Chinese Bitcoin Ban and Mining Dominance Could Be a Problem

While the world tries to figure out what China is doing in regards to Bitcoin I think there is one serious threat that is not being reflected in the Bitcoin price. While its been widely reported that China is essentially closing all Bitcoin exchanges another news source is reporting that Bitcoin “executives” are forbidden from leaving the country and makes a note that all Bitcoin businesses in China are under threat. Including miners.

So what?

Chinese dominate bitcoin mining, and therefore are the engine of the Bitcoin network. If they shut off tomorrow who is to say exactly what would happen – but the Bitcoin network would most certainly slow way down.

China dominates Bitcoin Mining

While its certainly possible for other countries to pick up what China drops, it wouldn’t happen overnight.

I really do not know how real this threat is, but its important to be aware of what may lie ahead.

At What Price is Bitcoin’s Intrinsic Value?

Estimating Bitcoin Prices

Disclaimer: These are just my thoughts, don’t trade on my speculation.

When trying to set a bottom price in Bitcoin – the price I view as “the bottom” I like to look at Bitcoin mining (go here to learn about mining). The process of mining itself isn’t what matters for this topic – just the cost to mine Bitcoin. Miners run computers which complete complex calculations to earn bitcoin. Computing takes electricity which is the “cost” to produce Bitcoin. When the price is high enough then miners make money. If any of the following happen then mining could become unprofitable:

  • Bitcoin price drops substantially
  • The price of electricity increases dramatically
  • The complexity of the calculation increases dramatically, requiring more computing power and therefore more electricity – aka Difficulty and Hashrate
  • Dramatic increase in mining competition

In a very dramatic scenario if the cost of mining Bitcoin was way above the price, then Bitcoin Miners would stop mining and the Bitcoin network would shut down.I want to stress at this point its highly, highly, highly improbable.

Bitcoin Miners Run the Show

Cutting to the point – many sites like this one allow you to enter in a bunch of variables and calculate “mining profitability”. The variables are very important for actual miners. I like to use the Bitcoin Mining breakeven price as the “bottom” in Bitcoin prices. For this exercise I just try to get a baseline.

My view is that the miners are the guys with millions of dollars in hardware aka major skin in the game. Therefore their breakeven price should be “defended”, meaning the Bitcoin price should stay above that mining breakeven level. Looking at it a different way (I am generalizing here) – if you can buy something for less than it costs to produce – thats a good deal, right? This is assuming there is major demand for that product/asset.

If the Bitcoin price was to stay below this level for an extended period then I think Bitcoin prices could fall further.

Bitcoin Price Breakeven Math

Currently CryptoCompare shows a 15% per day profitability in Bitcoin mining. This indicates that the breakeven price for miners is around $3,600 USD with Bitcoin currently trading at ~$4,000 USD.

In the last bitcoin selloff we went below this $3,600 number but bounced back and hung around that price. Could just be coincidence, who is to say for certain..

Bitcoin Mining Price
Bitcoin Breakeven Mining Price

There are obviously hundreds of other things to consider when determining the price of Bitcoin. Because its such a new market it can be tough to get a baseline value, and thats why I decided to post this outlining what I use.

Pirate Bay Leverages Torrent Network to Mine Bitcoin – Thieves Not Happy

I have to hand it to Pirate Bay for thinking this scheme up. It makes sense for them. Hilariously the users of Pirate Bay are complaining. The people stealing digital content are unhappy they are being taxed.

Im also curious why Pirate bay wouldnt move to an ethereum model where users pay in ether what they download. Seems more inline with what they are doing versus bitcoin mining. Maybe thats stage two.

When it comes to the Pirate Bay, it’s usually movie studios, music producers and software creators that get annoyed with the site — you know, copyright and all that. But in an interesting twist it is now users who find themselves irked by — and disappointed in — the most famous torrent site in the world.

So what’s happened? Out of the blue, the Pirate Bay has added a Javascript-powered Bitcoin miner to the site. Nestling in the code of the site is an embedded cryptocurrency miner from Coinhive. Users who have noticed an increase in resource usage on their computers as a result of this are not happy.

The issue is a very new one, with users only noticing a CPU spike starting later on in the day yesterday. Needless to say, the reaction has not been good — even from the Pirate Bay’s own moderators. Over on Reddit, there are complaints about “100% CPU on all 8 threads while visiting TPB,” and there are also threads on the PirateBay Forum.

As noted by TorrentFreak, a quick delve into the HTML of the PirateBay reveals what’s going on.

An administrator and “supermod” on the PirateBay Forum, Sid is far from impressed:

ffs [That’s addressed to Winston not you lot.]

