What’s causing the Bitcoin Price to rise?

What’s causing the price of bitcoins to rise so dramatically?  I get asked this question many times a day from friends and colleagues wondering what’s driving the price of bitcoins. My favourite response is the old trader’s adage, “more buyers than sellers”. Even though this response is a joke, the basic fundamentals are true (I guess that’s what makes it an “adage”). The reason why the bitcoin price is rising is because there are a lot more buyers than sellers. An increasing number of people around the world are buying bitcoins, and by most back of the napkin estimates, only a small fraction of the world’s population has any bitcoin yet, so we might be only scratching the surface of the bitcoin price rise.

I think its only a matter of time until a wave of new crypto currency users come from countries with failed governments. There are lots of examples of this happening already such as the number of luxury goods shops accepting bitcoin in popular tourist destinations in France and Switzerland, they are being used by the elite from African and middle eastern countries. There are more than 1 billion people living in India and their governments are ineffective and wasteful, they are subject to wild banking laws and black markets make up such a large part of the Indian economy, it only makes sense that many people in India will move away from using their government currency and use crypto currencies instead. The government will have to spend a lot of resources and restrict the freedoms of citizens to access the internet in order to try and stop this trend.

Where could the price of bitcoin go?  Anywhere the market decides. Nobody is in control of the bitcoin price, and this is part of its appeal. If the bitcoin blockchain cannot provide value to users, its market price will eventually fall, maybe it will crash, but whether its bitcoin or some of the many other crypto currencies, the idea of blockchains has been discovered, and this cannot be unlearned.

Those of us with bitcoins should be less concerned about whether the price rises or falls, and more concerned about what governments will do about it. As the crypto economies grow, they will erode the power of governments to tax residents who do not disclose their crypto income/assets. And there will be increasing arms race between the most sophisticated members of rich countries and their own governments who try to tax their crypto currency profits.

 

Trading Bitcoin Price Spreads Bitfinex, Poloniex, QuadrigaCX

As bitcoin gains popularity, more exchanges are emerging globally, each with its own pros and cons. With so many exchanges to trade on, deciding which one is right for you will depend on your trading strategy, and one strategy I’d like to highlight is spread trading. This means profiting from the different prices for bitcoins between various exchanges. In the example below I’ll use examples for Bitfinex, Poloniex, and QuadrigaCX.  I use QuadrigaCX as an example because this is the best place for Canadians to buy and sell bitcoins, and QuadrigaCX also offers a bitcoin/US dollar pair. Also keep in mind that Bitfinex & Poloniex use USD “tether” which is a representative token and not actual US dollars.

The strategies described below are probably best done using the API from each exchange. If you are not familiar with using web APIs, then the strategies below can still be used by entering your orders manually, but you can execute orders (and manage order books) much better using a program to enter orders for you instead of entering orders manually. Here are links to web API documentation for each exchange: Bitfinex API, Poloniex API, QuadrigaCX API.

Let’s take a look at the market on each of these three exchanges to see what the current spreads are. When I refer to the “spread”, I’m referring to the difference between the bid and ask prices posted to the exchange, and then I will compare the “spread” between each exchange to see if there are any profit opportunities.

At the time of writing, here are the current markets:

Poloniex 15,529 / 15,560

Bitfinex 15,526 / 15,538

QuadrigaCX 15,505 / 15,999

The first thing we should notice as we look at these bids and offers is the markets on Bitfinex and Poloniex are much tighter than the market on QuadrigaCX. There is a small difference (a fraction of 1%) between the bids and offers on both Bitfinex and Poloniex, but a few percent difference between bids and offers on QuadrigaCX. This is where the opportunity lies. Even though QuadrigaCX is based in Canada and largely deals with Canadian payment methods, they still post a USD market, but since moving USD in and out of QuadrigaCX is much less common than Canadian dollars, their USD markets are also much more shallow.

When evaluating these markets, we should also keep trading costs in mind. Explicit trading fees are the biggest expense, the only other expense being the implied cost of carrying the float of money required to make trades. Poloniex will cost about 0.25% per transaction (depending on your volume), Bitfinex will cost 0.20%, and QuadrigaCX charges 0.50% per transaction. So in order to make a profit, we need to at least cover these trading costs.

