New Bitcoin and Altcoin Quarterly Futures Contracts

On 17th December 2018, the March 2019 quarterly ADA, BCH, EOS, ETH, LTC, TRX, and XRP futures contracts will be listed:

  • BitMEX Cardano / Bitcoin 29 March 2019 futures contract (ADAH19)
  • BitMEX Bitcoin Cash / Bitcoin 29 March 2019 futures contract (BCHH19)
  • BitMEX EOS Token / Bitcoin 29 March 2019 futures contract (EOSH19)
  • BitMEX Ether / Bitcoin 29 March 2019 futures contract (ETHH19)
  • BitMEX Litecoin / Bitcoin 29 March 2019 futures contract (LTCH19)
  • BitMEX Tron / Bitcoin 29 March 2019 futures contract (TRXH19)
  • BitMEX Ripple / Bitcoin 29 March 2019 futures contract (XRPH19)

On the same date, the June 2019 quarterly BTC futures contract will be listed:

  • BitMEX BTC / USD 28 June 2019 futures contract (XBTM19)

The Price Crash & The Impact On Miners

Abstract: Cryptocurrency prices have fallen significantly in the past few weeks. In this note, we analyse the impact this price decline may have on the mining industry. The Bitcoin hashrate has fallen around 31% since the start of November 2018, equivalent to around 1.3 million Bitmain S9 machines. We conclude that many miners are struggling; however, we point out that not all miners have the same costs and that it’s the higher cost miners who switch off their machines first, as the price declines.



Since the start of November 2018, the Bitcoin price is down around 45%, while in the same period the amount of mining power on the Bitcoin network has fallen by around 31%. According to our estimates, this represents around 1.3 million Bitmain S9 miners being switched off. The mining industry may therefore be under considerable stress right now, due to the falling prices of cryptocurrency.

The prices have so far caused two large downward difficulty adjustments to Bitcoin, 7.4% and 15.1%, on 16th November and 3rd December, respectively. The 7.4% adjustment was the largest since January 2013 and the 15.1% adjustment was the largest since October 2011. The charts below are based on the daily chainwork and therefore reflect changes in network difficulty.

Bitcoin Daily Work Compared to the Falling Price

(Source: BitMEX Research, Poloniex)

Daily Mining Revenue and Cost

As the chart below illustrates, Bitcoin mining industry revenue has fallen from around $13 million per day at the start of November to around $6 million per day, at the start of December. This drop in incentives was even larger than the fall in the Bitcoin price, due to a delay in the way difficulty adjusts. In the six-day period ending 3rd December, 21.8% fewer blocks than the expected 144 per day were found, as miners left the network before the difficulty adjusted, and as a result, fewer blocks were found. Therefore in the short term, there was a 21.8% fall in mining incentives on top of the impact of the declining price.

Bitcoin Daily Mining Revenue and Expected Electricity Spend – US$m

(Source: BitMEX Research, Poloniex)

(Notes: Assumes an electricity cost of US$0.05 per KWH, assumes advertised Bitmain S9 specification)


Bitcoin Cash ABC Daily Mining Revenue and Expected Electricity Spend – US$m

(Source: BitMEX Research, Polonies)

(Notes: Assumes an electricity cost of US$0.05 per KWH, assumes advertised Bitmain S9 specification)


Ethereum Daily Mining Revenue and Expected Electricity Spend – US$m

(Source: BitMEX Research, Polonies)

(Notes: Assumes an electricity cost of US$0.05 per KWH, assumes 32Mh/s at 200W)

Miner Profit Margins

The chart below shows that prior to the recent crash, the industry was making gross profit margins of around 50% (these figures assume electricity is the only cost included in gross profits), while after the price crash, this fell to around 30% for Bitcoin and 15% for Ethereum.

Miner Profit Margin

(Source: BitMEX Research, Poloniex for prices)

Ethereum Mining Profitability

In the period, the Ethereum hashrate has only fallen by 20%, much lower than Bitcoin, (representing around 1.5 million high-end graphics cards), while the price decline has been more significant than Bitcoin, at 54%. Therefore, gross profit margins have declined even more sharply for Ethereum, but it is not clear exactly why this is the case.

