XBTH18: The main event

The launch of the new Bitcoin quarterly contract is always an exciting time. The basis, or lack thereof, points to trader excitement or apathy. As Bitcoin nears $20,000 and with the CBOE and the CME now on board, the basis gyrations of the BitMEX Bitcoin/USD 30 March 2018 futures will fascinate traders.

The leading factor in the basis movements will be the CBOE and more so the CME Bitcoin futures contracts.

The CME contract launches Monday morning Asia time. As a betting man, I predict the basis will move up and to the right in an aggressive fashion. This will carry XBTH18 basis higher as well. Those who cannot trade the CME contract will find that XBTH18 is a great way to play the most anticipated launch of a crypto-related product to date.

Strategy 1: Bullish on price and basis

For those who believe the price and basis will rise together, go long XBTH18. This the highest risk strategy I will propose, but also has the largest profit potential.

Strategy 2: Bullish on price and basis but delta neutral

For those who do not want to run naked Bitcoin delta, go long XBTH18 versus short XBTUSD. You make money on basis expansion via the long XBTH18 position. If the price and futures basis are rising, the XBTUSD swap will also trade at a premium. That means that as a short, you will receive funding.

This strategy is predicated on your view that the price will rise. The FOMO will invite buyers to pay a premium for the 100x leverage. This is what drives the futures basis and swap funding higher.

Strategy 3: Bullish on basis and delta neutral

This strategy is for those who believe that buyers will exert extreme pressure on the CME futures basis but who are not exactly sure whether the price will go up or down.

Traders should go long XBTH18 and short-spot Bitcoin. This trade only makes money if the XBTH18 basis increases.


Bitcoin moves are exaggerated over weekends when flat cash ceases to travel between exchanges. The FOMO before the CME launch will be legendary, thus it behooves traders to put these trades on as early as possible.

You don’t want to wake up Saturday morning, after a Volar session, to the XBTH18 basis trading a few percentage points higher. The time to buy is now.


CBOE Bitcoin shorts got Ashdraked


There once was a trader who went by the handle Lord Ashdrake. He was a Romanian programmer, and was a prolific force during the nuclear Bitcoin winter in 2014 and 2015. His skill was shorting Bitcoin, and that strategy worked like a charm until it didn’t.

When Bitcoin finally broke and held $300, Ashdrake performed his usual action of shorting Bitcoin. Unfortunately, this time the price continued through $300 to $500, and almost touched $600 in under two months.

Ashdrake completely blew up his account to the point where he could no longer trade Bitcoin. His folly was being unable to shift into a bull-market mindset. The trader community coined the phrase “to be Ashdraked”. It meant to completely blow up your trading account by shorting Bitcoin.

Leading up to Monday’s CBOE Bitcoin futures launch, the financial media constantly droned on that institutional investors would line up to short Bitcoin into the ground. However, within 12 hours of the launch, the CBOE Jan Bitcoin future hit the circuit breaker three times, and was up over 20%.

Interactive Brokers was so afraid of being Ashdraked that they did not allow clients to go net short on the futures contract. They have since reversed that stance, but shorts must post a whopping 400% margin.

Contango, anyone?

As I write this, the CBOE future continues to trade at a premium to spot. There is a very simple reason why this future should usually trade at a premium.

Consider the plight of the average traditional active asset manager. Global central banks crushed volatility in all asset classes in their relentless drive to create inflation. Bonds, equities, ETFs, and asset-backed securities are all prominently featured on central-bank balance sheets.

Retail investors noticed. They realised en masse that it is better to own a passive market-tracking ETF than to entrust an expensive human to generate alpha. Even the so-called smart money became glorified beta chasers.

However, Bitcoin and other digital currencies continued to be volatile, to have a negative correlation to risky assets, and to go up in value. If I am an average active fund manager, I am surely underperforming a passive equity investment in the S&P 500, for example.

If I do nothing, I will certainly lose assets to passive ETFs with lower fees and better performance. However, I could swing the bat and import a call option with a negative correlation to my portfolio as a whole. If it goes to zero, who cares? I was going to underperform the index anyway. If it rises 50% to 100% in a month, I have added a few crucial basis points to my performance. That could be the difference between receiving a doughnut as a bonus or getting PAID.

That call option is going long on Bitcoin futures. I don’t have to believe in Bitcoin, only in its price, volatility, correlation, and liquidity. I don’t have to hold Bitcoin. I only need to use the USD already deposited with the CBOE or CME to trade the futures contract.

The specs will be net long Bitcoin futures contracts. The market makers who are delta neutral will sell futures and purchase Bitcoin. As I have said previously, market makers must receive a very high basis to compensate them for the USD margin they must post.

Unfortunately for these market makers, unrealised USD gains from being long Bitcoin cannot be used to offset the unrealised USD losses on their short futures position. Therefore the basis must be attractive enough to compensate for the large balance sheet usage.

The basis on the CBOE opened close to +10%, and now trades in the +3% to +5% range.

CME game time

All the traders I speak to unanimously prefer the CME’s contract structure to the CBOE’s. The main point of contention is that the CBOE uses only Gemini as a reference exchange. The liquidity of Gemini pales in comparison to the sum of Bitstamp, GDAX, itBit, and Kraken.

The CBOE launch on Monday whetted the appetite of speculators globally. Never before in my markets career have I seen such attention paid to a new futures contract.

The game has just begun, and the CME is going to rain threes like Steve Kerr all over the CBOE.

Out of the gate, I expect the CME near-month contract to hit the 7%, then 13% circuit breakers. By mid-morning Asia time, I expect the contract limit to be up at 20%.

Tame Bitcoin… yeah, right

Bitcoin is a wild bucking bronco, and the CBOE and CME lack the skills to ride for eight seconds.

We crypto traders should thank our lucky stars that these venerable exchanges decided to list futures contracts this year. The volatility and attention they have brought exceed anything I could have imagined.

Central banks saved commercial banks from certain death via aggressive money printing. However nine years after the GFC, banks and investors are desperate for volatility. Bitcoin, altcoins, ICOs, and all manner of digital tokens provide the long-lost market gyrations that made generations of traders wealthy.

As Jesse Livermore said:

I think it was a long step forward in my trading education when I realized at last that when old Mr. Partridge kept on telling other customers, “Well, you know this is a bull market!” he really meant to tell them that the big money was not in the individual fluctuations but in the main movements that is, not in reading the tape but in sizing up the entire market and its trend.

Moral of the story: don’t get Ashdraked. BTFD, ya heard?

Bitcoin Gold (BTG) – Investment flow data

Abstract: A few weeks ago, we published a piece on Bitcoin Cash and how one can analyse transaction data on the two blockchains involved in the split, to try to draw conclusions about the potential investment flows between the two chains. In this piece we provide a similar analysis, with respect to Bitcoin Gold (BTG).


Bitcoin Gold overview

Bitcoin Gold (BTG) is a Bitcoin chainsplit token, similar to Bitcoin Cash. Anyone who held Bitcoin on block 491,406, (which occurred on 24th October 2017) was allocated an identical amount of Bitcoin Gold. Some exchanges allowed customers to trade their Bitcoin Gold from this date, based on customer balances at the time of the fork. However, the Bitcoin Gold blockchain itself, did not appear to become usable until 14 November 2017, 21 days after the snapshot point.

The aim of Bitcoin Gold appears to be to improve mining centralization, by switching the hashing algorithm to Equihash from SHA256, which is currently more GPU-friendly than the ASIC-dominated SHA256.


Allocation of Bitcoin Gold to the coin founders

Although the Bitcoin Gold project team does not always appear to want to make this fact well-known, 100,000 coins were created and then allocated to the Bitcoin Gold team members. This consists of the block reward for 8,000 blocks, which with a block reward of 12.5 BTG, amounts to 100,000 coins.

Based on the current spot price of Bitcoin Gold of US$450 per coin, this balance is worth approximately US$45 million. In the eyes of many, this seemingly unnecessary allocation is likely to damage the integrity of Bitcoin Gold. Bitcoin Cash, for example, did not have such an allocation. One could argue that Bitcoin Cash’s initial difficulty adjustment mechanism also allowed an unusually large number of coins to be created in the initial period following the fork, although this seems somewhat fairer than what Bitcoin Gold did, as anyone could have mined the Bitcoin Cash tokens and they were not directly allocated.


Total coins spent

As at 20th December 2017, 2.61 million Bitcoin Gold tokens have been spent at least once. This compares to 4.7 million and 2.4 million Bitcoin spent, since the snapshot point and the point at which Bitcoin Gold transactions became possible, respectively. This also compares to 4.1 million Bitcoin Cash, which was spent after an equivalent number of days following the Bitcoin Cash fork point.

The 2.61 million Bitcoin Gold which has been spent represents c15.8% of all the Bitcoin Gold. In our view, this is likely to be related to the level of divestment from Bitcoin Gold, mainly because this 2.61 million coin figure is higher than a comparable first time spend in Bitcoin over the same period.


Figure 1 – Bitcoin Gold (BTG) vs Bitcoin (BTC) – Number of coins spent at least once since the chain split compared to the BTG price – million

Source: BitMEX research, Bitcoin blockchain, Bitcoin Gold blockchain, Bitfinex (Price data)


Daily Bitcoin Gold spend for the first time

The average daily spend for the first time on Bitcoin Gold is falling slightly, compared to the initial period after the launch. In the last 10 days the average daily spend for the first time was 44,000, compared to around 110,000 in the first 10 days.


Figure 2 – Bitcoin Gold coins spent for the first time since the split (daily millions) compared to the BTG price

Source: BitMEX research, Bitcoin Gold blockchain, Bitfinex (Price data)


Security Incident

For a 4.5 day period, from 21 November 2017 to 25 November 2017, the official Bitcoin Gold Github repository may have been hacked, and the official website pointed to a malicious wallet. According to an announcement from the Bitcoin Gold team, the hacked wallet allowed the malicious entity to access funds sent to new Bitcoin Gold addresses provided by the wallet, and therefore Bitcoin was not affected, as existing private keys were not compromised. It is not clear exactly what happened, but the Bitcoin Gold team claims that at least 80 BTG were stolen. Given the severity of this incident, the impact could have been far worse, in our view.

This illustrates why it’s important to handle these new fork tokens with caution. In particular, we would strongly advise you not to import your Bitcoin private key into these new fork token wallets, without first spending the Bitcoin to a new output with a different private key associated with it, after the token snapshot point, so that your Bitcoin is not at risk.


Public companies with exposure to the crypto space

Abstract:  The prices of crypto-related assets like Bitcoin have skyrocketed in recent months and many speculative investors understandably appear to want upside exposure to the space. However, the risk of a downwards correction is high, in our view. In this piece, we look at a potentially lower-risk method of obtaining upside by presenting a selection of listed equities which have some exposure and businesses in other areas.


