Crypto Trader Digest – Oct 19

19 October 2015 Arthur Hayes

BitMEX Smashes Volume Records

The launch of the 100x daily Bitcoin / USD futures contract, XBT24H, corresponded with a surge in intraday price volatility this weekend. The result was a massive surge in trading volumes on BitMEX. This weekend, we hit a high of 29,000 Bitcoin traded over a 24 hour period. We want to thank all of our traders for helping to make BitMEX one of the most liquid exchanges to trade Bitcoin / USD. If you have not tried out XBT24H, you can take it for a spin on the BitMEX Testnet before trading with real Bitcoin.

We are working diligently to improve the trading experience. We received many great suggestions for new features and UI design change requests. Look out for further announcements about upgrades to the platform.

The Case For CNY Devaluation

Whether or not the recent pump to 1835 CNY and subsequent dump to 1700 CNY is attributable to the MMM ponzi scheme, the premium of XBTCNY to XBTUSD continues to slowly rise. The PBOC resumed the CNY devaluation last Friday, and continued today. Each day at 9:15am Beijing time (GMT + 8), the PBOC releases the CNY Interbank Rate. The Interbank Rate is the rate at which banks can buy and sell CNY against the PBOC. The USDCNY and USDCNH (offshore CNY) follow the trend of the official interbank rate.

The PBOC has allowed the CNY to strengthen vs. the USD and more importantly their trade rivals Germany (EUR), Japan (JPY), and South Korea (KRW) for years. Now with global growth slowing, and the aggressive money printing from Japan and Europe, China’s hand has been forced. Xi Jinping’s biggest economic goal is to shift China away from an investment led economy to a services and consumption lead one. Many politically important groups will be impoverished by the shift in economic focus. A way to cushion the blow to the manufacturing sector is to weaken the CNY.

While the CNY was strengthening, the most popular carry trade was to borrow USD, FX into CNY, then buy bonds yielding significantly more than the cost of USD funds. Because the PBOC had a one way policy of CNY appreciation, carry traders did not forward hedge USDCNY. If they had hedged, the USDCNY forward premium would wipe out most of the profit. These carry traders profited off the PBOC who sold CNY and bought USD. The PBOC’s USD assets, mainly US treasuries, have much lower yields than comparable CNY debt. The easiest way to import USD into China was to fake invoices; this allowed individuals and corporate to FX more USD into CNY than allowed by the PBOC.

The one way CNY appreciation is now over. The carry traders are rushing for the exits, and the PBOC has put up the road blocks. Banks are now enforcing the yearly $50,000 FX limit; overseas UnionPay withdrawals are limited to 100,000 CNY per year; money changers, who previously would help move CNY in and out of China, have been shut. With capital trapped onshore, the PBOC can now devalue the CNY without suffering a loss in China’s capital account.

With the easy and cheap means of moving CNY out of China closed, Bitcoin presents a legal and viable option. The premium of XBTCNY and XBTUSD has begun rising ever since the PBOC devalued the CNY by 4% in August. If this hot money leaks into Bitcoin, the premium and price will shoot higher.

The top chart shows the XBTCNY premium vs. the PBOC Interbank Rate. The premium rose as USDCNY moved higher (read: CNY devalued). The bottom chart shows the premium vs. Bitstamp XBTUSD. As the premium rose, XBTUSD rose as well. These are the most important charts in Bitcoin. China drove the 2013 Bitcoin bubble. The PBOC isn’t done yet. The CNY will weaken, and as it does Bitcoin will slowly leak higher.

This process will happen either slowly or all at once. To take a longer term bullish view on the devaluation, consider buying the BitMEX March 2016 25x leveraged Bitcoin / USD futures contract, XBTH16.

XBT Term Structure

Volatility spiked over the weekend during the China pump and dump. As a result, the term structure parallel shifted upwards. All contracts became more expensive, with shorter dated contracts experiencing the greatest shift upwards. There is a liquidity premium for shorter dated contracts, and that is why they tend exhibit more basis volatility.

The term structure has now become inverted. XBTH16 looks quite cheap in comparison to its peers. XBTH16’s basis only increased 9%. Given the time value this contract still retains, it should increase the most if the price volatility continues. If the curve flattens, XBTH16 should trade at 60%, an increase of 10% annualised. If the curve steepens, XBTH16 could trade at 70%, an increase of 20% annualised.

Trade Recommendation:

Buy XBTH16 (March 2016) vs. sell XBTZ15 (December 2015) to bet on the annualised basis of XBTH16 rising.

XBT Spot

The stair step rally continued into last Friday’s settlement. Then Saturday early morning China time, a pump began. XBTCNY reached a high of 1835. At the pump’s peak, the premium in China was 10%.

