The Week: China Embraces Blockchain and Bitcoin Head-Fake Decimates Bears

Looking back on a week in which Bitcoin defied bearish sentiment to pop more than 40% in a single day, China’s president publicly supported the role of blockchain in the country’s future, Polish police arrested the head of Crypto Capital on suspicion of money laundering, Binance continued its global expansion with the introduction of Nigerian Naira pairs and Jack Dorsey answered the question of whether Twitter would be involved in Libra with a resounding “Hell No!”.

China to Take Leading Position in Blockchain

A “collective study” session for leaders of China’s politburo into the utility of blockchain seems to have proved fruitful after President Xi Jinping heralded the future of the technology. The leader of the world’s second largest economy said the country has an opportunity to take a leading position and will commit spending into supporting its integration with core infrastructure. Previous reports had suggested China was investigating the possibility of a state-issued digital currency pegged to the Renminbi. Whether the news suggests a softening of the hard stance against cryptocurrencies remains to be seen.

CEO of Crypto Capital Arrested

Earlier this year, popular crypto trading platform Bitfinex revealed that $850 million of its capital had been frozen following an incident with a banking partner named Crypto Capital. The shortfall was made up by the issuing of the platform’s native LEO token. Police acted to arrest Ivan Manuel Molina Lee, the head of the company, on suspicion of money laundering, bringing hope that Bitfinex will be able to reclaim the lost funds.

Bitcoin Options Coming to Bakkt

The move towards institutionalisation of crypto trading moved a step forward this week with the news that Bakkt will be introducing options trading for users by the end of the year. Options, which allow investors to buy or sell a specific futures contract at a predetermined price at the option's expiration date, is a popular instrument in traditional markets, but is currently only available for crypto on lesser-known exchange Derebit. 

The Bitcoin Head-Fake…should We Have Seen It Coming?

It’s often said that trading is a zero-sum game. While this phrase doesn’t account for time horizons (e.g. a day-trader and a long-term holder could both end up satisfied with a mutual trade due to their differing time preferences), it largely holds true.

This is particularly the case for those ‘big decision’ moments where bitcoin is drifting sideways on diminishing volumes. Social media becomes awash with amateur chartists plotting ‘death crosses’, descending triangles and other speculative analysis in a bid to predict the next big move. When a large move follows, amplified by cascading liquidations, one side is euphoric while the other despairs. But the series of events isn’t always so straightforward.

Recently, AngeloBTC, an influential trader with almost 140k followers and best known for once being top of the BitMex leader board, tweeted the following:

On the face of it, this tweet seems like helpful advice. At the time, Bitcoin was trading around $8100, 70% down from June’s highs, and the bearish consensus was a retest of the $6k-ish mark that had provided support for much of 2018 (before being broken to the downside in November of last year). For trader anticipating that $8k wouldn’t provide support for much longer, the tweet provided welcomed confirmation bias.

On Thursday, the bears got their wish as Bitcoin lost support and dropped down to $7.3k. From there, ‘another leg down’ seemed like an inevitability. But not so. Bitcoin recovered on high volume to reclaim $8k, before driving up to $10.4k range well within 24 hours. The 42% move up was one of the highest in bitcoin’s history and resulted in $150 million in liquidations on BitMex.

In the bears’ post-mortem, the question that’s inescapably asked is whether anyone could have seen it coming. Some would point to the news coming out of China as a force majeure and proclaim that no one on the short side could have anticipated the reversal in momentum. Well, not so surprisingly, some did:

John, a market veteran – so venerable that he even has a popular indicator named after him – has seen this many, many times before: lure the opposite side into a sense of false confidence, bring increased liquidity into the market, and then exploit for maximum gain.

So, is Angelo still sitting on the sidelines waiting for $6k? I would think not. He knew what he was doing (he knew his tweet would be widely shared across twitter, reddit, 4Chan, etc.) and I would bet he made a nice profit from it.

At the time of writing, Bitcoin is still looking bullish at $9.7k. Whether this amounts to the start of the next bull run, we’ll have to wait and find out. In Bitcoin, after all, nothing is off the table. But if the last few days teaches us anything, it should reinforce Warren Buffet’s wise words: Be fearful when others are greedy, and greedy when others are fearful. And further, always expect the unexpected.

Tweets of the Week:

Trader Cronk had his fingers crossed as Bitcoin broke below $8k:

Jimmy Song wonders who will be next to oppose Bitcoin:

Market trend reversals are often characterised by capitulation. Roy Blackstone points out the latest social media “influencer” to give up at the worst moment possible:

The Week’s Best Content:

Recommendation 1 – How to think about value

Joel Monegro, famous for the ‘fat protocol thesis’ that supported the 2017 bull run shares his opinion that “Cryptonetworks, as markets, will seek equilibrium or collapse”.

Recommendation 2 – ETH’s monetary policy is underrated

Ryan Sean Adams completes his two-part take on why ether’s cryptoeconomics incentivises long-term network security.

Recommendation 3 – Bitcoin is not a pyramid scheme

Parker Lewis continues his excellent Gradually, then suddenly series with an explanation of why Bitcoin’s incentive structure shouldn’t be confused with pyramid schemes.

Don’t Miss:

Cryptoween

The Wellington, London

30 October, 7.30pm

Crypto Arnie reprises his popular CryptoWeen event for a second year. The event brings together funds, investors, influencers and developers for Haloween-themed networking.