The lowest bid based on the price quoted above is QuadrigaCX @ 15,526 and the highest offer is QuadrigaCX @ 15,999. If you bought 1 bitcoin at 15,526 and sold at 15,999, your profit before commissions would be 473 (the difference between the buy and sell). But what are the fees? 77.63 on the buy side, and 80 on the sell side for a total of 157.63. So if you can make a market with a spread of 473 and incur 157.63 of costs, then your profit will be 315.37.

Is it this simple?  Well, yes and no. In one sense, anyone is free to post markets and wait for traders to take their bid or offer. But on the other hand, the market is wide for reason. Looking at the volume of trades on the BTC/USD market on QuadrigaCX, it can sometimes take more than an hour to go by between transactions. This light liquidity is the risk that you need to take in order to get the reward.

Another way to bridge this liquidity is to post bids and offers on QuadrigaCX, recognizing that the spread is the widest on this market, and when you do get filled on one leg of the trade, you can offset your risk by taking the opposite side of the trade on a more liquid exchange (such as Poloniex and Bitfinex). For example, if we post a bid of 15,510 and an offer of 15,900 on QuadrigaCX, and the 15,510 bid gets filled, we can still work our sell order on QuadrigaCX at 15,900, while we also work duplicate orders on other exchanges. We can work OCO orders (“order cancels other”) so that when one of our sales gets filled on one exchange, we cancel the other working orders. You can see how using a computer program (a “bot”) to do this type of trading is much better than doing it manually (unless you want to stare at a trading screen all day).

The program (or trading strategy) that you use must make the necessary calculations for you, so that your program (or you) can know where to place buys and sells. If you are writing a program to do this type of trading, you need to have the program run checks and make calculations, adjust orders according to formulas. You can either set cron jobs to refresh orders and calculations on specific time intervals, or have the program place buys and sells based on other triggers, or both. Once you understand how to price these types of markets, its really up to your imagination how to let the program run your trading strategy. You can take more or less market price risk, you can tie up more or less capital, you can have the strategy take a bullish or bearish strategy, and you can use other exchanges (such as Deribit) to hedge your risk.

If you are a programmer and you know how to use JavaScript, Nodejs, python, or other such languages to build these programs, but you don’t want to risk your own capital, I am happy to put up the money in exchange for your work, please feel free to contact me on this site, I’m always looking for more competent developers.

CBOE Bitcoin Futures Contract Specs

On December 10th 2017, the CBOE will launch bitcoin contracts for trading on their futures exchange. Below is a description of the key facts associated with the CBOE contracts. My initial thoughts are that with a contract size of 1 BTC on the CBOE compared to 5 BTC for the CME contract, the smaller CBOE contract might be more accessible to retail traders because of its smaller size. I also think that having two contracts with different sizes with some slight basis risk (due to the reference price each contract uses), the CME and CBOE contracts will compliment each other by adding greater liquidity in a similar way that e-mini and miny contracts did with other futures contracts. Both contracts will be cash settled based on their respective underlying indexes.

Another feature that will come out of the CBOE futures contracts if they take-off is the Gemini Exchange will likely get a lot more volume and attention, this is probably good for the Winklevoss twin’s business.

Here are the CBOE contract specs:

CBOE Bitcoin (USD) futures (XBT) are cash-settled futures contracts that are based on the Gemini auction price for bitcoin in U.S. dollars.

Contract multiplier is 1 bitcoin.

Ticker Symbol: XBT

Contract Expirations: “The Exchange may list for trading up to four near-term expiration weeks (“weekly” contracts), three near-term serial months (“serial” contracts), and three months on the March quarterly cycle (“quarterly” contracts).”

“Market Orders for XBT futures contracts will not be accepted. Any Market Orders for XBT futures contracts received by the Exchange will be automatically rejected. Stop Limit Orders are permitted during regular and extended trading hours for the XBT futures contract.”