The price languished above 1800 CNY, then dumped late Sunday night to a low of 1706 CNY. The rally that started a few weeks back is not over. $260 held on Bitstamp, and China has remained above 1700 CNY. After the weekend fireworks, expect a period of consolidation between $260 to $265. A break below $260 on decent volume will put pause in the rally. If the price can hold above $270 for 24 hours, a run to $300 is likely.

Trade Recommendation:

Buy October 2015 25x leveraged Bitcoin / USD futures contracts (XBTV15) while spot is $260 to $265. The upside target price is $270 and then $300.

The Most Important Chart In Bitcoin

14 October 201514 October 2015 Arthur Hayes

The PBOC is back at it again. Today they devalued the Yuan by the most in 2 months. Their first shock and awe campaign sliced 4% off the Yuan’s value vs. the USD. Then the PBOC sold US Treasuries to support the CNY in the open market.

Since August, the PBOC has been hard at work stemming the enormous flow of capital fleeing China. The $50,000 per year FX limit is beginning to be enforced by banks. There is now a yearly 100,000 CNY limit on overseas UnionPay withdrawals. And I have heard anecdotal stories about the closure black market CNY / HKD money changers in China and Hong Kong.

Today’s action might be the resumption of the devaluation trend the PBOC embarked upon this summer. With the closure of the easy, cheap, and convenient ways to squirrel cash out of China, Bitcoin becomes more attractive. If Bitcoin emerges as a legal means to export capital out of China, the premium for it onshore in China will rise.

In my post China Bitcoin Premium Points To Moon, I presented a one month chart of the Bitcoin premium (OKCoin XBTCNY vs. Bitstamp XBTUSD) starting August 30th. The above chart is an extension of that time series. The premium dipped to 1%, but during the recent rally has resumed its climb above 2%. If this premium continues to rise above 5%, then we know China truly appreciates Bitcoin’s potential as a means of wealth preservation.

If the PBOC renews its devaluation of the Yuan, watch this chart closely. A lot of money through a small door will spell riches for those positioned correctly.

Hello Bitcoin: China Begins Actually Enforcing Capital Controls

16 September 2015 Arthur Hayes

Faced with a depreciating currency and an acceleration of elites running for the exit, China is actually beginning to enforce capital controls. The official individual FX limit is $50,000 per year. But for those with the right connections, RMB flowed out of China like water. The amount of illegal capital repatriation from China has been estimated in the trillions of USD. Now that is all changed. Xi Jinping is hell bent on transitioning the Chinese economy into one lead by domestic consumption rather than by investment. GDP growth has slowed, and at the same time the strengthening USD has forced the PBOC to allow the RMB to weaken.

Property markets in favoured jurisdictions have seen furious buying by cash rich Chinese. The Chinese hoard levitated property prices in Vancouver, Sydney, New York City, and parts of California. The explosive growth is about to come to an abrupt halt, if the PBOC has it way. They have instructed banks to begin enforcing the $50,000 limit and to look through the ultimate beneficiary account to determine if bundling of funds is occurring. [AFR]

The crackdown from Beijing has seen Chinese banks setting up watch lists for unusual transactions, according to one bank manager, who asked not to be named as he was not authorised to speak about the policy.

He said the operation was aimed at cracking down on a practice whereby family and friends of those wanting to purchase a property overseas all transfer US$50,000 into an overseas account. That’s the limit each Chinese individual is allowed to move out of the country each year.

The purchaser then pays back his friends and family in China and uses the money from the overseas account to put down a deposit on the property.

However, banks are now tracking the source of funds for overseas bank accounts that have received more than US$200,000 within 90 days, according to the bank manager, who works in Shanghai for one of the major state-owned banks.

“We have always had this policy but now it has been restated and is being enforced more strictly,” he said.

“In the past we could find a way around these rules but now all those ways have been blocked.”

“I’m sure this would be having an impact on overseas property purchases,” he said.

Sydney and Melbourne are starting to feel the pinch [AFR].

Chinese purchases of Australian property have dropped significantly in the past month, according to agents, as buyers struggle to shift money out of the country following Beijing’s move to tighten capital controls.

One Chinese agent said the latest efforts by the central government to avoid large capital outflows were having a “significant impact” on his business.

“It has affected 70 to 80 per cent of current transactions and some have already been suspended,” said the agent who asked not to be named.

The tighter foreign exchange rules are also set to impact the federal government’s relaunched Significant Investor Visa (SIV), which provides fast-tracked residency for those investing at least $5 million into Australia.

“I think it will be big, big trouble for the SIV program because the amount of money is just too large,” said one Shanghai-based adviser, who sells Australian property and advises wealthy clients on their migration plans.