There are a few potential reasons. It could be that Ethereum miners are more hobbyist minded and less profit focused, or Ethereum miners could have started from a higher gross profit margin position than Bitcoin, so they are less inclined to monitor the network and switch the miners off when necessary. As the data shows, Ethereum miner gross profit margins now appear significantly lower than Bitcoin, falling to 15% in the last few days, so this could change (Note: This analysis only included electricity costs, when including other costs, mining may be a loss making operation).

Bitcoin Cash ABC Mining Profit Margins

As the above chart shows, the Bitcoin Cash ABC gross profit margin went negative during the split into two coins, Bitcoin Cash ABC and Bitcoin Cash SV. The two camps mined uneconomically in a race to have the most work chain. Ten days after the split, on 25th November, the profitability of mining Bitcoin Cash ABC rapidly climbed up to around the same levels as Bitcoin. This appeared to indicate the end of the “hashwar,” which proved to be almost completely pointless, as the war ending had no clear noticeable impact on either the coins or their value.

As the latest data in the below table shows, the two sides are getting closer again with respect to total work since the split and its possible uneconomic mining resumes.

Bitcoin Cash ABC Bitcoin Cash SV
Log2(PoW) 87.753365 87.747401
Blocks                          560,091                              560,081
Cumulative total since the split
Log2(PoW) 82.189 81.875
Blocks                                   3,325                                   3,315
Mining electricity spend $7,939,318 $6,389,264
Coin price (Poloniex) $108 $94
Estimated mining gross profit/(loss) ($3,450,568) ($2,494,139)
Gross profit margin (76.9%) (64.0%)
Assume leased hashrate
Estimated leasing costs $14,608,345 $11,756,245
Estimated mining gross profit/(loss) ($10,119,595) ($7,861,120)

(Source: BitMEX Research, Poloniex for prices)

Flaws in the Above Analysis

The above gross profit margin charts do not show a complete picture. While the revenue figures are likely to be accurate, the only cost included is electricity. Obviously miners have other costs, such as the capital investment in the machinery as well as maintenance costs and building costs. Therefore, although the charts below show that the industry is highly profitable when only considering electricity costs, given other costs, the recent price crash is likely to have sent almost all the miners into the red. This indicates that miners invested too much in equipment and have achieved large negative ROIs.

Electricity Cost is Not Uniform

Another crucial point not reflected in the above analysis is the variance in electricity rates. The charts above assume a flat cost of $0.05 cent per KwH; however, not all miners have the same electricity costs and there will be a distribution.

As we mentioned above, 31% of the hashrate was shutdown in the period, logically those with the highest electricity costs should turn off their machines first. Therefore the average electricity cost on the network should have fallen considerably in the past month.

The below chart is an illustration of the above, it assumes that electricity costs are normally distributed with a standard deviation of $0.01 per KwH and that higher-cost miners switch their machines off first. Although this assumption is likely to be highly inaccurate and energy prices will not be normally distributed across the mining industry, from a macro level it illustrates a point and it may be more accurate than the above chart.

According to this analysis, average Bitcoin mining gross margins have only declined from around 50% to 40%, implying a far more healthy situation for the remaining miners.

Bitcoin Mining Gross Profit Margin (Illustrative)

(Source: BitMEX Research, Poloniex for prices)

When evaluating the potential negative impact of price declines on Bitcoin, analysts sometimes forget that not all miners have the same costs. It is these cost variances that should ensure the network continues to function smoothly despite large sudden price declines and allows the difficulty to adjust.

What Caused the Price Crash?

There has been considerable speculation around the causes of the price crash, with some saying miners sold Bitcoin in order to finance a costly hashwar in Bitcoin Cash. The cryptocurrency intelligence monitoring platform Boltzmann flagged to us that their platform had detected unusually large miner selling of Bitcoin on 12th November, a few days before the Bitcoin Cash split.

Boltzmann detected that net Bitcoin sales from miners were “17.5 standard deviations below [the] 3-month trailing average.” On further analysis, it appears these miners may have been a member of Slushpool.

Bitcoin miner net flow & price

(Source: Boltzmann, 12 hour aggregation of miner net flow)

Conclusion and Price Commentary

While it may be true that mining pools selling Bitcoin to fund losses in the Bitcoin Cash hashwar may have been a catalyst for the reduction in the price, we think it’s easy to overestimate the impact of this. We are in a bear market and prices are falling regardless of the news or investment flows.

