What goes up..
Bitcoin was still ranging and broke below the assumed low resistance of $30,000 for a few hours before climbing back into the descending range. This was in part due to the appearance of several prominent bitcoin proponents on the B-word talk on Wednesday 22/07. Edit: It’s now still in range but has taken considerable upside — a potential as to why and how this happened in the second piece.
The overall sentiment of the B-word talk was very positive with Twitter CEO Jack Dorsey outlining a huge commitment and involvement in pushing the adoption of bitcoin by supporting the development of hardware and software in open-source fashions and easily accessible to anyone interested. Cathie Wood was fine, she knew the talking points and had practiced them. But it felt like her years at the institutional level has shaped the language and communication of her interpretation of bitcoin, maybe it was jarring hearing corporate elite language being used to describe bitcoin for the first time, but either way, she wasn’t on the same level as Jack in terms of being able to see, or explain, the holistic view of bitcoin in the future of commerce — more on that later.
Elon Musk. On the whole, it was positive from Mr Musk, he was expressing interest in making use of at home-miners in space heaters (a bit late), believes the migration of miners to greener energy, and using bitcoin as a way to smooth the transition to new energy supplies were all wins for the network. He also revealed SpaceX holds bitcoin, Tesla will likely start accepting bitcoin again soon (but who wants to spend it on a car), and his personal position is heavily weighted towards the orange dot over dogecoin and ethereum. However, Mr Musk seems adamant that the future of humanity is in the hands of him and a select few friends who agree with him and bitcoin/crypto should ultimately bend to their vision.
He continued to show his ongoing cryptocurrency education by citing some issues typically touted by people first exploring bitcoin such as; the limitations of bitcoin’s layer 1 transitions, the lack of on and off-ramps (he should really try LondonLink), questioning the requirement of money licenses for all users in a truly P2P world and imagined a new cryptocurrency that has higher transaction limits, less costly and just as secure as bitcoin, which would “be of great interest”.
I imagine most people watching that have been following the market since, maybe, 2016 sort of era, rolled their collective eyes when he started along these lines. But once you think of Elon’s rationale of bringing about the best future for humanity — you can understand his viewpoint — sure all those features would be of great interest. Yet it misses some key points to understanding bitcoin, in that a portion of its value comes from acting as a store of expended energy — the link tying a virtual ‘object’ back to the real and physical world, where effort is required to make something out of nothing.
There have been thousands of ‘the next bitcoin’ and attempts to hijack the network by groups or individuals in the past. Bitcoin has remained resilient and ultimately unaffected by such attacks. While it may be a bit far-fetched to say Elon will attempt to create his own cryptocurrency or diverge the core principles of bitcoin, he is by far the largest and most widely known person who could take that position. This shouldn’t really be a concern though and if bitcoin was able to be toppled by one of the richest people in the world then it would be a failure anyway. Yet, combination punches of central bank digital currencies, superstar billionaires and a good helping of mainstream fear-mongering and erroneous reporting may mean bitcoin is in for a fight with bigger challenges than ever before.
Jack Dorsey spent time musing how the internet would look if bitcoin had been around when the current crop of internet companies were being made. The best summary of this was an exchange between Musk and Dorsey wherein Musk asked if Twitter could allow advertisers to accept payment in cryptocurrencies. To which Jack, ultimately avoiding the question, walked a tight line of being hugely dependent on these services currently yet also seeing the bigger picture, in which he is much more interested. Stating that if advertisers wanted that, Twitter would do all it could to accommodate. However, Dorsey went on to say that cryptocurrencies open up entirely new types and forms of internet native revenue streams that are abstract and not easy to imagine for those already involved in cryptos, let alone those new to it. This reeks of the previous iterations of bitcoin vs blockchain or cryptos vs DLTs that was the hot topic of London town in the previous bull run of 2017. One side sees it as business as usual with slightly different payment rails. The other sees it as an explosion of innovation, soon to render a lot of current business lines and services obsolete.
