Sunday, November 25, 2018

At $3,650, many continue to deny the bursting Bitcoin bubble

Can the Bitcoin price go negative?

Five days ago, when I began to type the most recent Bitcoin text, the Bitcoin price was $4,600. Now it's $3,650 or so, the price first seen on August 12th, 2017 i.e. 15.5 months ago. During the fresh slide, the price was stuck near $4,250 for a quasiday before the drop continued during the night in the middle of the weekend.

What is rather amazing is that the mining continues at almost full speed. Most of the miners who are running cannot even pay 1/2 of their electricity expenses now. The expenses of the kids connected to the SlushPool are covered by their parents so they will probably never stop but it seems that even the professional rings with the specialized ASIC hardware keep on working.

Here you have a typical miner who keeps on working for the rosy future of the mankind. His choice of words makes it clear that what he is doing isn't really a commercial activity. He isn't trying to achieve a profit or minimize losses. He really does it in order to "support Bitcoin"!

The environmentalists sometimes terrorize us for turning on a 60 Watt Edison light bulb instead of a 6 Watt LED bulb. For some reason, the same environmentalists don't interact with the guy above who runs a whole useless factory.

One year ago, the Bitcoin price was about $10,000 and we were bombarded by articles about the wonderful financial perpetuum mobile that Satoshi Nakomoto invented. For some reasons, now, when the price is one-third of the price one year ago, the media are mostly silent. That may look paradoxical: Don't the mainstream media prefer to cover negative stories?

Well, not really. The mainstream media only like to cover negative stories that are inherently lies, such as the global warming that is frying the Earth or the crisis in cosmology or physics. They don't like to inform about real negative events. And the positive hype one year ago was omnipresent because some people were motivated to spread the hype.

It's not hard to see the correlations between the silence and recent behavior. Most of the people who are closing their cryptocurrency positions are doing so silently. When someone says that he's selling his BTC holdings, he is still told: "If you sell it you’re a fool and don’t deserve to have the BTC."

I had to laugh while reading that response. The seller is a heretic who hasn't really deserved to possess the holy BTC, anyway. You know, in the real world, he deserved it simply because he bought it (or was given it) at some point. If BTC is anything like money or even an arbitrary traded asset, you can't "not deserve" to have it. You just buy it and sell it and the supply and demand determines the price (or exchange rate). There should be nothing "emotional" or "moral" about these operations. But the Bitcoin isn't economics, it's a religion.

Incidentally, other cryptocurrencies drop almost proportionally – and the Bitcoin is kept near 54% of the capitalization. So the ideas that the Bitcoin is more resilient surely don't seem to materialize. Ripple is now the 2nd cryptocurrency ahead of Ethereum – it's been slightly more resilient because Ripple is "partially institutionally backed" which is a good thing in these difficult times.

The Tether – which is pegged to the U.S. dollar and therefore isn't bursting – is already the 7th cryptocurrency by capitalization. I remember the rank was about 30 when I began to follow it. Another halving of the volatile cryptocurrencies will make Tether #4, ahead of Bitcoin Cash (ABC) – it could happen within days or a month. At the end, if keeps on operating, the Tether will stand at the top, of course.

All the survivors in the cryptocurrency ecosystem look – or try to look – robust, happy, determined. At some moment, the mining, exchanges, and other parts of the system will try to close or misbehave, change the rules, and so on.

Everyone "actually" knows that the bubble is bursting and $0 seems the only solid enough floor. Everyone knows that the trend is down at the time scale of days or weeks or months now. So when the price gets a few percent above the recent low, the number of sellers skyrockets because they may see a nice selling opportunity relatively to where they were very recently. Further slides seem almost unavoidable and $0 is the intrinsic price which many more people start to see as a relevant benchmark. But the ingenious concept of the "number zero" is still a taboo of a sort in these circles. Almost no one who was a real or prospective Bitcoin buyer expected the price to go this low so they have run out of their cash to buy it. The demand will be low but there are still 17+ million worthless Bitcoins waiting to be sold to somebody. ;-)

The sliding price is amazingly smooth or autocorrelated. It exhibits a lot of inertia – which is natural because most of the hodlers and traders are "momentum traders". The more the price goes down, the greater fraction of them is convinced that it means that it should keep on going down and the game is over! The same was happening with the happier positive sign one year ago. The adjective "undervalued" really doesn't work when people are comparing the price only to some apparent fantasy price at the infinite future. That asymptotic price was seen as infinity last year but it's zero for most of the people now.

And no, it's not another temporary fluke before new all time highs. Four years ago when the Bitcoin price went down, the Bitcoin was still waiting for billions of potential buyers who hadn't heard about the ultimate wonderful bubble of Bitcoin yet. These potential buyers have been depleted a year ago. Everyone has heard of the Bitcoin by now. You have a fixed pool of Bitcoin hodlers who are throwing the hot potatoes on each other. (The crypto capitalization dropped by 81% in 2014 – but by 86% now. So the "overall" drop is already worse now, too.) On top of that, people couldn't short the Bitcoin during the previous crashes which made bounces more likely. That's gone.

It's plausible that the downtrend was and is accelerating. I think that the number of people who are buying leveraged Bitcoin has decreased markedly. On the contrary, many more people may be entering short positions at Bitmex, the key global trading place at this moment. When the signs of the positions are being reversed to "short", the collapse may accelerate. The last stage of the bursting bubble may resemble a linear decreasing function more than the exponentially decreasing function.

In the subtitle, I asked whether the price of one Bitcoin can go negative.

The immediate answer is No. It doesn't hurt if you have private keys from some Bitcoins (if you neglect possible legal problems for all holders of cryptocurrencies). You may always throw away the private keys, so how could it be a liability? On top of that, cryptocurrency exchanges probably don't allow you to enter a negative price while you're placing a selling or buying order. So for obvious and technical reasons, the Bitcoin price cannot be negative.

However, I actually think that the exchanges – and especially the futures markets – should allow negative prices. Why?

Well, imagine that the sellers' pressure continues and really pushes the Bitcoin capitalization below $1 billion, for example, so that Tether is above the Bitcoin as I previously mentioned. In that case, the total Bitcoin capitalization will be below $1 billion and therefore much smaller than the actual amount of total cash that people trading Bitcoin and related products have readied. For a year, we've seen a vastly opposite situation – the total Bitcoin capitalization was vastly overestimating the overall amount of cash that has flown into the Bitcoin (because most of the people have bought the Bitcoin at much lower than the "then current", insanely exploding price).

OK, if this imbalance reverses and the Bitcoin capitalization is much smaller than the cash available to the relevant traders, it seems clear to me that the amount of short positions will go up substantially. In fact, I think that the amount of cash in the short positions will be close to the amount of cash in the long positions.

In that trading, the "original" 17+ million Bitcoins may become negligible and the trading will be mostly the trading of the derived futures (Bitmex, CME, CBOE...). But for those futures, BTCUSD=0 is not a special place at all – the positive and negative values (and short and long positions) are almost perfectly symmetric. Well, you still know that the settlement price will be non-negative because the "real" 17+ million Bitcoins will never have a negative price. But because that settlement price will be "basically zero", the current price of the futures long before the settlements should be the settlement price (zero) plus minus fluctuations that should go in both directions for the "average risks" to be zero.

Right before the settlement, the futures price should return to non-negative values but long before the settlement, I think it would be perfectly reasonable for the Bitcoin futures price to be allowed to be negative – and it could have good reasons to be negative so that the product remains useful. So I recommend Bitmex, CME, CBOE, and others to allow negative values for their futures.

No comments:

Post a Comment