Tezos Rapture

The most anticipated ICO of 2017, Tezos, will begin July 1st.

What does Tezos do? Do you really care? In a nutshell: Tezos is souped up Ethereum. Tezos claims to fix governance issues and features formal verification of smart contracts. They don’t want a DAOsaster happening on their watch.

Tezos, like Ethereum, will launch via an un-capped ICO. If you so desire, you can pledge all your hard earned Bitcoin and Ether for new and shinny Tezzies (XTZ). Tezzies are the tokens that are used natively on the Tezos protocol. They sound super cute, n’est pas?

Bancor raised $152 million this month and surpassed the DAO as the largest crowdfunding project in human history. One of Tezos’ esteemed advisors, Emin Gun Sirer, in a recent Hacking Distributed blog post, stopped short of calling Bancor an outright fraud. With ICO euphoria at an all-time high, Tezos could crush the record just set by Bancor. My target is $500 million.

The token generation event (TGE – repeat after me “it is not a security”), will take place over 2,000 Bitcoin blocks. That is approximately two weeks. Every fundraising milestone reached will be covered to death and will engage financial reporters, an element missing from past ICOs.

DLS = Shadystan

The structure of Tezos is a little different that many ICOs you may be familiar with. Essentially the founders constructed a US entity, Dynamic Ledger Solutions (DLS), that gets a payout if certain conditions are met. The Tezos foundation, who issues the tokens and receives the Bitcoin and Ether, is contractually obligated to pay DLS 8.5% of the proceeds and 10% of the tokens.

A Swiss foundation raises hundreds of millions of dollars from retail investors globally, and then funnels a significant portion of the loot back into a US company. DLS owns all the Tezos IP, which the foundation essentially purchases with proceeds from the token sale. Ding Ding Ding, SEC please look over here. Not even a white-shoe law firm like Wachtell Lipton Rosen & Katz could wipe the stink off of this structure.

If the price of Tezzies performs badly in the secondary market, and / or the tech does not deliver as advertised, a hoard of grannies and grandpas have a nice juicy US entity to sue into oblivion.

DLS also could face the wrath of an ambitious securities prosecutor. If I were a young Southern District of New York prosecutor, DLS is the perfect target for an opening salvo in the war on ICOs. Someone will get perp walked due to ICO events. Who better than a gaggle of Goldman and Bridgewater bankers to publicly tar and feather.

The Tezos founders are incentivised, through their DLS stake, to engineer a quick cash grab. The bigger the raise, the more immediate funds they receive through the 8.5% sale proceeds payout. The short-term incentives rub many potential investors the wrong way.

Rally Time

Even in Shadystan, people will rush to purchase Bitcoin and Ether for the sole purpose of investing in Tezos. The Tezos Bitcoin and Ether vacuum will provide a strong bid for the funding currencies. During the DAO ICO, Ether rallied 40%. A similar phenomenon should occur during the Tezos TGE, especially if I am correct with my fundraising target of $500 million, which is almost 0.7% of the total market cap of Bitcoin and Ethereum combined.

Tezzies will not be distributed until late 2017. During those months, people who invested more than they could stomach to lose will start getting the shakes. There is a non-zero probability that Tezzies never materialise. Freaked out investors will search for any guidepost as to what the market believes the price of soon to be distributed Tezzies to be. We can help – through the darkness, the light of BitMEX will shine bright.

BitMEX Has Got Your Back

The BitMEX Tezzie / Bitcoin 29 December 2017 futures contract, XTZZ17, is now live. Using only Bitcoin, traders can speculate on the future value of XTZ. Traders can go long or short with up to 2x leverage.

XTZZ17 provides a real market for the future value of Tezzies. Punters who bought into the ICO, and want to take some off the table, can short XTZZ17. Traders who missed the TGE but still want a piece, can go long XTZZ17. Each contract is worth 1 XTZ.

Given the hype surrounding Tezos, I think XTZZ17 could rival the intensity and volatility of Zcash prior to spot being listed. Get ready to strap yourselves in.

Postmortem: Downtime, July 5, 2017

Traders,

On July 5, 2017, we suffered a prolonged downtime – our longest since launch in November 2014 – due to a server issue. Trading was suspended from 23:30 UTC until 03:45 UTC, for a total suspension of 4 hours and 15 minutes.

Those of you who trade with us know that we take our uptime very seriously, and the record shows it. Before this month, we had not had a single month with less than 99.9% uptime, with our longest 100% streak reaching nearly 300 days.