That really is serious, so hopefully we can get some action on it quickly. And perhaps get some attention for the uploading and commenting bugs while they’re at it.

He offers the following advice for anyone concerned about the latest addition:

Until it is fixed (and I would expect it to be fixed sooner rather than later) noscript will block it from running, as will disabling javascript.

Blocking/disabling javascript will compromise site functionality in several ways:

– scrolling back though pages of comments won’t work

– posting comments won’t be possible

– viewing the file list won’t work

The website for the Javascript miner even recommends against doing what the Pirate Bay is doing — that is, sneaking the miner in under the radar without telling anyone:

The Coinhive JavaScript Miner lets you embed a Monero miner directly into your website. The miner itself does not come with a UI — it’s your responsibility to tell your users what’s going on and to provide stats on mined hashes.

While it’s possible to run the miner without informing your users, we strongly advise against it. You know this. Long term goodwill of your users is much more important than any short term profits.

Here is the List of Reasons Why are Bitcoin and Ethereum Price are Tanking

An amazing sh*t storm is the last few days is hitting Bitcoin and Ethereum prices:

Bitcoin tops Nasdaq in survey of world’s most crowded trade

Its popular now for investors to buy each and every dip in Bitcoin price, but also for hedge fund managers to talk about what a bubble Bitcoin is. Who knows which side is right – maybe its both.

I will say this chart from Bespoke Investments caught my eye:

My main issue with this is that Bitcoin is in its infancy and starting from zero. Many saying “its a bubble” follow the bitcoin price from 6 cents to the current level and say that simply based on the percentage return makes it a bubble.

Whats clear is that if you are a money manager it has to be painful if you missed this ride up.

From the Nasdaq:

Bitcoin tops Nasdaq in survey of world’s most crowded trade

     ft.com
Source: ft.com

Ominous omen? Bitcoin, the crypto currency that has exploded higher this year, has overtaken the also-buoyant Nasdaq Composite as the world’s most crowded trade, according to a closely watched survey released on Tuesday.

Some 26 per cent of investors polled by Bank of America Merrill Lynch in the first week of September said betting that bitcoin will rise is the most crowded trade of them all. That puts it ahead of 22 per cent voting for the Nasdaq and 21 per cent pointing to an anti-dollar wager. Nasdaq was pinned at about 30 per cent in the August survey.

Bitcoin has been garnering more mainstream appeal of late and has been catching the eye of risk-loving retail traders. It has surged from $968 to the dollar at the end of 2016 to above $5,000 last month, according to Coindesk data. It traded at $4,352.58 on Tuesday.

Notably, other crowded trades in recent history have not ended too well. The dollar was at the top for much of the start of this year, according to BofA Merrill. The currency has tumbled 10 per cent against six major trading partners since December 30.

 

 

From CNBC:

Bitcoin’s nearly five-fold climb in 2017 looks very similar to tech bubble surge

  • David Ader, chief macro strategist at Informa Financial Intelligence, shows how bitcoin’s gains resemble that of the Nasdaq Telecommunications Index before the tech bubble burst.
  • Bitcoin has gained nearly 400 percent this year, helped by increased interest from institutional investors.
  • However, digital currency expert Chris Burniske points out the market value of bitcoin is still a fraction of what stocks were during the dot-com boom.

Short seller Andrew Left targets Grayscale’s Bitcoin trust  

When charted, bitcoin‘s rapid gains resemble how stocks surged into the tech bubble before collapsing.

David Ader, chief macro strategist at Informa Financial Intelligence, matched a graph of the Nasdaq Telecommunications Index at its peak in 2000 to bitcoin’s five-year run to all-time highs.

“This is the price chart for an overly frothy market, in my opinion. I just don’t see anything quite as comparable to this in bubblelicious terms,” said Ader, a former top-rated bond market strategist.

Bitcoin climbed more than 3.7 percent Thursday to a record of $4,802.74, up nearly five times in price this year and about 67 percent higher for August, according to CoinDesk.

Source: Informa Financial Intelligence

“I think it’s going to come to a sorry ending,” Ader said. “I don’t know anybody who’s actually used a bitcoin for any purpose legal or otherwise. This looks like an overly frothy market and frothy markets lose their froth.”

Ader said he used the Nasdaq telecom index since many of those stocks led the Nasdaq composite’s overall gains during the tech bubble. The Nasdaq telecom index shot up more than 700 percent from 1995 to 2000, before collapsing 90 percent in the next two years. The index remains about 75 percent below its record high.

Bitcoin’s meteoric surge this year comes as many on Wall Street are becoming more interested in the digital currency and the blockchain technology behind it. New digital asset investment funds are rolling out and the Chicago Board Options Exchange is planning to launch bitcoin futures.

