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Bitcoin futures liquidation

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Crypto tax refresher as regulatory scrutiny spikes

Dispatch #25 – 2021

July 30th, 2021

This is a holiday-shortened edition of the Dispatch that provides a mid-year tax refresher for US readers. The key message is that YOU are responsible for keeping track of the cost basis and calculating gains/losses. There’s rising bipartisan support to crack down on crypto tax avoidance and the just-passed Infrastructure Bill assumes $28bn from better crypto tax enforcement. Full discussion line up follows:

  • Crypto tax refresher
  • Exchanges lower futures leverage available to clients
  • Debt service moratoriums ending
  • BITCOIN SCHOOL – short liquidation  

The Dispatch will be off next week

Crypto tax refresher

We are more than halfway through 2021, so let the headline below from this CNBC article incentivize collecting your crypto trading data. If you haven’t done this already, download the entire transaction history from your exchange account. Keep this backed up, as this will be your proof of cost basis.

To repeat the Dispatch’s key message: YOU are responsible for tracking and reporting capital gains/losses. This is particularly true if you move coins out of the exchange wallet for better security. Don’t you pay for gains and claim losses for your stock trades? Crypto should be no different, except that your exchange/custodian is unlikely to provide a 1099 form like your stock brokerage does.  

However, even though crypto exchanges haven’t historically provided 1099s to clients, the IRS is gathering transaction data from the exchanges. The IRS has ramped up “John Doe” warrants to gain access to records at Coinbase, Kraken and other exchanges as this legal newsletter lays out. A portion of the article is below with highlights by the Dispatch.

Crypto to fund the Infrastructure Bill!

This week’s Infrastructure Bill provides proof of the government’s focus on crypto taxes. The mainstream headline above from Fox is somewhat intimidating, but what this really means is stronger reporting rules on crypto exchanges. How that translates to an incremental $28bn in tax revenue is one of the wonders of Washington!

Source: Foxbusiness

The takeaway, once again, is pay your taxes just like you do with gains from any other asset. This Coindesk article has more details about the infrastructure bill.

FTX & Binance lower futures leverage to 20x

Two of the largest exchanges offering crypto derivatives have announced a substantial reduction in the leverage available to traders. Binance, the world’s largest crypto exchange, and FTX have said they are lowering max leverage to 20x from the 100x previously available. This Businessinsider story offers more details. The tweets below are from the respective leaders of Binance and FTX.

This is an encouraging trend, but 20x leverage on an asset that exhibits annualized volatility near 100% is the wrong combination. You typically want to leverage assets that have low volatility and steady appreciation. Think of your house with the typical 20% down mortgage, which is 4x leverage.

These leverage futures were only available to non US residents. However, just this week, Binance announced restrictions for residents of Germany, Italy and Netherlands.

Government debt service moratoriums set to end soon

The 1.75m mortgage borrowers currently in forbearance is the largest by dollar value. While that’s a small 3.5% of total mortgages, it’s large, relative to the current 1.37m house national inventory as this Fortune article explains. This program is set to expire at the end of September.  

At the same time, 30 million student loan borrowers will have to resume loan servicing at the end of September. The average payment is $400/month according to this Fortune article. Democrats in Congress are pushing to extend the moratorium again to 2022.

Finally, the eviction moratorium on renters expires today (Saturday) as Congress failed to extend protection. It’s not like Congress was surprised by the deadline, which they have known for months. This is estimated to place 12m families at eviction risk.

The government’s failure to extend the most pressing program — rental eviction for mostly lower income families ­— may suggests that the other program will also sunset as currently scheduled. All three of these programs have been extended three times from the original Cares Act schedule. Collectively, the end of these programs could become a short-term headwind for real estate markets and a longer-term headwind for consumption.

BITCOIN SCHOOL – Recent liquidation of bitcoin shorts  

The recent rally caused shorts to be liquidated

The Dispatch has previously highlighted how falling bitcoin price leads to long futures positions liquidation. The opposite can happen when prices rise, as it did this past week. The chart below shows the notable liquidation of bitcoin future shorts. In stock market paralance, this is essentially a “short squeeze”.

Bitcoin short futures liquidation

Source: The Block Crypto

However, as the chart below illustrates the recent short liquidation was small compared to the long liquidations in May.