So what happened?

The crypto market is exploding, as many of you know. While we have one of the most sophisticated trading engines in the industry, its focus has always been on correctness (remargining positions continuously, auditing every trade), rather than speed. This was a winning strategy from 2014 to 2016, and we’ve never lost an execution, but as we entered record-setting volume in the beginning of this year, requests started to queue up.

 

Optimizing the BitMEX Trading Engine

We started optimizing. The web layer, up to this point, hadn’t had any issues – we could always scale it horizontally – but the engine (at this time) cannot be horizontally scaled. We partnered with Kx, the makers of kdb+, which powers our engine. We began testing new storage subsystems and server configurations. We settled on an upgrade plan, set for five days hence (July 11), and began testing the switchover. We simulated the switchover thrice, each time setting a timer so that we could best estimate our downtime. The plan was:

  • Move to a larger instance with a faster local SSD, and
  • Move from bcache + ext4 to ZFS.

Some more details on those actions:

  • EBS is slow. So we would move the trading engine from an AWS c3.xlarge, which we used for its fast local SSDs in combination with bcache, to an i3.2xlarge. This gives us far faster local SSDs, nearly 20x the local SSD storage so we can easily cache our entire data set.
  • ZFS gives us some distinct advantages over other filesystems:
    • ZFS checksums individual blocks, preventing data rot. It can be scheduled to automatically check & repair drives (this is called a scrub), and can be configured to alert on varied criteria. This goes a long way toward ensuring the continued integrity of our data.
    • ZFS allow us to easily mirror and replicate our data across multiple volumes and physical locations.
    • ZFS snapshots are cheap, especially compared to traditional backup systems that must check the size & modified time of every file; in our testing, we can snapshot as often as every second (!) without any significant performance regression.
    • Kdb+ data is stored in a columnar fashion, like so:
      trade
      ├── foreignNotional
      ├── grossValue
      ├── homeNotional
      ├── price
      ├── side
      ├── size
      ├── symbol
      ├── tickDirection
      ├── timestamp
      └── trdMatchID
    • This data is highly compressible – in practice we see compression rates approaching 4x. This directly translates to less data over the wire to EBS and faster checkpointing & lower latency on the write log. For example, du is able to show the “apparent size”, that is, the size the OS thinks these files are, versus the actual space usage:
      /u/l/b/e/d/h/execution $ du --apparent-size -h
      955M .
      /u/l/b/e/d/h/execution $ du -h
      268M .
    • ZFS has the concept of the ARC (fast in-memory caching, a adaptive combination of MFU and MRU caches; in practice, the MFU cache is better for our use case), and the L2ARC, which provides a second-level spillover of this data, ideally to fast local SSD. It even compresses, leading to some eye-popping metrics:
      L2 ARC Size: (Adaptive)       1.17 TiB
      Compressed:            33.74% 403.90 GiB 
      Header Size:            0.08% 931.12 MiB
    • ZFS snapshots are amazing, and easy to code for. This allows us to do things that would be impossible otherwise, such as automatically snapshotting the engine data before and after any code changes. This is only practically possible because of the instance nature of snapshots.

I could go on. We’re ZFS superfans.

 

What Went Wrong

As Donald Rumsfeld once said:

Reports that say that something hasn’t happened are always interesting to me, because as we know, there are known knowns; there are things we know we know. We also know there are known unknowns; that is to say we know there are some things we do not know. But there are also unknown unknowns – the ones we don’t know we don’t know. And if one looks throughout the history of our country and other free countries, it is the latter category that tend to be the difficult ones.

We had the plan ready to go, checklists ready, and we had simulated the switchover a few times. We started preparing a zpool for use with the production engine.

Here’s where it went wrong.

19:47 UTC: We create a mirrored target zpool that would become the engine’s new storage. In order to not influence I/O performance on the running engine, we snapshot the data storage drive, then remount it to the instance. This is not something we did in our test runs.

Bcache, if you haven’t used it before, is a tricky beast. It actually moves the superblock of a partition up by 8KB and uses that space for specific metadata. One piece of this metadata is a UUID, so bcache can identify unique drives. And that makes perfect sense, in the physical world. It’s in the virtualized world that this becomes a problem. What happens when you snapshot a volume – bcache superblock and all – and attach it?