Minimum Price Intervals: 10.00 points USD/XBT (equal to $10.00 per contract). The individual legs and net prices of spreads in XBT futures may be in increments of 0.01 points USD/XBT (equal to $0.01 per contract).

The reporting limit will be 5 contracts (this seems quite low, but maybe this is something that the CFTC wanted)

There will be price limits, please consult the exchange website for more information.

 

 

Bitcoin Futures on CME December 18th

Today the CME announced bitcoin futures trading will begin on December 18th, 2017. This is very exciting news for crypto market participants. Trading in bitcoin futures on a CFTC regulated exchange will move bitcoin closer to the mainstream, add practically unlimited liquidity, and provide bitcoin holders with a way to hedge their bitcoin price exposure to the USD fiat economy.

The CME bitcoin futures contracts will be cash settled based on the CME CF Bitcoin Reference Rate (BRR), which aggregates bitcoin trading activity across several spot exchanges between 3:00 p.m. and 4:00 p.m. London time each day. The contract size will be 5 bitcoins, which considering the current price of $10,000 BTC/USD, the notional value of each contract might be around $50,000. This contract size is probably too big for the average retail trader, but good enough for the rest of us.

FAQ: CME Bitcoin Futures – CME Group – CME Group

CME Group plans to launch Bitcoin futures contracts on December 18, 2017, pending regulatory review and certification. CME Bitcoin futures are based on the CME CF Bitcoin Reference Rate (BRR), which aggregates bitcoin trading activity across major bitcoin spot exchanges between 3:00 p.m. and 4:00 p.m. London time.

Bitcoin Futures Get Official Green Light From Regulators

CME, Cboe allowed to proceed after pledges to regulators CFTC says venues will help U.S. surveil bitcoin’s spot market CME Group Inc. and Cboe Global Markets Inc. are poised to offer bitcoin futures contracts, easing the way for mainstream investors to bet big while dragging regulators into a realm skeptics call a fad and fraud.

Deribit Suffers Loss – Remains Solvent

Deribit recently announced they have suffered losses due to liquidations triggered by margin calls. Essentially what happened was as the market prices changed, margin calls and forced liquidations were triggered, and the market did not have enough liquidity to fill all the orders in an orderly manner, so as positions were blown out, there was a big gap in fill prices to where theoretical prices might be. The beneficiaries were the market makers who let the market gap down, then filled margin liquidation orders at prices well below expected prices. The exchange made up the difference (since the liquidated positions were the result of margin calls), and then asked major market makers to eat some of the loss, which it sounds like they did.  Below is a copy of the text provided by Deribit.

The case highlights another situation where market participants are at risk since crypto financial intermediaries such as exchanges provide users with too little information about their financial position. With the absence of clearinghouses or independent rating agencies, users are left bearing a lot of risk, and its difficult for users to guage the magnitude of this risk.

Yesterday around 14.00 UTC we had liquidation algorithms of portfolio margin users creation a chaos in the 29 December future. This resulted finally in bankruptcies of more than 105 BTC. Further various client accounts had unjust losses due to liquidations as well.

 

We had to halt trading yesterday for a while to fix the issue before we could continue again. We are sorry for the downtime.

 

We solved the issue of the losses by contacting our biggest market makers and traders that have been making profits trading against the malicious algorithm at prices far above the market. We are grateful for their understanding of the incident and for their direct support of our exchange.

 

Further we decided to refill the insurance fund further such that all other traders will remain completely unaffected and no profits will be socialized among other traders in this session at all.

 

The total final loss left for the exchange amounts to around 60 BTC (or USD 235.000 at the time of writing). Please note that all users’ funds are safe and we as an exchange can, of course, handle a loss of 60 BTC. The exchange will continue operating as normal.

 

This was our first major incident since we opened doors for trading in the summer of 2016. We will work hard now to improve various liquidation algorithms such that this could never occur again. This might further delay the launch of new products like Ethereum futures and our upcoming Spot Exchange.

The insurance fund will also be replenished again with 25 BTC.

How to trade bitcoins on QuadrigaCX

Now that you’ve opened and verified and also funded your QuadrigaCX account, you are ready to trade some Canadian dollars and US dollars for bitcoins and ethereum. This post will explain how to make a trade on cryptocurrency exchange QuadrigaCX.

