The Rock Is In The Building

Litecoin is affectionately referred to as “rock” by many crypto traders. Litecoin has acted like a rock in trader’s bags since it hit its all time high of $40 in 2013. The technical merits of why Litecoin should be worth more than $0 are few and far between. Litecoin exists on life support only because Chinese traders for some reason enjoy trading it. Mainly that is because it is the only shitcoin the big three Chinese exchanges (BTCC, Huobi, OKCoin) offer.

During the current 2017 altcoin bubble, rock caught a stray bid. The pump and dump operators finally decided it was Litecoin’s time to shine. Rock is up almost 200% since late March.

The narrative supporting the rally is that SegWit is close to being activated. The activation threshold on Litecoin is 75% vs. 95% for Bitcoin. Litecoin is a CTRL+C, CTRL+V of Bitcoin. The slight changes include being Scrypt mined, and a block time of 2.5 minutes on average.

Many traders point to Litecoin as proof that if Bitcoin activates SegWit the price should explode higher as well. Some seriously delusional traders con themselves into believing Litecoin could actually serve as a replacement for Bitcoin if the Core vs. Bitcoin Unlimited civil war results in a contentious hard fork.

Oblivious traders are filling their bags with new shiny rocks. How do I know? Because in a recent tweet, Coinbase CEO Brian Armstrong said they will list a Litecoin / USD pair. Altcoin pumps begin in earnest on Poloniex, and end when exchanges such as Coinbase and / or Bitfinex decide to list them.

A recent example of this phenomenon was Ether in Spring 2016. After a lacklustre performance in the secondary market from listing in August 2015 until January 2016, Ether ignited and went asymptotic. The peak during that particular rally was reached when Bitfinex announced it would list ETH. As soon as ETH listed on Bitfinex, the dump began.

Exchanges late to the party, even BitMEX is guilty of this from time to time, signal that peak fomo is near. Those traders tempting fate by holding Litecoin should be cautious. It isn’t called rock for nothing.

Baby Got BOOST

Before today, I would have thought ASICBOOST was a new form of energy drink. It even could be the long awaited reincarnation of 4Loco. Sadly that would not be nerdy enough.

An email from Greg Maxwell made the rounds yesterday, and is causing an uproar. Bitcoin Magazine published an article about the email that is going viral throughout the Bitcoin industry.

TLDR

  • An unnamed leading mining equipment manufacturer is using a patented technology, called ASICBOOST, to achieve efficiency gains of up to 30%.
  • If activated, Segregated Witness (SegWit) would eliminate any advantage for miners using the ASICBOOST technology.
  • Therefore the reason why large miners refuse to support SegWit activation is because they would lose their economic advantage.
  • Maxwell proffered a Bitcoin Improvement Proposal to eliminate gains achieved by using the ASICBOOST technology.
  • Although not explicitly mentioned, everyone assumes Maxwell spoke of Jihan Wu’s Bitmain.

Let’s Assume It’s True

The purpose of this piece is not to argue whether or not I believe Maxwell. Rather I believe for good or bad, many in the community will agree with Maxwell’s analysis and there will be a discernible impact on the Bitcoin price.

My base case is that SegWit will not be activated, and there will be no hard fork this year. If Jihan Wu is truly a Chinese devil (or Gweilo if he was white), and can secretly mine Bitcoin 30% cheaper than everyone else, my base case will hold.

If Bitmain captures above average profits mining Bitcoin as it currently stands, they have no reason to actually desire a contentious hard fork. They also would not want SegWit to smash the piggy bank. Therefore the optimal strategy is to vocally support a hard fork to erode support for SegWit.

SegWit to many is a convoluted way to scale Bitcoin. Many would just prefer a simple increase in the block size from 1MB to 2MB. However, Bitmain would never go so far as to actually conduct said hard fork.

In essence, Jihan can buy a new pad on the Hong Kong Peak each year under the status quo. Despite high Bitcoin network transaction fees, the price keeps rising. Users prefer Bitcoin as a store of value and a global form of money good collateral, to a fast and cheap payments network.

A continuation of the status quo is bullish for the price. The price dipped from $1,200 to below $900 on fears of a paradigm shift. If you believe the arguments put forth by Maxwell, then it makes business sense for Jihan to prefer the current small block, high fee, rising price situation.

