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Word on the Street: Chinese stock market rout may have added to Tether crash

The notorious "October effect" in stock markets (expected higher volatility and market crashes) has not disappointed, with the US and Chinese indices continuing their tumultuous run. This volatility has at times coincided with large sell-offs in cryptocurrencies and the panic selling in Chinese markets this week may have spilled over to the bitcoin and tether market this week - both of which share a large base of retail Chinese investors.

Bitcoin is back in the black for the week, holding key support around $6,200-$6,400, which has raised eyebrows as to where it’s coming from considering the systemic worries around tether at the start of the week. Monthly volatility has jumped as indicated by the average true range (ATR) indicator which has gained from an average of ~$75 on 4 hour ticks to ~$90.

btc atr 1
The average range of Bitcoin price volatility had been declining in October up until October 15.

The rest of the top 5 in market cap have moved in lock-step with bitcoin this month, though not finishing as strong.
top 5
ETH (orange), XRP (red), BCH (yellow), EOS (blue).

Tether crash may have been compounded by Chinese stock market rout (high impact)

More than a flash crash, Tether dropped as low as $0.85c on the US exchange Kraken and $0.80c on Poloniex on Monday the lowest it has ever been. Meanwhile bitcoin traded at a premium against USDT on Bitfinex compared to the exchanges quoting in USD and arbitrage opportunities were aplenty.

usdt

The price of Tether still hasn’t recovered and is around $0.96c, essentially depegged from the 1:1 ratio it’s meant to have with USD. Considering the importance of Tether to the ecosystem, with a $2.5b market cap, the markets have remained relatively calm and bitcoin’s price has held a solid support around $6,200-$6,400. Such strong support looks unnatural to some and has led to speculation as to where it is coming from – if not miners holding to cover cost of production.

In January research on Bitcoin mining, Morgan Stanley estimated the cost of production per BTC as over $3,000 in China and over $7,000 in the US.

morgan stan btc energy

For the moment, Bitfinex remains the main suspect in providing the price floor. However, what could have also compounded the price spike for BTC in USDT is the rout in the Chinese stock market.

Chinese exchanges and investors have played a huge role in the uptake of USDT trading since the Chinese government outlawed trading in CNY (Chinese Yuan) with many of the world’s biggest exchanges, Binance, ZB, Huobi and Bibox all implementing USDT trading immediately after the ban. This pseudo-fiat allowed Chinese investors to stay with the exchanges and avoid official attention in China by sending USD deposits.

Huobi-BTCCNY-BTCUSDT
Chinese exchange Huobi switched from trading CNY to USDT within weeks of the government ban.

The Chinese stock market (Shanghai Composite) has plunged over 30% since the start of the year led by tech stocks and continued to fall another 4% this week on the liquidation of margin positions. The Chinese stock market is known for its large retail investor base – the same investors who dominate the crypto market – and capital controls are crimped by government insofar as moving money into overseas exchanges or equities.

ssebtc
The Shanghai Composite (SSE) in the candlesticks plotted against BTCUSD (orange) and BTCUSDT (red) shows negative divergence between Monday and Tuesday around the same time as the Tether price dump.

Crypto exchanges and particularly bitcoin’s lure as an alternative asset may have compounded the spread between USD and USDT this week as more Chinese investors bought BTC (therefore selling USDT) than US investors did.

btcspot
24hrbtc
*In 24hr BTC global trading volume, USDT has over 50% of the BTC market, compared to just over 20% in USD.
*

Considering the strong buying pressure BTC/USDT this week, and the limited liquidity in USDT ($2.4b market cap) compared to the global liquidity of the US dollar (trillions), the buying support around $6,400 could sustain a lower Tether price for longer.

Venezuela announces Petro to start trading on six exchanges (low impact)

The world’s first national digital currency has officially hit six exchanges, according to Venezuelan media. The six exchanges are Cave Blockchain (caveblockchain.com), Bancar (bancarexchange.io), Cryptia (cryptiaexchange.com), Amberes Coin (amberescoin.com), Afx Trade (afx.trade), and Criptolago (criptolago.com.ve).

They are all minnow local exchanges with little trading volume, despite president Maduro stating that the petro would be available at "the most powerful exchanges in the world" – and initially saying it would be available at 16 exchanges. Similarities have also been drawn between the Petro whitepaper and that of Dash.

On top of this, the country has receded on its original claim to be fully-backed by oil; now the mix is 50% oil, 20% gold, 20% iron and 10% diamond.
Venezuela is one of the most resource-rich countries in the world and has the world’s largest oil reserves.

Russia and China ditch USD in bilateral trade, leaving gap for crypto (low impact)

The two vying superpowers are moving closer to "dedollarization" – remove their reliance on USD for international trade – by bypassing the SWIFT network which the US holds power of veto over. This is in tandem with China working on its own national digital currency and this week advertising a new round of positions at its Central Bank Digital Currency lab.

On Thursday, the Russian Deputy Minister of Economic Development said Moscow is working with Beijing on an inter-governmental agreement to expand the use of the ruble and yuan in mutual trade settlements.

Europe has also been working on its own SWIFT alternative and this trend does leave a gap in international trade/interbank settlements for a supranational cryptocurrency to potentially fill. From early on XRP has positioned itself as a blockchain rival to the SWIFT network.

Novogratz says institutions coming in Q1-2 2019 (low impact)

The outspoken hedge fund manager who called the bottom of the bitcoin market in September is still holding on to his prediction that "Q1 [or] Q2 [2019] if the institutions start coming in, we’ll put in new highs," he told Bloomberg.

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