Crypto Trader Digest – May 2

BitMEX has partnered with Clef. Clef is an innovative way of account verification. Gone are emails, passwords, and 2FA; with just one simple phone app, you can log into your BitMEX account securely and quickly.

Clef completely replaces your entire login – no more username or password to remember. It also allows you to manage your session length from your phone. With the security & control of this approach, we are able to offer a session length of up to 1 month (up from 1 day) if you manage your session with Clef.

In other news, Trailing Stops are now available through the BitMEX UI. A Trailing Stop is a Stop order that moves dynamically with the price of the contract. Use Trailing Stops to better manage take profit and stop loss orders.

Daenerys returned to the Dothraki after hitting the dessert buffet, hard, sans dragons. In the presence of the Khal she claimed to be the mother of dragons. He laughed in her face. She was more a pale cherub than the Khaleesi.

In Bitcoin, the same has happened today – without the theme song. Craig Wright claims to be Satoshi Nakamoto, but his proof remains elusive. We are to believe that two dudes witnessed Craig sign block #1 and #9. There is nothing more antithetical to Bitcoin than this. A community based on mathematical proof & cryptography is supposed to just believe two dudes saw Craig do the the dirty.

Wright put forward a signature to prove his identity. It turned out to be copy+pasted from public signature data available from very early blockchain transactions. Is there any question that Wright is a scam artist? What does this say about the very public figures that are vouching for him?

Even the Economist couldn’t hold back extreme skepticism of Wright’s assertions. I am surprised they even ran such a weak story. A painful retraction is inevitable.

Much smarter people than myself are waging successful war on this flimflam story on Reddit. I want to focus on the price implications.

After the articles and blog posts were published, Bitcoin received the stick. Today is a Chinese public holiday so volumes are muted. Traders are afraid that if Satoshi is outed, a government will force him to sell his stash to pay taxes.

Wright is Australian; capital gains taxes are assessed once the asset is sold. If they just sit there, then no tax is due. But even if he really is Satoshi, the thing traders fear most will not happen. Those coins will not be dumped any time soon. He claims he doesn’t have access to them, a Seychelles trust does.

After the initial shock, what is the best trade? During this afternoon’s pukefest, BitMEX June futures, XBTM16, got slaughtered. The % basis PA went from 65% to 35% in a matter of hours. Given the remaining time value in the June futures, this is a golden opportunity to buy low.

The price will either collapse testing $400, or continue the upward ascent towards $500. At the $400 level, bottom feeders will aggressively buy cheap longer dated futures contracts. If we continue towards $500, traders will FOMO into June futures because they rightly believe if that level is breached, the market will gap higher aggressively.

The trade is to buy BitMEX June futures, XBTM16, vs. short sell spot Bitcoin.

The NIRP hydra slithered into a new market recently. Interactive Brokers notified all holders of JPY cash balances that they will be charged 0.25% per annum on cash balances. [ZeroHedge] Deposit holders until now were mostly shielded from the effects of NIRP. While they earned nothing at the bank, at least they weren’t charged outright.

Interactive Brokers cannot be happy about this decision. Even more Yen will flow into physical cash. It will not be used to purchased overvalued equities, bonds, or speculate in the FX casino. Interactive Brokers undertook this action because their bank began NIRP’ing them.

Koruda-san disappointed markets greatly by denying further monetary stimulus. The ineffectiveness of the BOJ’s monetary policy in Japan has elicited new solutions to increase consumer spending and investing. [Bloomberg] A wealth tax on inert corporate cash is the new trial balloon being floated.

One proposal states that corporations be charged 2% per annum on cash balances. While the intended outcome is for increased spending on salaries and or CAPEX, this will certainly not happen. If corporates didn’t feel Japanese business conditions warranted increased spending before, they certainly won’t in the face of blatant expropriation.

Corporates will sell JPY and invest in any corporate or government backed debt instrument internationally. A deposit tax will certainly accomplish the BOJ’s goal of a weaker Yen. However after trillions of Yen crowd out other global investors from positively yielding securities, other countries will adopt similar policies lest their currency appreciate too greatly vs. the Yen (read China and Europe).

Retail Japanese investors possess fewer options than rich corporates. If their favorite broker begins charging them for cash balances, they will seek out safes, mattresses, gold, and alternative digital assets (read Bitcoin).

Mrs. Wantanabe is trading Bitcoin. Her trading activity is increasing. Average daily volumes at Quoine and Bitflyer have doubled since January. Japanese policy-makers are fighting a losing battle. No amount of money printing will fix a dying population. The surging inflation for consumer goods and energy will only retard family formation further. But try they must, and Bitcoin / Yen is quickly becoming a pair to watch. In cooperation with BitMEX, Quoine is launching Bitcoin / Yen 100x leveraged daily futures contract, XBJ24H. It is nearing completion. Soon anyone with Bitcoin will be able to participate in this market.