The price of Bitcoin is up over 1,600% YTD, while many alternative coins such as Ethereum and Litecoin have appreciated in value to an even greater extent, leading, in our view, to significant downside price risk. For example, potentially another four-year cycle of weak prices could be driven by the Bitcoin halving schedule. Existing investors in the space may wish to take some profits but still retain some upside exposure, and new investors in the space may wish to obtain some upside exposure while mitigating some of the downside risks.

Here is a list of public companies with some business segments driven by crypto-related areas, which may benefit from further crypto price appreciation but which have other businesses that could mitigate the downside risks. Before investing in any of these, you should obviously do more research on your own: the information below is intended only as an introduction to the companies.

Stock Website Comment


http://www.tsmc.com Potentially a solid investment opportunity, with a strong high-margin business and good crypto upside linked to the core business.
http://www.alchip.com More work may be required to determine the significance of the crypto-related business.


https://www.gmofh.com Could be an interesting investment, although the crypto exchange is new and currently small in scale.


http://www.globalunichip.com Strong ASIC design business, however the stock is expensive.


https://www.gmo.jp Possible lack of focus on one crypto area.


https://www.overstock.com Possible lack of focus on one crypto area.


https://squareup.com Not clear if this business model has strong earnings power.


https://www.ig.com Crypto trading may just cannibalize the existing clients.


https://www.plus500.com Crytpo trading may just cannibalize the existing clients.
http://www.garage.co.jp The link to crypto is weak.


http://premiumwater-hd.co.jp The link to crypto is weak and it’s not clear how shareholders may benefit from an ICO.


http://www.cmegroup.com Crypto business may not be significant.


http://www.cboe.com Crypto business may not be significant.


http://www.sbigroup.co.jp A link to the “fake Satoshi”  may be worrisome.

A slightly more detailed look into the companies


Investment conclusion:

  • Investing in TSMC is likely to be a good way of obtaining some moderate upside exposure to crypto while significantly mitigating or eliminating the downside risk.


  • This Taiwanese company is the world’s largest semiconductor foundry. TSMC is a pure play, focusing entirely on integrated-circuit fabrication.
  • According to the most recent quarterly earnings call, the crypto-mining-related business is $375 million per quarter, which represents 5.1% of group sales. However, with crypto prices continuing to appreciate, it is likely that this business segment is growing very fast.

Investment case:

  • TSMC has extremely high profit margins, with an EBITDA margin of about 66% expected in 2017. In our view, the company is likely to be able to achieve similar margins in the crypto business.
  • With current crypto prices, miners and ASIC designers are likely trying to make very large orders with TSMC, which could mean significant sales growth next year. If the crypto prices increase significantly, orders in 2018 could be very strong. If one is  convinced 2018 is going to be a big year for crypto, TSMC could be a relatively less risky way of obtaining such exposure.
  • Crypto mining is a challenging and competitive business, and much of the profit could end up at the company supplying the key equipment. TSMC is well positioned to benefit regardless which mining company becomes dominant. As Mark Twain once said, “When everyone is looking for gold, it’s a good time to be in the pick and shovel business.”
  • TSMC also pays a healthy dividend, yielding c3.1%. The company has never cut its dividend and this should support the share price if the market weakens.
  • TSMC is very focused on the core business as a semiconductor foundry and will not be distracted by investing in other blockchain related areas like ICOs or Ripple. In our view, companies with focus tend to perform better over the long term.

Investment risks:

  • TSMC are believed to currently have only one crypto-mining client, Bitmain, so there is significant customer concentration risk.
  • The company has high exposure to Apple (APPL US) and the iPhone.

Valuation metrics:

(Source: Bloomberg, BitMEX Research)


Investment conclusion:

  • Alchip may merit further investigation to establish the significance of the crypto business.


  • Alchip is a Taiwanese ASIC design and manufacturing company, of smaller scale than GUC (mentioned below).
  • We do not know how significant crypto mining is for this company. A page in a recent company presentation explained some of the Bitcoin-mining-related products and in 2015, the company completed the first mining 16-nm tap out for the now defunct KNC miner.

Investment case:

  • This company is less well known and therefore the upside from strong crypto growth in 2018 could be significant.

Investment risks:

  • The scale of the company’s Bitcoin business is not known.
  • The earnings track record is unreliable, with the company making loses in 2016.
  • The order outlook is said to have poor visibility relative to some other companies.
  • The stock is up 171% YTD, indicating the crypto exposure may already be reflected in the valuation.

Valuation metrics:

(Source: Bloomberg, BitMEX Research)

GMO Financial Holdings

Investment conclusion:

  • GMO Coin may become a successful crypto exchange in Japan due to the company’s existing infrastructure and expertise. Therefore, GMO Financial could represent an interesting investment opportunity.


  • GMO Financial are a listed subsidiary of GMO Internet, with GMO Internet owing 80.8% of GMO Financial. Therefore, the shares are not very liquid.
  • This business includes a retail FX platform as well as the new GMO Coin exchange, which is 58% owned by GMO Financial.
  • The crypto-mining business and ICO will not occur within this subsidiary, but will occur at group level inside GMO Internet.

Investment case:

  • GMO Financial offers more direct exposure to the crypto-exchange business than the parent. The exchange business is reasonably new and therefore has considerable growth potential.
  • The FX trading-platform business is the largest retail platform in Japan, therefore GMO Financial may already have the infrastructure and expertise to build a successful crypto exchange.
  • The exchange plans to offer a leveraged product shortly.

Investment risks:

  • We have not been able to identify any trading-volume data at GMO Coin, therefore the market share is likely to be low. However, a recent company presentation indicates that growth is strong.
  • The company does publish monthly volume data for the non GMO Coin exchange businesses.

Valuation metrics:

(Source: Bloomberg, BitMEX Research)

Global Unichip

Investment conclusion:

  • Valuation ratios appear reasonably expensive and the stock price may already reflect the benefits of crypto.


  • Global Unichip (GUC) is a Taiwanese fabless ASIC design company. TSMC holds about 34% of the shares in GUC, and the chairman of GUC also has a role at TSMC China.  However, TSMC’s technology library is open to other competing fabless companies.
  • Crypto-mining-related sales are believed to account for around 20% of GUC sales in 2017, and this is likely to grow significantly in 2018, in our view.

Investment case:

  • At 20%, the crypto business is a significant part of sales. The mining business could become more competitive in 2018, making ASIC design key. If crypto prices increase in 2018, GUC is likely to perform well.

Investment risks:

  • The stock price is already following crypto markets to some extent, with the shares up over 300% in USD this year. There is significant downside risk if crypto markets collapse but this is still less risky than actually holding crypto tokens.
  • The stock is expensive on a forward EV/EBITDA of 34.7x.
  • GUC is also reliant on machine-learning/AI areas for growth in addition to crypto.

Valuation metrics:

(Source: Bloomberg, BitMEX Research)

GMO Internet

Investment conclusion:

  • GMO Internet appears to lack focus in their crypto endeavors, therefore GMO Financial may represent be a better investment opportunity.


  • GMO Internet is a group of Japanese companies based in internet infrastructure and digital payments. The main business lines of the company are online credit-card transaction processing, domain-name services, and SSL certificates.
  • In October 2017, the company announced the launch of a Bitcoin-mining business and a potential ICO.
  • The company also has a subsidiary called GMO Coin, a crypto exchange.

Investment case:

  • GMO offers broad exposure to different areas in crypto, ICOs, mining, and the operation of exchanges.
  • The core business of SSL certificates is enjoying strong growth, with sales up about 90% in 2017.

Investment risks:

  • The company is entering competitive fields and GMO appear to lack focus by trying many different areas at the same time. They may not succeed in all ambitions.
  • GMO plans to launch a 7-nm mining chip next year, which may be ambitious, especially as Bitmain is likely to be a strong competitor and it’s not clear who GMO’s mining-chip manufacturing partners are.
  • The effective ownership of the exchange business (GMO Coin) is low, at only 46%.

Valuation metrics:

(Source: Bloomberg, BitMEX Research)


Investment conclusion:

  • The company may lack focus in the crypto space and the stock may already be rallying as a result of the crypto exposure.


  • Overstock is an American e-commerce company focused on furniture and bedding.
  • For several years, company CEO and founder Patrick Bryan has enthusiastically supported Bitcoin. This may stem from his anti-Wall Street stance, which itself grew after several prominent investment banks and hedge funds were accused of targeting Overstock with a naked short selling campaign in 2005. Bryan was eventually mostly vindicated after winning a payout in a settlement of the issue.
  • Overstock first accepted Bitcoin payments in 2014 and became involved in several projects, including the Counterparty platform in 2014 and then the tZERO platform, which first launched Overstock stock as an instrument in 2016 and is currently building a distributed ledger system.

Investment case:

  • Overstock offers broad exposure to the space.

Investment risks

  • Like many of the companies mentioned in this list, Overstock seems to lack focus and is experimenting with various crypto related ideas.
  • The shares are up 214% YTD, partly as a result of the crypto theme.

Valuation metrics:

(Source: Bloomberg, BitMEX Research)


Investment conclusion:

  • The crypto story may already be well understood by the investment community and there may be considerable downside risk due to the valuation rating.


  • Square is a digital-payment-solutions company based in the US.
  • Square recently announced the launch of a new product that allows users to buy and sell Bitcoin on a mobile application.

Investment case:

  • The new Bitcoin application has received positive feedback since the launch for its ease of use.

Investment risks:

  • The stock is very expensive based on traditional valuation metrics.
  • The Bitcoin application does not offer users the ability to send payments on the Bitcoin network by itself.
  • It is not clear if the business model of buy/sell Bitcoin inside a mobile application is profitable.

Valuation metrics:

(Source: Bloomberg, BitMEX Research)

IG Group

Investment conclusion:

  • A strong crypto business may cannibalise earnings from other areas, so the crypto-related upside may be limited.


  • IG Group is a UK-based CFD and spread-betting-platform company.
  • Due to their high volatility, crypto-related trading products are offered and are likely to be contributing to earnings as the volatility of other products is lower.

Investment case:

  • IG is one of the largest and strongest CFD companies in the retail space.

Investment risks:

  • One of the big challenges for the company is the regulatory environment in the UK and Europe. The retail leveraged trading industry is under close scrutiny by regulators.
  • While the crypto business may perform well, it’s not clear that this will result in new clients or whether IG’s existing clients will merely enjoy trading and switch to whichever product offers volatility.

Valuation metrics:

(Source: Bloomberg, BitMEX Research)

PLUS 500

Investment conclusion:

  • Similar to IG, Plus 500’s stronger crypto sales may cannibalize earnings from other areas.


  • Plus 500 is a UK-based online retail trading platform.

Investment case

  • Plus 500’s technology platform lets it roll out new instruments faster than many of its peers, so it may be able to capitalise on new trends faster in the volatile crypto space.
  • Plus 500 trades at a discount to IG, due to IG’s stronger reputation and longer track record. However, customer retention at Plus 500 is improving and there is increased focus on loyal, higher-value customers rather than on speculative clients who may lose all their money and leave.

Investment risks:

  • Regulation and possible stricter rules related to CFDs are a major risk, just like for IG.

