. There are two competing incompatible hardfork upgrade proposals, with the associated clients being Bitcoin ABC and Bitcoin SV. Therefore, there could be a chainsplit; users holding BCH prior to the hardfork could end up with coins on both sides of the split.
On settlement, the BCHZ18 contract will settle at a price on the Bitcoin ABC side of any split and will NOT include the value of Bitcoin SV.
This is consistent with the approach BitMEX took when Bitcoin Cash initially split off from Bitcoin in August 2017. The Bitcoin / USD contracts were settled based on the Bitcoin price at the time and did not reflect the price of Bitcoin Cash.
Impact on the BitMEX .BBCHXBT Index
The BitMEX .BBCHXBT Index is currently comprised of the following constituent exchanges:
⅓ * Poloniex + ⅓ * Binance + ⅓ * Kraken
At the time of the fork, if the constituent exchanges use the BCH/XBT symbol for the BCHABC chain then BitMEX will keep that symbol as a reference, otherwise BitMEX will refer to the relevant BCHABC/XBT symbol to be used as part of the Index.
Product Affected
BCHZ18
Further Information
For more information, BitMEX Research has sponsored a new website, ForkMonitor.info, to assist stakeholders monitoring events on the day of the expected split.
Effective 26 September 2018 at 12:00 UTC the December Altcoin / Bitcoin Futures contracts indices will include the last price of Binance and Kraken (where possible) in efforts to further strengthen the underlying stability of the reference price. Existing Altcoin / Bitcoin September Futures contracts will remain under their current indices until expiry.
Contracts Affected
ADAZ18
BCHZ18
EOSZ18
ETHZ18
LTCZ18
XRPZ18
New Index Creation For Affected Contracts
.BADAXBT will be (0.5 * Bittrex + 0.5 * Binance)
.BBCHXBT will be (⅓ * Poloniex + ⅓ * Kraken + ⅓ * Binance)
.BEOSXBT will be (⅓ * Poloniex + ⅓ * Kraken + ⅓ * Binance)
.BETHXBT will be (⅓ * Poloniex + ⅓ * Kraken + ⅓ * Binance)
.BLTCXBT will be (⅓ * Poloniex + ⅓ * Kraken + ⅓ * Binance)
.BXRPXBT will be (⅓ * Poloniex + ⅓ * Kraken + ⅓ * Binance)
In an effort to increase resource efficiency and reduce the likelihood of system overload, we are making a change to how we deliver images (partials) to newly established websocket subscriptions, for certain tables.
For clients working directly with our realtime API, images for new subscriptions to certain tables are now being delivered on an interval of 2.5 seconds. The following tables are affected:
– orderBookL2
– orderBookL2_25
– instrument
API clients can expect a latency of up to 2.5 seconds when subscribing to these tables before receiving a table image (a message with a ‘partial’ action).
This change only affects the first message for newly created subscriptions. Subsequent deltas (messages with an ‘update’, ‘insert’ or ‘delete’ action) will continue to be delivered in realtime and are not subject to an interval.
There are no changes to the schema of the API itself. Only the timing of the initial image is affected.
As a market leader in the crypto trading space, we are constantly looking at ways to improve and innovate new and existing products.
To further strengthen the trading of our XBT/USD products, BitMEX is proud to announce an introduction of Kraken’s XBT/USD price feed into the BitMEX .BXBT Index.
This change will take place on 16 September 2018 at 12:00 UTC on the XBTUSD Perpetual Swap product, new Futures products and on our Option products. Existing XBT/USD futures products that have not settled will remain under the existing index.
New Index Change
.BXBT will change from (0.5 * Bitstamp + 0.5 * Coinbase Pro) to (⅓ * Bitstamp + ⅓ * Coinbase Pro + ⅓ * Kraken).
Products Affected:
– XBTUSD
– XBT7D_D95
– XBT7D_U105
– XBTH19
Old Index Change
A new index, .XBT will be created that will be based on the old .BXBT index: (0.5 * Bitstamp + 0.5 * Coinbase Pro).
This new index will be phased out after the settlement of the affected products (28 Dec 2018 12:00 UTC).
Products Affected:
– XBTU18
– XBTZ18
From 06:53 to 07:03 UTC today, September 3rd, 2018, the service of our websocket API was impaired, which impacted the live data updates on the bitmex.com website as well as clients connected directly to our websocket API.
As part of a scheduled software release on the trading engine, our market data distribution component became saturated with a cascade of updates during the restart process which temporarily prevented downstream data distribution on the websocket API.
We apologise for the disruption. The root cause has been identified and mitigated in the production environment. BitMEX engineers have already deployed a fix for the underlying issue to prevent a re-occurrence. We are also improving a number of alerting mechanisms to enable us to recover from potential issues in a more timely manner.