The most pressing concern for any government is how to finance itself. Usually governments recognise they can acquire the savings of their subjects via the banking system. The government bestows economic rents upon banks, who in return are mandated to hold a certain percentage of funds in government bonds. Fragile By Design: The Political Origins of Banking Crises and Scarce Credit by Charles W. Calomiris and Stephen H. Haber is an excellent book that describes the relationship between the form of government and the evolution of a country’s banking system.

While the Chinese government essentially owns all the banks, that doesn’t mean that citizens will place their savings with them. Citizens do so because they earn a return on deposits, and holding wealth in cash is very tough. The largest denomination in China is 100 CNY (about US$15). With such small denomination physical bills, it becomes quite difficult to buy big ticket items (cars, property, stocks, bonds) in cash. Thus citizens must transact through the government banking system.

If you happened to live or work in China a decade ago, a common sight would be an auntie lugging around a trash bag full of cash to buy an expensive good. Ever wonder why Chinese love man-bags? Try carrying around 10,000 CNY in cash; it’s quite tough using a traditional wallet.

China extended a gargantuan amount of credit over the past decade. Malinvestment and outright theft was rife. The consequences are rising non-performing loans (NPLs) at state-owned banks (SOE) banks, and capital flight (those who enriched themselves are getting out while they can).

Beijing has two options to deal with the issue.

Option 1: Extend more credit to roll-over the bad loans. This expands the money supply and creates inflation. Historically the citizenry bears this inflation tax through lower real-yields on banking deposits, and a weaker CNY. This option retards the transformation of China into a more consumer lead economy, which is a major policy goal of Beijing.

Option 2: Allow inefficient SOE industrial companies to go bankrupt. Beijing instructs the SOE banks to extend no further credit. This option creates massive unemployment. The masses of workers who migrated from rural inland farms to the vibrant coast will be cast back into the poor hinterland. This options creates social unrest, and investors in industrial firms’ equity and debt get bageled. When the elites and the poor have a common cause, watch out.

As a foreigner not privy to the inner workings of the standing committee, I can only glean Beijing’s intentions through the actions of various SOE companies, especially the banks.

Managers of SOE banks have a tough gig. They must please Beijing at the same time as their investors, both domestic and foreign. The big four banks (ICBC, Bank of China, China Construction Bank, and Agricultural Bank of China) are expected to show net profit growth each year. China is growing, the banks should be making more and more money. Bankers will do anything, cut any corners, fudge any accounting ratios in order to show YoY growth.

ICBC and Bank of China recently reported a growth in earnings; however to accomplish this feat, they had to breach the government mandated 150% bad-loan provision coverage. [Bloomberg] The C-suite managers are party officials; they would not breach these requirements unless Beijing tacitly approved.

It appears Beijing chose Option 1: the silent but deadly inflation tax. This confirms my view that the CNY will depreciate implicitly internally or explicitly externally. Whether the PBOC depreciates the CNY outright is irrelevant. As Chinese savers receive less on demand deposits, they will move out on the risk curve. We can see the effects of that in real estate, commodities, gold, and silver trading recently.

Any scarce money good asset, collateral, or commodity that can be purchased with a depreciating CNY will rocket higher in price. The whole digital currency complex will be re-rated higher as desperate Chinese savers do anything to preserve purchasing power. While the PBOC deflected attention from the CNY by halting the outward depreciation, watch the banks. Beijing’s policy actions will be transmitted through their favourite conduit. Those who listen will be made rich.

Bitcoin lending rates on Poloniex were over 1% per day when Ether was pumping earlier this year. The one thing that kept many traders from lending more Bitcoin on Poloniex was counterparty risk. 100% of your capital was at risk. Using the new BitMEX P2P swap product, traders will be able to earn the swap rate with less counterparty risk.

Trade Mechanics:

1. Deposit Bitcoin as margin on BitMEX.
2. Sell ETHXBT, the BitMEX P2P swap product.
3. Sell Bitcoin, and buy Ether.
4. Store your Ether securely.

Sellers of the ETHXBT contract receive the Poloniex Bitcoin borrow rate and pay the Ether borrow rate. Because the Bitcoin rate was higher than the Ether rate, ETHXBT sellers would receive daily income in Bitcoin.

The long ETH position is used to hedge the short ETHXBT position. When the daily interest received falls below your required rate of return, buy back the ETHXBT contracts and sell Ether for Bitcoin.

Due to the 25x ETHXBT leverage, you are only required to hold 4% of the value of the position with BitMEX. Rather than 100% of your capital being at risk, only 4% is. Even though not one Satoshi is held with Poloniex, you can still earn the high lending rates.

Once the BitMEX swap structure is live on all products, the trade can be done with USD and Bitcoin. Instead of lending USD on Bitfinex and placing 100% of your capital at risk, you can achieve the same economics with as little as 1% of your capital at risk on BitMEX.

More announcements about the launch date of ETHXBT will be forthcoming. As always, we appreciate feedback on how we can make this product better. You can trade a free beta version today on Testnet.