Valuation metrics:

(Source: Bloomberg, BitMEX Research)

Digital Garage

Investment conclusion:

  • One could consider a pair trade, long Digital Garage and short Kakaku.com, although the link to a real crypto business seems insignificant and unlikely.


  • Digital Garage is a Japanese technology investment fund, with the primary asset being a price-comparison website called Kakaku.com (2371 JP).
  • Digital Garage also has an investment in the blockchain-infrastructure company Blockstream.
  • In theory, one could go long Digital Garage and short Kakaku.com to increase exposure to Blockstream.

Investment case:

  • Blockstream has rolled out a satellite product, broadcasting Bitcoin blocks all over the world.

Investment risks:

  • Blockstream’s business model appears unclear. The company seems focused on technology and infrastructure rather than on commercialisation and therefore may not be able to generate earnings.
  • The link to Blockstream is very limited.

Valuation metrics:

(Source: Bloomberg, BitMEX Research)

Premium Water Holdings

Investment conclusion:

  • The link to the crypto space may be too weak.


  • Premium Water is a high-growth mineral-water delivery company in Japan, delivering water to the home and office markets.
  • According to page 10 of the COMSA whitepaper, the company will conduct an ICO, perhaps to raise funds to invest in business expansion. COMSA is a Japanese centralized ICO solutions company that recently conducted a token sale themselves.

Investment case:

  • It is possible that the company could raise a significant amount of funds in an ICO and there is a chance that existing shareholders may benefit from this.

Investment risks:

  • It is not clear how existing shareholders will directly benefit from the ICO, if at all.

Valuation metrics:

(Source: Bloomberg, BitMEX Research)

CME Group

Investment conclusion:

  • Crypto is not likely to be a significant earnings driver.


  • CME Group operates an institutional derivatives exchange that deals with futures contracts and options. The instruments are related to interest rates, stock indexes, FX, and commodities.
  • The company recently announced the launch of Bitcoin futures contracts.

Investment case:

  • Financial speculation appears to be one of the main activities Bitcoin is used for and the launch of a Bitcoin product could therefore lead to significant volume growth for the CME.

Investment risks:

  • The Bitcoin product is new and it is not clear whether there will be significant demand relative to the CME’s other products.
  • On a forward EV/EBITDA of 21.0x, the stock is already reasonably expensive.

Valuation metrics:

(Source: Bloomberg, BitMEX Research)


Investment conclusion:

  • Crypto is not likely to be a significant earnings driver.


  • CBOE operates an institutional financial-options-trading platform. The main instruments are related to FX and stock indexes.
  • The company recently announced the launch of Bitcoin futures contracts.

Investment case:

  • Similar to the CME, financial speculation appears to be one of the main activities Bitcoin is used for, and the launch of a Bitcoin product could therefore lead to significant volume growth for CBOE.

Investment risks:

  • The Bitcoin product is new and it is not clear whether there will be significant demand relative to CBOE’s other products.
  • On a forward EV/EBITDA of 24.4x, the stock is already reasonably expensive.

Valuation metrics:

(Source: Bloomberg, BitMEX Research)

SBI Holdings

Investment conclusion:

  • A partnership with “fake Satoshi”, Craig Wright, is a significant concern. We do not recommend investing in SBI.


  • SBI Holdings is a Japanese financial company whose main business is the domestic online stock-trading platform. SBI can be considered a peer to GMO.
  • SBI holdings appears enthusiastic about the crypto space. The company has a crypto fund, with investments in Ripple, R3, Orb, Coinplug, Wirex, Veem, and bitFlyer (source).
  • SBI plans to make further investments, including into Bitcoin mining. SBI also has a blockchain consulting business, including advising on ICOs.

Investment case:

  • SBI Holdings offers broad exposure to many areas in the space.

Investment risks:

  • SBI recently announced a strategic partnership with nChain, the company run by Wright, known inside the Bitcoin community as the “fake Satoshi”. This may indicate that SBI has limited knowledge about the crypto space or that the company may be wasting shareholder funds, by partnering with Wright.
  • SBI also appears to lack focus in its blockchain strategy.

Valuation metrics:

(Source: Bloomberg, BitMEX Research)

Other listed crypto-related names

Ticker Name Market cap (million USD) 2017 YTD return (USD) Description Blockchain pure play
4751 JP Cyberagent 4,814 50.0% Operates a media website, Ameba, and provides an advertising agency, foreign-exchange-trading website, and PC and mobile content. Potentially preparing for its own cryptocurrency exchange. No
3774 JP Internet Initiative Japan 841 16.2% Provides Internet connection services for businesses. Preparing Bitcoin services. No
6172 JP Metaps 365 (24.6%) Develops  advertising  platforms for smart phones. Potentially preparing for its own cryptocurrency exchange. No
3825 JP Remixpoint 322 359.9% An electricity retail business, energy-saving consulting. and used-car business.  BITPoint Exchange business. No
2315 JP CAICA  231 (7.7%) Provides information-systems solution services for financial and telecommunication industries. Issues a cryptocurrency “Caica”. No
3696 JP Ceres   216 34.8% Provides Internet marketing services.  Operates CoinTip service. No
3853 JP Infoteria 177 47.6% Provides software development based on XML.  Issues a cryptocurrency “Zen”. No
8732 JP Money Partners    133 (18.0%) Provides foreign-exchange transactions.  Alliance with the Kraken exchange. No
3807 JP Fisco  125 22.4% Provides financial information.  Exchange and deal with MonaCoin. No
8704 JP Traders Holdings   120 (8.7%) Provides financial services through Internet and call centers. Quoinex exchange business. No
3121 JP MBK  102 36.7% Provides loans and investments services for firms and real estates in Japan and China. Invested in BTCBOX exchange No
3808 JP OKWave   43 36.6% Q&A community website OKWave. Potentially preparing for its own cryptocurrency exchange. No
2377 TT Micro-Star 2,058 5.6% Also known as MSi. Manufactures and markets motherboards, graphics cards, and other computer peripherals. No
2376 TT Gigabyte Tech 1,102 28.8% Manufactures and markets computer motherboards No
3515 TT AsRock 296 100.6% Develops, designs, and retails motherboards No
2399 TT BioStar Micro 84 70.5% Manufactures and markets computer motherboards and interface cards No
6150 TT TUL Corp 68 312.3% Develops, manufactures, and markets graphics  cards, multimedia products, and interface cards No
United States
NVDA US Nvidia 116,085 80.2% Designs, develops, and markets graphics processors and related software. No
AMD US AMD 9,928 (9.3%) Manufactures semiconductor products. No
GBTC US Bitcoin Investment Trust 5,139 2,383.0% Trust invested exclusively in Bitcoin. Yes
RIOT US Riot Blockchain 275 732.7% Buys cryptocurrency and blockchain businesses, and supports blockchain-technology companies. Yes
SSC US Seven Starts Cloud Group 262 241.5% Provides artificial-intelligence, blockchain and fintech-powered digital-finance solutions No
MGTI US MGT Capital  204 475.3% Operates a portfolio of cybersecurity technologies. Yes
DPW US Digital Power 103 686.4% Designs, develops, manufactures, and markets switching power supplies for sale to manufacturers of computers and other electronic equipment. No
HIVE CN Hive Blockchain 636 n/a Operates as a cryptocurrency-mining firm. Yes
BTL CN BTL Group 197 991.7% Develops blockchain technologies. Yes
CODE CN 360 Blockchain 33 600.0% Invests in blockchain-based technology. Yes
DCC AU Digitalx 106 495.7% ICO advisory and blockchain consulting services Yes

(Source: Bloomberg, BitMEX Research)


This piece does not constitute investment advice. You should do your own research before deciding to make any investments.

BitMEX Product List Update

Quarterly Bitcoin / USD Futures Contracts

The following quarterly contracts will be listed on or before 15 December 2017 12:00 UTC:

  • BitMEX Bitcoin / USD 30 March 2018 futures contract, XBTH18

We will add the BitMEX Bitcoin / USD 29 June 2018 futures contract, XBTM18, in the near future.

Quarterly Bitcoin / JPY Futures Contracts

No new Bitcoin / JPY quarterly contract will be listed after the BitMEX Bitcoin / JPY 29 December 2017 futures contract, XBJZ17, expires. We will add a Bitcoin / JPY perpetual swap in the near future.

Quarterly Altcoin Futures Contracts

The following quarterly contracts will be listed on or before 15 December 2017 12:00 UTC:

  • BitMEX Ether / Bitcoin 30 March 2018 futures contract, ETHH18
  • BitMEX Dash / Bitcoin 30 March 2018 futures contract, DASHH18
  • BitMEX Litecoin / Bitcoin 30 March 2018 futures contract, LTCH18
  • BitMEX Monero / Bitcoin 30 March 2018 futures contract, XMRH18
  • BitMEX Ripple / Bitcoin 30 March 2018 futures contract, XRPH18
  • BitMEX Zcash / Bitcoin 30 March 2018 futures contract, ZECH18

Please note the fee structure for all altcoin futures contracts will change to maker / taker, -0.05% / +0.25%.

I’ll Take That

Building wealth is the easy part, securing and storing it for use by subsequent generations is very difficult.

Half a millennium ago, a wealthy family needed a private army to secure its land and wealth. If you couldn’t project violence in the defence of your assets, they would be forcibly taken by an opportunistic person.

As civilisations evolved and we entered the age of the nation state, society agreed that a centralised government should have a legal license to kill in order to secure the interests of property owners. Regardless of the economic “ism” a government claims to practice, the goal is the same. Protect a small group of asset holders against the hoard of commoners who might like to improve their lot at the expense of the elites.

Today the richest humans don’t command standing armies, and their holdings include financial and real assets. Stock and bond ownership relies on a central depository to affirm that you indeed are the owner. Government deed offices proclaim a piece of land or real estate is yours.

You are rich as long as the government allows you to be. The trappings of wealth can be taken at a whim. Should your actions upset a powerful state actor, your bank accounts will be frozen, and assets confiscated through the courts.

The recent Saudi corruption drive is case and point. Mohammad bin Salman (MBS), the crown prince of Saudi Arabia, is on a mission to wean the country off of oil. This is harder said than done, especially since the general population only complies because of generous government handouts. To beef up the government coffers, MBS did what all governments do, go after certain rich people.

MBS certainly wouldn’t subject himself to austerity. Last year he purchased a yacht worth over $500 million while at the same time slashing government spending.

Overnight some of the country’s richest members were herded to the Ritz Carlton, and placed under arrest owing to “corruption” charges. The most famous billionaire ensnared was Prince Alwaleed bin Talal. This Price is a world famous investor and has large stakes in some of the biggest tech darlings globally.

After a few days cooped up in the Ritz, MBS presented his chattel with a choice. Liquidate your assets and give the Saudi government up to 70%, or stay locked up. Even if a large percentage of your wealth is held offshore, due to information sharing between governments, MBS likely knows where the biggest nuggets are held. If he doesn’t think you have been forthcoming enough with the true state of your offshore wealth, well the Yemeni front line is awful fun these days.