After logging into your QuadrigaCX account, choose the “Trade” tab from the main menu. When on the “Trade” menu, you will see the current order book displayed for the default market (btc/cad) with the bids displayed on the left side of the page and the offers displayed on the right side. Stacked on top of the order book are order entry modules that you can use to place your order.

If you are unfamiliar with how a market works and/or how prices are formed, the first thing you do is examine the current bids and offers. The bids and offers listed are orders from other users who have placed orders to either buy or sell at certain prices. For example, if you see a bid price of $4,000 CAD for 2 BTC, this means that someone (or a number of users) has placed an order to buy 2 bitcoins at a price of $4,000 CAD.  Oppositely, if you see an offer for 2 BTC at $4,010 CAD, this means that someone (or a number of users) has placed an order to sell 2 bitcoins at a price of $4,010 CAD.

The “price” of bitcoins is simply the last time that a bid or an offer was matched. If you want to buy bitcoins with Canadian dollars, then examine the offers. Using the example above, the lowest price offered is $4,010 CAD for 2 BTC. This means that you can buy up to 2 BTC at a price of $4,010 CAD. If you want to buy 0.10 BTC, and this price meets your objective, then go ahead and enter your order to make a transaction. Using the BUY side order entry module on the left side of the order book, enter a price of $4,010 and quantity of 0.10 BTC. As you enter your order details, you will see that the order entry module dynamically updates to reflect your inputs. This helps you confirm the price and amount you wish to enter.

Once you have input your desired price and quantity, and reviewed your order, simply press the “buy” button located within the order entry module, and your order will be sent to the market. If the current offer was $4,010 and you enter an order to buy at this price, your order will be matched and filled. This will mean you purchase bitcoins at this price.

Conversely, if you’d like to sell bitcoins, the same mechanics are used to sell, but instead of trying to pay the lowest price, you are trying to sell at the highest.

Maybe you’d like to buy bitcoins, but only if they reach a certain lower level. Maybe you’ve determined that a price of $3,500 is the highest price you are willing to pay. You can enter these details in the order entry module, and your order will be sent to the order book where it waits until the market falls to this price, or you cancel your order. This is called a “limit” order. From what I can tell, there is no time limit to how long orders can sit.

QuadrigaCX is the best place for Canadians to buy and sell bitcoins with the most liquid order book and the most stable deposit/withdrawal methods. Please use this link to open an account as it will mean some referral revenue for me 🙂

Bitcoin Core/Unlimited Risk Management & Probabilities

Bitcoin holders are keeping an eye on a potential fork that will create “Bitcoin Unlimited“, a proposed new chain that will solve some perceived shortcomings with the current bitcoin “core” network. Bitcoins have the largest market cap of any crypto currency, and so there is an important network affect associated with bitcoin values/prices. Any forks or modifications to the bitcoin blockchain is bound to have implications for holders. This post describes my current thinking on how bitcoin/crypto investors should approach the anticipated Bitcoin Core (BTC) / Bitcoin Unlimited (BCU) fork.

The first thing we should understand is why there is a split in the bitcoin community. Bitcoin exists as long as its blockchain is being updated, and the value of bitcoin is related to the number/amount of miners/users willing to do things with or make transactions using bitcoins. Whether bitcoins are more or less valuable depends on a number of factors, including the scale of the bitcoin economy. If the scale of bitcoin use/adoption falls, its also likely the value/price of bitcoin will fall as well. One of the features of bitcoins is there is a fixed block size limit of 1MB. This “hard coded” limit restricts the amount of traffic that can be processed by the bitcoin blockchain, and therefore causes processing delays when the number of transactions on the bitcoin blockchain reaches certain levels. Lately, with the popularity of bitcoin rising, the bitcoin blockchain has pressed up against this constraint, causing transactions to either be delayed or expensive.  Part of the reward for bitcoin miners is receiving newly mined bitcoins but they also prioritize processing transactions with associated fees, and the portion of mining earnings coming from fees relative to newly minted coins has been rising along with blockchain “congestion”.

