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. 

Bitcoin is Back at Price Levels Rarely Seen

Bitcoin is back at price levels only seen at the top of the 2013 Bitcoin peak. The ceiling is broken and a floor is being installed. its been explosive, but this time it feels like its holding steady.

 $1000USD bitcoins are in the house.

Bitcoin is Putting in a Wall of Buys at $1000

Someone has put a bid in for 1777 bitcoins! at $1000 USD. The price still holds after 24 hours.

https://www.bitfinex.com/stats
http://bitcoin-analytics.com/

Bitcoin Proliferation is Good for Chinese Macro

The Bloomburg propaganda machine has been working overtime lately. They promote articles claiming that China is pulling the market down. The language is clear when they publish articles with plunge, crash, and free fall, despite the fact that bitcoin has been steadily rising over the last year and remains near all-time highs. They Promote fud so frequently that it is having a diminishing effect that people are charting.

It doesn't take long to see why they are untrustworthy, they have major support from organisations whom have a vested interest against Bitcoin, but let's also take a step back and look at the macro reasons. Why is it many American media outlets keep talking down bitcoin and why the Chinese aren't as threatened by bitcoin as one might think.

The Chinese are the major source or bitcoin repression according to American media. however China have been consistently trading bitcoin at higher prices than elsewhere in the world for at least the last two years. The capital flight drum gets beat here as a reason.  Lets talk about the chinese macro economic environment.As you know are an exporting economy.They do a lot of their business with international transactions. These are often made in dollars, are slow and costly. They also have more people than any other country, you can see why they don't want to use someone else's a dollar. you can also see why a world currency would able to be transferred easily across borders for trade appeal to them.

In the past China has taken advantage of a weak currency which has given it a competitive advantage on its exports. this has helped build up their economy quickly. Now they are going to float their currency. This is in part because the IMF and WTO wanted them to do this to become part of the world currency call the SDR. (yes those are the world bankers acronyms, equivalent to advance crypto jargon, IMHO they are worse) China need to prove a stable currency for the IMF so they have held their currency level with a basket of currencies for many years. They have done this successfully but it just so happens that the USD has been going up out of line with their main trading partners and other countries in the SDR. Despite what many people think the Yuan is not in "free fall".

China have the largest foreign exchange reserves of any country. They own more USD than anyone else and more of other countries money as well. This is generally made up of government bonds built up over the last twenty years of trade surpluses and currency devaluation. So now that they want a stable currency, they can use this reserve to do it. Selling off foreign currencies for Yuan when they get to high against the Yuan or when the yuan needs support. China is holding a lot of USD, more than any other foreign currency so they made money out of the USD gain. They can also potentially influence a drop in the dollar. Scary I know, but 3 trillion in reserves, makes a pretty significant impact on a $15T a year FX market.

So what is the threat of bitcoin to China. It is such a small thing at the moment with around $15billion total market cap. What could be the potential risks of a prolific bitcoin to the governments agenda there?

The Chinese government already struggles to control its financial system. They try to impose strict rules on reporting and deposit rates, have recently removed dozens of corrupt officials and yet they still have real estate bubbles and stock market crashes. With the traditional system central administration is actually quite difficult. I would suggest that blockchain like technologies might actually provide a solution for central planners as the allow more transparency of transactions and better potential oversight. Bitcoin is not excluded from this.

Bitcoin is also practicle for exporting. It is not linked to any nation, making it neutral and great for bi-lateral agreements. China being first to adopt it would give it an advantage over its competitors and provide a moral high ground. The many emerging countries which China is actively trading with as part of its strategy can easily get on board. Countries with unstable politics, often with anti-American factions, will have no issue, and countries with no infrastructure but people with smart phones can leapfrog to the latest methods.

Further, with all of its foreign funds, the Chinese could gain a lot of control over bitcoin. With the potential of no longer needing their foreign funds to stabilise the Yuan. 1. they could make bitcoin stable 2. the could make the USD less stable. 3. they could push up the bitcoin price in foreign currencies without anyone really knowing,

All of this type of thing requires a market capitalisation in bitcoin, and transaction volumes, many factors higher than we currently have , but given this is sorted, it is al quite logical. Infact what happens in a financial crisis where the USD starts to drop before the Chinese have got their money out? The USD could restrict capital flight in some ways and in that case they may be left with no other method to repatriate their funds.
 