Bitcoin presents a different way to secure wealth. Instead of trusting a government staffed with capricious humans, holders of Bitcoin trust cryptography and a decentralised network of profit motivated miners.

Bitcoin is less than a decade old, and is still very much an experiment. But if you possess a sum of wealth, it is prudent to diversify the networks used to secure it. Many people believe if they follow the “law”, they will be alright. However, laws change to serve the growth and power of the government writing them.

The government failures in Venezuela and Zimbabwe illustrate that in times of crisis Bitcoin can be used to grease the wheels of commerce. Unfortunately for most, it takes a time of crisis to elucidate the fatal flaws of a particular economic system. Only then will people take concrete actions, which only moments ago, were diametrically opposed to their belief system. At that point it’s too late.

BitMEX vs. CME Futures Guide

Bitcoin is at a watershed moment. The Chicago Mercantile Exchange (CME), the largest exchange globally by notional traded, deemed Bitcoin worthy of a futures contract. The contract will allow investors to speculate on the Bitcoin / USD price without owning Bitcoin. Prior to this contract, derivatives traders were required to own Bitcoin in order to post margin on futures trading platforms such as BitMEX.

Due to the different client bases that BitMEX (retail), and the CME (professional investors) serve, the price discrepancies between two futures contracts with the same underlying will present enormous opportunities to generate arbitrage profits. This guide will walk traders through how to execute such trades.

Contract Specs

Each CME contract is worth 5 Bitcoin (XBT), and quoted in USD. Margin and profit and loss (PNL) are denominated in USD. This is what I refer to as a linear contract structure.

CME XBT Value = 5 XBT * Contracts
CME USD Value = 5 XBT * Price * Contracts

Each BitMEX contract is worth 1 USD of Bitcoin, and quoted in USD. Margin and PNL are denominated in XBT. This is what I refer to as an inverse contract structure.

BitMEX XBT Value = 1/Price * 1 USD * Contracts
BitMEX USD Value = 1 USD * Contracts

The above chart shows the XBT value of each contract. The CME contract has a fixed value in Bitcoin no matter the spot price. The BitMEX contract’s Bitcoin value follows a 1/x function. Technically speaking the BitMEX multiplier is negative, even though in the graph uses a positive multiplier for a better visualisation.

Assume you are long 10,000 contracts at a price of $1,000.

XBT Value = 1/$1,000 * -1 USD * 10,000 = -10 XBT

Now the price falls to $500.

XBT Value = 1/$500 * -1 USD * 10,000 = -20 XBT

At a lower price, the XBT value is a larger negative number.

XBT PNL = -20 XBT - (-10 XBT) = -10 XBT

This means that the value in Bitcoin declines faster as the price falls, and increases slower as the price rises. That is negative gamma, or negative convexity.

The above chart shows the USD value of each contract. The CME contract’s USD value changes in a linear fashion with respect to the spot price. The BitMEX contract’s USD value is fixed at $1 per contract.

CME Contract Specs

Contract Size

The CME contract is much larger in notional terms than BitMEX’s. If the price of Bitcoin is $8,000, one CME contract is worth $40,000. To achieve a similar notional on BitMEX requires 40,000 contracts.

When I touch on spread trades later, the much larger CME notional means that only traders with large amounts of capital can put on these trades. This limiting factor, along with the lower leverage offered by the CME, means most retail traders will be unable to trade the CME product.


The first major difference between the two contracts is the underlying index. The CME settles on the CME CF Bitcoin Reference Rate. This index includes prices from Bitstamp, Gdax, itBit, and Kraken. BitMEX settles on the BitMEX Index that includes Bitstamp and Gdax.

Traders who hold either contract to expiry will need to familiarise themselves with each index, and at a minimum be able to trade on all four exchanges.

Both BitMEX and the CME expire on the last Friday of the contract month. However, BitMEX expires at 12:00 UTC, while the CME expires at 16:00 London Time which is either 16:00 UTC or 15:00 UTC depending on daylight savings. Given that the expiry time differs by only 3 to 4 hours, there is little benefit to adjust the time value when computing relative basis.


Bitcoin is a call option. The more volatile it is, the more valuable the option. Due to an infinite upside, and a capped downside at 0, the trading pressure on the margin comes from longs. That means that market makers who are price neutral will usually be short derivatives. Their propensity to quote an offer depends on how easily it is to purchase spot Bitcoin, and how their short derivative is margined.

As I previously mentioned the BitMEX contract is margined in XBT. That means that shorts can purchase spot Bitcoin and use this as collateral against their BitMEX short. If you buy $1,000 of Bitcoin, deposit the full XBT notional with BitMEX, then short 1,000 BitMEX contracts, you cannot be liquidated if the price rises.

BitMEX shorts, due to the inverse contract structure, are long gamma in XBT terms. That means as the price rises, their unrealised losses increase less quickly. Therefore, BitMEX shorts can use more leverage than they otherwise would if the contract used a linear contract structure.

Contrast that with the CME, which margins the contract in USD. For a market maker who is short, their spot Bitcoin hedge cannot be used as margin at the CME. As the price rises, their Bitcoin is worth more; however those unrealised USD gains cannot be deposited as margin. The CME will demand more USD collateral as the unrealised losses mount.

This makes shorting the CME contract very capital intensive. A priori, I expect the CME contract to trade more expensive than BitMEX. CME shorts need to be compensated via a higher basis for their implicit short volatility position.

The CME intends to list a futures curve out to one year. The backend of the curve, due to a larger time value, will be illiquid when compared to the front months, and will trade at a very high basis.

I will now present two spread trades. Assume that you are a USD based investor.

Spread Trade: Long BitMEX vs. Short CME

Assume the following:

Leverage: 5x / Initial Margin of 20%

Spot = $8,000
BitMEX = $8,000
Contracts = Long 200,000
CME = $10,000
Contracts = Short 6
Spread = $2,000

First compute the XBT and USD exposures.

On BitMEX:
XBT Exposure: 200,000 Long Contracts / $8,000 = +25 XBT
USD Exposure: 200,000 Long Contracts * 1 USD = -$200,000
Margin Requirement: 20% * 25 XBT = 5 XBT
Collateral Currency Exposure vs. USD: +5 XBT / -$40,000 (Valued at the spot price)

XBT Exposure: 6 Short Contracts * 5 XBT = -30 XBT
USD Exposure: 6 Short Contracts * 5 XBT * $10,000 = +$300,000
Margin Requirement: 20% * $300,000 = $60,000
Collateral Currency Exposure vs. USD = 0

Because you are a USD based investor, you must ensure that you do not have XBT/USD risk at any time. Due to the XBT BitMEX margin requirement, you must short an additional 1 CME contact to hedge the 5 XBT margin required on BitMEX.

Margin XBT/USD Price Risk:
BitMEX: +5 XBT / -$40,000
CME: -5 XBT / +$50,000 (Short 1 Contract)
Net: 0 XBT / +$10,000

Due to the CME’s higher basis, we earn carry on the BitMEX XBT collateral.

Spread XBT/USD Price Risk:

BitMEX: +25 XBT / -$200,000 (Long 200,000 Contracts)
CME: -25 XBT / +$250,000 (Short 5 Contracts)
Net: 0 XBT / +$50,000

As predicted, we earn $50,000 PNL from this spread trade. The below table stresses the portfolio on a large up and down move.

$4,000 -25.00 XBT -$100,000 $150,000 $50,000
$8,000 0.00 XBT $0 $50,000 $50,000
$16,000 12.50 XBT $200,000 -$150,000 $50,000

The trade continues to return $50,000 regardless of the price movement. However, this is a leveraged trade, we must post additional margin on either BitMEX or the CME depending on the price move.

The below table summarises what actions must be taken to ensure we meet margin requirements.

Margin Action Currency Needed
Price Falls Buy then deposit XBT on BMEX, sell CME contracts XBT & USD
Price Rises Deposit USD to CME USD

Because we are short gamma on our long BitMEX position, we must post XBT and sell CME contracts to hedge the XBT collateral. Both of these derivatives require additional margin. On the upside, we only need to post additional USD with the CME. Depending on your cost of capital, a prolonged down move without any recovery could become very expensive.

Another issue is the sizing of this trade. Each CME contract is worth 5 XBT. If you wish to remain price neutral on your XBT collateral, a 5 XBT loss needs to be a small % with respect to your trade notional. Otherwise you will always be over and under hedged. The below table illustrates this point.

Entry Price: $8,000
Multiplier: -1 USD (for inverse contracts the multiplier is actually negative)

Contracts XBT Value Down % Move Up % Move
50,000 -6.25 XBT $4,444.44 -44.44% $40,000.00 400.00%
250,000 -31.25 XBT $6,896.55 -13.79% $9,523.81 19.05%
500,000 -62.50 XBT $7,407.41 -7.41% $8,695.65 8.70%
1,000,000 -125.00 XBT $7,692.31 -3.85% $8,333.33 4.17%
2,500,000 -312.50 XBT $7,874.02 -1.57% $8,130.08 1.63%
5,000,000 -625.00 XBT $7,936.51 -0.79% $8,064.52 0.81%

The % Move is a measure of how far the price needs to move up or down to generate a contract value change of 5 XBT. As you can see, go big or go home.

Spread Trade: Short BitMEX vs. Long CME

Assume the following:

Leverage: 5x / Initial Margin of 20%

Spot = $8,000
BitMEX = $10,000
Contracts = Short 250,000
CME = $8,000
Contracts = Long 5
Spread = $2,000

First compute the XBT and USD exposures.

On BitMEX:
XBT Exposure: 250,000 Short Contracts / $10,000 = -25 XBT
USD Exposure: 250,000 Short Contracts * 1 USD = +$250,000
Margin Requirement: 20% * 25 XBT = 5 XBT
Collateral Currency Exposure vs. USD: +5 XBT / -$40,000

In order to hedge the 5 XBT of margin required, sell an additional 50,000 BitMEX contracts.

XBT Exposure: 50,000 Short Contracts / $10,000 = -5 XBT
USD Exposure: 50,000 Short Contracts * 1 USD = +$50,000
Net: 0 XBT / $10,000

XBT Exposure: 5 Long Contracts * 5 XBT = +25 XBT
USD Exposure: 5 Long Contracts * 5 XBT * $8,000 = -$200,000
Margin Requirement: 20% * $200,000 = $40,000
Collateral Currency Exposure vs. USD = 0

Spread XBT/USD Price Risk:
BitMEX: -25 XBT / +$250,000 (Short 250,000 Contracts)
CME: +25 XBT / -$200,000 (Long 5 Contracts)
Net: 0 XBT / +$50,000

As predicted, we earn $50,000 PNL from this spread trade. The below table stresses the portfolio on a large up and down move.