Furthermore, in a bear market prices seem to fall on non-news or bad news and ignore good news, while in a bull market the reverse appears true. We think it’s likely that prices would have been weak regardless of any miner selling prior to the Bitcoin Cash split. For cryptocurrency, trader sentiment is king.

This is likely to be a very tough time for the mining industry. However, for miners with lower costs, our basic analysis indicates that the situation may be better than people expect. If the miners acquired their equipment from Bitmain at below-cost prices, they could still be in the green, even when including depreciation and other administrative expenses.


Remember BlockMEX? Well the firm has limped along for several years. They have tried various business models. None have made any money. But that doesn’t matter, VC firms continue to shower the company with cash, and its valuation continues to rise. The CEO now has a great new idea. Let’s listen in on the recent board meeting.

Billy – Billy is the CEO of the company. He just joined as the previous dude got ousted. The VC firm The Blind Fund, who supplies most of the cash, ousted the previous CEO in favour of Billy who they thought would play ball better.

Kaiser Soze – One of the general partners at The Blind Fund.

Kaiser Soze – So Billy, what are we going to do to get some traction? It’s been over four years, and BlockMEX still makes zero revenue. You guys need to do something new.

Billy – Well, I have a new idea. ICOs are toxic. The projects are trash, and the regulators hate them. What about STOs, Securities Token Offerings?

Kaiser Soze – Tell me more.

Billy – Ok, so imagine you want to buy a fraction of a piece of real estate. And then you could trade your fractional ownership, which is represented by a token.

Kaiser Soze – Call me old fashioned, but isn’t that just a Real Estate Investment Trust (REIT)? Most stock markets around the world already have those.

Billy – But do REIT’s ride on a Blockchain? Do they use Distributed Ledger Technology to hold the record of the title?

Kaiser Soze – No, but they trade billions of dollars a day already, and you can easily trade them with your local broker almost everywhere in the world.

Billy – You don’t get it. If the token rides on a Blockchain, like the Ethereum protocol, then they reach help anyone anywhere. Like those poor investors in North Korea who have nowhere to put their savings. Now they can own a token.

Kaiser Soze – Anyone, really?!! It’s pretty clear these are securities, right?

Billy – Yes.

Kaiser Soze – So that means they are regulated, and in most places the exchange needs some sort of license.

Billy – Yes, that’s correct.

Kaiser Soze – The same license the incumbent exchanges already possess?

Billy – Correct.

Kaiser Soze – And the technology stack that operates the matching engine must also be approved by the regulator, right?

Billy – Correct.

Kaiser Soze – So you are replicating the same technology, getting the same license, to go after the same client base?

Billy – Correct.

Kaiser Soze – Ok, sounds like a winner. We can keep pumping money in, and make it up on volume. [The Blind Fund never saw a negative gross margin business they didn’t like.]

Billy – Exactly what I was thinking. Everyone is talking about STOs and how they are the future. Another type of STO is an equity offering of a startup.

Kaiser Soze – So how would that be different than doing an IPO?

Billy – Well many companies these days are staying private, the cost of doing an IPO and all the regulatory and compliance costs, are daunting—-especially for smaller companies. There should be a way for smaller technology companies to raise funds by selling some type of equity.

Kaiser Soze – Would these companies pay dividends? I’m assuming these are unprofitable companies.

Billy – Not only would they not pay dividends, there would be no audited accounts, or any duty to really explain anything to their investors.

Kaiser Soze – Wow, that’s amazing. How would this STO thing fit in on the balance sheet?

Billy – Not sure on that one yet.

Kaiser Soze – Traditional financial theory would suggest that this token is worthless because there is no cash flow.

Billy – Come’on Kaiser. We have been through this before. Traditional finance is dead. We are in a new paradigm. Don’t be a luddite.

Kaiser Soze – I know, I know. But if you are selling equity like securities, wouldn’t that need to be registered with a national regulator?

Billy – Shhhhhh.. Don’t tell anyone. We are just going to shoe horn this one in. Because we use a Blockchain and or Distributed Ledger Technology, those rules don’t apply. The best part is, we can absolve ourselves of any legal liability by basically telling investors when they buy these things they actually have zero rights. ROFL.

Kaiser Soze – Man, this Blockchain shit is LIT! You can do anything.

Billy – I know, right? Maybe the only thing we can’t do is become revenue positive.

Kaiser Soze – Don’t worry about that. I know some people in the desert, who have more cash than brains. They won’t let us down.