Only seven SIV applications have been submitted since the new rules were introduced on July 1, which require investors to put their money into riskier assets such as venture capital and emerging companies.

The fall 2013 Bitcoin bubble was fuelled by speculation that Chinese investors would be able to send their capital abroad by using Bitcoin. The problem was the grey channels were by and large much cheaper and easier than using Bitcoin. Therefore the massive inflows never materialised. The situation is grossly different now. The PBOC is actively enforcing the controls and the avenues open to the Chinese are rapidly disappearing.

The big question for anyone attempting sell RMB / buy Bitcoin then sell Bitcoin / buy USD (or another G10 currency) is liquidity. I took data from Bitcoinity.org about trading volumes for BTCCNY and BTCUSD. For the Chinese exchanges I divided their reported volume by 2 because they double count trades. Over the past 30 days the average daily trading volume was 82,400 BTC. To minimise price impact, assume that you trade 30% in line with volume. At a BTCCNY rate of 1,500 CNY, that comes to a total of 51,180,000 CNY of Bitcoin that can be traded per day with minimal price impact. I did the same calculations for the top BTCUSD exchanges, and the amount is 39,366,600 CNY. Because you need convert RMB -> BTC -> USD, I assume that 39,366,600 CNY worth of BTC can be traded each day with minimal price impact.

Chinese people love property. It is one of the preferred vehicles in which park their cash abroad. The other benefit is they can ship their families off to obtain passports in better jurisdictions. The below table shows how many equivalent houses Chinese buyers could purchase each day using Bitcoin.

City	Median House Price	Equivalent Houses
Sydney	1,000,000 AUD	8.7
Arcadia California	1,084,500 USD	5.7
New York City	572,800 USD	10.79
Vancouver	900,592 CAD	9.1

According to the National Realtors Organisation, for the 12 months ending March 2014 Chinese people bought $22 billion in property in America. Per day that equates to roughly 368 million CNY, or over 9 days worth of Bitcoin trading. This happens each day, and this is just for America. Chinese will not all rush to use Bitcoin as a method of wealth transfer, but with no other options they will get creative. The largest Bitcoin exchanges globally are in China. In China, you can wire CNY to the exchange, buy Bitcoin, and remit Bitcoin outwards in under 30 minutes for 0 fee. The foundation is there, and now there is a real pain point. As the capital account of China deteriorates due to slowing global growth, a stronger USD, and competitive devaluation by their trading partners, the only way out may be Bitcoin.

Sources:

2014 Profile of International Buying Activity

Median house price in Sydney tops $1 million for first time

Arcadia Home Prices & Values

New York Home Prices & Values

Canada National Average Price Map

Renminbi vs. Bitcoin Correlation

9 September 2015 Arthur Hayes

The PBOC shocked the world this summer with a 4% devaluation of the CNY. What was the effect on Bitcoin if any, due to their actions?

The above chart is a time series from early June until early September of USDCNY and BTCCNY (OKCoin.cn). The USDCNY rate was stable up until the beginning of August when the devaluation began. After the devaluation began, it appears that the two exchange rates were negatively correlated. Traditional economic thinking would suggest that a weaker currency would lead to a higher BTCCNY rate.

I then calculated the correlation from Aug 30th to September 8th between the two rates. It came to -0.779. A correlation of 1.00 means the two rates move in the same direction and magnitude, and a correlation of -1.00 would means the two rates move in the opposite direction but same magnitude. The observed -0.779 correlation is a relatively strong negative correlation, meaning as CNY weakened and USDCNY moved higher, and the BTCCNY rate moved lower.
There were many external events such as the block size debate that occurred at the same time as the CNY was devalued. This may explain the divergence, but given China is the world’s largest Bitcoin trading market, I would expect the weakening of CNY to have a meaningful price positive impact on Bitcoin. It remains to be seen if as the effects of currency devaluation will slowly change investors holding preferences for their domestic currency vs. other international risk assets. If you believe that the PBOC has just begun in its race to the bottom, buy BitMEX March 2016 (XBTH16) Bitcoin/USD futures contracts. As investors begin to sell CNY and buy wealth preserving risk assets, Bitcoin will benefit.

Crypto Trader Digest – Sep 7

7 September 2015 Arthur Hayes

Brokedown Palace: EM FX

As a Hong Konger with essentially USD (HKD is pegged to the USD), my travels around Asia have gotten much cheaper lately. The Chinese started the party by devaluing the CNY. Subsequently traders took the hammer to emerging market (EM) currencies and many worry a repeat of the 1997 Asian Financial Crisis is upon us.

Talk about volatility, a few weeks back Kazakhstan decided enough was enough and let the Tenge (its currency) fall by 22% in one weekend, annualise that! Meanwhile sleepy Bitcoin has been locked in a tight trading range, and volatility is at historic lows. If Empress Yellen decides to raise rates, the EM FX complex will take another drubbing.

