Bitcoin’s Blockbuster Blowout

Bitcoin and cryptocurrencies have had a rough few days and while the cryptosphere searches for explanations, trying to find one narrative to fit the circumstances is like trying to centralize all of the computing power which supports Bitcoin’s blockchain — it’s an exercise in futility.

When Tommy Loke was a young boy, his grandmother used to beguile him with stories from their ancestral home in Guangzhou, China. As a second-generation Asian-American, Tommy’s grandmother felt that it was important for him to learn about his Chinese roots, the rich history of the land and ancient traditions passed down through the centuries.

But one of the more bizarre superstitions that Tommy’s grandmother had passed down to him was the advice to never point a finger at the moon, because a celestial queen, Chang Er, who lived on the moon, would take offence, cutting the ear of whoever would dare to point a finger her way.

To Tommy, that superstition made absolutely no sense — he had learned from his teachers at Wilmore Elementary, just outside Lexington, Kentucky, that the moon was a satellite planet orbiting the earth — nothing more, nothing less.

Scientifically-inclined, the suggestion that some mystical Chinese celestial queen was living on the moon (how would she even breathe?), waiting to cut the ears of earthbound finger-pointers was right up there with believing that the moon itself was made of green cheese.

Yet despite his well-developed childhood skepticism (Tommy was mature for his age), Tommy had as yet never pointed at the moon — not necessarily out of superstitious belief, but more so because the opportunity had never presented itself.

So years later, well after Tommy’s grandmother had passed on, on a particularly clear evening in San Francisco, California, where Tommy had settled after college, the pacific night sky was lit with a gorgeous full moon.

It was one of those moons which astronomers term a “Super Moon,” — like the massive yolk of a sunny side-up egg, a pale yellow, the imperfect lunar surface so close that you could almost touch it.

Looking out from the balcony of his apartment in South San Francisco, his wife and children fast asleep, Tommy couldn’t help but reach out and “touch” the moon — it seemed so close — when it struck him.

By indulging in this wanton act of childhood innocence, Tommy had inevitably broken a thirty-five year streak of never having ever pointed at the moon.

When it occurred to him — he shrugged off the superstition with the nervous laughter of someone who was trying to convince himself unsuccessfully, that nothing serious had transpired.

The next morning on his way to work, Tommy chided himself for even allowing such a ludicrous superstition to occupy even one iota of his mindspace.

After all, wasn’t he the vice president of development at one of San Francisco’s most admired technology companies?

Yet why did he have a nagging feeling that he ought to protect his ears more carefully for awhile. Despite it being a comfortable 68 degrees outside, Tommy wore a beanie and pulled it snug over his ears.

As he walked down Market Street on his way up to his office, he noticed a commotion outside his office building. Two homeless people seemed to be scuffling over something.

Always keen to avoid trouble, Tommy quickly skirted around them when suddenly one of the homeless men lurched forward at the other man he was having an altercation with, missing his target, losing his balance, the attacker fell onto Tommy.

At first Tommy, didn’t notice that he was bleeding, he just felt warm liquid on the right side of his beanie.

Disgusted and thinking that the homeless man had thrown up on him, Tommy removed his beanie when he noticed that it had blood on it — his blood.

Because the homeless man who had rushed the other man had been armed with a knife and somehow in the confusion, struck Tommy in the ear with the knife, cutting a small part off.

Holding his hand to his ear, Tommy’s hand was covered in his own, warm blood — seeing the blood he passed out.

Hours later, Tommy woke up in a hospital ward, his ear by now bandaged and his wife and children waiting anxiously by his bedside.

Which is when Tommy was reminded of what he had done the night before — point at the moon. But could all of this have been Chang Er’s doing?

And while Tommy’s ear injury may have had as much to do with his pointing at the moon as Al Gore did with inventing the internet, it’s not uncommon for us to search out for causality and a narrative where no reasonable one exists.

Bully For Bitcoin

Which is why when Bitcoin tumbled over the past few days, taking along with it the rest of the cryptosphere, against a backdrop of what till then had been inexplicable resilience as other markets tumbled — a narrative had to be created, constructed and more importantly, believed.

Over the past week, Bitcoin fell more than 50%, crashing to as low as US$3,850 and threatening to erase all of 2019’s gains in the bellwether digital currency.