$4,000 37.50 XBT $150,000 -$100,000 $50,000
$8,000 6.25 XBT $50,000 $0 $50,000
$16,000 -9.38 XBT -$150,000 $200,000 $50,000

The trade continues to return $50,000 regardless of the price movement. However, this is a leveraged trade, we must post additional margin on either BitMEX or the CME depending on the price move.

The below table summarises what actions must be taken to ensure we meet margin requirements.

Margin Action Currency Needed
Price Falls Deposit USD to CME USD
Price Rises Buy then deposit XBT on BMEX, sell BMEX contracts XBT

Because you have positive gamma on the short BitMEX position, you will not face a doubling of margin requirements when the price falls. This spread trade is more capital efficient; however, I doubt whether BitMEX will frequently trade more expensive than the CME for reasons described above.

Gap Risk

The CME does not trade over the weekend. Longs or shorts depending on the price action over the weekend, could be insta-rekt when the exchange reopens Sunday night US time.

Interactive Brokers, one of the CME’s clearing members, expressed severe reservations about this product due to the high volatility. They are scared shitless about how to deal with underwater shorts. It is not impossible for Bitcoin to gap up 100% in a matter of hours on positive news. Imagine what will happen when an ETF finally is approved.

BitMEX deals with gap risk via Auto-Deleveraging. The CME at the present moment cannot employ a socialised loss feature. Instead, clearing members must pony up the cash. That is why they are being such scaredy cats.

Depending on your broker, margin requirements for short positions could be extremely unforgiving. This will push CME basis up even further, and make putting on the spread trade described above, even more expensive.

Are You Yellow?

Arbitraging BitMEX vs. the CME requires a high level of trading sophistication and attention to detail. The different margin currencies and policies present many opportunities to transform what is a sure profit into a massive loss.

However, owing its the difficulty, these spread trades will be juicy. For students of markets, this is an arbitrage opportunity of a lifetime. Those who put in the time to perfect these strategies, will profit handsomely.

Bitcoin Cash (BCH): Investment flow data (update)

Abstract: In early September 2017, we published a piece on Bitcoin Cash  (also known as BCash) and how one can analyse transaction data on the two blockchains involved in the split, to try to draw conclusions about the potential investment flows between the two chains.  In this piece we update the analysis, with another three months worth of data.


Total coins spent

Bitcoin had an initial lead with respect to total coins spent at least once since the fork, when compared with Bitcoin Cash.  However, Bitcoin Cash caught up in early September.  Since then both coins have been approximately neck and neck.  As at 29th November 2017, 6.5 million and 6.3 million Bitcoin and Bitcoin Cash coins have been spent at least once since the fork, respectively.


Figure 1 – Bitcoin Cash (BCH) vs Bitcoin (BTC) – Number of coins spent at least once since the chain split

Source: BitMEX research, Bitcoin blockchain, Bitcoin Cash blockchain, Bittrex (Price data)


Daily Bitcoin Cash Spend for the first time

Although there have been several spikes, normally after a rally in the Bitcoin Cash price, the number of Bitcoin Cash coins spent each day (for the first time since the fork) continues its decline.  In the last five days, the average daily first time spend has been just c19,000 per day, compared to lows of around 50,000 in August.


Figure 2 – Bitcoin Cash coins spent for the first time since the split (daily)

Source: BitMEX research, Bitcoin Cash blockchain, Bittrex (Price data)


Transaction Volume

With respect to transaction volume, a more normal metric compared to our somewhat convoluted first time spend since the fork metric, there is not much change in the relative transaction volumes of the two chains.  The total cumulative Bitcoin Cash transaction volume is 5.5% of Bitcoin, since the fork.  Although this figure is increasing slightly, averaging at 6.0% in the last 10 days, compared to the overall total figure of 5.5%.


Figure 3 – Daily transaction volume (Number of transactions)

Source: BitMEX research, Bitcoin blockchain, Bitcoin Cash blockchain, Bittrex (Price data)


Proportion of Bitcoin Cash coins spent

In the first four months of Bitcoin Cash, 38.5% of all coins that existed at the time of the fork, have been spent at least once on the Bitcoin Cash chain.  In our view, this is a remarkably high figure, considering many millions of coins are lightly to have been lost forever years ago.


Figure 4 – Bitcoin Cash (BCH) – Proportion of spent vs unspent coins since the chain split

Source: BitMEX research, Bitcoin Cash blockchain



In our view, the above data shows that after just four months, there may have been considerable investment flows between the two coins.  Therefore, many supporters of each coin may have already made their respective investment/divestment decisions, and the future of each coin may now be determined more on merit or utility, rather than the opinion of the holders at the time of the fork.

We would like to remind readers that there are many weaknesses with resepect to this analysis, the main one being that a spend on the Bitcoin Cash chain does not necessarily relate to a divestment.


Bitcoin’s Unique Value Proposition

Abstract: In this piece we examine the question of “What is Bitcoin for?”  We conclude that neither low cost payments, censorship resistance nor digital payments, are particularly compelling on their own. However, when combining both censorship resistant money, with the ability to use money electronically, we have a potentially interesting and somewhat unique set of characteristics.



There has been a significant amount of debate and discussion in the Bitcoin ecosystem, about what Bitcoin is for.  Should Bitcoin be a form of “digital gold”, where a robust rule-set and a resilient network are the priority, or should Bitcoin primarily be considered as a payment system, where low transaction fees are the focus?

Of course most people would like Bitcoin to excel in both of these areas and in the long term,  Bitcoin may be able to do so.  However, the blocksize debate opened up a schism in the community, about which area should be the priority, in the short to medium run.

In this piece we look at three key characteristics of money and payment systems:

  1. Low transaction fees,
  2. Censorship resistance, and
  3. The ability to transact electronically.

We then look at various choices one could make when deciding which type of money to use and the set of characteristics that each choice provides.  We look at where Bitcoin should position itself, such that it may be able to provide a unique option.


1. Low transaction fees

Low transaction fees and usability have clearly been a key selling point of Bitcoin to many people.  Bitcoin has had lower transaction fees than many online international banking transfer systems and Western Union for example. A simple user experience is key to adoption, and there is a fear that if user adoption is too slow, Bitcoin may lose out to alternative payments solutions, either traditional centralized type systems or alternative distributed proof of work based tokens such as Ethereum.

However, although Bitcoin is cheaper and perhaps easier to use than some centralized alternatives, in many cases centralized alternatives are faster and cheaper than Bitcoin.  For example in many Western European countries, retail domestic interbank transfers are both free and instant.  In China, Alibaba (BABA US) and Tencent (700 HK) are offering fast, simple and cheap payment solutions.  Tencent is said to be able to handle 200,000 transactions per second, far in excess of what Bitcoin can achieve.  Some may see these offerings as a risk for Bitcoin, while others see this as a battle Bitcoin was always going to lose anyway.  Although currently fast and free payments are not available to everyone in the world, therefore Bitcoin can fill a useful niche.  However, if instant and free payments can eventually be provided by traditional payment solution providers, is it really sustainable to build Bitcoin based on the assumption that they won’t ever provide such an offering?


A shop window displaying various electronic payment options, including Alipay, WeChat Pay and Apple Pay


2. Permissionless & censorship resistant money

Other members of the Bitcoin community prioritize other features, ahead of low fees.  This is often characterized as “censorship resistance”, but may actually refer to a range of related properties.  The main aspects of these features are the following:

  • The ability to use the system without seeking permission,
  • The inability of the government or the authorities to block payments,
  • The inability of the authorities to reverse payments, and,
  • Resistance against the entire system being shut down.

However, just like the low transaction fee use case mentioned above, these characteristics are also non unique.  Physical cash (notes and coins) also have these features, again making Bitcoin seemingly useless.  Physical cash not only has these features, it has them to a far greater extent than Bitcoin.  Cash also has additional features which Bitcoin cannot offer, such as the ability to use cash when communication networks are unavailable or without a device such as a smartphone.

It should be mentioned that Bitcoin may have one interesting feature here that physical cash does not have, the censorship resistance of the rules of the monetary system as a whole.  In Bitcoin, end users may have the ability to enforce all the rules of the system, which cannot be said for physical cash.  This ensures some interesting properties such as the 21 million supply cap or preventing other inflationary type policies, not available as an option for physical cash.  In this respect Bitcoin can be said to be most like “digital gold”, in regards to its monetary characteristics.


The use cases of censorship resistant money

These censorship resistant type features are sometimes associated with illegal activity, the so called black market or grey market.  Although there are of course many legitimate use cases of this feature, for example a lack of trust with respect to your partner in the transaction or the high costs associated with enforcing payments, due to dealing in multiple jurisdictions.

Black market areas could include things like, tax evasion, money laundering, illegal drug dealing, sex related services, the sale of illegal weapons, bribery and organized crime.  Grey market areas could be considered as legal goods and services, sold in an unauthorized way.  Grey market type transactions could be said to include:


  • Remittance to or from a country imposing some form of capital controls,
  • An individual subject to political oppression restricting the use of their funds,
  • Purchasing products or services from a lower price or alternative region without the consent of the regulator, manufacturer or service provider, for example pharmaceuticals, consumer electronics or media subscription services,
  • Donations to a politically sensitive cause,
  • The sale of cars without proper registration,
  • The unauthorized sale of copyrighted material such as textbooks,
  • Computer software or digital content sold without the correct license,
  • Unauthorized transactions in stocks and shares in the OTC market,
  • Participation in online gambling or poker without meeting regulatory requirements,
  • Sporting event tickets sold in violation of the terms printed on the ticket,
  • The sale of airline loyalty points in the secondary market,
  • A young teenager using online e-commerce systems or in store mobile payment technologies, without being old enough to have the necessary banking relationships,
  • A female using online e-commerce systems, in a cultural environment where its socially unacceptable for females to have banking relationships,
  • Payments for basic services such as babysitting, without registration for sales tax or employment,
  • Payments to a babysitter who has inappropriate immigration status, or,
  • Payments from intelligence services to informants.


These examples may make this use case somewhat controversial and many may think there could be limited upside due to a lack of demand for these goods and services.  However, in our view there is significant demand for this type of use case, indeed some people estimate these types of activities account for the majority of global economic activity, depending on how its measured.

Additionally, as we explained above, Bitcoin offers nothing new here, physical cash already has the features which make it ideal for these scenarios and actually has superior qualities to Bitcoin in relation to censorship resistance.  One key cultural difference is that physical cash is already deeply embedded in society, while Bitcoin is relatively new, making it potentially more controversial.

HSBC UK credit card eligibility criteria – requiring users to be over 18 years old

Note: Credit card systems are typically used as the base layer for mobile payment technologies, which are therefore often inaccessible to those under 18 years of age, unlike cash which is permissionless.


3. Electronic payments

In our view, as we enter the digital age, one characteristic of money trumps all of them.  The ability to use money electronically, such that it can be used over the internet or on a mobile device.  The internet and electronic communication systems are becoming increasingly integral parts of our culture and therefore the ability to use money electrically is an incredibly powerful feature, becoming increasingly important.