The Market Hath Spoken

The price is steadily rising post publication of said article. If the community believes in the veracity of the claims put forward, the price will shortly surpass $1,200 and retest $1,300.

I’m All Blocked Up

Will Segwit be activated? Will a hard fork occur? Will the block size ever increase? These are the burning questions that act as a drag on further Bitcoin price appreciation. I don’t know how it will all pan out, but that doesn’t mean that BitMEX can’t allow its clients the ability to profit by predicting how Bitcoin will or will not scale.

BitMEX is pleased to announce the launch of two prediction futures contracts themed around the ongoing Bitcoin scaling debate.

Segwit

SEGWIT, symbol: B_SEGWITZ17, is a prediction future on whether or not BIP141, also known as Segregated Witness, will be activated on the longest Bitcoin chain by the expiry date (31 December 2017, 12:00 UTC).

SEGWIT will settle at 100:

  • If BIP141 is activated during an “activation period” by the expiry date, and
  • The Bitcoin chain that activated SegWit must remain the Bitcoin chain with the largest hash power for 1,512 out of the following 2,016 blocks (75%). These 1,512 blocks must have passed by the expiry date.

SEGWIT will settle at 0 if the above conditions are not met.

What is an Activation Period?

An activation period spans one difficulty period (2016 blocks). 95% of the blocks mined during an activation period must signal acceptance of BIP141 for SegWit to be activated.

View Activation Periods

Big Blocks

BLOCKS, symbol: B_BLOCKSZ17, is a prediction future on whether a block larger than 1MB will be mined on the longest Bitcoin chain.

BLOCKS will settle at 100:

  • If a greater than 1MB block is mined on the Bitcoin chain with the largest hash power, and
  • If the Bitcoin chain that mined the greater than 1MB block must remain the Bitcoin chain with the largest hash power for 1,512 out of the following 2,016 blocks (75%). These 1,512 blocks must have passed by the expiry date.

BLOCKS will settle at 0 if the above conditions are not met.

Note that blocks of size > 1MB due to SegWit activation shall not mean a block greater than 1MB has been mined; BLOCKS is contingent on an actual base block size limit increase.

Trading Prediction Futures

Each contract can either settle at 100 or 0. The value of each contract is 0.0001 XBT multiplied by the futures price. For example, if you bought one contract at 50.00 , it would be worth 0.005 XBT. If the contract settled at 100, you would make 0.005 XBT. If the contract settled at 0, you would lose 0.005 XBT.

No leverage is offered on prediction futures contracts.

You will find all BitMEX prediction futures contracts under the tab entitled “Binary”. All prediction futures contracts’ symbols will begin with “B_”. This prefix denotes that contracts are binary, meaning they will either settle at 100 or 0.

Prediction Futures Series Guide

Hold The Line

Throughout China’s history, northern rulers struggled to effectively control those to the south and west of them. The varied ethnicities, topography, and economies of China meant that no ruler was able to retain absolute power for long. Due to relative global peace and globalisation since WW2, the Communist Party of China (CCP) has been able to maintain control by bribing the masses with employment.

Rich people don’t have kids. As a result, after the baby boom in the mid-20th century, the global developed and developing population rate has fallen or will soon fall below the replacement rate. The replacement rate is defined as a woman birthing 2.1 children over her productive lifetime. Africa is the one exception, but unfortunately their consumption power cannot replace dying first-world consumers.

Xi Jinping’s mission to solidify the political base of the Communist Party of China occurs at a time when global demand for goods is falling, wages in China are rising, and the population is aging. Any perceived threat to the continuation of the CCP’s rule cannot be tolerated. 99% of humans aren’t communist, capitalist or any other “ist”, they are hungry.

China must feed its billion plus population by providing employment. Without employment, young men transform from docile workers to cannon fodder for skilled orators and politicians.

These trends explain why this year’s National Congress is of extreme importance. Calm must be maintained at all costs. However, internal monetary pressures continue to build.

Grandma Yellen unleashed another 0.25% rate hike last week. She also did not alter the forward guidance. Another two rate hikes are expected this year, and some analysts believe the Fed could and should increase the pace of hikes.

The Fed should raise rates faster while the market shrugs them off. The S&P 500, which is the only economic indicator of importance, has not reacted negatively to rising rates. Yellen has cover to raise more aggressively. The higher rates go now, the more they can be cut when the next financial crisis strikes.