As a way to overcome this perceived handicap of the bitcoin blockchain, various forks have been proposed and implemented that remove or modify the hard coded cap on the block size.  Let’s keep in mind that anyone can copy, modify, and create a new crypto currency based on bitcoin or any other open sourced crypto currency. As a way to encourage adoption, new cryptos will provide credit to holders of other currencies. For example, a new “better coin” could be forked from bitcoin and all bitcoin holders could automatically have their address and keys available on the “better coin” blockchain. Users of the new chain receive tokens for “free” and the value of those tokens will be determined by other means (such as a market).

Since the value of a new crypto is related to its popularity, for any crypto to exist, there needs to be at least some miners/users willing to keep the blockchain up to date. Cryptos with low popularity, will likely be worth less. With all this in mind, we cannot create something out of nothing, a market will bake in all the perceived risks/rewards and prices will tell us the weighted aggregate opinion.

I want to make it clear, bitcoin unlimited does not impact the current bitcoin blockchain. Miners/users might stop using BTC in favour of BCU, but the bitcoin blockchain cannot be destroyed as long as at least someone is willing to defend it. If you currently own bitcoins on an address you control with a private key, you will still own those coins following a bitcoin unlimited hard fork. After the fork, you might also have access to new coins on the bitcoin unlimited network. Since you can’t create something out of nothing, its likely that the value of the combined bitcoin core and bitcoin unlimited coins will be worth some related amount. We don’t know whether this will be less than current, more than current, or the same amount. Time will tell, but anything is possible.

How do we determine the value of BTC and BCU?  The first place I’d suggest starting is the split chain tokens traded on Bitfinex. Bitfinex has listed a few different tokens that represent part BTC and part BCU. A holder of a split token can request delivery of each constituent part, so with these split tokens, we can use market prices to determine the relative values of each constituent part and therefore the probability of the impact on the future value of BTC and BCU.

At the time of writing, here are the current prices

BTC/USD @ 2285

BCC/USD @ 2000

BCU/USD @ 220

BCC/BTC @ 0.90

BCU/BTC @ 0.095

We can glean a lot of useful information from the prices listed above. First thing to notice is the market is expecting the combined future value of BTC + BCU to be worth less than the current value of BTC. In other words, the sum of the parts are expected to be worth less than the current whole. In other words, the sum of BCC/USD & BCU/USD is less than the current price of BTC/USD. This may be caused by an implied carry (a risk premium) that is theoretically baked into the current price of the future. This spread might also reflect the market’s expectation that when you split the current bitcoin economy into more constituent parts, some of the network affects are eroded, so the sum of the parts ends up being worth less than the whole. We could also study this phenomenon with other forks, most prominently with ETH/ETC.

The next thing I notice is the current price of the future value of bitcoin unlimited is worth a lot less than the current price of the future value of bitcoin “core”. Its about a 90/10 split with BCC being worth 90%. This information helps us make some judgments on the likely adoption of bitcoin unlimited. The market does not expect bitcoin “core” users to jump ship en-mass and begin to use the bitcoin unlimited blockchain.

What can bitcoin holders do to manage the “fork risk”?  The first thing I think holders should do is re-examine the way they hold their coins. Do you hold your own key or do you use a hosted service?  Are your coins invested somewhere, and does that debtor have access to the future bitcoin unlimited coins and are they obligated and/or willing to share those with you?  If you are using exchanges such as Poloniex and Bitfinex to make margin loans, how will these exchanges treat your position?

When deciding what to do, its important that you review your investment objectives and allow those objectives to determine your investment strategies. There is a lot to consider when investing in crypto currencies, and users should also consider using hosted services or obtaining advice if they are feeling overwhelmed.

 

How to Buy Clam Coins

The price if CLAM coins has been rising rapidly lately, and I’ve been getting asked by friends, how they can buy clam coins? Clam coins are a type of crpyto currency, like bitcoins, but instead of being mined by proof of work, clam coins are mined by proof of stake. This means that miners who help update the blockchain are provided with mining rewards based on the amount of clam coins they have on the mining client. This incentive is 1 new clam coin per minute rewarded proportionately based on stake.