Polly Pocket Has Liquidity Issues

Overheard at the recent Polly Pocket Investor Day.

Polly Pocket is the managing partner of Polly Pocket Capital. The fund invests solely in tokens.

Schmuck is an investor in the fund.

Polly – Welcome everyone to our Investor Day. 2018 has been a challenging year for our fund but we are fully confident in our ability, over the long run, to deliver superior returns.

Schmuck – Speaking of performance, can I get some more colour on what your fund actually holds?

Polly – Great question. As you know, we don’t disclose exactly what we own, but I can give you a taste. Our fund is divided into listed and unlisted tokens.

Schmuck – Ok, what do you mean by listed and unlisted? I thought the mandate only allowed the fund to invest in tokens that are already traded on a secondary market.

Polly – Well, that is true. But we saw some great deals, so we created a side pocket. The side pocket contains all the pre-ICO deals that we invested in.

Schmuck – Hmm…So you basically can invest in whatever you like, regardless of the fund mandate?

Polly – In a nutshell, yes.

Schmuck – Greeeeaaat. How do you mark these illiquid, unlisted tokens?

Polly – As you know, due to our amazing connections, we get in on deals well before the unwashed masses. Typically we get a 70% – 90% discount to the last round where most of the plebes purchase these tokens. We then mark the value of the token to the last round price.

Schmuck – So if you invest a price of $1,and the last round which could be a very small amount of the total float, is sold at $10, you record a 10x gain?

Polly – Yes.

Schmuck – Does that also mean that I get charged management fees on the 10x value?

Polly – Yes.

Schmuck – Your liquid token portfolio got molly whopped this year, correct?

Polly – Yes.

Schmuck – So the AUM will get bled at an accelerated rate due to the marking of the side pocket? I’m am paying 2% on a 10x marked up illiquid token with no secondary market, and there is no visibility as to when it will actually list?

Polly – I mean that sounds worse than it is, but you are essentially correct.

Schmuck – Do you apply a haircut to this valuation because there is no liquidity, and an indefinite time to listing?

Polly – No. We believe there is extreme value, and this is reflected in the last round price. Our team of token experts really knows how to value these things.

Schmuck – Maybe, but the management fees paid on these side pocket investments could consume the entire value of the investors’ capital. What happens if I would like to redeem?

Polly – We would sell our liquid tokens first. Once that pool of capital is exhausted, we would be unable to meet your redemption request.

Schmuck – Is there no way to sell your interest in these projects? Have you ever tried?

Polly – Legally we can’t. The SAFT term sheet does not allow us to transfer our interest before the token lists.

Schmuck – So basically you are telling me, I’m up shit creek without a paddle?

Polly – I wouldn’t put it that way. Sometimes we suffer liquidity issues.


The BitMEX Research team has compiled a list of tokens that raised over US$50 million that have yet to list.



These deals have massive valuations, and many of the most venerated token funds took down large chunks. It is unclear when, if ever, these deals will ever list on the secondary market.

Given the large amount of token supply out there, who will buy this shit?

Can you really mark these investments to the last round price?

There are anecdotal reports of funds attempting to sell their SAFT interest, and the prices offered were way below the last round price.

2019 is going to be the year of reckoning for many funds. You can mark something to an absurd level in year 1. But the meter starts again on January 1st. If these things come to market, there will be no accounting tricks to hide the gargantuan losses that these funds will post.

The Confession

Overheard in St. Patrick’s Cathedral in New York City.

Judas is an Ethereum developer; he’s had some bad luck. He is now at Church giving a confession.

Father is the Bishop.

Judas – Forgive me Father, for I have sinned. It has been one year since my last confession.

Father – Welcome my son, please tell me how you have sinned.

Judas – Well as you know, I am an Ethereum developer. But I believe I have given false witness to another god.

Father – Who would that be, the Devil, Satan himself?

Judas – No Father, my faith strayed. I believed in Decentralisation.

Father – Huh? Not sure I follow. Please explain.

Judas – I am an Ethereum developer. You know, the world’s virtual computer. I believed that using the Ethereum protocol I could decentralise anything. And I was specifically interested in the trading of financial assets, like stocks.

Father – Ok, but what would a decentralised stock market look like?

Judas – Well, anyone, anywhere could exchange stocks. You wouldn’t need to get approval from any government or a traditional exchange like the New York Stock Exchange or Nasdaq. It would also allow anyone to sell equity in their project to anyone in the world. In short, true financial freedom for everyone, everywhere.