Many EM countries and corporates issue debt in USD not their local currency. Investors understandably don’t want EM FX exposure. Many of these countries are either goods or commodity exporters. The current world economy is characterised by slowing world trade, falling demand for industrial commodities, and a strong dollar. This toxic mix ensures that EM countries and corporates will struggle to pay back USD denominated debt. FX traders see the structural balance of payments problems and continue dumping EM currencies, further exacerbating the problem.

Governments valiantly fight against the global markets by selling down their FX reserves of USD denominated assets. Notable examples are China and Saudi Arabia. At some point smaller nations will have to throw in the towel and allow their currencies to weaken drastically. Regular citizens need not sit back and watch their purchasing power destroyed. Diversifying a portion of their wealth into Bitcoin now, is an intelligent decision. Non-USD Bitcoin exchange rates will begin trading a substantial premiums reflecting the market’s view on the future devaluation that will occur in a particular currency. Get out now while the getting is good.

For readers who are in EM countries and can trade deliverable FX forwards here is a trade idea:

Buy Bitcoin, sell USD at one of the big global exchanges.
Sell Bitcoin at a premium, buy your local EM currency. You now have EM currency that you need to convert back into USD.
Buy a deliverable forward (DF). You will deliver EM currency and receive USD when the DF expires. Now you have USD, wash, rinse, and repeat.
The premium that Bitcoin trades to your local currency must be greater than the premium on the DF for this trade to work.

Tongzhimen Hao (Greetings Comrades)

The whole world now hums to the tune of Zhongnanhai. Xi Jinping put on a powerful parade last Thursday commemorating their “victory” (read: the US and Russia saving their ass) in WWII. However the markets didn’t care, and the Shanghai Composite closed down over 2% today. In addition they continue to fix the CNY stronger, which necessitates the PBOC to sell even more US Treasuries to support their currency.

Bitcoin traders should be watching the China equity, FX, and rates markets like a hawk. Knowing the change in the daily PBOC fix of USDCNY is a must. Up until now the beauty of day trading Bitcoin was that the fundamentals (if there are any) mattered little. The ability to correctly read a chart and the human emotion it conveyed easily conveyed profits upon the punter. As a global financial catharsis courtesy of China is at hand, clueless traders will be caught out by economic data points. Dust off that textbook and educate yourself before you rek yourself.

They keys data points are:

USDCNY Exchange Rate
Daily change of the Shanghai Composite
The 10yr US Treasury Yield

Dramatic changes in any of these variables will begin to have a noticeable impact on Bitcoin just like they do for gold.

XBT Term Structure

The curve shifted slightly lower in the past week. Given the price rise, this is surprising. The non-linear return in USD for being long the XBT series futures should have lead to an increase in their premium over spot. Long-end futures (Dec15 XBTZ15 and Mar16 XBTH16) look very cheap. If the rally continues and enters the fomo phase, the long end futures will become much more expensive. Traders who wish to profit from a parallel shift upwards due to a rising price should buy XBTZ15 or XBTH16.

XBT Spot: Breakout

The sleepy 4-day holiday weekend in China culminated with a breakout on Sunday (it was a working day). Bitcoin broke through $230 and traded as high as $248 on Bitfinex. Now the price languishes at $240.

The rally started at $200 and the channel will culminate at $260. $260 is where the previous breakdown in price occurred. Expect price to stall at $240 and trade down into the mid $230’s. If $235 is broken on the downside consider this rally over and ride the rollercoaster back to $220. If $235 can hold, the rally can continue to stair step higher to $250 then $260.

The resistance at $260 will be fierce and in the absence of a new development, the price will not ascend this mountain. China continues puking even after the government has sounded the all clear. Expect more gyrations in the financial markets that could be very positive for Bitcoin if investors view it as a new safe haven.

Trade Recommendation:

Buy XBTU15 (BitMEX weekly Bitcoin/USD futures contract) while spot is $235-$240. The upside target is $255-$260.

China Devalues Yuan, Bitcoin To Da Moon

11 August 2015 Arthur Hayes

In the August 10th Crypto Trader Digest, I predicted the PBOC would devalue the Yuan to regain export competitiveness. Less than 24 hours after hitting the press, the PBOC shocked the market with a 1.9% devaluation. Global macro will be tilted on its head now that the world’s largest export regime is actively engaging in currency debasement.

The RMB is one of the largest globally traded currencies and it’s importance in global capital flows cannot be underestimated. Bitcoin, which is a financial and speculative asset, will be affected as well. Chinese households are now faced with a very painful question, how to protect and grow their saved capital.

