BCH Heading Towards the Abyss?

Let me preface this post with I am an emotionless trader — while the rest of the cryptocurrency world fights some fierce propaganda war between BTC & BCH, I will trade anything that I think I have a quantifiable edge trading vs the rest of the market. Since BCH’s launch I have been one of the few full time traders to see the real potential in trading BCH despite the limited liquidity where a trader could secure a very high win percentage if you knew what fundamental indicators to track. In fact, my ROI trading BCH outperformed my BTC trades over several time frames.

However, it appears like the BCH story could take a very different turn in the coming months and I believe we can quantify how bad things could get for BCH supporters.

Why Write This?

I think it’s an important piece for all people investing in the crypto ecosystem to understand exactly how BCH could potentially affect many altcoins and the entire ecosystem as a whole.

Will the Below Analysis 100% Definitely Play Out?

No.

If the entire cryptocurrency ecosystem gets mega bullish again in this post-regulated, cash settled futures launch world, the overall market’s bullishness could “bail out” individuals affected in the below scenario. However, even in this scenario, there’s economic game theory that suggests that even that may not be enough. Or, more simply, complex markets aren’t binary, there’s a wide variety of possible outcomes.

Quick Synopsis of How BCH’s Price “Success” Worked

Roger, Jihan & friends are not to be underestimated. Their control of the market, for a time, was masterful and they were making insane profits in a variety of ways (CNBC published this timely article that only scratches the surface of Bitmain’s P&L). I won’t go over all the details in great depth here, but here’s the general game plan that those with vested interests in BCH succeeding were seemingly following —

  1. Control the circulating supply
  2. Create “artificial price floors” to absorb sell pressure to make price look more attractive to outsiders
  3. Use profits from other endeavors like BTC trading (ex — move into Tether, tx Tether to altcoin exchanges trading BCH, open BTC shorts, sell off BTC spot, hope market helps the selloff, rebuy BTC spot lower, take profits from all trades & pump into BCH).
  4. Prior to the BCH November hard fork, miners would utilize the EDA (Emergency Difficult Adjustment), pile network hashrate into mining BCH causing BTC mining instability and some opportunities trading the resulting price movements. (This doesn’t exist anymore now with the 144 block DAA moving average which not only made BCH hashrate more stable, but actually made BTC hashrate more stable as well.)
  5. Use additional revenue from mining including huge markup on hardware sales, delaying shipments, “burning in” new miners, high BTC fees, etc.
  6. Sweetheart early investor deals into newly launched altcoins (the best example being Tron) & using those profits to support the BCH project.
  7. Try and birth BCH adoption / use cases to drive buy pressure.

Controlling the Circulating Supply

There’s already been a few very good articles written (although dated now) on the dynamics of BCH’s circulating supply like this one from Chainalysis (scroll down to BCH Miners are Keepers section) and this article from the BitMex Research team. You should absolutely read these pieces if you aren’t fully aware of the metrics behind the BCH circulating supply.

However, let’s take a little closer look and identify some of the wallets involved. Wallets are linked / underlined.

  1. Bitmain’s BCH Sales Wallet — This wallet currently controls 2.6% of all BCH (includes non-circulating coins) with almost 441k BCH and, more importantly, have never spent a single coin. We’ll address this wallet more in detail below, but this should confirm / show that Bitmain is a revenue generating machine if they can just sit on such a huge cache of unspent coins. To put this amount in perspective, this wallet has 3x the amount of BCH of Bitfinex’ BCH cold wallet.
  2. “Unknown BCH Mining Wallet #1” — Almost definitely ViaBTC or Antpool, this wallet started mining on BCH’s first day (8/1/2017) and currently controls 0.28% of all BCH with 47,421 BCH. This wallet has also never spent a single coin.
  3. Unknown BCH Mining Wallet #2 — Also, almost definitely ViaBTC or Antpool, this wallet controls the 8th most BCH with 0.52% or 88,855 BCH and also hasn’t spent a single coin.
  4. Unknown Wallet — A newer BCH wallet that isn’t a miner wallet and appears to be some kind of sales wallet. This wallet currently controls 78.5k BCH and, yet again, hasn’t sold a single coin. It’s very possible this is Bitmain’s new wallet to replace #1.

When you have pro-BCH interests and you can absorb the expenses associated to collecting more BCH without any pressure to sell a combined 650k BCH, you’re probably printing money in your other revenue generating businesses and these entities are not only successful, but should be respected.

However, one must ask the question — exactly how long can these hoarding practices continue? We’ll get to that.

Cracks in the Armor

Obviously, the Chinese miners & Roger have been ultra successful in their other endeavors and can hedge their BTC bets by supporting an alternative SHA256 PoW coin in case they don’t like a contentious hard fork or UASF attempt by controlling the BCH market and supply. However, there comes a time in my opinion, when the liabilities start to sink the ship slowly. Let’s see if we can’t quantify exactly how much pressure is on these entities now.

Entire Cryptocurrency Ecosystem Price Correction

Unless you have been living under a rock, since the launch of the CME bitcoin futures, bitcoin underwent a ~70% correction (depending on the exchange pricing you’re using). Things were even worse for BCHUSD which underwent an 81.5% correction using Bitfinex pricing. Things are even worse when examining the BCHBTC pair where there was a December high of .25 on Bitfinex and the pair continues to make new lows with a new one today at .118. For two months now (since December 20th), the BCHBTC pair has done nothing but dribble its way down to new lows despite entities trying to inorganically support the price and absorb sell pressure.

