The Binance effect, CBOE futures killed, and Bitmain’s bulking phase 💪
Bitmain entering bulking phase for their proprietary mining with $80 million of hardware expected to be deployed
CBOE discontinue bitcoin futures after dwindling volume
Correlation analysis by Binance finds high correlations among the USD returns of top cryptocurrencies and lower correlations among the BTC returns of top altcoins
Bitmain Bulking Phase for Proprietary Mining
CoinDesk released a news piece during the week reporting that Bitmain is believed to be putting $80 to $100 million worth of hardware into their own proprietary mining operations. Over the past few years, the proportion of revenue earned by sales of mining hardware has risen to 94%.
The news piece is based upon reports from mining farm operators in the southwestern regions of China that are closely linked with Bitmain. The farmers reported that Bitmain will be deploying approximately 200,000 hardware models including their latest hardware devices as well as older models.
The opportunity cost in not selling this hardware is estimated to between $80 million to $100 million and this implies that Bitmain is anticipating it is more profitable to put this hardware into mining. Could they be seeing that conditions in the crypto market are changing?
There are a number of factors which may be playing into Bitmain’s decision to invest this hardware into proprietary mining:
The difficulty of mining the Bitcoin network has been significantly lower since October to November where hundreds of thousands of miners are estimated to have shut down operations.
Bitmain has recently developed more powerful ASIC hardware models. Deploying these models for their own mining would mean this hardware can be put to use when the majority of competitors are still mining with far less powerful hardware models.
Although Bitmain likely already have an attractive energy deal, electricity rates are expected to be significantly lower for most miners amid excess energy production by hydropower plants in China.
Winner-Take-All for Bitcoin Futures Market
This is the natural winner takes all effect of markets coming into play with traders naturally gravitating towards the most liquid market.
Analysts at Messari have noted a number of reasons for CME dominating bitcoin futures despite CBOE listing bitcoin futures prior to CME:
CME had more existing customers connected to their exchange already making it easy for them to trade the new product when it was listed
CME has a better infrastructure enabling faster trades and a faster information feed
CBOE chose a dodgy way to settle the prices of their futures contracts which was open to potential manipulation.
Interesting Bits 🤓
Binance Research released a study last week which analysed correlations among major cryptocurrencies. Not surprisingly, bitcoin was found to be highly correlated with other top altcoins in terms of USD returns with an average correlation of 0.78.
Correlation calculations were carried out for both USD returns and BTC returns among the top 30 cryptocurrencies. The correlations were calculated for returns over the past three months (1st December 2018 to 1st March 2019) and calculations were also completed for the period a year prior (1st December 2017 to 1st March 2018) and mid-2018 (1st June 2018 to 1st September 2018).
The key findings of the study were the following:
Bitcoin USD returns are highly correlated with those of top altcoins underscoring its significance the market leader
Correlations among top cryptocurrencies in USD returns has been increasing since last year which may be possibly due to volatile price movements in late 2017
Correlations among top cryptocurrencies in BTC returns have been decreasing since last year
Correlations are higher among cryptocurrencies listed on Binance likely due to Binance being the most liquid market and a higher association existing among assets listed upon the exchange. Binance have dubbed this “The Binance Effect”
Consensus mechanisms may have a role to play in correlations with cryptocurrencies that share the same consensus mechanism exhibiting higher levels of correlation
The propagation of stablecoins may have a role to play in increasing correlations for USD returns
Although the price of bitcoin has recorded increases over the past several weeks, the movements have been weak with small-bodied candles being recorded on the weekly chart.
The price is approaching the downward trendline that it has failed to surpass several times in 2018. This is the trendline which catalysed an almost 50% decline in price in November.
The price sold off on Thursday as it approached the trendline and the daily timeframe has been forming Doji candles since which typically reflect uncertainty.
There is also an area of seller liquidity just above price from around $4080 to $4250. Prices have entered this territory several times in recent price action to find sellers willing to push prices down.
That’s a wrap.
If we missed out on anything or if there is anything you want to be discussed in the next newsletter, tweet at us @AdaptiveIO. Don’t forget to subscribe to get the analysis straight to your inbox 😉.
You can find more information about our background and expertise here.
Disclaimer: Nothing in this newsletter constitutes financial or investment advice. You are completely responsible for your own decisions, obviously. Read full disclaimer here.