Father – Heresy. You planned to usurp the Angels, the NYSE, and Nasdaq. Did you not consult the good book about our Lord’s relationship with those organisations?

Judas – I did, but I thought because I used the decentralised world computer, Ethereum, that our Lord and Saviour would not mind.

Father – Son, you did not read the Gospels close enough. Specifically, the Gospel according to Howie.

Judas – Well, I thought my lawyers were well versed in the Gospels. They told me that because it was decentralised, the Gospel according to Howie did not apply.

Father – [Shakes his head in sorrow] In my last sermon, I preached that the Lord’s children must be vigilant against false prophets. Specifically those wearing Brioni suits, and white Church’s shoes. These white shoe lawyers, care not for your soul, but only for their pockets.

Judas – Oh, I missed that one. I was too hungover after a night at the Box. We were celebrating our ICO.

Father – Ah, the ICO. I also lead a vigil against that tool of the Devil. But son, how is your project decentralised, if you personally launched an ICO, and profited from it? Surely, a truly decentralised project has no identifiable leader, and no one entity profits from its operation?

Judas – I realised the errors of my ways now.

Father – How has the Lord made you repent?

Judas – The Lord decreed that I must pay a large sum of money to absolve my sins.

Father – Better that, than the Lord sending you to Sodom and Gomorrah, a.k.a. Rikers.

Judas – I know, I am forever grateful to the mercy of our Lord.

Father – I am glad you have learned son. Our Lord is merciful. But he will strike rath down upon those who threaten his kingdom.

Father – Let us pray to our Lord and Saviour. In nomine patris et filii spiritus sancti JAY CLAYTON.

Decentralise Zero

I was staring at my plush toy cactus, and I thought has anyone tried to decentralise zero? Later, I was messaging Meltem and through our conversation, the following ideas manifested themselves about the absurdity of 2018.

I dedicate this newsletter to the concept of zero. I have seen the future, and many crypto investors will become familiar with this round number, although they might not know it yet.

Bitcoin Cash ABC’s rolling 10 block checkpoints

Abstract: We evaluate Bitcoin Cash ABC’s new rolling 10 block checkpoint system. The new system does defend against “deep” hostile reorgs; however, it increases the risk of consensus chain splits and provides new opportunities for a would-be attacking miner. Another tradeoff is that the change increases the damage hostile miners can do to the network, but it reduces the potential reward for such behaviour. It is not clear at this point if this change is a net benefit, although it is a fundamental change to the system and it may therefore be better to spend more time assessing the dynamics involved before the network adopts this technology.


Bitcoin Cash ABC added a new rolling checkpoint system in software version ABC 0.18.5, which was released on 21st November 2018. Essentially, the new mechanism finalizes a block once it has received 10 confirmations, which prevents large blockchain reorgs. Therefore even if an alternative chain has more proof of work, if it conflicts with a checkpoint, the node will not switch over to the most work chain.

This feature may have been added as a defence against potential attackers including from supporters of the rival Bitcoin Cash SV chain, who have indicated they may wish to attack Bitcoin Cash ABC.

Security Analysis of the New Checkpointing Mechanism

The new rolling checkpoint mechanism includes a trade-off:

  • The risk of a deep reorg is reduced.
  • The risk of a consensus chainsplit is increased.

Network Risk Analysis of the New Checkpoint System

Latency issues Attack scenario
Reorg risk

No change

It it unlikely that latency problems will cause nodes to be out of sync with each other by 10 blocks, therefore, this is largely a non-issue, in our view. The new checkpointing system is therefore not likely to cause problems here. Although with a block size of up to 32MB, there could be some latency issues in a small number of circumstances and it is possible nodes could be out of sync by 10 blocks.

The checkpoint doesn’t seem to solve any issues to do with latency. If latency issues cause a 10 block reorg, the user may want to follow the most work chain. Therefore we do not think there is any benefit here.

Risk reduced

The risk of a deep hostile reorg is now reduced or limited to 10 blocks.

Consensus split

New small risk introduced

In the unlikely scenario that poor network connectivity causes nodes to be out of sync with each other by 10 blocks or more, the conflicting checkpoints could cause a consensus split resulting in two or more coins.