Stock market and real estate investments have soured. Households are unable to invest abroad due to capital controls (the elite always could, but I am talking about regular folks). Due to a depreciating Yuan, imported goods will become more and more expensive. They must find a way to convert their paper wealth into real assets that cannot be devalued by the central government. Alternative means of investing will become more and more prevalent. P2P loans, wealth management products, and crypto currency will be three alternative areas where Chinese households will rush to convert Yuan into some form of wealth preserving asset.

The PBOC stated this was a one off devaluation. If anyone believes that, I have a ghost city in China to see you. China is mercantilism on steroids. Kuroda-san’s BOJ printing press will now go into overdrive. Mario Draghi will have no choice but use the cover of Grexit to unlease Euro QE. Each successive devaluation by its exporting peers will be met with force from the PBOC. Chinese speculators recognise this, and they will begin selling and borrowing CNY to buy any risk assets they can get their hands on.

It is time to back up the truck and buy buy buy Bitcoin. The $40 fall from $300 is a blessing. Coins can now be bought at much cheaper levels. To obtain long exposure, buy BitMEX December 2015 futures, XBTZ15.

Fall 2015: The Empire Of Chaos And Bitcoin

6 August 2015 Arthur Hayes

The financial markets have largely forgotten the pain experienced during the GFC. This time around with 0% interest rates and free money galore, all sorts of risk assets have been buoyed. Bitcoin came about during the depths of the GFC depression. Bitcoin at its core is a reaction against ways in which mainstream finance has been practiced over the past 100 years. Bitcoin feeds off of investors dissatisfaction with monetary and governmental regimes.

After 7 years of free money, cracks in the world economic edifice are beginning to show. I have identified three salient areas where instability might flare up this fall. While I can’t predict the exact response of global assets in each scenario, I am willing to wager that Bitcoin will benefit from chaos and instability.

The Federal Reserve Rate Hike

The Fed aggressively lowered interest rates and printed money via quantitative easing starting in late 2008. Now they are determined to show the world that they can raise interest rates and recover some of their tattered credibility. Through different mediums they have loudly telegraphed that 0.25% rate rise will happen by year end. The financial media has touted the party line that the US economy and in particular equities can handle positive short term rates.

I disagree strongly. When discounting any asset at 0%, even a small rise wrecks havoc on any discounted cash flow analysis. Even more troublesome, is what happens to companies who must now roll low interest debt into higher yielding debt. That is not a problem when the general business climate is improving. However, the collapse in the commodity complex tells us that end demand and real economic activity is falling worldwide. Many businesses only exist because yield starved investors have financed them at ridiculously low interest rates.

Important Dates:

Federal Reserve Open Market Committee (FOMC)

September 16-17

October 27-28

December 15-16

Grexit And Eurozone Turmoil

After Alexis Tsipras acquiesced to Germany’s bloodless coup, Grexit was temporarily taken off the table. For ordinary Greeks, the situation has become worse. Capital controls still remain, and business activity is grinding to a halt. Greece might still need a “time out” from the Eurozone to shave its unserviceable debt load.

Once European bureaucrats return from their Mediterranean beach holidays, the uncomfortable truths of a troubled Eurozone will appear once more. Spain and Poland have national elections this fall. Anti-EU parties are gaining strength. PM Rajoy’s People’s Party is being assaulted by Pomedos. Pomedos is campaigning on an anti-austerity framework. If Greece is able to receive debt relief, Pomedos will campaign for similar tactics to be employed by Spain.

Polish MP’s are up for re-election this fall. Dissatisfaction with the EU program could lead to a change in the makeup of parliament. Given that many of the EU bailout programs need domestic approval before the commitment of funds, a hostile parliament can spell trouble for Brussels.

Important Dates:

Polish elections October 25

Spanish elections before December 20

China

The drama surrounding the correction in the Chinese equities market, while entertaining, is not the main event in the Middle Kingdom. The real problems facing China are accelerating CPI food inflation, a slowdown in economic activity, and the mass exodus of capital.

Once you get past the glittering luxury store fronts on the eastern seaboard, Chinese poverty rears its head. The mass of poor people spend a significant amount of their disposable income on food, especially pork. Pork prices have been on a tear this year. Beijing and the PBOC are acutely aware of how food inflation impacts the majority of its citizens. The legitimacy of the Chinese Communist Party (CCP) is at risk during period of high inflation. As a result, the PBOC is hesitant to aggressively cut interest rates for fear of stoking inflation. Instead to prop up the faltering stock market, they must resort bans on selling stocks and directly buying the market.