Without any interaction, the kernel automatically mounts the drive, figuring it was also the backing device on the existing (running) bcache device, and appeared to start spreading writes randomly across both devices. As you can imagine, this is a problem, and began to trash the filesystem minute-by-minute. It seemed odd that it mounted a bcache1 drive, but we were not immediately alarmed. No errors were thrown, and writes continued to succeed. We start migrating data to the zpool.

22:09 UTC: A foreign data scraper on the engine instance (we read in pricing data from nearly every major exchange) throws an “overlap mismatch”. This means that, when writing new trades, the data on disk did not mesh perfectly with what was in memory. We begin investigating and repairing the data from our redundant scrapers, not aware of the bcache issue.

23:02 UTC: A read of historical data from the quote table fails. This causes the engine team serious concern. We begin to verify all tables on disk to ensure they match memory. Several do not. We realize we can no longer trust the disk, but we aren’t sure why.

We begin snapshotting the volume every minute to aid in a rebuild, and our engine developers start copying all in-memory data to a fresh volume.

23:05 UTC: We schedule an engine suspension. To give traders time to react, we set the downtime for 23:30 UTC and send out this notice. We initially assume this is an EBS network issue and plan to migrate to a new volume.

23:30 UTC: The engine suspends and we begin shutting down processes, dumping all of their contents to disk. At this point we believe we have identified the cause of the corruption (bcache disk mounting).

Satisfied that all data is on multiple disks, we shut down the instance, flushing its contents to disk and wait for it to come back up.

It doesn’t. We perform the usual dance (if you’ve ever seen a machine fail to boot on AWS, you know this one): unmount the root volume, attach to another instance, check the logs. No visible errors.

We take a breath and chat. This is going to be more difficult than we thought.

23:50 UTC: We decide to move the timetable up on the ZFS and instance migration. It becomes very clear that we can’t trust bcache. We already have our migration script written – we begin ticking boxes. We clone our Testnet engine, which had already been migrated to ZFS, and begin copying data to it. The new instance has 2x the CPU & 4x the RAM, and a 1.7TB NVMe drive. We’re looking forward to the increased firepower.

00:30 UTC: We migrate all the init scripts and configuration, then mount a recent backup. We have trouble getting the bcache volume to mount correctly as a regular ext4 filesystem. The key is recalling the superblock has moved 8kB forward. We mount a loopback device & start copying.

We also set up an sshfs tunnel to Testnet to migrate any missing scraper data. The engine team begins recovering tables.

~01:00 UTC: We destroy and remount the pool to work around EBS<->S3 prewarming issues. While the files copy, we begin implementing our new ZFS-based backup scheme and replicate minutely snapshots, as we work, to another instance. This becomes valuable several times as we verify data.

~02:00 UTC: The copy has finished and the zpool is ready to go. Bcache trashed blocks all over the disk, so the engine team begins recovering from backup. This is painstaking work, but between all the backups we had taken, we have all the data.

~03:00 UTC: The backfill is complete and we are verifying data. Everything looks good. We didn’t lose a single execution. Relief starts flooding through the room. We start talking timetables. We partition the local NVMe drive into a 2GB ZIL & 1.7TB L2ARC and attach it to the pool to get ready for production trading.

03:05 UTC: We bring the site back online, scheduling unsuspension at 03:45 UTC.  Our support team begins telling customers the new timeline. Chat comes back on.

03:45 UTC: The engine unsuspends and trading restarts. Fortunately, the Bitcoin price has barely moved over these four hours. We consider our place in the world.

 

Postmortem

While we prepared for this event, actually experiencing it was quite different.

Over the next two days, the team was communicating constantly. We write lists of every thing that went wrong: where our alerting failed, where we could introduce additional checksumming, how we might stream trade data to another instance and increase the frequency of backups. We introduce more fine-grained alerts up and down the stack, and begin testing them.

To us, this particular episode was an example of an “unknown unknown”. Modern-day stacks are too large, too complicated, for any single person to fully understand every single aspect. We had tested this migration, but we had failed to adequately replicate the exact scenario. The best game to play is constant defense:

  1. Don’t touch production.
  2. Really, don’t touch production.
  3. Treat in-service instances as immutable: clone, modify, test, switch.

As we scale over the coming months, we will be implementing more systems toward this end, toward the eventual goal of having an infrastructure resilient to even multiple-node failures. We want to deploy a Simian Army.

