Market Monday: PBOC tightening, price shenanigans, and Wikipedia views

Blockchain is a trust layer for the Internet – Laura Shin, Forbes reporter

Price action

If last week is a sign of things to come, 2017 will be insane. Bitcoin’s price spiked to nearly $1100 on January 5 then promptly crashed to below $900 three days later. Guesses why:

  • Chinese yuan has been consistently weakening, and the bitcoin price spike caused the government to initiate a round of regulatory tightening at bitcoin exchanges (reasons below), and this, in combination with a new wave of government support for the yuan, led to panic selling
  • Pump and dump by market moving traders (buy lots of coin, get the media to concoct some narrative, frantic buyers follow, then pumpers sell their bitcoin at a gain). Note also that pump-and-dump is a commonly used conspiracy theory when no one knows the real answer

My view of bitcoin and crypto’s long-term fundamentals hasn’t changed.

News and updates

The PBOC – China’s equivalent of the Fed Reserve – met with leading Chinese exchanges like BTC China and OKCoin, which in aggregate account for a super majority of cryptocurrency trading activity and, in so many words, gave them a slap on the wrist: Exchanges will need to follow stricter rules from now on. They can’t market as aggressively. They can’t look the other way when it comes to suspicious activity like money laundering and capital flight. Basically the government is saying more or less that they’re paying attention and will come down harder if a) Bitcoin becomes a meaningful way for people to get money out of the country and b) regular citizens (what they call 老百姓) lose too much money playing the markets.

Segwit is no closer to being adopted, hovering still around 25% (as currently deployed, Segwit adoption requires 95% participation among full nodes)

The SEC postponed making a decision – again again – for both the Wink COIN ETF and the SolidX XBTC ETF – a SolidX decision was delayed to March 30th and a COIN decision delayed to March 11. Here’s my comparison chart of the two. Helpful to remember the first equity ETF took 4 years for approval, and the first bitcoin ETF application, COIN, was submitted in July 2013.

Leading altcoins continue to track bitcoin’s price. Interesting potential research – what is the correlation of bitcoin price with large altcoins like Ripple and Litecoin and Monero? Prior research showed no correlation between bitcoin’s price movements and those of major asset classes like equity, credit, commodities, and real estate. This is incredibly important – asset diversification is a cornerstone of modern portfolio theory, and now we have this uncorrelated (though volatile!) new asset class.

An interesting read: this paper on what moves the bitcoin price. Examined daily price data from 2009 to 2014. Verdict: Bitcoin’s economy size (eg, VC investments) and monetary velocity are its biggest price drivers. Wikipedia views show strong correlation as a leading indicator of rising public interest, of all metrics. Macrofinancial indicators show no correlation eg, stock market indices, the price of oil, foreign currency exchange rates.