CryptoAM: Exchange Fraud, Bitcoin Mining, and Bunkers

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Happy Friday, Avi here! Hopefully everyone is weathering this drop in the markets and has already made plans to go outside this weekend. I’ll be taking weekends off, but see you all bright and early next week. I’ll also be at Consensus next week in NY (shoot me a line if you’re there as well) — so look out for some interesting information.

1 thing you need to know:

One: The largest Korean exchange, Upbit, has been raided by Korean authorities. Upbit is being accused of siphoning user funds to executives accounts, causing massive panic selling in Korea as people exit Upbit positions to secure their capital.

  • Be skeptical though, there have been many cases of misreported stories from Korea. This could also be a buying opportunity if it turns out to be similar to the “raids” we saw in November/December.

  • Be smart: Keep your eyes on price action today, as any indication of the scandal getting worse could send the market tumbling more.

  • Why this matters. If crypto exchanges keep getting in trouble, we are going to see a backtrack on the currently favorable view that many countries are taking towards these exchanges. Every one of these incidents make the case stronger for decentralized exchanges.

Two: It’s a slow day for news. If you have anything I missed, email me and I’ll include it on Monday.

I’m reading this today:

Here is a interesting article on network value, which is always a good read during downturns. The core of the argument is that you can take the value of the network (marketcap) and divide it by an EMA of network usage to come to a predictive indicator of price and also a metric that shows how much the network is truly worth. Why yes, this is most definitely a shameless share of one of our reports.

Someone sent me this article about the history of money at 6am today. They are crazy. Who emails 18 minute reads at 6am? Anyways, it’s fantastic, I’m halfway through and I’m sharing it. I’ll have a tl;dr Monday for those who don’t make it through. For those who do, tell me what you think!

Things I like:

Releases are around the corner. Have more? Shoot an email to cryptoampm@gmail.com.

Huawei is making it easier for Chinese users to access Bitcoin. They are now allowing downloads of a bitcoin wallet. This is a big step forward for China and cryptocurrency adoption. Previously, there were Bitcoin wallets available on Huawei phones in China.

  • Why this matters: Huawei was likely unable to provide this service either due to pressure from the Chinese government or expectations of pushback. Releasing a Bitcoin wallet on their platform implies that Chinese officials are becoming more comfortable with the idea of cryptocurrency.

  • Be smart: This likely won’t have large impact on the markets, as the wallet is not included with the phone. A similar title for the U.S would say: “First BTC wallet published on App Store” .

Here’s a ridiculous article about ultra-wealthy people keeping their Bitcoin in underground bunkers.

  • My favorite quote: “It’s a subject we discuss a lot, and we believe Bitcoin won’t reach the mainstream if people have to hold their own private keys,” Rogers said. “It’s a pretty high hurdle technically to be your own bank with lots of security.”

  • Which cracks me up, because that’s exactly the opposite of why Bitcoin exists. In 10 years, there will be many crypto “banks” and we will be back at square one.

Also, here is Fundstrat misunderstanding the relationship between mining and price. This is a reminder to think critically about what you read, even when it comes from a top firm.

  • “Bitcoin miners verify and process transactions, supporting the network in exchange for mining rewards and transaction fees,” Fundstrat said. “We argue that the Price/Miner’s Breakeven Cost multiple has proven a reliable long-term support level, and further, that the likely trajectory of future mining infrastructure growth should underpin Bitcoin price appreciation into year-end 2019.”

  • Fundstrat essentially says: Mining cost provides a floor for bitcoin, and growth of mining infrastructure is bullish.

  • To which I say: Mining follow price, price doesn’t follow mining. Cost of mining goes lower as price goes lower. Cost of mining goes higher as price goes higher. I will present a simplistic argument here.

  • There are many different miners, with many different costs. Miners tend to mine under conditions where they make money. Let’s assume infrastructure is built, and average cost to mine a bitcoin is $3000, with most of that being electricity cost. If price drops, then miners with the highest cost will stop mining. Hash rate (the power needed to mine 1 bitcoin) will go down, meaning less electricity is needed to mine a bitcoin, meaning cost to produce goes down. As price increases, miners join the pool, increasing hash rate, and price to produce goes up. Conclusion: cost to produce lags price.

  • A multiple like Fundstrats can tell you whether a price is over/undervalued. It will not tell you whether Bitcoin will reach certain prices like they imply. Keep an eye out for a more in depth article where I will be dealing with this concept!

Bitcoin decided what to do:

Technicals: Bitcoin convincingly broke key resistance levels of 8.8k overnight. Combined with a move of 5D EMA below the 20D EMA, price action is pointing towards a renewed downtrend.

Fundamentals: With the Upbit exchange being investigated, expect Korean volume to abate as people stay away from trading. This shouldn’t have long term material affect on Bitcoin price, but will have significant short term affect as people attempt to exit all positions on Upbit. Fundamentals of the market have not changed, and I expect clearer regulation on the horizon to bring in buy pressure over the rest of the summer.

What I’m thinking. I exited all alternate trades when bitcoin made significant movements down to the 8.8k level, and am not going to enter any new trades until the trend has reversed itself. I have not exited any long positions to USD as this is a low volume downturn. I may exit a portion of alternate positions to USD if we break 8k on high volume as this would indicate a probable run to 6.6k.

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