Already, we are making improvements:

  • Moving to ZFS itself was a long-planned and significant step that affords us significantly improved data consistency guarantees, much more frequent snapshotting, and better performance.
  • We are developing automated tools to re-check data integrity at intervals (outside of our existing checks + ZFS checksumming), and to identify problems sooner.
  • We have reviewed every aspect of our alerting system, reworking several gaps in our coverage and implementing many more fail-safes.
  • We have greatly expanded the number of jobs covered under Dead Man’s Snitch, a service that has proven invaluable over the last few years.
  • We have implemented additional backup destinations and re-tested. We are frequently replicating data across continents and three cloud providers.
  • We continue to implement new techniques for increasing the repeatability of our architecture, so that major pieces can be torn down and rebuilt at-will without significant developer knowledge.

 

Thanks to our great customers for being understanding while we were down, and for continuing to support us.

In Defence of ICOs

The ICO mania elicits strong emotions from many market participants. Digital currency industry insiders and outsiders heap a constant stream of invective upon the ICO industry. While I believe the majority of ICO issues are worth close to zero, I do not dismiss the importance of this new mode of financing. Infact, I like many, believe the ICO phenomenon is part and parcel of the move to democratise financial services.

Professional Money Managers

The asset management industry comprised of hedge and venture capital (VC) funds began in earnest in the late 1960’s and early 1970’s. Labor’s victory over capital produced high union membership and demands for pension schemes in the public and private sector. That produced huge pools of investible capital worldwide, and especially in America.

In 1971 Nixon untethered the greenback from gold, and began the government issued fiat money bonanza that is still with us today. Alongside that, advances in technology produced the first commercial mainframes, which transformed financial markets and birthed many of the technology companies still inexistence today.

Professional money managers were needed to allocate the vast amount of capital now available. Due to the large amount of dry powder available, VC investors could invest in companies with unproven technology and no operating experience. Traditional banks would never loan to such outfits.

Proliferation of VC funds helped provide funding for most of the technology that we enjoy today. VC funds take an extreme amount of risk, and the successful shops are rewarded with amazing returns on investment.

The vast majority of the world cannot invest in a technology firm before the company goes public. VC funds only take investments from large public or private pension funds, and or very wealthy individuals. The public markets previously were the only place regular individuals could invest. Once a company is public, the risk is lower and so is the return.

A large percentage of the world is financially repressed due to low interest rates. The scramble for yield has pushed valuations to extreme levels for private and public companies. Many small and medium investors want to get in on the VC game, but cannot due to regulations and access. ICOs will change that.

ICO or VC Funding?

Why would a talented team choose to ICO their product over selling equity in their company to a VC?

Speaking from experience, raising money is a full time job that distracts key members of a team from producing a good product. Most VC investors are sheep, which is why most firms lose money. They will only commit capital to fashionable sectors or business models. Career risk prevents most managers from taking bold risks. If you lose money with everyone else, you keep your job. If you lose money alone, you’re out on the street. If your product idea or business model is not sexy, you will not receive funding.

The ICO process is much simpler and generates more publicity for a product. Instead of selling equity inthe company producing a piece of technology, the ICO sells an interest in the usage of the product itself.

Your intended user base can now own a piece of the product. That not only incentivises them to use it, but to tell others about it as well. Contrast this to VC funding, which generates a nice blurb on DealBook, but your target consumer is no more incentivised to use or talk about your product.

Because subscription for the ICO and distribution of the tokens is completely automated, it removes the investment banks from the capital raising picture. Investment banks typically charge between 3% to 7% of a traditional IPO’s deal size as a fee. That does not include payments to the hordes of lawyers needed to launch a deal.

Security or Token?

Breaking securities laws in many jurisdictions will land you in pound-me-in-the-ass prison. That is why teams issuing ICOs structure their tokens so they will not be construed as a security.

It is a token because it derives its value strictly from usage natively in an application(s) or protocol. Without properly functioning technology, the token is fairy dust. There is no ownership in the company producing the token, nor any income stream.

By lowering the barriers to obtaining funding, the masses can now participate in early stage and risky technology projects without the need for traditional gatekeepers. No gatekeepers means no fees to underperforming asset managers, banks, and most importantly regulators. Some governments will embrace ICOs, many will staunchly oppose them.

Swiss regulators are becoming relevant again by blessing the token structures of many high profile projects. However, the spineless Swiss turned rat on Americans with supposedly secret bank accounts. If the jealous American regulators start actions against high profile projects blessed in Switzerland, will the Swiss stand up and fight, or kiss the ring like they have in the past?