Beijing recognises that China must transition from an investment to a consumer driven economy. The 10+% GDP YoY gains are a thing of the past. Many economists believe 3%-5% GDP growth is coming. Unfortunately the vast amount of debt underpinning many businesses and local governments need a high nominal GDP growth rate to paid back. The PBOC now must absorb these non-performing loans at a time when they can’t cut rates due to inflation fears. At some point, the government will have to allow selective entities to default and that will send a ripple through the Wealth Management Product (WMP) industry. WMP’s are high yielding debt instruments with implicit guarantees of the issuing banks and or local governments. If investor confidence is shaken in WMP’s, these funds will need to find a new investment vehicle (maybe Bitcoin?).

Finally, the capital flight from China is accelerating. The elites recognise the precarious state of the Chinese economy and their position in it. They are sending their spawn to America, Canada, Australia etc. to deploy RMB into real estate and other assets. The capital account of China is closed only to those without the right Guanxi (read connections). The PBOC has begun selling US Treasuries to offset the flow of capital out of China. If Beijing actually cracks down on the porous nature of the capital account, these funds will need to find another way to escape the RMB and China. Bitcoin is one option. It is still too illiquid to handle the tens of billions USD leaving the country each month, but even a small percentage of these flows going through Bitcoin could lead to a massive price rise.

The RMB strengthened against the USD and other Asian trading rival’s currencies for the past few years. Faced with the set of domestic financial challenges described above, the PBOC at some point may begin devaluing the Yuan. Chinese investors who want to protect against depreciation can turn to Bitcoin to protect a portion of their wealth.

What To Own In A Global Market Collapse

8 July 20158 July 2015 Arthur Hayes

The Monday after Lehman brothers collapsed, I stepped on the trading floor as a new graduate. My first day of work consisted of sitting in a chair (a nice Herman Miller one), and watching a floor full of traders lose their marbles. 7 years will have passed since the onset of the GFC, and it looks like this fall will be another doozy. What started with a breakout rally in China is ending in tears. Anyone who FOMO’d in at the highs is now severely underwater. Greece threatens to tear Europe apart, the S&P 500 is nearing its 200 DMA, and oil might will trade with a 4 handle again shortly.

Governments, when faced with a total collapse in asset markets, throw all the free market voodoo out the window. In China, over 50% of stocks are suspended from trading due to heavy selling pressure. Pension funds, who were goaded into the market, are now forbidden from selling equities. The PBOC has taken its first hit of QE with a 500 billion RMB stock purchase program.

It’s downright despicable when the government promotes equities and then forbids you to sell. China is not alone in its market manipulation. Faced with similar circumstances in 2008 and 2009, many western-oriented countries forbid short selling, and enacted other restrictive polices in their respective financial markets.

Across a sea of red, only US treasuries, the USD, and Bitcoin are trading with green candles. Bitcoin is a singular asset free from governmental meddling. It isn’t as liquid, but at its core it is an asset and a means to save and invest wealth. When the price fell by 50% in two days, no government halted trading. There were no road blocks that inhibited Bitcoin in finding its clearing price. Governments welcome speculators with open arms when they buy, and shut the door and let them burn when they sell. Bitcoin has flaws, but when you’ve had enough, at least you can exit stage left.

Bring On The Weekend: Grexit & China QE

3 July 2015 Arthur Hayes

Screen Shot 2015-07-03 at 3.45.39 pm — Shanghai Composite Index, Bloomberg

Grexit

Greeks head to the polls this weekend to vote on whether or not to accept the now expired EU bailout package. 5 years of can kicking has finally come to a definitive vote on Greece remaining in the EU currency union. The issues and implications have been covered ad nauseam by countless blogs and the financial news media.

In a nutshell:

No Vote: The bank run and capital controls will continue. Greece will attempt to negotiate further with the Troika, but the likely outcome is Grexit.

Yes Vote: The bank run and capital controls will continue unless the ECB provides more Euro liquidity to Greek banks. A new government will likely be formed, and negotiations will begin anew. Grexit isn’t off the table, but the timeline is pushed further into the future.

Impact on Bitcoin:

No Vote: Grexit becomes a very likely scenario, and global asset markets fall. Bitcoin sentiment improves as the misery imposed by capital controls and the shortage of goods continues. Positive price impact.

Yes Vote: The capital controls will still be in place. Global asset markets will rally, but could fade quickly as the facts on the ground will not materially change. This is the scenario that is priced into the markets currently. Bitcoin sentiment might be dampened somewhat, but the fact that capital controls will remain and the ECB still might not provide more Euros to banks means that the Bitcoin story begin pushed by the MSM will continue to gain ground. Neutral price impact.

China QE

The second and more important development is the continuation of the crash in the Chinese equities market. This past weekend the PBOC launched a double rate cut (the one-year lending rate and the Reserve Ratio Requirement). The last time they did that was October 2008 on the heels of the Lehman Brothers bankruptcy. Investors didn’t play ball instead sending equites sharply lower on the week. The Shanghai Composite was down 10% on the week and closed below 4,000.