For China, USD interest rate normalisation puts increasing pressure on the CNY. In a normal year, this would not be an issue. The PBOC could raise rates onshore, or allow the CNY to weaken. However the directive is for a calm period before the National Congress.

The PBOC can’t materially tighten rates onshore lest they pop the gargantuan property bubble. The Chinese property market is a government sanctioned ponzi scheme. Developers, which are some of the most valuable companies in China, borrow money from financially repressed savers. The developers then purchase land from local governments, who “buy” land from their peasant subjects at below market rates.

The developer must build, sell, and refinance before the bill comes due for past loans. Should rates rise materially, developers will be forced to dump inventory en masse.

Over 70% of household wealth is trapped in property. Each time it appears that Beijing will allow the market to correct, they relent in the face of sure losses from a wide swath of the population.

Tiananmen Square essentially was an inflation inspired middle class protest against the CCP. However in 1989, the middle class were mostly teachers, in 2017 they are hundreds of millions of property punters. Impoverish them, and the CCP will see its mandate to rule evaporate.

The second option of a material currency devaluation is also off the table for the time being. A 20% to 30% one-off devaluation is needed. However, an action of that magnitude would portray China’s economy as both weak internally and externally. A perceived “weak” China will not be tolerated while the new leadership ascends.

A recent Bloomberg article illustrates that Xi Jinping is not relenting in his dive to tame China.

For the first time local party committees are using “negative lists” — including everything from bribe-taking to involvement with illegal construction projects — to screen delegations to the 19th Party Congress, which will set China’s political hierarchy for the next five years. A front-page article endorsing the moves in the party’s flagship People’s Daily newspaper Monday showed the push has support from the highest levels.

The negative lists — a concept often associated with trade negotiations in which anything not specifically mentioned is allowed — gives Xi yet another tool to shape the key party gathering in Beijing. While no date has been set, it’s expected to occur in the second half of the year.

The twice-a-decade congress is crucial for Xi to secure lasting influence beyond 2022, when his own tenure would be expected to end. At this year’s meeting, 11 of 25 Politburo members — including five of seven members on its supreme Standing Committee — could be replaced.

Bitcoin Withdrawals

Mandated by the PBOC, the large exchanges are implementing new KYC and AML policies. Certain accounts must now travel in person to the exchanges’ offices for physical checks of identity. If followed, this will make client onboarding expensive and extremely bureaucratic. The end result will be less people trading on exchange, and more trading on OTC platforms such as LocalBitcoins.

I believe that withdrawals will not resume until after the National Congress and a subsequent CNY devaluation. However, a recent notice from Huobi implies an imminent lifting of the withdrawal ban. To withdraw Bitcoin, clients must state and prove where the coins will go, and state the purpose of the withdrawal. Responses such as “I want to escape a weak CNY” will certainly not fly.

True to form, the government is saddling exchanges with needless bureaucracy to bankrupt those with weak balance sheets. The PBOC will keep inventing new KYC / AML policies until they are ready to allow Bitcoin to be freely traded again.

Unfortunately Chinese comrades aren’t stupid. They recognise the perilous state of the economy and still hold Bitcoin IOU’s on exchanges. The expected stampede for the exits by selling Bitcoin to withdraw CNY has not happened en masse. Held long enough, this Bitcoin IOU could protect wealth against the imminent devaluation. This is one reason why the price still hovers around $1,000.

OPEC : Oil :: Miners : Bitcoin

Jihan Wu, CEO of Bitmain the world’s largest operator and producer of mining equipment, made an apt comparison between the Bitcoin scaling issue and the oil market.

OPEC in their quest to maintain high oil prices sowed the seeds for American shale oil. The high oil price allowed engineers to explore and drill for more expensive shale oil. Shale oil’s extraction price continues to decline as technology improves. As the supply of oil increased, prices fell, and OPEC’s hold on the market withered.

According to Jihan, Bitcoin miners are like OPEC. A small number of players control the majority of the hashrate. Bitcoin transaction volumes have increased, but the network can only process a finite amount of transactions. Therefore, transaction fees rose alongside the price.

Miners are happy. Some users are not. As a work around, some developers (core) altered the Bitcoin protocol allowing it to process more transactions without the need for a larger miner produced hashrate. If these off-chain scaling solutions are successful (e.g. The Lightning Network), miner’s earnings from transaction fees could decline.