The talk laid down plans to provide open-source hardware for self-custody, emphasizing the importance of users being in control of their own funds, and software — as well as providing educational material on both parts. He also briefly mentioned a new social network, currently named ‘Blue Sky’, that would be exploring these potential revenue streams and incentive systems built into the network. The energy debate was put into a more realistic context with supporting evidence from Ark’s bitcoin mining white paper — although the figures and data are not complete or industry-wide — but it’s by far the most far-reaching research that has been done so far. It was all very promising, despite Elon’s minor missteps he can clearly see the benefits of bitcoin. Cathy came across as a figurehead of the ‘trust in new tech’ investment movement but is nevertheless championing bitcoin. It was still just the type of thing that would set off another bull run.
Bitcoin pumps thousands of dollars in a few hours — is this news at this point?
Looks like we’re in for a wild ride over the next few weeks as movements in bitcoin typically seen at the end of the holiday season started early and now there’s, as of writing, a fight to break the $40,000 resistance which will signal a potential trend for next few weeks.
After weeks of downward trending sideways action, bitcoin rose $6,000 dollars in the space of a few hours — with the spot price on a few exchanges hitting $48,000. A lot of this volume was occurring in, where else, the Binance BTC/USDT perpetual futures contracts.
So how did it happen?
Like all derivatives, the price is based on the underlying asset, and you need to post collateral to get access to the derivative. These derivatives are used to bet on the direction of the price going up or down. Once there is enough interest in the derivatives market, swings from the underlying asset can cause highly volatile moves in either direction as traders betting on one direction over the other have their collateral wiped out.
After the dip in May traders took a more bearish outlook and began shorting bitcoin using the USDT/BTC perpetual futures. Unlike during the run-up and eventual sell-off, a lot of these trades were using stablecoins as collateral instead of BTC, as previously.
This was how the market dropped so violently as both the BTC and then the futures contracts were losing value and became cyclical as the value of the underlying asset of BTC lost value, so did the futures and more collateral was needed, forcibly selling the underlying BTC to either liquidate the trader, closing accounts or forcing them to pay into the trade to keep it open. Oh, and people were doing this on x125 leverage. Madness.
The liquidations came thick and fast. Cryptocurrency data provider bybt.com estimated $8.6 billion of liquidations in 24 hours on the 18–19th May. Eventually, some sort of floor was found when long-term holders bought up the $30–40k range. It was a wild ride.
In essence, the reverse of that happened this time around — but with a little extra nonsense sprinkled in — this is still crypto after all.
As the collateral was mostly stablecoins this time, those thinking the downward trend was here to stay were naked shorting bitcoin. Naked shorting is the practice of short-selling an asset without first borrowing or knowing that the underlying asset can be borrowed. Hopefully, you can see where this is going.
A combination of consistent buyers at $30,000–$40,000 and a continual drip of bitcoin out of exchange into self-custody wallets drove a short-squeeze. The reverse of miners liquidating bitcoin to fund closing or moving operations out of China, was the catalyst this time as there were outflows of ~60k bitcoin leaving exchanges shortly before and during the squeeze. There wasn’t enough of the underlying asset, bitcoin, for derivative traders to borrow. The reverse of May, those betting on the price going down became forced buyers. Around $800 million on Binance alone of naked shorts got blown out, pushing the price briefly to $48,000.
It’s always nice to see the price of bitcoin move in a positive direction, but this is a huge win for fundamental traders. All on-chain metrics showed a heavy amount of accumulation for the last two months which was not being reflected in the price. The on-chain metrics are much like bitcoin addresses — while you cannot know the actors behind the wallets and there are ways to obfuscate metadata — there are ways of analyzing the blockchain. For a while it looked as if on-chain data was losing some of its ability to judge the market, however, it can now be said that the indicators were correct, albeit a bit earlier than the price warranted.
It’s incredibly good news as once again it shows the price cannot be artificially suppressed via market instruments, and while the role of shorts are very useful for the overall health of the market, there is enough available data that would normally be siloed away or require a huge premium to access. What remains to be seen is if those now back in the black will sell into the market or continue to hold for the longer term. Bitcoin will continue producing blocks every 10 minutes and a lot of what’s going on around that is just noise.