Bitcoin all futures liquidations

Source: The Block Crypto

Stay safe, enjoy the summer and do reach out if you have any questions or comments about the material in this Dispatch.

Asi

Important Disclosures

This is not an offer or solicitation for the purchase or sale of any security or asset. While the information presented herein is believed to be reliable, no representation or warranty is made concerning its accuracy. The views expressed are those of RockDen Advisors LLC and are subject to change at any time based on market and other conditions. Past performance may not be indicative of future results.

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Crypto downdraft as Tether reserves & regulatory news add to worries

Dispatch #16 -2021

May 21st, 2021

The lead story this week is the crypto downdraft, which reminded participants about the downside of volatility. The action reinforces the importance of positioning size to be able to absorb volatility: Bitcoin had the first ever $10K daily move on May 19th! The Musk tweet, highlighted in Dispatch #15, began the soggy price action, then Tether reserve worries, China crypto restrictions and US regulatory measures added further pressure. On a positive note, Wells Fargo aims to offer crypto to clients. Following is this week’s discussion line up:

  • Tether reserve release highlights worries
  • China reiterates crypto restrictions
  • OCC turns less crypto friendly & form inter-agency crypto group?  
  • Treasury Dept. plans to enforce crypto reporting rules
  • FDIC seeks comment on banks’ crypto activity
  • Wells Fargo to offer active crypto fund to wealth clients
  • BITCOIN SCHOOL: Charts of the crypto downdraft

For a PDF of Dispatch #16, please click here.

The crypto downdraft in context

The crypto downdraft this week led to the first ever $10K single-day move in the Bitcoin price, and it happened in both directions, as the chart below from TradingView illustrates.

The surge in trading activity led to some exchanges going down, adding to the retail panic. Recurring exchange outages at times of stress, illustrates fragility in exchange services, as this Bloomberg article argues.

However, the chart below from Visual Capitalist puts the price action this week in historical context: Pull backs have been a feature of this 12-year-old asset, but that high volatility has also brought substantial gains over longer periods of time. Two key factors that help to realize the potential long-term upside is to keep position sizes small and investment horizon long.

Tether reserve release

Tether, the largest stablecoin issuer, released (on May 13th) a breakdown of the reserves backing the $42bn of Tether outstanding as of March 31, 2021. This release was part of the agreement with the NY Attorney General, which was covered in Dispatch #6. The release shows that the bulk of the reserves are in commercial paper and NOT cash or high-quality securities like treasuries. Tether is the dominant trading currency in the crypto echo system, and the higher-risk reserve backing should worry institutional trading entities using Tether as collateral. This tweet thread from a thoughtful insider, goes through the bear argument. Less thoughtful crypto fans spin this event positively, claiming that it clears up the cloud over Tether’s reserves. The Dispatch leans to the cautious interpretation. This Coindesk article provides additional color.

Source: Tether

The next chart illustrates Tether’s dominant position among stablecoins and how balances have risen quickly. It is the “USDT” in the chart from The Block.

China reiterates crypto ban

Many pundits attribute Wednesday’s price move to this story that was first reported by Reuters. While the warning primarily reiterates existing rules against crypto activity, it does include new language to close loopholes that have allowed Chinese citizens to access crypto markets. This Blockworks article provides good background and the current state of China’s crypto market.  

OCC turns less crypto friendly?

The Office of the Comptroller of the Currency (OCC), which is housed within the Department of the Treasury, regulates national banks and credit unions. The recently appointed head of the OCC, Michael Hsu, has said that he will review some of the approvals made by the prior head Brian Brooks. The OCC under Brooks had issued national banking license to a handful of crypto custodians. Brooks, prior to the OCC role, had been the legal counsel at Coinbase and had been supportive of crypto assets. This Decrypt article provides more details.

In addition, Michael Hsu told the House Financial Services Committee that he has discussed forming a task force on crypto with the Fed and FDIC about. This Coindesk article goes into more details and provides evidence that federal authorities are planning to enact more rules and regulation to the crypto market.

Treasury Dept. to enforce reporting on crypto transaction larger than $10K

Banks are currently required to report US$ transactions larger than $10K, so extending that rule to the crypto market is levelling the playing field. This measure (really more of a goal) was included within the 24-page document released this week, as part of the Biden administration’s proposed American Families Plan Act. This Blockworks article goes into more detail.