On the margin, either you view Bitcoin more as a store of value akin to gold, or a payments network. If Bitcoin is more a store of value, the price of transactions is of little concern. Gold is rarely used for day to day commerce. It is used to store large amounts of wealth, and as a settlement currency for large notional transactions. Therefore the velocity of gold is low.

If Bitcoin is more a decentralised payments network, then the price and speed of a transaction is paramount. Bitcoin must be able to compete with credit card networks such as Visa and Mastercard if it is to become a real payments solution. Currently Bitcoin is clunky and expensive and is no match to these incumbents.

If neither SegWit nor a block size increase reaches consensus, Bitcoin will continue to travel down the road to becoming another form of money good collateral that is expensive in small quantities to move. To many miners this is a perfectly acceptable solution as long as the price remains high. Given that blocks are full, transaction fees are high, and the price continues to rise, users view Bitcoin more a store of value than a payments protocol.

The question is, can another cryptocurrency become a store of value, and be cheap and fast to send. Should another coin achieve this feat, it will become a major challenger to Bitcoin. To date, no coin is within striking distance of Bitcoin. Many claim that Ether will unseat Bitcoin, but it does not command the same global mindspace as Bitcoin.

Will a group of miners engage in a contentious hard fork, I don’t know. But I do know humans. Humans are lazy and greedy. Regardless of the temper tantrums thrown on various social media platforms, miners care about their bottom line. Doing nothing will not harm them in the short to medium term.

A Bitcoin hard fork will not be as cute and cuddly as Ethereum’s. The Ether market cap was barely $1 billion when the DAO disaster necessitated a face saving hard fork. Bitcoin is worth $17 billion. The amount of money invested in mining equipment, exchanges, and wallets tailored for Bitcoin is orders of magnitude larger than for Ethereum.

A failed hard fork that leaves a minority chain commanding a double digit percent of the network hashing power will not be viewed kindly. Unlike Ether and Ether Classic, the sum of the newly formed majority and minority chains will be drastically lower than the pre-fork value of Bitcoin. Ether never positioned itself as a store of value or a payments protocol. It is fuel for decentralised applications.

Bitcoin’s value is its relative stability vs. other cryptocurrencies. Disrupt that stability and its status as the reserve currency of crypto will evaporate. The challenger that does emerge will certainly not use Bitcoin’s Proof of Work algorithm. If successful, the challenger will render all Bitcoin ASIC mining equipment worthless.

Is Jihan going to stake the future of his Billion dollar mining company on a hard fork that could go pear shaped? No chance.

New ETH, XMR and DASH Monthly Futures

On 24 March 2017 at 12:00 UTC, BitMEX will delist the following Altcoin weekly futures contracts: ETH7D, XMR7D and DASH7D. As their replacement, BitMEX will trial the following monthly futures contracts:

  • ETHJ17
  • XMRJ17
  • DASHJ17

These above contracts will settle on 28 April 2017 at 12:00 UTC on their respective 30 minute TWAP. All other specifications on the contracts remain the same.

Onwards and Upwards

“If you mess with the bull, You get the horns!”

A managing director on the sales trading desk at Deutsche Bank used to scream that out when the market ripped higher. Equities almost makes up for the lack of pay vs. fixed income by employing some of the most colourful characters.

What do you call Bitcoin sans China or an ETF approval? All Time High. Two of the most central bullish tenants have been removed, yet Bitcoin still trades above $1,200.

The next issue that could crater the price is the ongoing scaling debate. The Segwit vs. Bitcoin Unlimited civil war is spoken of not only where internet trolls hide, but also in mainstream financial news outlets such as Bloomberg. No matter, the price continues to slowly grind higher.

With the Mt. Gox all time high surpassed, we are in the beginning stages of a secular rally. This rally will completely re-rate the entire cryptocurrency complex. The Ether market cap is now over $2 billion. DASH continues to rip higher. Three cryptocurrencies with >$1 billion market caps would be something to behold. All hail Shitcoins.

What is encouraging about the 2017 Bitcoin rally is that realised volatility is muted. The above chart displays the 30 day realised volatility and the XBT/USD price. Volatility rose during the initial PBOC crackdown, but then continued to fall as the price surpassed $1,200.