The easiest way to buy clams is to find a friend who already has some, and then offer to buy clams from them. They can also store your clams if you are new to blockchain wallets. Most of us don’t know anyone with clam coins, so below is a description of how a Canadian can buy clam coins.

Since there is no direct market between Canadian dollars and clams, Canadians who want to buy clam coins have to first buy bitcoins and then exchange them for clams. There are two main ways Canadians can exchange their dollars for bitcoins, one way is to use QuickBT. This method works if you want to buy a small amount of bitcoins (under 0.05 btc) and you have an account with a bank that’s part of the Interac Online network.

For all other Canadian users, QuadrigaCX is the best exchange. I’ve written a blog post on how to use QuadrigaCX, please use my link so I earn some affiliate revenue.

Once you’ve figured out how to use QuadrigaCX, and you’ve purchased some bitcoins, you’ll need to open an account at Poloniex which is one of the largest crypto currency exchanges. The market for btc/clam on poloniex is the most liquid. When you’ve transferred your bitcoins to your Poloniex exchange account, you can trade them for clams.

Once you have your clams, you have a few other options. Clam coins have very limited use as a medium of exchange since there are very few places to spend your clams. Leaving your clams sitting on a Poloniex address is fine, but you won’t receive any interest this way, and with the way the clam blockchain is built, your clams should be worth slightly less as time goes by (because of the way mining rewards are provided).

I think the best/easiest way to use your clams is to open an account with just-dice.com. This is a dice site that is the main place for users to keep their clams. Just-Dice will provide depositors with the mining reward and you can also be part of the site bankroll and be an investor in the ups and downs of this gambling bankroll. The returns from gambling are small, but the returns from mining clams are still large. So I think the best place to put your clams is at Just-Dice if you are a new user.

Another choice is to lend your clams to other users on Poloniex. You can do this manually or run a bot if you’re good with a little programming. There are open source Poloniex bots available on Github. The challenge with lending your clams on Poloniex is the rate of return is currently low. Mining your clams is a more profitable right now

If you want to make mining profit of your own, the best thing to do is setup and run the mining client. A friend of mine wrote a Gist that describes how to setup the mining client. If you can use a linux terminal, its pretty straight forward.

What Are Bitcoins?

Bitcoins are a form of money. They can be used as a medium of exchange and they’re sometimes used as a unit of account, but they have no store of value. As a form of money, bitcoins are very similar to other widely used currencies such as the US dollar. Bitcoins are different from the US dollar in the way they are created, used, and exchanged.

A record of all bitcoin transactions are kept on a decentralized public ledger called a blockchain. Bitcoins are stored on addresses and the blockchain itself is maintained by miners. When miners contribute to maintaining the blockchain records, they earn bitcoins in return. This reward provides miners with an incentive to contribute computing resources to maintaining the bitcoin blockchain.

If you want some bitcoins, there are a few ways you can get them, but the easiest way is to buy them. You can buy bitcoins by using an online bitcoin exchange or bitcoin broker. In Canada, an easy way to purchase bitcoins is on a website called QuickBT or an exchange called QuadrigaCX.

Once you’ve purchased some bitcoins, what can you do with them? Bitcoins are not very useful as a way to buy consumer goods such as groceries or clothing. You’re probably better off using a currency more widely accepted as a medium of exchange in your country. But bitcoins can also be used as a way to conduct transactions and make investments online. One of the coolest things about bitcoins and other digital currencies is how they are outside the control of governments and can be used to conduct transactions relatively anonymously. Bitcoins can travel almost instantly across the world making them a truly global currency.

Bitcoins are a great currency for gambling, investing, and running online businesses, but if you’re not into any of these things, then you might as well just keep using whatever currency is popular in your day to day life. Its difficult for most people in American to see the appeal of bitcoins when the US dollar seems to work well enough. Most of us don’t question how the US dollar works either. But if you start to learn more about money, I hope you will see that bitcoins and other decentralized digital crypto currencies offer many opportunities.