FDIC calls for comment on digital assets

The Federal Deposit Insurance Corporation (FDIC), which is a banking regulator and deposit insurer, is calling for public comments on banks’ activity regarding cypto assets. The comment period ends on July 16, 2021. The Dispatch believes that this action further legitimizes the emerging digital asset sector. However, the FDIC could throw a wrench in banks’ plans to offer crypto, which was highlighted in a NYDIG story in Dispatch #14. The release can be read here

Well Fargo to offer active crypto strategy to clients

In this Business Insider interview, the President of Wells Fargo Investment Institute lays out what went into the decision to offer digital assets to wealthy clients. This is one more sign that the largest wealth management firms continue to push into digital assets. These flows will take time to materialize as firm like Wells Fargo will need to first educate an army of brokers and advisors on the asset class before they can then advise clients.

BITCOIN SCHOOL

Crypto markets relative size + charts on the downdraft

The data in the chart immediately below is pre-selloff, but it still drives home the point of the small size of the digital asset sector compared to traditional assets. Digital assets with scarcity and/or network effect may attract the vast pools of capital currently invested in high-valuation stocks or bonds exposed to inflation.

Source: WSJ article

The world added $24tn of incremental debt just in 2020, taking debt to 355% of global GDP. It’s tough to argue that the US$24tn, much of it stimulus payments, will generate a high economic return to pay back the borrowing. Total global debt is US$281 trillion now, according to the Institute of International Finance, which is shown in the chart from this Bloomberg article. Current low GDP growth makes the payoff math close to impossible, which is one reason capital could flow to scarce assets like Bitcoin.

Charts on the crypto downdraft

Futures liquidation was high this week, but not as high as the April 19th liquidation. This points to spot selling as significant contributor to the downside move this week. Long liquidation chart below

Source: The Block

Futures open interest has decline 56% from the peak on April 13th to $12.1bn balance on May 21st. The only other larger decline was during the Covid crash in March 2020.

Source: The Block

Coins purchased less than 6 months ago (aka short-term holders) are now near prior peak loss levels. Just note that some of the prior points were hit into the start of a multi-year down cycle.

Source: Glassnode

For technical analysts, the chart below shows the 50 day and 200 day moving average. The 200DMA will provide support, as of this Friday evening, while the 50DMA will become resistance for further upward moves.

Source: Koyfin

However, there are signs of large investor buying this dip. Here’s my cherry-picked example of a GOAT in action! GOAT = Greatest of All Time.

Source: Tom Brady via Twitter

Unlike the anecdote above, flows from OTC desks point to large investors buying last week. OTC stands for over the counter, which is often how miners sell their coins, and also how large volumes are transacted.

Source: Glassnode

Stay safe and do reach out if you have any questions or comments about the material in this Dispatch.

Asi

Important Disclosures

This is not an offer or solicitation for the purchase or sale of any security or asset. While the information presented herein is believed to be reliable, no representation or warranty is made concerning its accuracy. The views expressed are those of RockDen Advisors LLC and are subject to change at any time based on market and other conditions. Past performance may not be indicative of future results.

By

Fidelity Bitcoin pricing model

Dispatch #12 -2021

April 23rd, 2021

The leading story this week is the Bitcoin pricing model published by Fidelity’s Jurrien Timmer.  This study incorporates the exponential demand curve with the already well understood exponential supply decline. He uses the mobile phone adoption curve to model how the Bitcoin price may evolve over the long term. As the past week’s Bitcoin price weakness illustrates, the price over the short term can vary notably from any long-term prediction. The Dispatch also looks at the following stories:

  • The current Bitcoin price decline
  • The cycle is maturing
  • $14bn hedge fund – Brevan Howard – to invest in crypto currencies
  • Venmo enables crypto investments/purchases
  • Proctor & Gamble to raise prices
  • More crypto acceptance: Time Magazine & Jackson, TN

For a PDF of Dispatch #12 click here.

Bitcoin price theory from Fidelity’s Jurrien Timmer

Jurrien Timmer is Fidelity’s head of global macro research. He’s NOT a Bitcoin junkie, but as he says, started researching the asset in detail six months ago! I am copying his tweets below as they best convey his views. This is the most robust pricing model I’ve seen thus far. If you are on twitter, the full thread is here.