For Bitcoin, this rally was calm. Traders are still in disbelief. While the price continues to crawl higher, haters keep hatin’ because of China, scaling, and or lack of legitimisation by regulators. While they wait, others get rich. As a result, the crack up boom (aka Fomo) phase has yet to begin.

Another encouraging sign is the relatively low basis level exhibited by futures contracts. During the first quarter, the BitMEX Bitcoin / USD 31 March 2017 Futures Contract, XBTH17, traded with a maximum outright basis of 10% – 13%.

During the 2013 bubble, the ICBIT March 2014 quarterly future, featuring only 3x leverage, traded at a 100% outright basis at the end of December 2013. Shortly thereafter, the price crashed below $1,000 then $800 then $600, and finally we entered a nuclear winter for two years.

The market has matured since then. However, the market fomo will manifest itself in a sky high basis for the soon to be listed 30 June 2017 futures contract, XBTM17. Basis even with constant selling pressure from cash and carry arbitrageurs, can and will go substantially high due to 100x leverage engjoyed by longs.

A sustained 30 day realised volatility over 100%, and elevated outright basis levels of over 30% on XBTM17, will provide clues during the second quarter as to whether Bitcoin’s run is nearing completion. As the intensity of price action accelerates, the next upside physiological barrier is $2,000.

No Means No

A retail Bitcoin ETF is proving as elusive as entrance into the Elysian fields. The SEC issued a scathing rebuke as to why they disapproved a Bats exchange rule change that would have allowed the COIN ETF to list. The reasons for denial given by the SEC display a fundamental problem with the market structure of Bitcoin.

After reading the document, it is clear that the SolidX and Greyscale ETF applications are destined for the dustbin as well. Changing the thought process of a regulatory body takes years. A US-listed Bitcoin ETF will not be forthcoming any time soon.

Bitcoin Exchanges and Trading Volume

The COIN ETF daily Net Asset Value is calculated using the daily Gemini Bitcoin auction price. To create and redeem units, Authorised Participants (AP) must trade in the auction.

The SEC’s major issue with the application was that the auction volume was insufficient to support trading.

From the SEC:

Moreover, self-reported statistics from the Gemini Exchange show that volume in the Gemini Exchange Auction is small relative to daily trading in bitcoin and to the number of bitcoin in a creation or redemption basket for the Trust. As of February 28, 2017, the average daily volume in the Gemini Exchange Auction, since its inception on September 21, 2016, has been 1195.72 bitcoins, compared to average daily worldwide volume of approximately 3.4 million bitcoins in the six months preceding February 28, 2017. Also, as of February 28, 2017, the median number of bitcoins traded in the Gemini Exchange Auction on a business day (when a creation or redemption request might be submitted to the Trust) has been just 1,061.99 bitcoins,129 barely larger than the 1,000 bitcoins in a creation or redemption basket.

Gemini’s volumes are so low they barely can transact one creation or redemption basket. Unable to obtain liquidity on Gemini, AP’s would be forced to transact on other exchanges. The location of these “other” exchanges gave the SEC pause.

US-based and regulated exchanges account for a relatively small percentage of global Bitcoin / USD spot trading volumes. The most liquid exchanges are based in Asia or Europe. Bitfinex, the largest Bitcoin / USD spot exchange by volume, is insolvent. These facts are troubling to the SEC.

The agency worries that the majority of trading volume occurs on “unregulated” (read: Non-US domiciled) exchanges and this could endanger ETF investors. The agency cited inadequate surveillance of the major trading centers.

Even though Gemini has a trust license and is overseen by the NYDFS, the SEC found that even Gemini’s exchange was not on par with national exchanges such as the New York Stock Exchange or Nasdaq in terms of trading rules and procedures.

From the SEC:

The Exchange represents that it has entered into a comprehensive surveillance-sharing agreement with the Gemini Exchange with respect to trading of the bitcoin asset underlying the Trust and that the Gemini Exchange is supervised by the NYSDFS. Additionally, the Exchange states in its comment letter that it “agrees that less liquid markets, such as the market for bitcoin, may be more manipulable, but believes that … such concerns are mitigated as it relates to the Shares of the Trust and trading activity on the Gemini Exchange.” As explained below, however, the Commission does not believe this surveillance-sharing agreement to be sufficient, because the Gemini Exchange conducts only a small fraction of the worldwide trading in bitcoin, and because the Gemini Exchange is not a “regulated market” comparable to a national securities exchange or to the futures exchanges that are associated with the underlying assets of the commodity-trust ETPs approved to date.