Teams should polish up on their soap handling skills, for some might spend a few nights in Rikers.

Shitcoin or Supernova?

Armed with a slick website, any two-bit charlatan can seduce money from desperate investors from the comfort of their parent’s basement. Early stage technology projects are inherently extremely risky. There is no proven market or use case for many of the projects coming to market.

The vast majority of tokens are worthless. However, diversification is prudent. If you hit one Ethereum, you can stomach many DAO’s.

The question is how to choose which projects will survive. The need for an expert opinion to help retail investors wade through a sea of shit will be needed. Firms that proport to conduct “research” will begin to produce ratings on projects they deem likely to survive. Many former tech analysts at banks and traditional research houses will transform into ICO analysts.

Hot or Not?

An ICO trader’s time horizon is in a matter of months. If they can get an allocation of the hot deals, they can easily flip them quickly for 50x to 100x returns.

During that time span, it is very difficult to surmise if the project will obtain mass adoption. The success of this strategy depends on a trader’s read on market sentiment, and access to favorable terms on deals.

For those who can’t feel the market well, lengthen your investment time horizon. The gyrations of the price during a less than 1 year time horizon are irrelevant if the technology is actually mass adopted.

Doing actual analysis and engaging in critical thought makes you more of an investor than a trader. Successful investors will hit 10,000x return jackpots over multi-year time frames, that traders would have exited at 100x within a few months.

Insider Trading

Being a successful trader means that you have better information and or access than the majority of the market. The digital token trading markets like traditional forex markets are not regulated, and will struggle to be. Therefore, if you can’t stomach insider trading, then don’t take on short-term positions.

Digital currency influencers and insiders are given discounts or guaranteed allocations so that they will publically lend their name to a project. Sometime exchanges are paid to list certain ICOs on their secondary markets. In other instances, exchange principles acquire a coin OTC, then list it on an exchange they control. Then they dump the shitcoin on unsuspecting newbie traders.

The existence of insider trading does not detract from the usefulness of ICO financing. The digital currency markets are the purest and freest form of trading available today. That is why I love working inthis industry.

If insider trading were allowed in all asset classes, price discovery would be continuous. Otherwise the minority that trades using inside information earn above average returns because the plebes are stuck watching Jim Cramer for investment tips.

Onwards and Upwards

Unleashing the power of the 90% of the world’s population that is not served by the traditional financial services industry will be a chaotic experience. There will be booms and busts. The current exuberance borders on manic, but I wouldn’t short it.

The age of the expert is waning. Succeed or fail, adults are making free and clear decisions about how to allocate their precious wealth. If you don’t like it, I hear Bernie Madoff has a nice regulated vehicle open for investment.

Bull Market Baby

There is nothing better than being a market participant during a long, strong, and explosive bull market. The energy and intoxicating optimism is second to none. The last bull market I was privy to was in the summer of 2007.

I Eat First

2007 was the best year in terms of financial services bonuses in human history. Around the globe the Finance Insurance and Real Estate (FIRE) industries were rocking.

I landed on the Deutsche Bank Asia Ex. Japan Equity Derivatives Sales desk in Hong Kong that summer. The desk was nicknamed the snake pit. I could tell stories for days about my three months spent with the team, but I’ll tell one of the best here.

The head of the desk was a burly Canadian. Let’s call him Moose. His sales desk was one of the most profitable in Asia, and he let everyone know it by the way he carried himself. I was an intern on the desk. We would arrive before the morning meeting, hungover of course, buy breakfast, buy lunch, and do whichever other menial tasks the desk required. There were strict rules, of course. If you missed the morning meeting, you had to buy breakfast for the whole team (about 10 people) from the Mandarin Oriental. Believe me, that’s not cheap, especially when they know you’re buying.

We thought Moose was away at a conference. As such, we didn’t include him in that day’s kebab lunch print. The whole desk loved this particular kebab joint located a 10 minute walk away from the office. We slogged through a wall of heat from the office to the restaurant and back, still in shirt and tie. I don’t recommend it – or the smell.

We return to the office with our bags of kebabs, and to our surprise, Moose appears. He asks us where his kebab was. We politely told him we didn’t order him one because we thought he was still away. Oh, that was the wrong answer.

He goes to his desk and sits down. A few minutes later he comes storming down the aisle, looks right at us, and yells loud enough for the whole trading floor to hear, “On this desk, I eat FIRST!”. I then offered up my kebab, and the Moose was mollified. Legendary.