The speculation is fun, and I don't see a reason why the government of China would want to go down a path of repressing the bitcoin technology. I think the anti-communist libertarian idea of bitcoin is not the full picture. Bitcoin and certainly blockchain like technologies are more suited to communist type thinking than the current financial system. Chinese people are very quick to integrate new technologies into thier lives and I think we should give them some respect.

Miners Revolt

As Theresa May makes nice speeches for the hard Brexit and still manages to feel as cold as Margeret Thatcher. And as people buy safe assets in the shadow of Trumps Inauguration, Bitcoins price is bouncing back to $900 after a serious pull back from all-time highs, Litle however, the nubies know, but we have a Miners Revolt in the mix.

Adoption of the new core code including Segregated witness has reached a plateau. This update to the software that runs bitcoin was expected to be picked up quickly by people running bitcoin nodes, but it appears many miners are hesitant to adopt it. The new technology increases the transactions that can be processed in a single block on the blockchain.

Miners, who get paid in part by transaction fees, see this as a pay cut. Yes, it's true, the block size debate is not yet dead. Increasing the block size would theoretically allow miners to make more from transaction fees which are oft6en paid by kilobyte rather than by transaction. Segwit however, allowing more transactions per kilobyte is simply seen as a permanent pay reduction,

Miners are in an extremely competitive game and don't want or need this kind of efficiency. Every little bit counts to get ahead of competitors. It has become so prolific that Bitcoins total mining computer power is more 100 times that of googles servers. Is this justified? Of note is the that miners still only make a small percentage less than 10% of their money through transactions. This transaction fee payment is set to increase until, somewhere around 2120, it makes up their total income.

As yet there is little pressure from the community on miners to implement Segwit. Despite this, during the last all time high transactions on the blockchain were seriously delayed. 30 minutes is a long time for a crypto algorithm. Segwit could have prevented this. Bitcoin core is still very much a leading contender but many people have not updated their software to the latest version. Are we overly complacent?

Now is the stage in the debate when people must take advantage of the open source vote with their home computers. Thankfully a node can still be run this way. If you care you can easily make a digital vote. At the moment it takes 125GB. Miners are not the only people able to running the network. With the way votes seem to go these days, it is hard to know whether people will actually participate.

It all depends on your interpretation of decentralisation. Are there enough nodes in this cloud? The ballet is streaming live. Segwit needs 51%

(note currently Segwit node coverage including Bitcoin Core version v0.13.1 and Bitcoin Core version v0.13.2 is = to 47%)

Social Trading and the Hyper Neural Market

In our current financial system approximately 60% of trade volume is algorithmic and performed by computer trading bots.This can do some strange things to the market and over the last twenty odd years governments have set up things like market shut downs and "circuit breakers" etc, to try and stop things like flash crashes which have happened for unknown robotic reasons in the past.

As a human, it's not such a good thing. Traders struggle to keep up with the machines, even the simple indexes. Active traders and hedge funds are having a hard time proving their worth. Only the select few do really well and they are hard to get access to, with restricted access and minimum contributions.

Computer automation and the internet as we know has also been harnessed in a big way for social structures. Following and copy pasting are made easy and news is distributed quickly through various different channels. Now there is a new way to trade stocks, bond and commodities that take advantage of this. you can trade bitcoin on there as well. It turns out people are better at choosing people to copy than at choosing stocks. This is called Social Trading.

So now we have a combination of an algorithmic market and a new human social market. Like we did before except the human market is somewhat automated, people can copy other people's trades automatically in real time and combine combinations in different ways. You can get a tree of traders copying other trader copying other and copying themselves again in various different human links. I call this the hyper Neural Market.

It's like a cyborg market. A totally new beast altogether and I think that understanding this will be key to the future in crypto-currencies.I've been looking at it for a few years now and it is going well. You can set it up here. You do have to be careful who you copy, but social trading is one of my latest vices. It makes for an easy way to take advantage of volatility and the big uptrend in bitcoin price we are seeing now. You don't need to watch the charts all day. You Just need to find someone who is. I'm on it all the time.

PS Etoro actually runs a kindof a bitcoin ETF for trading which is somehow linked to bitstamp.