Next Steps

In order to be in the running again, an ETF sponsor must demonstrate how the proposed venue for the trading of physical Bitcoin is regulated on-par with large established exchanges such as the NYSE, and has a significant market share globally. That will be almost impossible.

If Bitcoin traders desired heavily regulated exchanges, they wouldn’t prefer trading on an insolvent exchange over one registered with various alphabet letter agencies. Many large Bitcoin traders trade Bitcoin expressly because the trading venues are less regulated. They believe the operators are allowed to focus more on the customer experience and provide exactly what traders desire instead of fluffing regulators.

The absence of margin or other leveraged trading products on heavily regulated US-based exchanges means they will forever play second fiddle to Asian and European exchanges. Given the “America is the best” mentality of its national regulators, convincing them to allow an asset whose price is set by the “shifty Chinese” (insert the international boogiemen of the year) is a tall order.

However, this is not a death sentence. The SEC and other organisations are puppets of the large vested financial players. At the point when Bitcoin is too large to ignore, and daily trading volumes are robust and healthy, the iShares, Vangaurd, and Spdr’s of the ETF fund management industry will sponsor a Bitcoin ETF.

These heavyweights only care about generating fees. The underlying asset is an afterthought. When Bitcoin is large enough to support a healthy AUM that generates large management fees, they will get behind Bitcoin.

Unfortunately the biggest problem with the Winklevoss’ application was their outsider status. The objections put forward by the SEC could easily apply to any number of currently listed ETFs. If the fund manager was one of the good ‘ole boys, the ETF would stand a chance of approval.

The Investors’ Exchange LLC (IEX) applied and was approved to be designated a National Exchange by the SEC. This was not an easy process. IEX, written about in the Michael Lewis’ book Flash Boys, aims to level the playing field by enacting policies that equalise trading between low and high latency traders. The HFT lobby went into overdrive to dissuade the SEC from approving the IEX application.

IEX gives retail investors a level playing field against HFT firms. Who doesn’t favor leveling the playing field for the grannies and grandpa’s. However, this was a very heated and drawn out approval process. The SEC did the right thing in the end, but the big boys brought out all the guns.

Imagine if the big boys wanted a Bitcoin ETF. They would get it.

SEC Ruling

Indefinite Detention

Hedge Fund Brother No. 1 Xu Xiang, pictured above, was once a high flying hedge fund manager who never lost. Then one day he was disappeared. He resurfaced months later, after being convicted of securities fraud and now sits in jail. Some feared Bitcoin exchange heads could face a similar fate; however, the PBOC showed mercy.

Another week, another “meeting” between the PBOC and the heads of large Bitcoin exchanges in China. Shortly after the meeting held on March 7th, the PBOC released a statement reiterating that they have the authority to shut down errant exchanges. A list of actionable offences surfaced a few days later via Caixin. [News.bitcoin.com]

The following activities are prohibited:

  1. Offering leverage and margin trades.
  2. Producing fake volume and manipulating the market using zero fees.
  3. Violating AML laws.
  4. Violating regulations on foreign currency management and cross-border capital transfer with bitcoin.
  5. Replacing fiat by using bitcoin to purchase goods.
  6. Tax Evasion.
  7. Engaging in false advertising or participating in Ponzi schemes.
  8. Providing financial services without a permit, including credit, securities, and futures trading.

After the “friendly” meeting, exchange after exchange announced an indefinite suspension of Bitcoin withdrawals. No further guidance was given as to when Bitcoin withdrawals would resume. The price sagged a bit, then shrugged off the news. By the end of last week, Bitcoin would hit fresh all time highs in USD terms.

Chinese regulators recognise that they cannot shut down the exchanges. Regarding said exchanges, one regulator noted:

If oversimplified measures such as closing them down were taken, [investors] will be led into the underground black market or OTC markets, which are more difficult to control. Therefore, it is necessary to explore the establishment of long-term regulatory mechanisms. [News.bitcoin.com]

The new strategy is to starve the weak, and regulate the strong. This strategy is classic China. The government lets an industry compete unimpeded for a time, then they pick the strongest companies and destroy the rest through denial of critical licenses or enforcement of opaque regulations.