Many investors also bought bitcoin this month after it survived a relatively uneventful split on Aug. 1 into bitcoin and bitcoin cash, an alternative version supported by only a few developers. Bitcoin cash is up about 180 percent from its Aug. 1 low, to Thursday’s price of $588, according to CoinMarketCap.

However, bitcoin could split again this fall because there’s another upgrade proposal, and others have warned that the speculative forces behind bitcoin could quickly turn against it.

Here are a few of the alarm bells sounded this summer:

By percent change, analysis from Bespoke Investment Group shows how bitcoin’s surge has already well surpassed that of any major stock market bubble.

Source: Bespoke Investment Group

That said, some well-respected names on Wall Street have also issued positive reports on the digital currency.

Lee and Moas both reason that bitcoin can climb to those levels if even a fraction of the trillions of dollars in gold or other traditional investments move into the digital currency.

Bitcoin has a market value of about $78 billion, and digital currencies overall are worth $170 billion, according to CoinMarketCap.

That makes the value of all digital currencies less than 5 percent of the more than $4 trillion inflation-adjusted value of stocks during the tech and telecom boom, said Chris Burniske, author of the upcoming book, “Cryptoassets: The Innovative Investor’s Guide to Bitcoin and Beyond.”

“If people think this is the ‘big bubble,’ then they don’t have an appreciation for how big the idea of cryptoassets really is,” he said.

Many digital currency enthusiasts agree there is speculation in the digital currency. But they note that, just like the dot-com bubble, companies that were able to utilize the underlying technology then became global giants.

More Rumors of China Banning Bitcoin Exchanges

Caixin (Chinese news source) re-upped on the news of some type of Bitcoin Exchange banning. This was after rumors late last week which we talked about here.

While its not clear just what is happening – its even murkier when you’re english speaking and reading second and third degree sources. In times like this I think its best to look at the Bitcoin market itself. In trading there is a saying that the news doesn’t matter – its the reaction to the news that matters.

Here is the Chinese Bitcoin exchange Huobi as of this morning. I’d say the Chinese traders don’t see Armageddon on the horizon.

BTC Price on Chinese Bitcoin Exchange Huobi

Remain CALM: About the China Bitcoin Exchange Ban Rumors

 

Update – it appears that we were right:

Note: this is how I understand the Chinese Bitcoin Exchange situation. Its my opinion only.

The bitcoin, ethereum and crypto markets all fell ~10% on a rumor that china was going to ban bitcoin exchanges. At this point it seems that through translation something was taken out of context. It looks like what China is looking to do is regulate bitcoin exchanges to prevent money laundering. There is a huge difference between “banning” and “regulating”.

Here is a link to the article that appears to have started the fire, as you can tell its a bit tough to understand just what they are saying:

Caixin China Bitcoin News

This reads more like the government isnt allowing exchanges between Bitconi and or Renminbi.

That was picked up by articles like the one below – saying that Exchanges were going to be shut down.

Forex Live markets misleading headline read here.

Hold tight – don’t panic until its clear whats going on.

Will the China ICO Ban Hurt Bitfinex

Its now widely known that China banned ICOs and even asked that ICO’s give money back to investors.

Where this could bring major problems is to exchanges and other entities that use Tether for funding. Tether, as I understand it, could be swept up in the ICO ban and could well be affected by this and China is a huge trading market.

Currently cryptos on Bitfinex like Bitcoin, Ethereum and Litecoin are all trading at a significant discount to US exchanges. Here is a shot between kraken at top and bitfinex on bottom, you can see a ~$200 price difference:

Kraken Bitfinex Bitcoin
Large Price Difference between Kraken and Bitfinex on ICO ban China

It should be noted that OKCoin is down around $4,080 at this time – so its possible that its just asian exchanges being hit harder by the ICO ban.

It will be interesting to see what the shakeout from this China ICO ban is over the next few days. I have a feeling there will be some casualties.

Bloomberg Coinbase Hit Piece – Sell Bitcoins No Payout

This article from Bloomberg talks about a “surge in customer complaints”…up to 293 about Coinbase. The article proceeds to use terms like “scam” and says that people who sold Bitcoin aren’t getting their money in the time frame quoted by the company.

Yes, they do mention that Coinbase is getting a lot of new users – but they don’t define just how many. Its MILLIONS of new users. 

I’m not suggesting that Coinbase has great customer support, or that they aren’t without problems. But linking them to “scams” is ridiculous. Step back for a second and think about this:

293 formal complaints against MILLIONS of new users, hard forks, record volumes.

That ain’t bad. Inconvenient even aggravating for users who need their money? Yes. Scam, no.