The Follow Follow Arbitrage Positive Bias

Recently in the bitcoin market a switch has occurred. The PBoC have suspended bitcoin withdrawals from Chinese bitcoin exchanges and the Chinese bitcoin markets, normally leading the way, have dropped and become timid. Now instead of the European western market following the Chinese markets, it is the other way around, the USD exchange rates are leading the market. There are some psychological factors at play. I call these the follow trade and the follow follow trade.

The follow trade effect happens when traders see the more volatile market as an indicator of what's likely to happen in their home market. They buy their home market in the assumption that the price of a bitcoin should be similar across the world. The follow follow trade is where this confirmation of a trend started at home in now in both markets leads to more buying in the original market.

Rates in different countries also tend to be drawn together in the longer term by a process called arbitrage. This is where people can sell bitcoins on one exchange with a high price, do a swift transfer to an exchange in a country with cheaper bitcoins. Alternatively traders can buy bitcoins on a cheap exchange send them via the bitcoin network to an exchange with a high rate and sell them there. These two alternate processes can be repeated until the market prices come together. the Chinese and US markets have been around $50 or 5% for the last month so you could have done this cycle six or seven times over. The profit is limited only by the speed and cost of a SWIFT transaction, about three to five days.

Five days is a long time in the digital currency world where a lot can happen quickly. It quickly becomes apparent that the arbitrage trade works best in one direction. Arbitrage is best when transferring bitcoins to the highest exchange and selling there. Bitcoin transfers can happen internationally within 10 minutes and cost much less that other transfer methods. Arbitrage opportunities pop up the whilst the overall price can be moving up or down and they are seen more commonly during volatility. The swift side of the arbitrage trade is ok, useable when the bitcoin market is going down or flat, but not good when it is rising. The time delay gives a risk of the arbitrage disappearing whilst the money is stuck in SWIFT limbo land and the arbitrage trader also misses out on the overall up movement of the market.

The only way to sustain the bitcoin transfer side of the arbitrage trade without a swift transfer is to keep on buying on the exchange with the cheap rates. This exchange would likely need to be in your home country otherwise it would take a long time for your money to get there. It is a lot easier to find a good arbitrage trade if you have a lot of fiat funds on the exchanges in different countries ready to buy bitcoin with.

Therefore in order to take advantage of arbitrage more and more fiat capital is required to be available to the market and this creates a positive bias. The more volatility the more arbitrage the more capital available, the more the price stabilises. After the arbitrage is gone the traders have little choice but to invest more fiat to stay in the game. This increase in capital eventually increases the price.

In China when bitcoins can't be withdrawn because of the government suspension, this only serves to exaggerate this effect. They can't dampen the USD market with BTC transfers and profit from the arbitrage. They will not want to actually withdraw fiat as this could be used to buy cheap bitcoins. To much FOMO in an upward trending market. When your market is the lowest the capital simply builds up and flows in. the USD value is not dampened by as much arbitrage and the Chinese become captivated by the follow trade. The USD market is charged by the follow follow trade. As long as the USD rate is above the Chinese rate it is a moon sand wedge. 

No SEC, No Corporate Takover

Today the SEC in the USA declined to make an exception to an obscure rule for the Winklevoss twins bitcoin ETF application. It got declined. the bitcoin market, which in a sense had hoped for its acceptance, has taken a hit. Down to $975 at one point but now rising at over $1100 USD. There are at least two other ETF applications in play in the USA at the moment, but this one, in particular, has grabbed a sensitive reaction. Some would say bitcoins fabled volatility is back.

The ETF concept has a strange relationship with bitcoin. It is debatable wether the ETF actually makes investing in bitcoin more accessible to the general public.For young people comfortable with computers it is easier to buy the real thing than the ETF. So in a way listing on the New York stock exchange with ETF has been out-moded by bitcoins new international trading ecosystem. It does however make the investment more accessible to established investors who don't want to change the way they do things. Ironically the same establishment that got bailed out in 2009 and for the failing of which bitcoin is the intended cure.

In integrating with old money using the old financial establishment's tools there is a moral hazard for bitcoin. As the currency is in its infancy there is a risk that it could be overwhelmed by new larger financial stakeholder. At this point, the initial vision of the cryptocurrency may be distorted. We are seeing lots of volatility induced by government and large corporate organisations, evident in the release today. Do we actually want more of this?

A large popular ETF will add a new mysterious metric to the bitcoin structure and things like the blockchain debate. I'm not sure I like the SEC conferences being involved in our future. Where we now can talk freely about the pros and cons of on and off chain transactions, Bitcoin core and Bitcoin Unlimted, settling the score in the in the public forums of the internet. Backed up by the real-time node and hash rate statistics it's like a new hyper-democracy. We can see already that with the ETF comes closed door meetings, announcements by insiders and section b part 11 exert 6, paperwork burial.

Where we now come to the bitcoin prices in a fairly decentralised way, ETF's will likely lead to larger the stakes with more influence. This is more important when forking the code on the card. The corporate agenda and profit maximisation will edge its way into consideration. For example, if a bitcoin ETF holds a quarter of the total market cap of bitcoin ($5 billion worth) then bitcoin forks in two, say bitcoin and bitcoin unlimited, it will double its money. It will then also have the power to cash out of one side if it chooses at a time to its advantage in order to crash the price of that fork and gain an advantage over competing ETFs. This profitable scheme leads to fork pumping and dumping on a major scale due to the inherent vulnerability of new bitcoin forks.

Though ETF funds can't directly effect miners or node counts they do increase the centralisation of price discovery between forks. This could prevent a hard fork from ever being effective or ensure only forks that benefit the ETF find traction. This allows old smoke screen corporate politics into bitcoins publically programmed political structure.

Money talks, at least it used to. The bitcoin price would rise but it's still not clear if a corporate takeover is a good thing. I prefer echo chambers of the blogosphere and the Git hub hive mind.