New risk introduced

Although the reorg risk is now reduced, the hostile miner now has a new attack vector. The attacker can attempt to mine a 10 block long (or longer) chain in secret and then publish the chain at a time designed to cause conflicting checkpoints on the network, causing a chain split.

Attacking Miner: An Alternative Option to a Reorg

As indicated above, if a hostile miner is producing a shadow chain, once this diverges from the “honest” chain by more than 10 blocks, it is essentially useless as it cannot reorg the honest chain, even if it has more work. Therefore the attacker might as well give up and stop extending the shadow chain.

However, this also means that as soon as the 10th block since the split has been produced on the “honest chain,” the attacker might as well publish the shadow chain at this point, depending on the attacker’s objectives. (i.e. release the shadow chain as soon as the attacker receives the block in red indicated in the below diagram.) This could then cause a consensus chain split, with some nodes having received the red block first and some receiving the shadow chain first, resulting in conflicting checkpoints.

(Source: BitMEX Research)

This attack may cause a consensus chain split, which could be just as damaging to the network as continuing on to do a hostile reorg. It is also cheaper than continuing on to do a deep reorg, since the hostile miner can stop earlier. Therefore it is not clear to us why this new checkpointing defence is a material improvement. Although the risks in this section are unlikely to materialise (and could require the attacker to have a majority of the hashrate), they seem at least as likely to occur as the problem the new checkpointing system is trying to mitigate against.

Advantages of the Checkpointing System

  • Although the new checkpointing mechanism may have a limited impact on security within a 10 block window, when looking back more deeply from the current chain tip, security may be increased over longer timeframes. This may be very useful to some exchanges or merchants who can now wait for more than 10 blocks before crediting a user account and achieve a higher level of assurance. However, a key focus of Bitcoin Cash is to increase transaction speeds, so this benefit may not be desirable for the Bitcoin Cash community.
  • Although a new attack vector is opened up by this mechanism, providing a new way for hostile miners to instigate a consensus split as we explained above, the incentive to do this is less clear than for a “normal” deep reorg attack. A normal reorg attack can be used to initiate a double spend against an exchange, whereby the attacker could profit. While it is possible to also attempt a double spend attack using this new chain split-related attack vector, the outcome is less clear, as it is not obvious which side (if any) will be the winner or which chain an individual exchange may follow. Therefore, although this attack is potentially more devastating on the network, the incentives for it are less obvious. We view this as a significant positive.

Other issues

Centralisation and More Developer Power

Another common criticism of checkpoints is that it gives developers more power and increases centralisation since developers normally manually insert the checkpoints when they release new versions of the software (like Bitcoin used to have). However in our view, this does not apply in this case as the checkpoints are automatically generated by the node software and not manually generated by the development team. Therefore this a non-issue.

Long Range Attack and the Initial Sync

As Eric Wall explained on Twitter, the new checkpoint mechanism opens up the ability to sybil attack nodes not on the latest chaintip. For example, nodes still in the initial sync or nodes related to users who temporarily shut down their nodes for several days. An attacker needs to launch his own relay nodes and generate a new 10 block long chain at any point in the past.

This lower work chain can then be broadcast to nodes (including the specific targeting of nodes not at the current tip), potentially causing these nodes to conduct the checkpoint prematurely, on an alternative chain. Not only does this leave these nodes on a different chain, but this chain is under the control of the attacker. This seems to be a significant flaw of the checkpointing system.

Satoshi’s “original vision” appears to imply that the ability of nodes to be switched off and then verify what happened when it was gone is potentially important:

Nodes can leave and rejoin the network at will, accepting the proof-of-work chain as proof of what happened while they were gone.
(Source: Bitcoin Whitepaper)

To some extent this Bitcoin Cash ABC upgrade abandons that philosophy, and requires nodes to be online 24×7.


The new Bitcoin Cash ABC checkpointing system is a fundamental change to the core network and consensus dynamics, resulting in a number of trade-offs. These changes may not have been adequately explored before the upgrade. Although we do not think it is likely such a change will result in an immediate crisis, it’s not likely to prevent one either.