And while last weekend’s sudden sell-off of Bitcoin and other cryptocurrencies, may have caught many off guard, there was more than sufficient reason to suggest that Bitcoin would take a bearish turn.

For starters, markets have been in turmoil, gyrating wildly against a heady mix of negative news, including (but to name a few), the ongoing trade war between the United States and China, the slump in oil prices with OPEC failing to agree on supply cuts and of course, the coronavirus outbreak.

And it is the coronavirus in particular which has largely been blamed for investors losing their appetite for risk.

All major stock indices are now officially in bear territory.

Last Thursday U.S. stocks plummeted over 10%, the worst fall since 1987 and triggering Wall Street’s 15-minute circuit breaker for the second time in a week.

Not be outdone, benchmark indices in London chalked historic daily falls, dropping the most since 1987’s infamous Black Monday. Across the channel in France and Germany, indices fell by over 12%.

Bond yields fell as well, with the benchmark U.S. 10-year Treasury Bill plummeting to 0.318% briefly in overnight trading — something that hasn’t been witnessed since the end of the Second World War and considering that as recently as mid-February, U.S. 10-year T-Bills were paying a coupon rate of 1.5%.

And while conventional wisdom would suggest that against a backdrop of falling stock prices and bond yields, there would be a flight to safety to gold, that hasn’t happened either.

Gold buckled along with stocks on Thursday, falling through the all-important US$1,600 per ounce support level and wiping out all of gold’s gains for 2020.

The prices of major industrial commodities also plummeted, with oil plunging after OPEC talks collapsed last week with no agreement on supply cuts.

Copper, an important barometer of industrial activity, also plummeted hitting a more than three-year low of US$2.46. Copper is seen as an indicator of borader economic demand, given its application in electrical equipment and manufacturing.

Against this backdrop, it would be a brave (or misled) analyst, calling for a secular rise in Bitcoin.

To be sure, Bitcoin was created in response to perceived flaws in the global economic system, but like it or not, Bitcoin still very much exists within the global financial system and not in spite of it.

Which means that Bitcoin’s price will always be subject to market forces and considering that it has a limited economic history with an as yet undetermined nature, as an asst class, Bitcoin is perhaps even more susceptible to market psychology than any other asset.

Be that as it may, it hasn’t stopped pundits from proposing any and all manner of explanation for Bitcoin’s rout.

It Was Oil’s Fault

Some analysts suggest that Bitcoin’s precipitous fall was due to the global market turmoil sparked by OPEC’s failure to agree to a supply cut.

But there is little data to support that supposition.

For starters, OPEC’s failure to agree to a supply cut had already been priced into oil futures as well as the stock market and secondly, it would suggest a correlation between the price of oil and the price of Bitcoin.

The data just doesn’t hold up to any supposed correlation between oil and Bitcoin.

What is possible though is that the plummeting price of oil wreaked havoc on all manner of risk assets, Bitcoin included.

Bitcoin as an asset just simply doesn’t have the breadth of liquidity and the depth of economic history to imbue macroeconomic qualities to it just yet — unlike gold.

It was PlusToken’s Fault

Speaking to cryptocurrency news site Coindesk, India-based cryptocurrency exchange Coinswitch.co CEO Ashish Singhal suggests,

“The sudden drop in prices seems to arise out of the selling of (Bitcoin) by PlusToken.”

PlusToken was an infamous Ponzi scheme that swept across China and South Korea over the last few years, creaming over US$2 billion worth of Bitcoin and other cryptocurrencies from its victims.

Last Saturday, before the OPEC oil price shock, it was alleged that PlusToken scammers moved a little over US$100 million worth of Bitcoin to so-called “mixers” which are designed to obfuscate the origin and destination of cryptocurrency.

Singhal claims that the PlusToken fraudsters may have then sold of the Bitcoin, causing prices to fall as supply flooded the market.

And there is some suggestion that PlusToken fraudsters have done the same before.

Last Sunday, cryptocurrency analyst Kevin Svenson said via http://www.w3.org/2000/svg\">"); background-size: 1px 1px; background-position: 0px calc(1em + 1px);">Twitter,

“PlusToken scam moved another 13,000 bitcoins yesterday.”