The market, of course, turned. Fast forward 18 months, the desk was half the size and Moose was far away, enjoying his middle age on his compound back in Canada.

Steps, then Ramp

Bitcoin’s $1,000 milestone has held, and so did $1,500. We are less than 20% away from the next milestone: $2,000. The rally to date has been relatively calm. The price quietly stair steps higher, with minor corrections. The parabolic euphoric spike has not occurred yet.

There are still haters who proclaim scaling, lack of liquidity, lack of regulation, and other similar issues as reasons why Bitcoin cannot continue to creep higher. The price action says otherwise, and forces bears to cover higher and higher.

In 2013, a mention of Bitcoin in Bloomberg, the Wall Street Journal, or the Financial Times would make traders wet. Now, not a day goes by where a mainstream financial media outlet isn’t talking about something related to the digital currency industry.

The constant barrage of stories only causes the FOMO to increase for the general investing public. In America, Joe Sixpack cannot trade an ETF yet, but in Europe the Bitcoin XBT Provider ETN (listed on Nasdaq Nordic) continues to trade well.

A few money managers are starting to dip their toes in the water. Small investments of a few million USD are flowing into the ecosystem. The market cap of digital currencies is still insignificant. A few million here and there continues to supply a strong floor to prices, which allows the speculators to pump them higher.

The euphoric stage has not been hit yet. When CNBC starts trotting out random retail investors who doubled their money investing in Bitcoin and shitcoins, then it is time to sell. For now, the haters are in awe of the sheer power of the bull market.

However, a nasty correction could come earlier. In my opinion, Bitcoin is due for a 20% to 30% correction in one 5 minute candle. When that will happen is anyone’s guess. But the market is a cruel and capricious lover.

$2,000 is the next key level. If Bitcoin breaks above and manages to hold the level after a correction, that is the signal that the euphoric phase can begin. The price testing and failing at $2,000 could lead to a meaningful retrace to $1,500 or even $1,000.

Bitcoin Scaling Game Theory

Go figure a scaling “consensus” was reached at the Consensus 2017 conference. Barry Shillbert’s negotiated Bitcoin Scaling Agreement taken at face value appears to be the holy grail; however, once one engages in a moment of critical thought, its importance quickly dwindles.

The Bitcoin core developers (Core) believe Segregated Witness (Segwit) is the solution to scaling Bitcoin. Many large miners, lead by Jihan Wu of Bitmain, believe a 2MB block size increase via a hard fork is the best scaling solution.

The agreement signed by followers of both factions sets out the following schedule:

  • Activate Segregated Witness at an 80% threshold, signaling at bit 4
  • Activate a 2 MB hard fork within six months

95% of the hashrate must signal for Segwit activation by the end of November 2017. The six month hard fork deadline is at a similar time. This presents an interesting game of chicken.

If the miners signal for Segwit and it is activated before a hard fork, they lose all leverage. Core then has no reason to support a hard fork. The converse is also true. If the hard fork happens first, theminers have no incentive to signal for Segwit.

Each side has the same ultimate goal, increasing the throughput of transactions at a reduced cost. How the goal is achieved could adversely affect each side economically. Many off-chain advancements, such as Lightning, require transaction malleability to be fixed, which Segwit will accomplish.

Blockstream and its investors, which directly pays the salaries of many core developers, is banking on the ability to implement and profit from Lightning. The miners under this circumstance would lose income from transactions not being processed directly on the Bitcoin blockchain.

However, both sides benefit from the price continuing to march higher. A cute and cuddly agreement, with no teeth aimed at can-kicking the important decision as to how Bitcoin must scale, is needed to distract new investors from the fundamental problems that continue to afflict Bitcoin. There is no incentive for either side to blink first.

Both sides must compromise if any solution is to prevail. The status quo will remain as long as the price remains above $1,000. Below that level, miners profit margins become tight, and Bitcoin holders feel moderately poor again, most likely because they FOMO’d into the market at $2,000. When your portfolio is sliced in half, you might come to the negotiating table.

My base case remains that Segwit will not be activated, and the block size will not increase.

The BlockMEX ICO

Last time we spoke about BlockMEX, the company pivoted into a digital asset exchange. Due to theICO craze, BlockMEX is exploring issuing a token. The following is a conversation between BlockMEX CEO Arthur Hayes, and Gary a principle at a VC firm.