Overall Summary of the Checkpointing System’s Impact


  • Reduces the incentive for a miner to attack the chain
  • Provides more assurances for merchants and exchanges for transactions with over 10 confirmations


  • Increases the ability of a miner to instigate a devastating attack on the network
  • Introduces new attack vectors on nodes which are still syncing to the main chain updated to estimate the value of mining losses since the Bitcoin Cash split

Abstract: Bitcoin Cash successfully split into two coins on 15th November 2018, Bitcoin Cash ABC and Bitcoin Cash SV. BitMEX Research sponsored a website, to track the two chains. There is now a “hashrate war” between the two coins and the hashrate is higher than one would expect given the price of the coins, such that miners are making large losses. The website has now been updated to help estimate the value spent mining on each side of the split and the loses miners may therefore be making.

(Notes: Screenshot of updated website)

Estimating the accumulated mining losses so far

Based on the mining spend since the split figure provided, one can estimate the total expected losses, based on the price of the respective coins, as the table below shows:

Bitcoin Cash ABC Bitcoin cash SV
Mining spend since the split US$887,963  US$520,115
Coins mined 2,337.5 2,012.5
Coin price US$261 US$97
Potential mining revenue US$610,087 US$195,212
Total Net profit/(loss) (US$277,875) (US$324,904)
Profit Margin (45.5%) (166.4%)

(Source:, Poloniex price data)
(Notes: Data as at 18:30 UTC on 16 Nov 2018. Mining spend calculated assuming standard Bitmain S9 miner performance and electricity cost of US$50 per MWh)

Although the table above shows that both sides are making losses, it illustrates why the ABC side may be in a stronger financial position than SV. Not only is ABC in the PoW lead (both with respect to the number of blocks and accumulated work), but the SV miners have larger expected losses than ABC miners, due to the lower price of the SV coin. The SV losses are also larger relative to the potential revenue, with a profit margin of minus 166.4% compared to ABC on minus 45.5%.

Despite this situation, one should of course be aware that the prices of these coins are volatile and highly uncertain. There is no guarantee that either side will be able to sell the coins they mined. However, the ABC side does have a reasonably liquid futures market.

What will happen next?

Mining is currently continuing on both sides, with neither side willing to back down over the fight for the most work chain. Despite the bleak financial situation, the rhetoric on the SV side remains strong, with Coingeek stating that they may be prepared to keep this up for “months and months”.

This will bleed Bitmain’s cash and cryptocurrency reserves, because we are prepared to fight for months and months. If I were a shareholder or investor in Bitmain, I’d be asking why Jihan Wu is spending all your money to control BCH when Bitmain’s business supports multiple cryptocurrencies.”
(Source: Coingeek)

However, with just around 24 hours passing since the split and SV miners already US$324,904 in the red, using our conservative assumptions, we would be surprised if the situation continues like this for months.


While the rhetoric from either side is strong, in a way the hashrate battle is totally pointless. Users and investors are free to choose the ABC or SV side of the split no matter which chain has the most blocks or highest accumulated work. The narrative of being the higher work chain appears important to proponents of the two coins, but the prudent think to do would be to step back and mine the most profitable coin.

In our view, as the accumulated losses gradually start to increase, it is inevitable that the parties involved step back and allocate the hashrate such that its distributed in a proportional way to the prices of each coin. How long this will take, we do not know, but the website should provide a useful tool. It can help asses the extent to which financial pressure is building on each side in this somewhat pointless hashrate war.



Is The ETHUSD Swap Fairly Priced

The Perpetual Swap derivative structure is a beautiful thing. Trading is simple, as it mimics the action of margin trading. Most retail traders are familiar with how to trade on margin. Using this wrapper, we can allow anyone to trade exotic derivatives.

“A quanto is a type of derivative in which the underlying is denominated in one currency, but the instrument itself is settled in another currency at some rate. Such products are attractive for speculators and investors who wish to have exposure to a foreign asset, but without the corresponding exchange rate risk.”Wikipedia

The ETHUSD swap has become the most liquid ETH/USD trading instrument globally. It allows speculators to trade ETH/USD risk, without ever touching Ether or USD. Like all BitMEX contracts, the margin and settlement currency for ETHUSD is Bitcoin. This keeps things simple from a trading perspective.

When the ETHUSD product listed, I walked readers through the mechanics of a quanto derivative. Please read Why Quanto and Hedging a Perpetual Swap for a refresher.

Subsequent to the launch of ETHUSD, the price of Ether took a digger. In such a bear market, many traders expected the funding rate to stay negative. Logically that makes sense.

The market is falling, so the pressure on the margin should be on the sell side. However, the cumulative funding rate from launch till the present is positive. A positive funding rate means longs pay shorts.