“They also did something similar after bitcoin crossed above $10,000 this year. They are slamming the market with sell orders. Essentially we have a giant whale unloading after every move up.”

While it’s impossible to know for sure, tracking the large number of scams that the cryptocurrency industry is regularly plagued by, moving large quantities of cryptocurrency to “mixers” has often predicated a substantial fall in cryptocurrency prices — particularly for Bitcoin.

And even if this evidence is purely circumstantial — once the cryptocurrency emerges from a mixer, it becomes extremely difficult to back trace — considering that cryptocurrency trading volumes have been relatively thin over the last month, it would not be difficult to send the price of Bitcoin plummeting with as large an amount as 13,000 Bitcoins to sell.

Non-Macro Asset

To be sure, we are in uncertain economic times. Typically, during times of market turmoil, traditional safe haven assets such as gold and the Japanese yen have risen.

The past week has upended the relationship between risk assets and so-called “safe haven” assets.

On Thursday, the dollar soared against the Japanese yen, as stocks were routed.

And gold, which typically would represent a “flight-to-safety” has had one of its worst weeks in recent history.

What does it all mean for investors?

For starters, it’s dangerous to be drawn into narrative psychology of one’s own making.

Correlation is a relationship that can only be inferred after the fact.

Think of correlation like a successful marriage — you can only tell how good it was when it’s over — either by death or divorce.

To derive more meaning from such correlations than actually exist is not just dangerous, it’s unprofitable.

Narrative psychology tends to come from our need to find correlation amidst randomness and has often convincingly proven that when it comes to the stories that we tell ourselves, the facts matter less than the narrative.

In other words, a story doesn’t have to be true to be effective — and therein lies the greatest danger when applying narrative psychology to markets.

When enough investors buy into a narrative — it manifests itself in the market via the price mechanism— the only problem is, how many believers is enough to manifest a price change?

The PlusToken fraudsters may indeed have pushed the price of Bitcoin down, but they may not necessarily have intended to do so.

Worried that the proceeds of their ill-gotten gains would suffer against the backdrop of macroeconomic turmoil, they may have been prompted to preemptively unload their ill-gotten stash.

When the price of Bitcoin fell, it coincided with a greater fall in the market —whether or not that fall in Bitcoin was a result of macroeconomic conditions, or incidental to the preemptive sale of Bitcoin in anticipation of macroeconomic conditions. is a factor which is virtually impossible to determine with any absolute degree of precision.

Because markets, just like many things in life, tend to be messy — it’s an example of what statisticians term “high kurtosis” — which is really just a fancy way of saying that random things happen far more often than you would expect.

But not everything in our world suffers from “high kurtosis” — the distribution of height, test scores and IQ all tend towards “low kurtosis” — where most points of observation gather towards the mean and skew towards a normal distribution.

Nor is “high kurtosis” in and of itself undesirable — because randomness tends to reward those who prepare for it statistically — for a trader, that means taking advantage of as many options as are available— literally.

The problem with adopting a narrative psychology, especially when it comes to explaining why prices either went up or down, is that it provides limited re-usable data, which can be translated into actionable trading advantages.

Instead of trying to explain what has already happened, given these unprecedented economic times, it is far more reasonable (and far more profitable) to deal with the data as it presents itself.

Very few things that happen in markets occur through a direct and unbroken chain of causation — if and when they do occur, investors who were able to spot or predict such causal links tend to profit in disproportion to the risk taken.

That ain’t workin’ that’s the way you do it

Money for nothin’ and your chicks for free

— Dire Straits, “Money For Nothing”off the album “Brothers in Arms”

Rather, most things that happen in markets, are due to an array of contributory correlations, each subtly influencing the final outcome — a butterfly that flaps its wings in Mexico really can cause a hurricane in China — as our present times clearly demonstrate.

The recent rout of Bitcoin may have been due to macroeconomic conditions, it may have been due to market manipulation, it may have been due to dumping by PlusToken fraudsters, it may have been due to margin calls on long futures contracts, it may have been due to risk adversity, particularly for nascent asset classes — or it may have occurred for all these reasons and none of these reasons.

More valuable, instead of trying to discover an unbroken chain of causation to explain Bitcoin’s price fall, is to gather the available data, test its reactivity and anticipate, on a balance of probabilities, the most profitable positions to take.