Bitcoin Watch: The Gamemakers Wait

[The following post is by TDV Contributor, Scott Freeman]

In 2014 hundreds of millions of dollars in new venture capital were invested in bitcoin-related ventures. The two focal points for these investments were China and the United States. While more money was probably invested in the US, developments in China were the most obvious. The funds went both into software infrastructure and market liquidity, and as a result, between January 2014 and January 2015 the landscape has changed to the point of becoming virtually unrecognizable.

Whereas one year ago there was only one liquid futures market (796.com), today two of the top 3 Chinese exchanges – Huobi and OKCoin – have developed futures markets. Beijing-based OKCoin dominates the market, with futures trading volumes ranging from $100 to $200 million US dollars per day. One year ago, it was very difficult to use margin to engage in leveraged speculation on Bitcoin price moves; today, though functionality is still far from perfect, up to 20:1 margin is available.

Unsurprisingly, trading is overwhelmingly dominated by Chinese exchanges, since they can not only draw on the world’s largest economy, but also benefit from a virtually regulation-free environment. China has no capital gains taxes, so Chinese residents are free to trade to their hearts’ content without worrying about any need to report profits or losses, and exchanges have no need to report back to Big Brother on their clients’ activities. Volumes have expanded rapidly, with reported volume on bitcoin futures markets now surpassing spot market trading by a factor of 5 or more. While it is difficult to comment on the reliability of these statistics, there seems little doubt that the increased ease of leveraged trading has led to a substantial increase in volume. If the reported numbers are correct, overall volumes are now at least 10 times the levels we saw back in January of 2014.

On the security front, we also saw several security breaches, the most memorable being the theft of 19,000 bitcoins from Bitstamp on January 4, 2015. This apparently pushed Bitstamp to finally take the plunge into multi-signature technology, which requires at least two approvals to finalize a transfer. This technology was added to the bitcoin code base in 2011; however, it had been very rarely used prior to December 2014, when Bitfinex first started using it. Nonetheless, multi-sig technology remains difficult to implement, so broad-based adoption is likely to take some time. None of the Chinese exchanges has yet implemented multi-sig.

During 2014 we also saw a gradual evolution in views regarding the ultimate usefulness of bitcoin. Innovative solutions were proposed to make use of the blockchain as a permanent public record of events, including ownership of assets at a given point in time. Some progress was also made towards increasing the acceptance of bitcoin as a medium of payment; nonetheless, this remains a minor function. What has become increasingly clear is that bitcoin excels as a means of moving large sums of capital quickly from place to place.

If I need to make a payment, or move the equivalent of 1m USD in collateral somewhere on a Sunday afternoon, bitcoin is the only way to do it. Finally, bitcoin has revealed itself to be the speculator’s dream come true, with a substantial market capitalization, high volatility, no regulation and the availability of 20:1 leverage. For the moment, those are the primary drivers behind bitcoin usage.

Prognosis for 2015

In 2015 it is to be expected that the Chinese exchanges will continue to evolve by adding both additional functionality and security features. Given their regulatory advantages, they will likely continue to remain the innovation and volume leaders. Nonetheless, a more secure regulatory environment in the US and the EU leaves room for optimism that bitcoin-related businesses will continue to multiply in both of those jurisdictions, as well. Particularly notable is the recent launch of a full exchange by Coinbase in the United States. Though it does not (yet) offer any type of advanced functionality, it does seem to have substantial liquidity, which is a good base on which to build on.

On the price front, the past two weeks we have seen yet another short-lived bitcoin spike, with prices rising quickly to the US$300 mark, holding there for approximately one day, then returning to the low $200s.

This is the second time in the past several months where we have seen such a short-lived pump, and this is sure to negatively impact the confidence of long-term bitcoin holders. Nonetheless, prices still remain substantially above last month’s lows around the $150 / 900 RMB mark, and as long as bitcoin avoids falling below, say, $190, temporary ups and downs in the low $200s should not impact confidence levels any further.

My feeling is that the market – and the gamemakers – are waiting for impulses from the broader financial market. For now the US dollar up-trend seems to be intact, and bitcoin seems to be no exception to this general trend. How much longer can this last until the next crisis incites a rush to the exits? All I can say with any certainty is that the dollar pump cannot last forever, and when the market reversal comes, it is likely to benefit bitcoin, as well. A nice currency crisis in Europe with, say, the imposition of currency controls in multiple countries, could be just what bitcoin needs to start a new sustained upswing.

[Editor's Note: In the TDV Newsletter, TDV's financial team analyzes the current market trends and their future trajectories. TDV Chief Editor Jeff Berwick and TDV Senior Analyst Ed Bugos bring you the actionable insights to survive and prosper at The End Of The Monetary System As We Know It]

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Scott Freeman is the CEO of the IT Group, which is a Shanghai-based group of companies focusing on information technology and financial services. He’s always on the lookout for self-starters who bring along creativity, enthusiasm and know-how. He can be contacted at [email protected].

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