This week in Bitcoin
Looking back over a rather slow news week in crypto, BTC chopped sideways briefly trading down at $10,150 before recovering over the weekend to test $11,000. Importantly BTC has stayed trading above the psychological $10,000 for a record 9 consecutive weeks. As stated in previous weeklies, we wouldn’t mind seeing BTC continue to track sideways and use the macro downtrend line as support and resistance until price meets the log long term trendline in Jan 2021 — as the old Wall Street saying goes, ‘’the bigger the base, the higher in space.’’
Building a base above $10,000 is significant. Even though BTC traded at the lofty high of $19,891 in Dec 2017, the nature of parabolic moves means the time spent at the apex of the parabola was tiny (a few hours) resulting in very few traders being able to actually exit positions or trade at the elevated levels. Despite the all-time high’s importance being ingrained into the collective conscious of the crypto markets and especially the media, it’s valuable to gain some perspective and understand that BTC has only spent ~6 weeks in its entire history trading above $13,000, a fact that is easily lost amongst the sky-high stock-to-flow price predictions and continued squabbling amongst protocols. With this perspective, building a base and normalizing BTC above $10,000 for over 9 weeks suddenly becomes a much more impressive development in the market. History has shown us in 2015 and 2016 the importance of BTC to track sideways and establish a base — we all know what then happened in 2017. In order for BTC to move higher, a new set of investors with long-term investment horizons must do the slow work to understand the technology well enough, to then buy and remove BTC free float from the market leading to further price gains.
Much like MicroStrategy’s recent BTC purchase, investors into the Grayscale investment trust is one such example which has contributed to this 9-week-old base with the addition of another 17,000 BTC during this past week. However, this addition is not necessarily new BTC being purchased in the market and may represent share issuances for BTC transfers into the trust. Either way, Grayscale’s growth means it now holds over 2.5% of the total issued BTC supply, and it’s a fair assumption that the majority of the beneficial owners of these custodied BTC will have long term views on Bitcoin. This theory is reinforced with data from Coindesk showing that BTC held on exchanges are in decline, indicating that investors are likely withdrawing coins and transferring them into cold storage / self-custody for long term holding. In light of the recent KuCoin hack, the ‘’not your keys, not your coins’’ meme remains an important lesson for many investors holding crypto assets on an exchange or with trusted third parties.
In a week that saw BTC’s total issued supply hit the 18,500,000 coin milestone, Bitcoin’s scarcity post halving is starting to bite as more volume is locked up as a long-term investment, contributing to ever higher bases being formed as a foundation for all-time highs in the future. With this 9-week base and a flood of media attention, a breach of $20,000 is starting to feel inevitable, especially if we continue to consolidate above +$10,000 into January.
Looking ahead with a longer-term mindset, a monthly close above $14,000 could signal that perhaps we would have a big enough base established to launch a move up towards an all-time high and hopefully sustain those Dec 2017 elevated levels for longer this time.
Bitfinex launches equity derivatives
Longstanding crypto exchange pioneer Bitfinex has become one of the first major exchanges to start offering USDT settled perpetual swap contracts that will provide traders with 24/7/365 markets initially for the STOXX Europe 50 index and German DAX index which typically only trade during business hours 5 days a week.
This is a shrewd move by the Asian exchange, as it looks to pick up trading fees from its majority client base of high-frequency trading clients, many of whom will trade magnitudes greater volume of traditional equity products when compared to crypto. This move will also further increase the prevalence of the Bitfinex owned and controlled stablecoin Tether, which has seen a +255% increase in market cap in the past 6 months with just over $15 billion now in circulation. As the CME and other traditional exchanges move into digital assets, we are now witnessing the digital asset industry moving towards traditional finance. The convergence will be fascinating to watch and the integration of the 2 industries will allow single pools of capital to cross collateralize and cross margin diverse portfolios spanning the 2 industries. Watch this space…
It’s been a while since a major exchange has suffered a security breach, but this past Friday saw popular crypto exchange KuCoin lose ~$150M of digital assets to hackers. Sadly, this number is likely to rise as the fallout is analyzed and reported, with the actual value potentially reaching as high as $280m once the dust settles.
Kudos to KuCoin CEO Johnny Lyu for full and quick transparency and solid communication to the industry, a seeming prerequisite for crypto exchange leaders these days, as a way to offset the justified centralization concerns that many users have with CEX’s. Post hack, a level of confidence was quickly restored as KuCoin assured investors that all losses would be covered by KuCoin and their insurance fund. The market seemed satisfied with little price impact. What is interesting about this hack is the majority of stolen assets were ERC-20 tokens and the resultant questions that have arisen from their subsequent liquidations.
As we have seen with One Coin, the Twitter hack/scam, and other predominantly BTC based hacks, the amount of chain analysis tools available combined with the difficulty in cashing out an asset that has an immutable public ledger makes profiting from BTC hacks challenging. The KuCoin hack was interesting in that the majority of assets transferred from the exchange’s hot wallets were ERC-20 tokens. As we have seen with past hacks, competitor exchanges are quick to blacklist the hackers’ associated wallets, but the difference with previous hacks is the timing. Now the market has liquid DEX’s, which anyone and everyone is free to use unabated. The blacklisting of an address with stolen assets held within is not possible with DEXs, as is the nature of decentralization.
Decentralized Exchanges such as Uniswap will invariably come under increased regulatory scrutiny if the instances of laundering stolen assets increase like we have seen with the current KuCoin events. Another way to look at this is that hot wallet hacks, which are simply an accepted operational risk with CEX’s, are not possible with DEX’s such as Uniswap. DEX’s are typically non-custodial and require users to connect their own wallets to the protocol to trade, rather than users transferring assets to wallets owned and controlled by the exchange to trade with. Therefore in the future, if everyone was using DEX’s, the risks of exchange hacks are mitigated.
Led by Binance’s CZ, soon after, the hack token project leaders came out to try and limit the damage by ‘’freezing’’ some of the stolen tokens, rendering them worthless and preventing the hackers from profiting from the theft. This is a good and a bad thing. Good insofar that investors’ capital is preserved, and it reduces the incentive for hackers to repeat such thefts, but also bad to the extent that it acutely exposes the complete centralized nature of these supposed ‘’decentralized’’ projects, and the ultimate control a few individuals have over the digital assets of investors. Due to the illiquid nature of many of these tokens, concerns were clearly held that the hackers could easily crash prices when liquidating the assets into thin order books. Whether project leaders made ‘’system upgrades’’ and ‘’contract amendments’’ so that they could support KuCoin and slow down the hackers or whether these centralized protocol level changes were made to save their projects and token value, we can only guess.
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