However, Bitcoin certainly does not provide anything new in this area either.  When using traditional currencies like the US dollar, internet based payment systems, controlled by computer interfaces have been around for years.  Recently, the options available in this area are improving rapidly, with mobile payment systems gaining significant traction.


Evaluating the combinations of these three characteristics

After reading the above, one may conclude that Bitcoin has no unique characteristics whatsoever.  This is true to some extent, however the key value proposition of Bitcoin, is a unique combination of the above characteristics, namely to have both censorship resistance and an electronic transaction system.  This subtlety can make the value proposition of Bitcoin difficult to understand, resulting in significant amounts of scepticism, when one first comes across the subject.

The below table aims to illustrative the three key features discussed in this note.  Two alternative strategies for Bitcoin are outlined below, one prioritizing low transaction fees and the other prioritizing censorship resistance.  The analysis is an oversimplification, assuming a binary choice between one or the other, when the reality is far more nuanced, however it still illustrates a point.

When choosing to prioritize low fees, the boxes ticked in the below table are identical to those ticked for traditional electronic payment systems, which can already provide both low fees and electronic payments.  However, by focusing on censorship resistance, a unique set of boxes is ticked, ensuring Bitcoin provides a unique set of features that cannot be offered by any of the competing systems.  No other monetary or payment system is able to offer both censorship resistance and electronic payments.  Therefore, in our view, however vital low transaction fees are, if we are faced with a decision, the smart choice may be to prioritize the strategy that provides the most unique combination of characteristics.  This could mean choosing censorship resistance, rather than focusing on what appears to be the most immediately useful requirement.


Ability to offer low transaction fees Ability to offer censorship resistant type features Ability to transact electronically
Physical cash
Bank deposit/traditional electronic payment systems
Bitcoin (Priority: Low fees)
Bitcoin (Priority: Censorship resistance)


Of course Bitcoin still needs to balance the need for both low fees and censorship resistance, and hopefully can achieve both, perhaps with new technology. Therefore, in the medium or longer term, perhaps all three boxes in the above table can be ticked.



We conclude that the “point” of Bitcoin is to provide characteristics traditionally only available when using physical cash, but in an electronic form, suitable for the digital age.  An “electronic cash system“.  Therefore its a false dichotomy to believe we are facing a choice between “digital gold” and a cash type system.  Bitcoin can be considered as a hybrid option, between digital gold, physical cash and traditional electronic payment systems.


Revisiting The DAO

Abstract: In this piece we revisit “The DAO” and the events following its failure.  We analyse what happened to the various buckets of funds inside The DAO, on both sides of the chainsplit which it caused.  We identify US$140 million of unclaimed funds still inside what is left of The DAO.


Key points

  • The DAO hacker appears to control tokens worth approximately US$60 million.
  • There are currently around US$140 million of unclaimed funds still inside The DAO withdrawal contracts.
  • In June 2017, the US Dollar value of funds unclaimed inside The DAO was higher than the value of the amount initially raised in May 2016.
  • A deadline is approaching, 10 January 2018, after which some of the funds, around US$26 million, may no longer be available to be claimed.


The DAO marketing material from May 2016

Source: DaoHub




In the early summer of 2016, one project generated a substantial amount of excitement and buzz in the crypto space, “The DAO”. DAO stands for Decentralized Autonomous Organization, and to the confusion of many, “The DAO” consumed that entire moniker for itself. The DAO was to be an autonomous investment fund, investing in projects determined by the token holders.  The fund was to be governed by a “code is law” philosophy, as opposed to the centralized top down control mechanisms in traditional investment funds, where key individuals matter.  

Many believed this novel approach would lead to superior investment returns.  Although it is a unique and potentially interesting approach, in our view, expecting strong investment returns at this point may be somewhat naive.

The fund raised Ethereum tokens worth approximately US$150 million at the time, around 14% of all the ether in existence, with investors presumably expecting spectacular returns.  The downside risk was expected to be minimal or zero, since one was supposed to be able to withdraw one’s Ethereum from The DAO, whenever one wished. In reality, doing so was a complex and error-prone process.



Problems with The DAO

As it turns out, The DAO was fundamentally flawed on several levels, as many in the Ethereum Foundation pointed out before the exploit was discovered.  For instance:


  • Economic Incentives – The incentive model of the project was poorly thought out.  For example there was little incentive to vote “no” on investment proposals, since “no” voters became invested in approved projects. Those that did not vote did not become exposed to the project. Additionally, there was no stated enforcement mechanism for successful projects to contribute profits back into The DAO.
  • Token viability – When projects were created, it would have end up creating new classes of DAO tokens, such that each class was entitled to different risks and rewards.  This would mean the tokens would not be fungible, an issue poorly understood by exchanges and the community.
  • Buggy code – The code did not always implement what was described or intended.  The smart contract code did not appear to be reviewed adequately. The coders did not appear to fully grasp its language, Solidity, nor some of the states the contract could reach.


A few weeks after the conclusion of the token sale, a “hacker” managed to find an exploit in the code, enabling them to potentially access The DAO’s funds, by draining the main pool of funds into a child DAO in which the hacker potentially had significant control.  This then led to an Ethereum hardfork, to attempt to prevent the hacker from accessing the funds and to return the funds to the initial investors. Since some in the Ethereum community were unhappy about this, it lead to the chain split between ETH and ETC.


In this piece we will:

  • Describe the relationships between the main actors involved in The DAO,
  • Revisit the key events surrounding Ethereum’s DAO hardfork,
  • Explore the movement of ETH and ETC funds inside The DAO, and
  • Speculate on what will happen to the unclaimed funds.



The main groups and individuals related to The DAO


Network map of the main groups and the individuals involved in The DAO

Sources: BitMEX Research, Full sources provided in the table below
Notes: There are other Ethereum foundation members with no association to The DAO, which are excluded from the above mapping.  Blue circles represent individuals; while yellow circles represent organisations.


List of the major parties involved in The DAO

Name Description People involved
DAOHub.org A DAO community website promoting The DAO, hosted by DAO.Link Felix Albert , Auryn Macmillan, Boyan Balinov, Arno Gaboury, Michal Brazewicz ,  Taylor Van Orden , Des Donnelly, Daniel McClure (Source)
Slock.it Slock.it wrote the code for The DAO and the company was hoping to develop smart locks.  Slock.it was expected to be financed by The DAO Stephan Tual, Lefteris Karapetsas, Griff Green, Christoph Jentzsch, his brother Simon Jentzsch, Gavin Wood and Christian Reitwießner (Source)
The “Hacker” The exploiter of The DAO Anonymous
DAO Token Holders (DTH)

Individuals from the general public who contributed to The DAO crowdsale or purchased DAO tokens on the open market

22,873 account holders (Source)
The DAO Curators 3rd party “arbitrators” separate from Slock.it to manage disputes or emergency situations arising from The DAO Taylor Gerring, Viktor Tron, Christian Reitwießner, Gustav Simonsson, Fabian Vogelsteller, Aeron Buchanan, Martin Becze, Vitalik Buterin, Alex Van de Sande, Vlad Zamfir and Gavin Wood (Source)
Note: Gavin Wood resigned as a DAO Curator prior to the exploit
Bity A Swiss based cryptocurrency exchange in partnership with Slock.it.  The exchange publishes WHG announcements (Source) Alexis Roussel (Source)
DAO.Link A Swiss registered joint venture company between Slock.it and Bity, which hosts the DAOHub website (The website promoting The DAO, pictured above) Stephan Tual, Simon Jentzsch, Alexis Roussel (Source)
Robin Hood Group (RHG) The original “white hat” group, which secured the majority of The DAO funds pre-fork

Publicly: Alex Van de Sande, Griff Green, Lefteris Karapetsas
Stephan Tual claims: “individuals from the eth foundation, devs, security experts, ethcore, slock, etc” (Source)

Whitehat Group (WHG) The organisation which took ownership of ETC from the RHG.  The WHG has close ties to Bity Only publicly known members are Jordi Baylina and Griff Green (Source)
The Ethereum Foundation Non profit foundation behind the creation of Ethereum Many individuals including some of the founders of Ethereum (Source)



The DAO timeline

In order to fully understand and account for the proper ownership of the funds, we must revisit the provenance of The DAO funds before, during and after the hardfork.


Date Event Movement of Funds
30 April 2016 The DAO crowdsale is launched (Source: Slock.it)
25 May 2016 The DAO crowdsale concludes c11.5 million pre-fork ETH raised
17 June 2016 The DAO is drained into a Child DAO by the hacker
(Source: New York Times)
c3.6 million pre-fork ETH drained to Hacker’s Child DAO


A “Child DAO” can be “split” from the main DAO as part of the The DAO’s governance process, similar to a spin-off company.

The splitting process was exploited by the hacker using a recursive call exploit, which drained more funds from the parent DAO than intended. The owner of a newly formed Child DAOs cannot withdraw those funds immediately; they have to wait for a voting period to end before securing those funds and being able to freely transfer them.

This voting period gave the Ethereum community a window of opportunity to attempt to reclaim the funds by attempting to exploit the hacker’s Child DAO using the same vulnerability. This, however, may have resulted in perpetual splitting and a “DAO War”, whereby the funds would be stuck in limbo forever as long as neither the hacker nor RHG gave up. This process could be easily scripted so would not take much effort on either side.

One way to solve this would be the implementation of a softfork to censor the hacker’s transactions, preventing him/her from participating in this war and quickly allowing the funds to be recovered.


Date Event Movement of Funds
21 June 2016
RHG begin “DAO Wars” and are able to to recover a majority of the funds
(Source: Reddit)
c8.1 million pre-fork ETH Drained into the RHG’s Child DAOs using the same vulnerability
24 June 2016
“DAO Wars” softfork proposed to secure attacker’s c3.6 million pre-fork ETH
(Source: Ethereum Foundation)
Would have censored transactions to prevent hacker from accessing their Child DAO
28 June 2016
Critical flaw in “DAO Wars” softfork discovered and it is abandoned
(Source: Hacking Distributed)


At this point, the RHG have managed to secure around 70% of the funds by exploiting other Child DAOs, but in order to guarantee the ability to reclaim the remaining c30% (around 3.6 million pre-fork ETH), a hardfork is the only possibility.  Moreover, the softfork proposal was found to have critical security vulnerabilities and was quickly scrapped.


Date Event Movement of Funds
20 July 2016
Hardfork is implemented, effectively undoing the effects of The DAO hack and making DTH whole on the forked ETH chain. Implemented via two withdrawal contracts.
(Source: Ethereum FoundationThe Ethereum Wiki)
c11.5 million post-fork ETH returned to DAO withdraw contract and can be claimed by DTH based on their current DAO token balances
20 July 2016
ETC, the ‘not-forked’ chain continues to be mined
The RHG and The DAO hacker will eventually have access to ETC in Child DAOs


After the fork, there are two chains in parallel universes. One, ETH, where the hack is undone, and one ETC, where the hack remains. The RHG have still secured around 70% of the ETC, and could have continued the attack on the ETC chain using the aforementioned ‘DAO wars limbo’ strategy, but decide not to. To refund DTH on the ETH chain, a withdrawal contract is used, which DTH must call to claim their ETH.