My hypothesis was that the positive funding rate represents the quanto risk premium. I then tasked one of the BitMEX Research analysts to conduct a test:

Step 1
Starting on the 9th of August and ending on the 22nd of October, to capture the funding income, you sold ETHUSD (100 XBT notional), and hedged by purchasing Ether with USD.

Step 2
Every hour, you recalculated your net Bitcoin PnL, hedging that exposure into USD.

Step 3
Compute the net returns in USD terms on your portfolio for the period.

Step 4 
Add net total funding you received (paid) from being short the ETHUSD swap over the period.


Absent the positive funding, you would have lost $46,779.73 hedging your Bitcoin PnL. This is expected because you are short correlation. Over the past few months, the XBTUSD and ETHUSD correlation has risen.

When the net funding payments received, $46,010.85, are added, your trade essentially breaks even. Along the way you bought 31.94 ETH to delta hedge and accumulated a 43.83 XBT short position to PnL hedge. The conclusion is that even though the funding rate has stayed positive, this funding compensates for the quanto risk premium.

Correlation is rising, therefore traders will bid up the ETHUSD swap over the spot price to profit from the quanto PnL. A positive funding rate results, and brings the market into equilibrium.

This is true over a long holding period. There were times where your net PnL was positive or negative. The chart above provides a time series of the cumulative PnL from this trade. As we can see, the market does misprice this swap occasionally.

It is quite amazing that in under six months, the ETHUSD swap has been priced to perfection. However, the volatility of both Bitcoin and Ether has fallen. When we return to a normal level of volatility, I expect fearful and greedy traders to push the ETHUSD swap away from the quanto adjusted fair price.

Bear Market Blues

The trend is your friend until it ain’t. Humans are very bad forecasters. We take yesterday’s returns and extrapolate them linear and non-linearly into the future. We believe the world works in perfectly-fitted curves.

When the market reverses, as it always does, a coterie of sad pandas are left in its wake. 2017 was the year of jubilation; 2018 is the year of melancholy. The worst part is knowing your 2018 bonus, should you receive one, will barely buy you a Swatch.

We crypto traders should know better by now, but we never learn. The market may be down 70% from the $20,000 high, but from the mood of traders, Bitcoin might as well be worth bupkis.

When traders lose money, they lash out. They lash out on Twitter, Telegram, Reddit, and other social media platforms. The smallest perceived slight, triggers them worse than a Hillary supporter after the Trump coronation.

This is the Bear Market Blues.

We Have Been Here Before 

The talented individuals at BitMEX Research did some analysis of the previous Bitcoin bull and bear markets.

They made a distinction between two measurements:

1. The peak-to-trough decline:  A peak-to-trough decline is measured by taking the low of a bear market and dividing it by the high of a previous bull market.

2. The intra-market phase increase/decrease: This is calculated by taking the high (low) of the bull (bear) market and dividing it by the price at the start of that market phase.

They conclude that we have more to go in this current bear market. Due to the collapse in Bitcoin price volatility, I agree with this sentiment.

The Double Whammy

Wham, bam, thank you ma’am. Bitcoin volatility and price collapsed this year.

Traders hate sideways markets. Traders can go long and short, not sideways. The chop will eat you alive in a sideways market.

Contrary to popular belief, Bitcoin requires volatility if it is ever to gain mainstream adoption. The price of Bitcoin is the best and most transparent way to communicate the health of the ecosystem. It advertises to the world that something is happening–whether that is positive or negative is irrelevant.

The Bitcoin price volatility is the gateway drug into the ecosystem. The media writes about things that move; therefore no movement, no coverage. The diehard traders and engineers will always hear about a new asset class or technology in advance of popular media outlet coverage. However, their efforts will only be amplified if many more people discover El Dorado. That requires the lazy mainstream financial press to write.

If volatility stays at these depressed levels, the price will slowly leak lower. For those of us who lived through the 2014-2015 bear market, we all await that nasty ass candle that breaks the soul of the bulls. Then, and only then, will volatility and the price ratchet higher.

Limbo Time

How low can we go?

A 75% fall from $9,152 takes us close to $2,000. $2,000 to $3,000 is my new sweet spot but don’t tell Michelle Lee just yet.

The key consideration to “calling the bottom” is the price action around the last gasp of the bears. You will know it when you see it. And the best part is, you probably will be too chicken to click that oh so scary Buy button.