Chinese Bait and Switch

May 6th, 2014
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  1. 06/05/2014
  3. Previous paste:
  5. China Bait and switch
  7. Today the 5 top exchanges released a joint statement the essence of which corroborates everything I have been saying so far.
  9. The essence of the statement is to implement all the following by 10th May
  11. 1. Stop 0% fees on trading (this prevents HFT inflating volume and market manipulation via painting the tape at zero cost).
  13. 2. Stop lending and cease margin CFD (will reduce speculation and shield inexperienced traders from getting burned): (timeline from OKCoin
  15. These two points address the PBOC concern with rampant speculation fuelled by the exchange platform features and ease of manipulation which puts investors at risk by promoting extreme volatility.
  17. 3. Stop promoting bitcoin at large meeting and conferences: The PBOC very much want a lid on bitcoin and want it to cool off. If it gains value to should do so in a sober manner and not with such volatility.
  19. 4. Start being transparent and release information (another way the market was terribly manipulated with insider trading).
  21. 5. Properly and not half heartedly collect customer identification (BTCChina for example allows you to just enter random numbers for passport without actually verifying the passport ID).
  23. 6. Comply with the governments requests and not play cat and mouse (e.g. like Huobi's CEO using his personal account to receive deposits).
  25. So what does this mean? It means the exchanges are not going to roll over and die willingly, but they are not going to play cat and mouse games either. They will move forward and work within the restricted framework they have been given.
  27. It's going to be extremely hard (but not impossible) for exchanges to operate because the banking system has been cut off from them. They will be able to deal in recharge codes. Contrary to popular belief, recharge codes are not illegal, but the banks will not process any cash from recharge code sales from their account holders. This will significantly cool it off, but is perfect for the cash-only economy of which is prevalent. There are also the bitcoin ATMs and p2p trading via BTCChina's smartphone app.
  29. BTCChina have not announced this at time of writing, but I tweeted it this morning anyway: They will launch a BTCC International Recharge Voucher system which will allow overseas traders to get money into and out of BTCChina. You will be able to wire money to an international provider and get/sell the codes.
  31. I am not entirely sure how well that will work in the future, as it's like the old MtGox codes, or BTC-e codes which were tradeable on the open market but also a pretty good vehicle for money laundering and ultimately problematic. But in any case, that is what BTCChina is doing. Clearly the other exchanges will follow and they clearly want to capture some of the international market. Since exchanges will introduce trading fees, their business model will be more solid and sustainable. Arbitrage will persist in some form and therefore USD and CNY bitcoin markets cannot not disconnect although we might see a premium/discount in price if the arbitrage routes are slow during high volatility.
  33. The big upshot to introducing trading fees is we'll finally get to see the real trading volumes at Huobi and OKCoin.
  35. I previously presented two possibilities in my game theory. The exchanges take the blue pill and get squeezed out and closed, or they take the red pill and face reality. They chose the red pill I assume their joint statements come after consultation with of the authorities at some level and not some random act of desperation although clearly, they have capitulated.
  37. If PBOC wanted bitcoin dead, they would have ordered the exchanges to be closed so there is clearly some willingness to allow the trade to continue in a drastically reduced form. I imagine if the exchanges had not engaged in shenanigans, had removed 0% fee HFT and leverage in December, the market would have cooled off and the PBOC wouldn't have pushed down as hard the second time mandating strict enforcement of the original notice. Smart-alecs are rarely rewarded.
  39. As a result I believe we're not going to see the huge flash crash everyone was been expecting because there wont be the news to cause it. The Chinese market should just cool off instead. It will bring some certainty to the bitcoin ecosystem and certainty is the main bull trading stimulus.
  41. I don't believe the market will suddenly recover and go bull, but it certainly can start to recover. That means sideways action, some ups and down without all the shocks (consolidation). There is a lot of good news in the bitcoin world and a lot of real world adoption and investment. It would not be unreasonable to suggest that 380-400 is the long term support level now. It certainly is from a technical perspective.
  43. For the next few days, let's be careful of the western media reporting on this issue however as it may have some impact on BTC/USD trading behaviour. Most news outlets (including the “reputable” bitcoin blogs) do not report on Chinese events accurately or offer sane interpretations. If news outlets misreport/misinterpret things (and quote each other) it could move markets in the wrong direction – market reaction is what matters, not the reality of the news.
  45. I do not expect to see BTC/CNY or LTC/CNY trading pairs crashing wildly because I don't believe there will be any more China news to precipitate it and exchanges are being quite careful about the news the announce and how it is worded (to avoid moving the market).
  47. From here on, I will begin accumulating bitcoins again. If you have been accumulating more USD during this bear trend, the relative cost of BTC even at these prices should be very low. This is a better strategy than trying to catch the bottom each time imo. Remember you can still trade on margin with a BTC balance at Bitfinex. So for me, even if bitcoin value does decrease more, I think it's wise to start accumulate and hodl bitcoins.
  49. I don't foresee any more doomsday news, in fact, Huobi and OKCoin have been very careful not to post anything bad for a few weeks (the very reason I suspected they might have a plan B). The Chinese authorities should be pleased by the actions of the bitcoin exchanges because they are addressing the issues that trouble the PBOC and that they have capitulated (remember what I said in a previous paste about “losing face”).
  51. So I've not much more to add from here. Things are looking up, even the price goes down some more, I think we're over the worst unless there is another black swan, which by definition, we cannot predict anyway.
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