Thursday, December 7, 2017

BITCOIN: "Thank You, Mr. Jackpots!"

Izabella Kaminska writes:

Unlike any other market in the world, there are no natural sellers in bitcoin. Even the miners who mint coin stockpile as much of it as possible and try to obtain as much free energy from alternative non monetary sources.

If and when they are forced to sell to pay for electricity bills they do so through established bilateral OTC channels out of fear that dumping huge amounts of coin on public exchanges could impact upward momentum, eating into their potential gains.

Walter Zimmerman, technical analyst at ICAP Technical Analysis, has been in the commodities and futures market for more than 35 years. In that time, he says, he’s never seen a market quite like it. He’s worried the launch of bitcoin futures next will only exacerbate the one-directional trading. And since bitcoin has no fundamental value that takes the next technical target point to as far as $47,400...

Over the last year bitcoin positions across many markets have become entirely one-directional. We’re told, for example, that over 90-95 per cent of client flow on some of the most popular CFD and spread betting platforms is on the long side....

Due to all these complexities, many less prudent platforms don’t hedge at all. Instead they
run business models that more closely resemble those of casinos, making money either on the spreads they charge, the overnight funding rates applied or, more commonly still, from playing the odds that their clients are more often than not going to find themselves on the losing side of the trade.

But bitcoin’s bull run is now testing those models too. Since too many clients are winning while the house is losing — with no effective hedges in place — the costs have to be made up in other ways. Hence on some platforms overnight financing rates are reaching Wonga-style rates of 365 per cent a year or more.

Now, the casino-models were probably prepared to suffer a bit of risk and even loss for the sake of the promotional value of offering bitcoin. The hope no doubt was that a slew of new clients would come for the bitcoin but stay for the opportunity to punt in all sorts of other markets, where failure is a much more common thing.

But, informed sources tell us, this isn’t really happening. Punters have come for the bitcoin and stayed for the bitcoin. And they’re now so in the money, the house is beginning to get nervous. In the interim, the only offset are high overnight charges, which — from a customer’s point of view — ensure bitcoin has to rise a good percentage every day just to keep everyone in the money...

A market with no intrinsic fundamentals has no ceiling on what the price can get to. As Icap’s Walter Zimmerman has pointed out in recent notes, that leaves it partial to over-exuberance until the point that the (impractical) realities of what has been created become impossible to ignore.

At the $47,400, those absurdities of the system will begin to become self evident, not just in relative asset-class value terms but also in total energy-cost terms to support the system.


  1. I took a look at the sentiment held by Twitter users' on bitcoin (by doing a Twitter search on bitcoin). If exuberance is an emotion, and if over-exuberance increases activity in the emotive portions of the brain and dims the parts dealing with reason, then that might explain what I am seeing.

    There's a complete disdain for anyone who might suggest that bitcoin is not going to do well. The responses the bitcoin enthusiasts provide to imagined and real skeptics are astounding, and takes a lot of sustained effort to debunk. One Twitter user compared the climb in Bitcoin to the monetary inflation by the Fed and implied that because the inflation by the Fed did not pop anything, neither would Bitcoin. Where does one begin to respond to that? That the inflation by the Fed *indeed* causes bubbles that pop and harm people? That climb in bitcoin prices are not the same as monetary inflation by the Fed because in one, money is printed and in the other, people are buying into it (with fiat currency) without really being able to buy goods with it? What's the point of bitcoin if no one is going to accept it?

    This is similar to the kinds of over-exuberance Trump supporters & Obama supporters had when their respective candidate of choice was elected as president. Everything is going to be well, we're going to reach the promised land. Oh well. Just to be clear, I don't think emotions are a bad thing; both reason and emotion are both important and it's not clear that having mostly one and not the other is a healthy thing.

  2. The gain only sustains as long as everyone holds and doesn't wish to convert bitcoin to dollars or some other currency. This is the ultimate house of cards. Everyone has to keep unrealized gains. If anyone with substantial bitcoin holdings actually wants to convert into realized gains, the whole bottom comes out. This is one of the only currencies where spending it will actually break it.