A few observations:

  • This is a long-term projection. Prices can deviate notably from model values both to the upside and downside, over shorter periods.
  • Mobile phone adoptionà one phone = one person. In the case of a monetary asset like Bitocin, one person could own any number of Bitcoin or a fraction of a Bitcoin.
  • A single institution could hold 10s of thousands of Bitcoin.
  • If Timmer’s model is accurate, it may show the lower bound rather than the upper bound of price range as institutional adoption increases.

The biggest issue with this model is that it uses blockchain wallets as “users”. This does not capture users that own Bitcoin via PayPal, Venmo, Robinhood or those that keep coins on an exchange wallet. The University of Cambridge Centre for Alternative Finance’s 2020 global crypto study puts the  number of true users at 101m (on page 12), which is likely a summer 2020 estimate. Jurrien’s model, in contrast, assumes 33m users, which is the number of wallets visible on the bitcoin blockchain.

Regardless, this analysis resonates closely as both the exponential demand increase (even if just on-chain addresses) and exponential supply decrease are brought together. Other models, such as the Stock-to-flow model that gets many Bitcoiners excited, only look at the supply dynamics without considering demand.  

The current Bitcoin selloff

The sharp selloff started last weekend and has been attributed to several items or a combination of these items. Whatever the exact reason, we had a historic futures long position liquidation this week as the liquidation chart below from The Block illustrates. This has unwound most of the excess positioning that took place ahead of the Coinbase IPO.

If you’d like more details, this Glassnode article looks at the price drop in more details. This blog post has a similar conclusion and uses some Glassnode data. In addition, Dispatch #10 addressed how sharp pullbacks are a normal part of bull markets. An updated chart of that  displayed in Dispatch #10, which includes the current pullback, is available at ecoinometrics.

But, this cycle is maturing

It is worth noting that there are signs we are well into a price cycle and that there is some “irrational exuberance”. The rise of many of the Alt coins like Dogecoin, which has neither scarcity like Bitcoin nor utility like Ether, is one example. The Dogecoin price was up 329% (was +700% a few days ago!)  month-to-date on Friday the 23rd. In addition, the Bitcoin HODL wave chart also shows a rise in the percentage of recently moved (purchased) coins, as you can see from the rising red/orange shaded areas. It’s not at a worrying level, but has risen.

Source: Glassnode and a live chart is available at Unchained Capital

Brevan Howard ($14bn hedge fund) to invest in crypto currencies

Brevan, which is a household name in the world of institutional money management, investing in digital assets is another sign of the asset class maturing. They will invest up to 1.5% of their $5.6bn main fund and launch a new fund to invest in digital assets. This Business Insider article has more details.

Venmo allow crypto purchases

Venmo users can buy as little as $1 of Bitcoin, Ethereum, Litecoin and Bitcoin Cash as of this week. This brings Venmo’s70m US-based users to digital assets, but this announcement shouldn’t be a surprise because parent PayPal is already offering crypto access. While this should continue to expand the network effect of crypto ownership, Venmo users won’t have access to the bitcoin network and will need to use Venmo to transfer value. More detail in this CNN article.

Proctor & Gamble to raise prices

P&G is following Kimberly-Clarke with a plan to raise prices later this year. In a relatively consolidated retail industry, it’s unlikely that these price hikes will be reversed soon. This is a datapoint to keep in mind as the inflation vs. deflation debate rages. This WSJ article digs further into the announcement.

Crypto Acceptance corner!

  • Time Magazine is accepting payment in crypto currencies. They are partnering with Crypto.com to enable these payments. More details on this company release.
  • Mayor of Jackson, TN announces plan to allow Bitcoin use within the city and possibly paying employees in Bitcoin. TheStreet.com covers the story.

The mayor’s tweet pushes an equality angle to the adoption.

As always, please reach out if you’d like to discuss any of the points in the Dispatch.

Asi

Important Disclosures

This is not an offer or solicitation for the purchase or sale of any security or asset. While the information presented herein is believed to be reliable, no representation or warranty is made concerning its accuracy. The views expressed are those of RockDen Advisors LLC and are subject to change at any time based on market and other conditions. Past performance may not be indicative of future results.