BlockCha̶ina: China Says "Get in the Car"
After months of brutal downtrend, bitcoin just had its best day since 2011 – and you can thank Xi Jinping.
So, let’s recap. In the three months to June, bitcoin, seemingly without warning, quadrupled in price. Euphoria reigned, naysayers were roundly booed, down-payments were made on many lambos. And then, for the next three months, the price was slowly, mercilessly ground back down. Despair reigned, boosters were roundly booed, alts were left bloody in the street. When the price dumped to US$7300 with barely a hint of resistance, the writing was on the wall: get ready for new lows because your internet magic money is dead in the water.
Then on Friday night, Xi Jinping, the President of China, appeared on national TV and said that his country of 1.38 billion people needed to dedicate itself to the development of blockchain technology.
Fasten your seatbelts
The result of this announcement was less explosive than it was thermonuclear. The price of bitcoin surged 45% in 12 hours, a feat that hasn’t been achieved since 2011, back when bitcoin was trading at a little over US$5. So, what the hell just happened?
The long and the short of it
I’m always suspicious of the convenient narratives that media outlets deploy to explain the latest shift in the bitcoin price. When the price dropped last week, half the sites were calling it a response to the Congressional hearings on Libra, the rest were saying it was somehow tied to Google’s announcement that it had achieved “quantum supremacy”.
In all likelihood, the drop was purely technical, a response to a lack of bullish momentum that allowed short-sellers to get on top of the price. While these moves seem dramatic in the moment, they’re driven primarily by cryptocurrency’s hypercharged derivatives market, which account for somewhere between 10 and 18 times the volume of the traditional buy-and-sell exchanges. It’s sentiment-driven trading on steroids: traders scrying charts for clues as to the market direction and then shorting or longing accordingly.
100x or bust
Yet this also explains why the resultant correction upwards has been so savage. Every time bitcoin dropped over the last few months, traders opened new shorts. As they became more confident, the shorts become larger and more leveraged. When President Xi did his thing on Friday, the price started rising organically, which liquidated a bunch of shorts, which pushed the price up, which liquidated more shorts and on and on until half the downtrend had been eliminated in one fell swoop.
While there’s still plenty to come out in the wash, here’s what we do know:
- Like it was in 2016 and 2017, China remains the most important story in crypto, but this time they’re embracing blockchain rather than rejecting it.
- The emphasis is on blockchain, not just bitcoin – China-facing coins could be well-placed for a surge.
- Shorters have been decimated and the conditions for a new bullish market have been set. Fingers crossed for a strong finish to the year.
- The old adage has never been truer: time in the market beats timing the market. So buy, HODL and treat yourself to a margarita.
Margin trading sounds fun! How does it work? Should I do it?
To quote Reverend Lovejoy: short answer yes with an “if”, long answer no with a “but”.
Margin trading works by allowing you to bet on whether the price of bitcoin (or any other asset) is going to go up or down. At a basic level, this isn’t so different from regular trading, but there are two key differences: you’re never trading actual, physical bitcoin, only using it as collateral; and you can leverage that bitcoin by a factor of 5, 10 or even 100, meaning that if you bet right your gains are multiplied five-, ten- or even one hundred-fold.
When you “long” bitcoin – that is, you bet that the price is going to go up – you decide how much to wager on the bet and how much leverage you want to use. Based on this, you’re assigned a liquidation price: the price at which your entire position will be automatically sold on market to cover your losses. The higher your leverage, the closer to the starting price that liquidation level will be. Choose 100x and your margin for error is almost zero.
If this all sounds a lot like gambling, that’s because it is. Margin trading is not for the faint-hearted and requires a tremendous amount of education, diligence and attention to avoid being pulverised. And while the rewards can be great, always keep this at the back of your mind: research has shown around 99% of day traders lose money. Are you good enough to be in that 1%?
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