Date Event Movement of Funds
23 July 2016
ETC is listed on Poloniex, other exchanges follow suit. ETC/USD reaches 1/3 of ETH/USD
(Source: Twitter)
9 Aug 2016
The RHG hands ownership of the ETC funds to the WHG. The WHG receive funds in their ETC multisig wallet as the ETC Child DAOs mature
(Source: Bity)
c8.1 million ETC Secured by the WHG
10 Aug 2016
Unannounced, WHG/Bity use Bity’s “verified money service business” account to attempt to tumble and swap 3 million ETC on 4 exchanges for ETH, BTC and EUR
(Source: Bity)
Poloniex freezes 2.3 million ETC, Kraken trades but freezes 1.3 million worth of ETC, Bittrex trades and processes 82k ETC, Yunbi trades and processes 101k ETC
12 Aug 2016
After the majority of the tumbled ETC is frozen, WHG/Bity announce that they have decided not to sell the ETC for ETH, and instead will distribute ETC to DTH
(Source: Reddit)
Bity trade back BTC, ETH and EUR into c1.5 million ETC, bringing their balance back to c8.1 million ETC


Graphical illustration of the above transactions

Source: Gliffy


Date Event Movement of Funds
26 Aug 2016
Bity announce launch of the “Whitehat Withdrawal Contract”
(Source: Bity)
30 Aug 2016
Bity announce that the first version of “Whitehat Withdrawal Contract” is published
(Source: Bity)
c4.2m ETC transferred from WHG to the withdrawal contract, c0.6 million claimed by DTH.  DTH are entitled to receive funds based on their DAO token balance at the time of the harfork, not the current token balance as is the case for ETH.
30 Aug 2016 Bity announce that second version of “Whitehat Withdrawal Contract” is published
(Source: Bity)
c3.8 million ETC transferred from old contract to new contract
6 Sept 2016
Bity announce that the remaining ETC (including that which was attempted to be traded on exchanges, and some from matured Child DAOs) is transferred to the Whitehat Withdrawal Contract
(Source: Bity)

c4.3 million ETC transferred from WHG exchange accounts and multisig into withdrawal contract.

During the time these trades were made, the price of ETC dropped in value relative to ETH, BTC and/or EUR, causing the trade back into ETC to yield an additional 700,000 of ETC that was added to the Whitehat Withdrawal Contract.  The exact details of these on-exchange swaps were not made public.


Graphical illustration of the above transactions

Source: Gliffy


Date Event Movement of Funds
6 Sept 2016
DAO Hacker moves the funds from his “Dark Child DAO”
(Source: Gas Tracker)
c3.6 million ETC Secured by Hacker
6 Sept 2016 DAO Hacker donates some ETC to the ETC development fund
(Source: Gas Tracker)
1,000 ETC sent to ETC developer fund
25 Oct 2016 to
7 Dec 2016
DAO Hacker tumbles funds into many different accounts, potentially swapping to different currencies
(Source: Gas Tracker)
c0.3 million ETC tumbled by hacker


At the time of writing the hacker has not touched the vast majority of the drained ETC, and is sitting on a stash of 3,360,332 ETC, worth US$58 million.

One feature of the Whitehat Withdrawal Contract is that a limit is set for the ETC funds to be withdrawn (originally set to 3 months, expiring on 30th January 2017). Due to a large proportion of the funds not being claimed within the 3 months given, this period was extended twice:


Date Event Movement of Funds
30 Jan 2017
Bity Announce the extension of the ETC Whitehat Withdrawal contract deadline to 14 April 2017
(Source: Bity)
14 April 2017
RHG Announce the extension of the ETC Whitehat Withdrawal contract deadline to 10 January 2018
(Source: Reddit)
10 Jan 2018
ETC Whitehat Withdrawal contract deadline ?


There have been no major events since then to the present day; the vast majority of ETH funds have been withdrawn by DTH, as has the majority of ETC.



The unclaimed funds

As at 19th November 2017, there is approximately US$140 million of unclaimed funds, as the approximate breakdown below illustrates.


DAO related funds on the ETH side of the fork

Bucket ETH Unclaimed US$ million Percent
Claimed balances
ETH Withdrawn by DTH 11,286,046 97.3%
Unclaimed balances
Unclaimed ETH in DAO Withdraw (Source) 235,414 86.6 2.0%
Unclaimed ETH in DAO ExtraBalance (Source) 76,204 28.0 0.7%
Unclaimed total 311,618 114.7 2.7%
Claimed & unclaimed
Total funds 11,597,664   100.0%

Source: BitMEX Research, Ethereum blockchain
Note: USD/ETH price of $368 used


DAO related funds on the ETC side of the fork

Bucket ETC  US$ million Percent
Hacker funds
ETC retained by Hacker 3,642,408 66.6  30.1%
WHG Funds
ETC Withdrawn by DTH (including donations) 7,035,319 58.2%
Unclaimed ETC (Source) 1,405,072 25.8 11.6%
WHG Total 8,440,391   100.0%
Hacker & WHG funds
Total funds 12,082,799

Source: BitMEX Research, Ethereum Classic blockchain
Note: USD/ETC price of $18.30 used


DAO related funds on the ETC side of the fork

Source: BitMEX Research, Ethereum Classic blockchain


Unclaimed DAO balances over time – ETH & ETC

Source: BitMEX Research, Github


Unclaimed DAO balances over time – USD

Source: BitMEX Research, Coinmarketcap, Github


As the chart above illustrates, at the Ethereum price peak in July 2017, the US Dollar value of unclaimed Ethereum inside DAO withdrawal contracts was even higher than the US$150 million initially raised.



Withdrawal Contract “Gotchas”

Whilst the notion of a withdrawal contract sounds binding, all of the unclaimed funds are still in the control of the owners of those contracts.


Safety Hatches

All of the three withdrawal contracts have ‘safety hatch’ mechanisms, meaning the ‘owners’ of these contracts have the ability to withdraw all of the funds at any time.



Whilst The DAO Curators have not indicated this is planned, it may be tempting to appropriate these funds if it is deemed that no more withdrawals will take place. The WHG, in contrast, have designed their contract specifically to ensure this happens.


Whitehat Deadline

The Whitehat Withdrawal contract also has a timeout system for when DTH are able to withdraw their funds. This deadline will expire on January 10th 2018 (although it has been extended twice before), so attempts to withdraw after this deadline may be denied.



What next for the US$26 million of unclaimed ETC?

The next obvious question is:

What happens to the unclaimed funds on January 10th 2018?

There are four clear options at present:


  1. Have WHG/Bity keep the funds as payment for their service, returning some of the ETC
  2. Donate the funds to a charity or the “community”, perhaps  the ETC, DTH or ETH community
  3. Extend the deadline again
  4. Commit to allowing withdrawals indefinitely, as with the ETH withdrawal contracts


An official response from Bity, suggested they may lean towards option two:


We feel that these funds should be donated to the DAO Token holders community where they originated from. After 6 months, we want to be able to donate these unclaimed funds to a community wide effort, like a foundation supporting smart contracts security. We want these funds to be used to develop the future of structures of Decentralized Governance, DAOs and smart contracts. We will see what options are available at the time.

Source: Bity


Of course, questions of who represents the ‘DTH Community’ will arise, and whether or not the funds are being spent in a transparent matter may come into question. Due to the anonymous nature of who is behind WHG, it may be difficult for the community to properly audit the spending of these unclaimed funds.

Additionally, this arbitrary timeline that prevents individuals in the future from claiming funds that are rightfully theirs may result in future legal action. As such, there is a possibility that WHG is only left with option 3 or 4, and will potentially allow ETC withdrawals to continue in perpetuity.

However, January 2018 will be over 18 months after The DAO, a long time in the crypto space.  In addition to this the price of both ETH and ETC has risen considerably since The DAO. Therefore perhaps some DTHs may forget about their tokens in all the excitement and wealth generation, which is prevalent in the Ethereum ecosystem.



Whilst many claims made in this note are cited, we do not guarantee accuracy. We welcome corrections.

The implications for Bitcoin of the new Bitcoin Cash difficulty adjustment mechanism

Abstract: In this piece we examine the potential impact of Bitcoin Cash’s new rolling 24 hour difficulty adjustment algorithm on the Bitcoin network.  We look at the possible implications of price movements of Bitcoin Cash, with respect to hashrate oscillations between the two coins.



In our last piece we looked over the history of coins sharing the same hashing algorithm and some of the potential problems related to swings in the hashate between the two respective coins.  In this piece we look more closely at Bitcoin and how it could be effected by changes in the price of Bitcoin Cash.

Bitcoin has a longer difficulty adjustment period than Bitcoin Cash, a two week adjustment windows, compared to the rolling one day period Bitcoin Cash now has.  Therefore, in the event of price movements changing relative mining incentives between the chains, Bitcoin will be slower to adjust and achieve the the 10 minute target time than Bitcoin Cash.  This could be a potential problem for the usability or integrity of the Bitcoin network.


A worked example of a Bitcoin Cash price increase

For this rest of this piece, broadly speaking, we assume miners have the objective of maximizing profits in the short term.  In reality miners may also consider other factors or have other objectives, for example, to see their favorite coin succeed, their hated coin fail, or they may try to maximize the long term value of their investment in coins and mining hardware, by focusing on maintaining network stability.

The following scenario applies to an increase in the price of Bitcoin Cash,  similar logic can be used for other price movements:

  1. There is stable equilibrium, where each coin is approximately achieving its 10 minute target time and the hashrate distribution is broadly speaking allocated in proportion to the relative price of each coin.
  2. The price of Bitcoin Cash increases.
  3. Bitcoin Cash then has higher mining profitability than Bitcoin and a significant amount of hashrate moves over to Bitcoin Cash.
  4. Within a day, Bitcoin Cash’s difficulty re-targeting mechanism quickly adjusts, such that the Bitcoin Cash block interval is around 10 minutes.
  5. Due to the higher difficulty on Bitcoin Cash, some of the hashrate moves back over to Bitcoin.  The Bitcoin block interval is longer than 10 minutes, since not all of the hashrate moves back over.
  6. Within around two weeks, Bitcoin’s difficulty re-targeting mechanism adjusts, and Bitcoin’s block interval reaches 10 minutes again.  More hashpower moves back over to Bitcoin, such that the hashrate distribution is approximately in proportion to the new relative price of the two coins, an equilibrium state.

The below table illustrates the above example with actual numbers.