Gary recently pivoted as well. Unable to raise his second fund to follow on with Blockchain companies with no hope of exiting, he now runs a fund solely dedicated to ICO’s.

Arthur: Did you hear about DogShit token? They just raised $100 million in under 5 seconds.

Gary: Really, what does DogShit token do?

Arthur: They take pictures of dog shit and put it on the blockchain. Every time you want to view thepictures, you have to spend DogShit token. The ticker is DOGE.

Gary: Wow revolutionary, why don’t you issue an ICO?

Arthur: Funny you say that, we are speaking internally about issuing one. We think we can be the first project to raise over $1 billion.

Gary: That is amazing. One question, why would your platform ever need tokens to operate?

Arthur: Well that’s the trick, we need to invent some plausible reason why users of BlockMEX need to use a token to trade.

Gary: Also, don’t you think some regulators might view ICO’s as securities? That could land you in some trouble. Especially if you raise $1 billion.

Arthur: We aren’t worried about that. We just need to get some fancy Swiss lawyers and just won’t sell equity. The financial regulator rubber stamps all these token sales and we can hide there if we get into any trouble.

Gary: Hmm, don’t you remember how the US government made all the Swiss banks roll over on their clients. In one action, Swiss privacy protections were rendered worthless.

Arthur: It’s a token, it’s the future. We aren’t worried.

Gary: Ok so what is this token going to be used for?

Arthur: Do you want the sales pitch or the reality?

Gary: Both.

Arthur: We will tell potential token holders that in order to buy or sell any product on BlockMEX you must spend 1 MOLLY token alongside posting the relevant Blockcoin collateral. The more transactions that we do, the more useful MOLLY tokens are, and hence the more valuable.

In reality, we will just buy a Lambo in every color of the rainbow. Then houses on the Peak in Hong Kong for all employees.

Gary: MOLLY is the name of the token, that doesn’t make any sense.

Arthur: Brah, I was inspired by Future’s song Mask Off. Seriously go to Youtube and listen to it. Music these days is sooo deep.

Gary: So why should I buy this token, it sounds like you are just going to scam all your token holders.

Arthur: Brah, didn’t you read Balaji’s recent Medium article on ICOs? I mean if the guy can convince VC funds to invest hundreds of millions of dollars, you included, to build a Raspberry Pi to sell on Amazon, he surely must be right about the ICO market. If he’s selling, I’m buying. Don’t worry about whether the project is worthy or not. Just buy it. It’s the new paradigm.

Gary: Ok, sold. Can I get in on the pre-ICO distribution. I only go in pre-ICO, it’s the only way I can justify my 75% performance fee. Otherwise my investors can just visit your website and purchase thetokens directly from you. They don’t need to pay me.

Arthur: Sure I’ll give you a 20% discount.

Arise China

The bullish Bitcoin narrative surrounding China disappeared after the PBOC neutered the leading exchanges. The most drastic action was the suspension of Bitcoin withdrawals while exchanges’ compliance departments were upgraded. After many months of speculating when the PBOC would give the nod, it appears that Bitcoin trading is normalising.

China being China, the PBOC never overtly told exchanges to halt withdrawals. They exerted pressure where it was needed and obtained the desired result. The big 3 exchanges successfully fluffed their way back in business.

OKCoin and BTCC now allow clients to withdraw token amounts of Bitcoin each day. At OKCoin it is 10 Bitcoin per day. Clients must pass stringent KYC / AML checks, and pinky swear they aren’t using Bitcoin to evade capital controls.

XBT/CNY began 2017 at a modest premium to XBT/USD, and after successive PBOC punitive actions it traded at a discount. The discount reached a low of 20% earlier this month.

A recent Caixin article, which claimed the PBOC would issue exchange fines and clarity as to how Bitcoin would be regulated, injected hope back into the market. The XBTCNY/XBTUSD spread rallied aggressively back to par and after the recent withdrawal resumption news, the spread inched to a small premium.

Even though many traders wrote China off it still has the most number of people with the desire and means to buy BitcoinThe PBOC recognised that it couldn’t ban Bitcoin and thus attempted to stymie its growth through various actions.

Bitcoin in 2017 is more widely held than in 2013. Punters in Japan and Korea took the “must have Bitcoin at any price” baton from China. Even Americans, evidenced by impressive new Coinbase account signups, are chomping at the “bit” to enter the digital industry. This new demand allowed themarket to ignore the PBOC attempts to control the price.