Regulators are in full panic mode. The government ordered state owned news sites to only publish positive news about the stock market. [ZH] Many analysts expect the margin calls to continue as the various shadow conduits (Umbrella Trusts) of equity market leverage continue to unwind. Calls for additional easing from the PBOC (People’s Bank of China) and outright quantitative easing are growing. The addition of the global market turmoil surrounding Greece means that the PBOC will likely add additional easing measures this weekend. They like to announce rate cuts on Saturday or Sunday. Bitcoin will react positively from additional easing out of China.

The Greek vote and the possibility of PBOC easing is the perfect setup for another Bitcoin rally over the weekend. After almost reaching $270, Bitcoin has retraced $20. The Greek vote is Sunday. Buy the rumour sell the fact. On Friday and Saturday, begin accumulating a long Bitcoin position with XBTN15 while spot is below $255. The Greek vote will be known Sunday night European time right before Asian financial markets open on Monday. That is the optimal time to close the position whether in profit or loss.

China Market Dump + QE = Bitcoin Moon

2 July 2015 Arthur Hayes

The desperate attempts by the PBOC to stem an equity market collapse have failed initially. After the weekend interest rate and RRR cuts, the main equity indices (ChiNext, CSI300, SHCOMP) opened down 5% only to rally intraday 11% and close up 4%-5%. The exuberance was short-lived as the market continued lower Tuesday and today markets are flat. Traders and analysts not satisfied with the current spate of monetary easing measures and are calling for the big daddy, Quantitative Easing (QE).

QE is the fancy economists’ term for printing money. Analysts believe the PBOC should begin to buy government debt, in particular the debt of local governments. The PBOC could also allow banks to swap NPLs for fresh RMB. The dash for trash will spur more financial institutions away from high yielding government debt and into risky equities. This will lend a healthy bid to the market. The newly minted retail traders will be saved from their FOMO buying madness, and China will be a happy and harmonious society where everyone gets rich buying equities.

The stimulus addicted market needs more rate cuts and QE at a constant pace or the market will continue falling. Goading the retail trading herd and more importantly leveraged structured product buyers back into the market will take a serious demonstration of commitment to money printing. QE is a foregone conclusion, the only question is when.

Faced with an abundance of money, equities will not be the only asset class that benefits. Speculative assets across the spectrum will be bid up by traders. Traders will look to the next market that could deliver 2x and beyond returns. Bitcoin’s fall from grace with Chinese speculators will end with an onslaught of central bank RMB liquidity. Now is the time to pre-position one’s portfolio for another manic Chinese Bitcoin trading episode. Instead of solely focusing on Greece and Europe, traders should listen carefully to PBOC communications to get a jump on when QE will finally be introduced into the Middle Kingdom.

Crypto Trader Digest – June 29

29 June 2015 Arthur Hayes

BitMEX Happenings

We have been hard at work building a new simplified trading UI. The first version is available for comment onBitMEX Testnet. Please test the new interface and provide your feedback. We will launch the new UI along with our new higher leveraged contracts very shortly. If you like the current UI, it will still be available under the “Advanced” option.

The PBOC Is Taking Over From The Fed

The hottest market in the past year has been the China A share market. The main indices are up over 100%. Millions of newbie traders are entering the casino with freshly minted yuan that they can now leverage. Chinese investors are being herded from one flagging investment (real estate) to the new and shiny equity market. At the helm of the SS. REKT is the PBOC (People’s Bank of China).

Through various liquidity injecting programs and schemes, the PBOC has injected trillions of RMB into financial institutions. The money made its way to the stock market and the results are there for all to see. The universal force of gravity has taken a liking to the Chinese stock market recently. In the last few weeks the Shanghai Composite Index is down almost 20%. The PBOC heard the cries of newly rekt retail traders and responded with a monetary bazooka this weekend.

For the first time since October 2008 (the beginning of the GFC), the PBOC cut both the one-year lending rate (0.25% to 4.85%) and the Reserve Ratio Requirement (by 0.50% for some banks). Forget Greece this is where the real action is. Money printing and the associated inflation never ends up exactly where central banks intend. The excess RMB liquidity won’t sit snugly in equities, but will find other financial assets as well. Bitcoin is one such asset that could benefit from a tidal wave of RMB free money.

Greece is just a sideshow. The real action is happening in China. The PBOC is engineering a financial asset bubble in an attempt to mitigate the inevitable slowdown in the real economy. The effects on Bitcoin may not be immediate, but long term bulls should begin positioning for Chinese traders to once again fall in love with Bitcoin.

Trade Recommendation:

Buy XBTZ15 (25 December 2015) futures contracts.

