Crypto Trader Digest – Jan 18

Bitcoin Hearnia


The New York Times article about Mike Hearn’s ragequit from Bitcoin tanked the price 20% in 24 hours. Hearn called Bitcoin a failed project due to the failure of the community to adopt his BitcoinXT solution to the block size debate. He then threw all his toys, said he’s done with Bitcoin, and “sold” his stash. Slowly then quickly the price dumped to a low of $350.

Did Hearn reveal any new flaws in Bitcoin? No. The difference is that the New York Time wrote about it, and he was a core developer. When the New York Times writes something negative about Bitcoin emanating from a long time Bitcoiner you have to take notice. But after the knee-jerk reaction to go short 100x, you must evaluate whether any new information has entered the market.

Without a larger block size, Bitcoin could be relegated to a settlement currency that’s too expensive for small transactions. Hearn argues that this is a bad thing. Bitcoin is used primarily as collateral that can be accessed by anyone with an internet connection. Bitcoin is digital gold. We don’t carry around 1oz gold coins, nor do most people send around 1 Satoshi. If Bitcoin ultimately is only used for larger transactions, that doesn’t diminish its central role as a global form of collateral.

The Chinese own the majority of the hashing power. Nothing new here. Chinese internet sucks. Yeah, I’ve been there and agree, but I haven’t heard any Chinese miners cite that as a concern. Also, nothing new here.

Hearn attempted to craft a solution to the block size issue. Unfortunately it wasn’t gaining traction as quickly as he would liked so he declared Bitcoin dead. Bitcoin’s strength is the consensus mechanism by which changes must be made. If you are bearish Bitcoin because one or two men couldn’t immediately change the course of the project on their timetable, you have missed the entire point of Bitcoin. If Hearn thought trying to steer the course of Bitcoin was tough, I can’t wait to see how he handles dealing with large financial institutions at R3. R3 is an organisation that is bringing together large financial institutions to craft blockchain solutions. I look forward to a followup article in 2 years when he ragequits R3.

Will Hearn quit Bitcoin forever? I highly doubt it. Hearn wants the block size to be increased. How better to galvanise the community to adopt a solution than hitting everyone where it hurts. If a New York Times article drops miners’ revenue and retained earnings by 20% in 24 hours, they will make finding a solution a priority.

What should traders do? Bitcoin is ruled by sentiment. This article is still propagating. Even though the price rebounded sharply from $350 to $380, this is not over yet until… Until the PBOC resumes devaluing the CNY. A break below $350 will lead to a retest of $300. While I believe China’s CNY devaluation is the most important bullish factor in 2016, nothing moves in a straight line.

Capital preservation is rule #1. Outright positioning longer than a few hours will be tough until the PBOC shows its hand again. Spread trades are like those mentioned in the previous section are more prudent. The Bitcoin frown will not be turned upside down while this story is making the rounds.

A Bitcoin Believer’s Crisis of Faith

How To Trade Chinese New Year

year of monkey

China has a tough road ahead in 2016. Faced with collapsing world trade and a banking system bloated with bad loans, they have no choice but to export deflation abroad. That means lowering domestic interest rates, and weakening their currency.

The problem for China is that everyone knows the CNY is heading lower. Rich and poor comrades are rushing to front run the PBOC. The widening of the CNY vs. CNH spread was the perfect example. The PBOC is closing all obvious channels by which Chinese capital can escape. They need every Kuai to help rectify their gigantic credit bubble.

Looking through monetary history, central banks and governments like to unveil massive monetary policy changes during the weekend or bank holidays. The PBOC is quite lucky; the Chinese New Year holiday presents an excellent opportunity to massively devalue the Yuan and cut interest rates without the threat of capital flight. The Chinese banking system and capital markets will be closed from February 7-13. During Chinese new year, all things financial come to a halt. The PBOC has free reign to duck hunt dormant capital with impunity.

The PBOC will schlong (I hope The Donald retweets this) the CNY by devaluing it 5%-10%. That is my prediction. The next question is: if you share my view, what trades are appropriate?

The no brainer trade from August 2015 until last week was to short USDCNH. CNH is the offshore and unrestricted flavor of the RMB. The CNY is the onshore and restricted version. The PBOC is determined to stamp out large short sellers of CNH. They began heavily intervening in the spot market causing overnight CNH interest rates to spike. Shorts must pay overnight to borrow CNH. Today the PBOC imposed reserve ratio requirements on Mainland banks who hold CNH offshore. This further restricts supply, as banks cannot lend freely to willing speculators.

Institutional investors have access to CNH NDFs (non-deliverable forwards) and CNH currency options. The majority of readers cannot trade these products. Don’t be sad, that’s why there is Bitcoin. Below are my top Chinese New Year trades.

Long XBTCNY vs. Short XBTUSD Spot

For those who can deposit CNY onto a Chinese exchange, sell CNY vs. buy Bitcoin onshore in China. Then sell Bitcoin vs. buy USD on your prefered margin trading platform. You need to use a margin trading platform where you can borrow Bitcoin with which to short. The Bitcoin risk cancels out, and long USD vs. short CNY remains.

Due to the banking holiday, the CNY must be in China before February 7th. Also you will not be able to add additional size to the position until after Chinese New Year.

Long Weekly BitVC CNY Futures vs. Short Weekly BitMEX XBT7D Futures

The BitVC futures settle based on the CNY price of Bitcoin on the major Chinese exchanges. The BitMEX weekly futures settle on the TradeBlock XBX Index, which represents the major USD Bitcoin exchanges. Again the Bitcoin risk cancels out, and traders are left long USD vs. short CNY. The advantage of this strategy is that margin can be posted solely in Bitcoin. You can upsize the trade during the bank holiday period if it is going in your favor.

Long BitMEX March XBTH16 Futures vs. Short BitMEX Weekly XBT7D Futures

This is a volatility and interest rate play. If the devaluation occurs, Bitcoin will rally sharply. Forward expectations for price and volatility of Bitcoin will increase. Because the March future has more time value than the weekly future, it will appreciate more.

If the expectation is for CNY to devalue and Bitcoin to rally, why not just go long Bitcoin? There are no guarantees in life. Using spread trade strategies limits risk, but also the upside. If the devaluation doesn’t come to pass, the losses will be much less than an outright long position.

Yuan Borrowing Rate Surges in Hong Kong: What You Need to Know

China Said to Put Reserve Rule on Offshore Bank Yuan Funds

BitMEX Arbitrage Webinar Lesson 3

Thank you to everyone who tuned into Lesson 2 last Wednesday. Lesson 3 will air this Thursday 21 January 03:00 GMT.

Lesson 3 Topics:

  • Constructing Futures Term Structure
  • Curve Steepeners
  • Curve Flatteners

Lesson 3 Live Broadcast Link

Lesson 2 Recording

Lesson 3’s slide deck and spreadsheets will be provided on our blog and via email prior to Thursday.