The normalisation of Bitcoin trading in China will serve as another source of dry powder to fuel the rally onwards and upwards. $3,000 Bitcoin is definitely attainable by month’s end with the renewed Chinese buying power. Expect Bitcoin to push through $2,800 by early next week as traders feel more bullishnow that China has their backs.

The Dearth of Dollars

Just like every other asset globally, the pricing of Bitcoin is directly affected by the availability of US dollars on trading platforms. Trust in exchanges is a precious commodity in Bitcoin. Exchange counterparty risk is the reason why dollars held on exchanges are in short supply.

In April, Bitfinex lost its ability to process dollar deposits and withdrawals. Traders who wanted dollar liquidity immediately were forced to buy Bitcoin and other digital currencies. That forced the price of Bitcoin and other digital currencies into a premium on Bitfinex vs. other trading platforms.

The chart above shows the spread between Bitfinex and Bitstamp, and the price of Bitcoin. Bitstamp’s banking relationship remained unaffected, which allowed traders to buy Bitcoin on Bitfinex and sell it for USD on Bitstamp. They could then withdraw dollars. The spread between the two exchanges represents the desire for Bitfinex users to redeem their dollar IOU’s for physical cash.

This glorious rally began in the wake of the announcement that dollar funding options were shut at Bitfinex, OKCoin and other exchanges that banked in Taiwan. However as the market continued to rally, the Bitfinex / Bitstamp spread narrowed and turned negative.

Without the ability to accept fresh dollar deposits, Bitfinex now suffers from a dearth of dollars. This will cause the price to underperform the global average as the price continues to rally.

The Tether Arbitrage

Tether, a pseudo Bitfinex dollar liability that rides on a blockchain, can be used to arbitrage the Bitfinex discount. Theoretically Bitfinex should convert 1 Tether into 1 USD. Currently traders are unable to deposit dollars to Bitfinex for the purpose of creating Tether. Kraken operates a market where traders possessing USD can purchase Tether.

The Steps:

  1. Deposit USD to Kraken, and buy Tether
  2. Send Tether to Bitfinex, and convert into USD
  3. Buy Bitcoin
  4. Send the Bitcoin to Bitstamp and sell for USD
  5. Repeat

Currently Bitfinex is trading at a 5% discount. Tether / USD on Kraken should theoretically trade at a 5% premium. Anything less than that, and an arbitrage is possible. If Bitcoin continues to rally Tether will be sucked back into Bitfinex.

According to Tether, there are 68.5 million Tethers in circulation. Depending on the length of this rally, the supply of Tether that can be used to arbitrage the Bitfinex discount will evaporate quickly.

The Bitfinex / Bitstamp spread may transform into a leading indicator of the Bitcoin price. Bullish and bearish traders will go long or short the spread respectively.

EOS and Tezos Futures Contracts Now Live

Behold the clash of the Titans! We believe that the EOS and Tezos token sales will be the largest of 2017.

EOS Futures

BitMEX is proud to announce the launch of EOS Futures contracts, expiry 28 July 12:00 UTC with symbol EOSN17. Each contract is worth 1 EOS and the contract offers 2x leverage.

Since the EOS platform is still under development, the following rules will apply:

  • If no EOS auction is completed before the expiry date, EOSN17 will settle at 0.
  • EOSN17 will have 25% Up and Down Limit against the previous session close price to prevent price manipulation. Each session is 2 hours long, and session closes occur every even numbered hour.
  • Settlement will occur either at the most recent EOS auction price (if EOS/XBT trading has not begun) or at the .EOSXBT30M Index Price if EOS/XBT has begun trading prior to 27 July 12:00 UTC.

Further details about this contract can be read in the EOS Series Guide.

Tezos Futures

BitMEX is proud to announce the launch of Tezos Futures contracts, expiry 29 December 12:00 UTC with symbol XTZZ17. Each contract is worth 1 XTZ and the contract offers 2x leverage.

Since the Tezos platform is still under development, the following rules will apply:

  • If the Tezos crowdsale is not completed before the expiry date, XTZZ17 will settle at 0.
  • XTZZ17 will have 25% Up and Down Limit against the previous session close price to prevent price manipulation. Each session is 2 hours long, and session closes occur every even numbered hour.
  • Settlement will occur either at the ICO price (if XTZ/XBT trading has not begun) or at the .XTZXBT30M Index Price if XTZ/XBT has begun trading prior to 28 December 12:00 UTC.

Further details about this contract can be read in the XTZ Series Guide.