How Would A Greek Use Bitcoin?

How would a Greek actually use Bitcoin? Now that capital controls are introduced many think it’s the perfect time for Greek citizens to adopt Bitcoin. Let’s analyse how exactly they could do that.

Greeks can now only withdraw 60 Euro per day and outbound remittances are not permitted. The banks and stock market are closed today as well. Currently there are two types of Greeks. Those who got their money into cash or abroad, and those with deposits sitting in domestic banks. The unlucky Greeks with money still in banks are SOL. With no hard cash and no ability to wire money, there is little they can do to buy Bitcoin. Those who have cash and offshore Euro have options.

Will Greeks buy daily necessities (gas, food, water etc.) with Bitcoin?

Probably not because stores want Euros in cash. Stores need to pay for inventory and their staff, that is done in Euro not Bitcoin.

Will Greeks use Bitcoin as a store of value?

Maybe but if they already have offshore Euros, what urgent need do they have for Bitcoin. If they have cash, buying daily necessities is of more use than a store of value that can’t be exchanged for any real goods.

Will Greeks use Bitcoin to turn onshore cash into offshore Euros (buy Bitcoin, sell it abroad, remit Euro to an offshore bank account)?

Possibly, this is the most likely use case currently for Bitcoin. There is one problem, who is going to sell it to them? Local Bitcoin sellers realise Euro once they sell their Bitcoin. They must recycle that cash back into Bitcoin to trade again. Outward remittances are not permitted, so it is effectively impossible for local sellers to replenish their inventory. Tourists are a solution to this problem. If you are planning a trip to Greece, buy some Bitcoin and then sell it locally in Greece at a huge markup. At a 10%-20% markup, a savvy tourist can easily pay for a substantial portion of their trip by selling Bitcoin.

Will the Greek government use Bitcoin as their national currency?

Keep dreaming. Greece needs to devalue its currency to regain competitiveness in Europe. That is not possible using Bitcoin.

Bitcoin isn’t useful for Greeks who didn’t act early to secure their wealth. It isn’t very useful to Greeks who got their money out either. If Bitcoin rallies on Grexit, it is solely because traders believe others globally will re-examine how they store and secure their wealth and turn to Bitcoin as a possible alternative.

Weekly Review: Bitcoin Investment Products

Week Ending	GBTC Avg Volume	WoW % Chg	% Premium	XBT Avg Volume	WoW % Chg	% Premium
6/19/2015	609 XBT		15.66%	1,896 XBT		0.41%
6/26/2015	197 XBT	-67.66%	17.32%	923 XBT	-51.30%	-0.35%

As the rally to $260 fizzled out, so did volumes on GBTC and XBT. Weekly ADV was down over 50% on both securities. Volumes rebound on Friday as the Greece drama reached a new level of absurdity. The Greece EU bailout package referendum is Saturday. Volumes will recover as volatility returns to financial assets globally.

XBT Spot

The bombshell over the weekend was Greece’s decision to let the people decide whether or not to accept the latest EU bailout program proposal. Faced with real democracy, financial markets worldwide are in turmoil. The market expects voters to reject the EU proposal, which accelerates a possible Grexit. EURUSD opened down 200 pips, S&P 500 futures are down, and Asian markets are down close to 2% as I write this newsletter. All eyes will be on the European open, especially financials (here’s looking at you Deutsche Bank).

Bitcoin has rallied $10 since the announcement, and now hovers at $250. From reading Reddit and many trader chat rooms, sentiment has improved. Traders are bullish and think the Greece turmoil will give Bitcoin a healthy bid. $260 is the all-important near-term level. To confirm the start of a real rally, Bitcoin must shoot through $260 on increasing volume. Another feeble attempt like last week, would be very negative in light of the positive sentiment currently expressed.

Trade Recommendation:

Buy XBTN15 while spot is below $255. If $260 is attempted on declining volume, close the position and go short with a $240 downside target.

Crypto Trader Daily – 28 February 2015

28 February 20154 March 2015 Arthur Hayes

Price Action

A new $250-$260 range has been established. The price spent most of the day hovering around the $254 level. The price appears to be firming up above $250. Early morning of 1 March China time will be interesting. The price has a habit of large moves while most Chinese traders are asleep or at the bar.

Trade Ideas

Increase long positions around the $250 level. Look for a decisive break above $260 in the early morning on the 1st of 2nd of March. Use XBTH15 to express this view.

In the News

China’s central bank conducts more monetary easing, lowering the Reserve Ratio Requirement in a surprise weekend move.

Paypal cuts support for Kim Dotcom’ Mega, time for Bitcoin? (IB Times)

Bitfury launches new 28nm ASIC chip (CoinDesk)