Illustration of hashrate oscillation dynamics – Increase in the price of Bitcoin Cash

Initial state Immediately after the price increase After the Bitcoin Cash difficulty adjustment After the Bitcoin difficulty adjustment
Relative prices
Bitcoin 1.0 BTC 1.0 BTC 1.0 BTC 1.0 BTC
Bitcoin Cash 0.2 BTC 0.4 BTC 0.4 BTC 0.4 BTC
Relative mining profitability
Bitcoin 1.00x 1.00x 1.00x 1.17x
Bitcoin Cash 1.00x 2.00x 1.00x 1.17x
Expected hashrate distribution
Bitcoin 83.3% 0.0% 66.7% 71.4%
Bitcoin Cash 16.7% 100.0% 33.3% 28.6%
Expected block interval
Bitcoin 10 minutes n/a 12.5 minutes 10 minutes
Bitcoin Cash 10 minutes 1.7 minutes 10 minutes 10 minutes

Source: BitMEX Research
Notes: The above model is an over simplification and excludes several other stages of hashrate oscillations.  The table assumes hashrate is distributed according the relative price levels of the two coins.  Transaction fee dynamics are excluded.


Implications for the Bitcoin network

The above illustrates that the Bitcoin chain could experience block interval swings for longer periods than Bitcoin Cash, due to the longer difficulty adjustment window.  However, the data also shows that even a large fluctuation in the price of Bitcoin Cash, from 0.2 BTC to 0.4 BTC, only increases the expected Bitcoin block interval by 25% to 12.5 minutes, after the Bitcoin Cash difficulty adjusts.

These slower blocks may generate some additional transaction congestion on the Bitcoin chain.  Although, somewhat ironically, this particular problem is likely to be of greater concern to Bitcoin Cash supporters than a Bitcoin supporters.  Many long term Bitcoin holders may not be concerned by periods of 12.5 minute blocks, as they are looking ahead to the long term, while this issue should be resolved within around two weeks.  Although this may be disruptive to users in the medium term, in our view, it is unlikely Bitcoin Cash will maintain such high levels of price volatility for extended periods of time.  Therefore the above problem may not be a serious concern.

However, it is possible that price volatility and therefore hashrate oscillations could remain for extended periods of time.  If this is the case, although Bitcoin may deviate from 10 minute intervals for longer periods, the magnitude of the deviation could be larger for Bitcoin Cash.  This could therefore impact both coins in a negative way.  Should this occur, the eventual Nash equilibrium end game solution could be merged mining, as we discussed in the previous piece.  Although due to the current confrontational political climate, reaching such a solution could take a considerable amount of time and reconciliation.


Bitcoin Cash difficulty adjustment schemes designed to cause disruption

There may be some small elements within the Bitcoin Cash community who wish to disrupt the Bitcoin network. For example, some people may have attempted to combine the timing of a rally in the price of Bitcoin Cash with a sharp downward difficulty adjustment caused by the EDA, to drive miners to Bitcoin Cash and disrupt the Bitcoin network.

If the plan is to cause this kind of disruption, one potential idea could be to increase the difficulty adjustment period, for example to a two month window form a one day rolling period.  This would mean that following a sharp price rally of Bitcoin Cash, the difficulty of Bitcoin Cash would take longer to adjust than Bitcoin.  Therefore Bitcoin Cash could remain more profitable than Bitcoin for longer periods, potentially causing disruption and transaction congestion on the Bitcoin network.

However, a long difficulty adjustment window like this may contradict the Bitcoin Cash philosophy. A shorter difficulty adjustment period, larger blocks and lower block times improve usability, which is a key focus of Bitcoin Cash.  In contrast, longer difficulty adjustment periods, smaller blocks and longer block intervals, may improve resilience, which appears to be a key priority for the Bitcoin community.  Therefore Bitcoin Cash is unlikely to adopt such a policy, in our view.

Another issue with this longer two month difficulty adjustment window is that the level of disruption to Bitcoin Cash, relatively speaking, with respect to periods with fewer blocks, will be even larger than for Bitcoin.  Therefore this approach could be considered a lose lose type scenario.  As we expressed above, ultimately, the win win scenario could be something like merged mining.

The Litecoin vs. Dogecoin hash-rate wars of 2014 and implications for Bitcoin vs. Bitcoin Cash

Abstract: In this piece we look at the hash-rate oscillations between Litecoin (LTC) and Dogecoin (DOGE) in 2014. We compare it to the current Bitcoin (BTC) and Bitcoin Cash (BCH) hash-rate oscillations and  consider whether we can learn any lessons from history.


Although there are many crypto tokens, the number of proof-of-work tokens, with their own set of miners, is surprisingly small — so having two significant proof-of-work tokens that share the same hashing algorithm is quite rare. There appear to be three examples of significant hash-rate oscillations caused by this kind of setup:

Year Coins Hashing algorithm
2014 Litecoin (LTC) vs Dogecoin (DOGE) Scrypt
2016 Ethereum (ETC) vs Ethereum Classic (ETC) EtHash
2017 Bitcoin (BTC) vs Bitcoin Cash (BCH) SHA256

(Source: BitMEX Research)

A comparison of the 2014 Litecoin (LTC) versus Dogecoin (DOGE) hash-rate oscillations with the 2017 Bitcoin (BTC) versus Bitcoin Cash (BCH) oscillations may reveal some lessons.

In early 2014, Dogecoin enjoyed a sudden, meteoric increase in price (figure 1). Its mining incentives increased quickly and this attracted significant hash-rate. The consequences resembled those of Bitcoin Cash’s infamous emergency difficulty adjustment (EDA), which resulted in sharp drops in mining difficulty and made Bitcoin Cash’s mining incentives higher than Bitcoin’s for short periods. Both instances caused sharp swings in the hash rate and network distribution between the respective coins.

We will look back at the 2014 incident with the help of some charts of hash-rate oscillation to see what it has to tell us about the swings in hash rate between Bitcoin and Bitcoin Cash, which many are tracking on the fork.lol website.

Mining incentives vs. the difficulty adjustment

The hash-rate distribution between two tokens with the same hashing algorithm should, in theory, be allocated in proportion to the total value of mining incentives on each respective chain. Mining incentives can be thought of as the USD value of both expected block rewards and transaction fees in any given period of time.

Even when token prices, block rewards, and transaction fee levels are temporarily stable, within difficulty adjustment periods further oscillations can occur because miners may switch to more profitable tokens with lower difficulty until the difficulties of the two tokens achieve equilibrium.

Litecoin vs. Dogecoin in 2014

Dogecoin enjoyed a large price rally in early 2014 and then began to challenge Litecoin for the title of the highest hash-rate Scrypt-based token. Litecoin has a two-and-a-half-minute block target time and its difficulty adjusts every three and a half days. Dogecoin has a one-minute target time and at the start of 2014 had a four-hour difficulty adjustment period.

Figure 1: Litecoin (LTC) versus Dogecoin (DOGE) price chart for 2014 (in USD). (Source: Coinmarketcap, BitMEX Research)

The Dogecoin price increased much faster than Litecoin in the early part of 2014 although, as figure 2 shows, Dogecoin never really approached Litecoin’s market capitalisation. Despite its lower market capitalisation, Dogecoin’s higher inflation rate meant that miner rewards were often higher, and a majority of the Scrypt hash rate switched over to Dogecoin during some periods.

Figure 2: Litecoin (LTC) versus Dogecoin (DOGE) market capitalisation in 2014 (in millions of USD). (Source: Coinmarketcap, BitMEX Research)

Dogecoin’s hash rate exceeded Litecoin’s in late January 2014, as figure 3 indicates. The hash rate swung between the coins for roughly a month as miners switched back and forth.


Figure 3: Litecoin (LTC) versus Dogecoin (DOGE) hashrate chart – billion hashes per second – 2014. (Source: Litecoin blockchain, Dogecoin blockchain, BitMEX research)

When, in 2017, Bitcoin Cash had higher mining incentives per unit of time than Bitcoin, many miners switched to Bitcoin Cash, repeating the pattern of 2014. As figure 4 shows, miners followed the money back then too.

A key difference is that even after the difficulty found equilibrium, Dogecoin at times offered higher USD value of mining incentives. In 2017, in contrast, Bitcoin Cash’s incentive lead was always only driven by anomalies in the difficulty adjustment algorithm. Bitcoin always had higher incentives per block than Bitcoin Cash. The higher incentives of Bitcoin Cash came per unit time from its faster blocks and as soon as the difficulty returned to equilibrium, Bitcoin regained its position as the highest incentive SHA256 coin.

Figure 4: Litecoin (LTC) versus Dogecoin (DOGE) mining incentive (USD per day) versus hash-rate share in 2014. Transaction fees were not included in the mining-incentive calculation. (Source: Coinmarketcap, Litecoin blockchain, Dogecoin blockchain, Dogecoin Github, BitMEX Research) 

In order to calculate mining incentives for Dogecoin, we had to consider what occurred in 2014, including six changes to the block reward and two hardforks. These changes are outlined in the table of figure 5.

Date Block number Event type Expected block reward Comment
New Old
14 Feb  100,000 Mining-reward change  250,000 500,000 Random reward between 0 and 500,000 DOGE.
17 Mar  145,000 Hardfork 250,000 250,000 Difficulty retargeting period reduced to one minute from four hours. Randomness removed from block reward.
28 April  200,000 Mining-reward change 125,000 250,000
15 July  300,000 Mining-reward change 62,500 125,000
11 Sept  371,337 Hardfork Merged mining with Litecoin enabled.
2 Oct  400,000 Mining-reward change 31,250 62,500
14 Dec  500,000 Mining-reward change 15,625 31,250

Figure 5: Dogecoin (DOGE) 2014 event timeline. (Source: Dogecoin blockchain, Dogecoin Github, BitMEX Research)

As figure 5 indicates, on 17 March 2014, Dogecoin changed the difficulty adjustment algorithm, reducing the target time to just one minute (one block) in order to try and alleviate some of the disruption caused by the hash-rate volatility.

Merged mining

In September 2014, Dogecoin activated its merged-mining hardfork. Merged mining is the process by which work done on one chain can also be considered valid work on another chain. Dogecoin can therefore be thought of as an auxiliary blockchain of Litecoin, in that Dogecoin blocks contain an additional data element pointing to the hash of the Litecoin block header, which is considered as valid proof of work for Dogecoin.

The merged-mining system is considered the ultimate solution to the hash-rate oscillation problem, ensuring stability even in the event of sharp token-price movements.

Implications for Bitcoin Cash

The Bitcoin Cash community is unlikely to want to implement merged mining, perhaps for political reasons, in the medium term. Some in the Bitcoin Cash community see Bitcoin as an adversary chain, rather than one with which it should coexist peacefully. Allowing merged mining can be considered the ultimate peace arrangement between two chains. Initially, some in the Dogecoin community were also unhappy about merged mining, but the community eventually realized that it was the best solution to their hash-rate oscillation problem.

However, Bitcoin Cash has recently fixed the EDA issue, which we highlighted in early September as a potential problem. Perhaps the new one-day rolling difficulty adjustment, combined with better price stability, will solve the hash-rate oscillation problem, such that no more fixes are required. If this doesn’t solve the problem, perhaps alternative difficulty adjustment schemes could be tried before merged mining may slowly makes its way onto the agenda.