By removing the elixir of leveraged and zero fee trading, only exchanges with diversified business lines will survive. Earnings from spot Bitcoin trading will only be significant for the largest of exchanges (BTCC, Huobi, and OKCoin). Exchanges not on that list, will most likely not exist in 2018.

All three of those exchanges either have mining operations, payment solutions, and or offshore derivatives trading markets. Once the weaklings fold, the PBOC will bless the large incumbents and subject them to rigorous monitoring.

Viewed on a longer time frame, the developments over the past three months are positive. One of the Damocles swords hovering over Bitcoin slowly is being removed. Bitcoin will not be “banned” by the regulators. They recognise the power of the underlying technology and are attempting to rationalise Bitcoin within existing goals for China’s monetary system.

PBOC Governor Zhou in a recent interview stated that China Bitcoin trading platforms are not exchanges but rather only “websites”.

If it (trading platform/website) is called an exchange, it is not allowed unless a relevant department of our country permits it. Many people regard bitcoin online trading platforms as exchanges. These are actually two different concepts. [News.bitcoin.com]

That is encouraging that the PBOC permits mere “websites” to accept deposits like banks, and offer the trading of currency like an exchange. There is a bright future for Bitcoin in China for those who can survive. The PBOC tacitly approves Chinese people trading Bitcoin.

The current purgatory will end once the PBOC right sizes the Yuan. Calm must be maintained up until the October National Congress. After October, Beijing will greenlight the PBOC to relieve the pressure and devalue. After a large devaluation, the PBOC can loosen capital controls because once the damage is done the desire to flee is lessened. At that time Bitcoin withdrawals will be re-enabled.

On Potential Post-Fork Contract Settlement

Traders,

Recently, we published A Statement on the Possible Bitcoin Unlimited Hard Fork, a statement of our views on the potential fork to Bitcoin Unlimited, its consequences, and further requirements we consider necessary for adoption.

Many have asked us about the settlement of our existing Bitcoin futures: the Bitcoin/USD series (XBT), the Bitcoin/CNY series (XBC), and the Bitcoin/JPY series (XBJ).

In the event of a fork in which both chains remain viable into the future and maintain double-digit percentages of the original Bitcoin hash rate (a “Contentious Fork“), we will take the following actions:

Contracts

  • As we predict the value of Bitcoin to then be split between BTC and BTU, currently-listed futures at the time of the fork will settle on the sum of BTC and BTU.
    • It may not be possible to predict or plan to get reliable pricing data from our current Index exchanges, or they may not list the minor coin at all. In the event of a Contentious Fork BitMEX reserves the right to move all Bitcoin derivatives to Last Price Protected Marking, until a stable index can be composed.
    • We will compose two indices representing the majority and minority chain, and the sum will be taken to compose the Mark and Settlement Prices. The indices will be separated in case not all component exchanges list the minority chain.
  • Contracts listed after the fork will settle on the BTC or the BTU price, but not both. Only contracts listed pre-fork will settle on the sum.
  • Perpetual swap contracts will be timed to switch underlying indices in tandem with a futures contract. Ample notice will be given. Like futures, the new index will reference only one chain.

Wallets

  • During the time immediately after the fork, BitMEX reserves the right to suspend withdrawals to avoid replay attacks and double-spending and account for the development effort required to accommodate a hard fork.
  • Users will be able to withdraw the minor currency, but not deposit it. We have no plans to support multiple margin currencies. Balances of the minor currency will be calculated via a snapshot at the time of the fork and maintained separately to major currency’s margin balance, as further mixing of the currencies thereafter could lead to improper attribution.

A Statement on the Possible Bitcoin Unlimited Hard Fork

As proposed in the multi-exchange hard-fork contingency plan, there is significant doubt that a Bitcoin Unlimited (BU) hard fork could be done safely without additional development work.

In the case of a fork, we support the plan as proposed by Bitfinex, Bitstamp, BTCC et al.

It will not be possible for any exchange, including BitMEX, to support both chains separately. For these reasons, BU will not be listed or used as a deposit/withdrawal currency until replay protection is implemented and BU is not at risk of a blockchain reorganization if the Core chain becomes longer.

If the BU fork does succeed, we intend to take every possible step to ensure the safety and integrity of customer deposits on both chains. As BitMEX does not offer margin lending, there is no concern about Bitcoin in active positions at the time of the fork.