This … this is has not been a good last 2 months. Currently .116

If things are bad for BTC price wise … they are even worse for BCH. The Chinese miners & Roger, who hold considerable amounts of wealth in coins, have seen 10 figures worth of paper wealth evaporate in 2 months. Even companies making 3–4 billion per year (see CNBC link) can’t stomach paper losses like this for too much longer before “cutting bait” on a loss leader. Let’s take the Bitmain sales wallet for example. If you track the red line on this image, this one Bitmain wallet has lost almost $1.1 billion in USD value. Obviously, bullish cryptocurrency ecosystem price action would alleviate many of the ills from this section, but more downwards price action or even sideways could increase the amount of pressure caused by BCH liabilities.

Single Bitmain Wallet Paper Losses

So Long Additional Revenue from Fees

Currently, the BTC mempool is pretty empty and fees are extremely low. Single satoshi transactions are / were being processed. While that’s great for users, this means far less additional revenue to miners and we can quantify how much less revenue miners are receiving now to spread around the cryptocurrency ecosystem —

Unfairly cheap fees

Okay, so what’s going on here? There’s a lot of factors at play here and they all contribute a little to paint the entire picture —

  1. Increased batching from economic nodes
  2. Increased Segwit adoption from economic nodes
  3. BCHBTC downward price movements make pointing more than the bare minimum hash at BCH less attractive. (Interestingly enough, the November BCH hard fork made the BCH chain far more stable, but tangentially, made the BTC chain far more stable as well. No more BCH pump plays during EDAs.)
  4. As the bitcoin price got hammered down, it’s possible less people are transacting onchain. Now, it’s important to note that you shouldn’t use raw transaction counts as a measure due to batching, but counting transaction outputs is far more accurate.
  5. While probably not even a blip on the fee market currently, Lightning Network on mainnet is still experimental, but the network is growing daily.

So right now fees are very low which provides less additional revenue to miners which means less available resources to apply to other altcoin markets. A few things can resolve this issue for miners — more onchain transactions, an “inorganic” filling of the mempool, increased BTC price, increased adoption, etc. Therefore, this isn’t a static situation, but the longer that fees stay low, the less additional revenue miners receive that can be used to invest in other coins like BCH.

Hardware Supplier Revenue Back to Accepting USD

A very clever way that Bitmain was able to develop BCH demand was by requiring retail mining equipment buyers to purchase BCH in order to buy one of their ASICs (this obviously didn’t apply to large quantity purchasers who were ordering in bulk from Bitmain directly). In addition, since ASICs were being released in batches on the website to small retail buyers, these releases could be well timed with BCHUSD pricing to squeeze out even more ROI. It’s an absolutely brilliant model that worked very well.

However, as of February 2nd, Bitmain is now accepting USD again, thereby decreasing the buy pressure for BCH (which is already very low). There are several reasons why Bitmain would do this —

  1. Requiring BCH was hurting sales numbers as it made purchasing their ASICs an extra step too difficult for small retail buyers.
  2. Increased mining competition could be adding some slight pressures and allowing for USD helps maintain a stranglehold over the mining hardware marketplace.
  3. Bitmain’s BCH liabilities have grown so much that they can no longer take nothing but BCH as payment and need to diversify back into fiat options. It’s this last option that is the most intriguing to me because we can quantify exactly how “stuck” they are and we can visualize their short term distaste for adding any additional large quantities of BCH.

Bitmain’s #1 Richlist Wallet BCH Intake

Let’s go back to that Bitmain Sales wallet we identified up above and let’s examine the rate of BCH flowing into their wallet.

Bitmain’s appetite for BCH waning or just moved to 1NrMNvxsDwsQ9DA4styegmTue9tPPsV9bg?

Well, Bitmain didn’t stop selling miners since the new year started yet their appetite for adding more BCH to this wallet at the same rate they did starting in October has all but vanished. Now, it’s very possible this is due solely to the current BCH & overall cryptocurrency ecosystem price action and that Bitmain will once again have a desire to accumulate coins they believe will appreciate in the future. It’s also very possible that Bitmain has setup a second wallet that would coincide with this steep drop off in BCH intake which can be found here (currently has 78k BCH, first seen January 16th which does match up to the chart above). I actually believe Bitmain is still hoarding BCH into this new wallet in an attempt to try and dispel the accurate belief that only a few entities control the entire BCH market.

Best case — this second wallet is Bitmain’s new sales wallet, also hasn’t spent any coins and now every trader is watching this wallet with the worst case being that Bitmain is trying to slowdown the amount of BCH it’s willing to take on.

The obvious question is — with no current robust OTC market for large BCH orders, with awful on-market BCH volume, how does Bitmain ever realize all of this profit? Is it even remotely possible?

The “Unknown” Mining Wallets

Traders identified two mining wallets that weren’t identifying themselves that were mining large amounts of BCH (those wallets are identified and linked above). However, an interesting thing has happened recently — those 2 wallets are no longer actively mining, 1 stopped in December and the other just stopped in February.

They didn’t stop mining, but where did they go? Why switch wallets?

Interesting, so those wallets have been “retired”, but these entities clearly haven’t stopped mining. Where are their block rewards going now?

It appears the 1Bgat address that retired has been replaced by this wallet and, most importantly, this wallet is selling its mining rewards —

Looks like this miner is starting to sell their mining rewards

The 17Wk4 address has been replaced by this wallet which isn’t spending any of the mining rewards and should be monitored by traders —

Add this wallet to your list of BCH wallets to monitor

So, we can conclude that, at the very least, half of the unknown mining team supporting BCH has felt the need to start selling their mining rewards which increases the sell pressure.

All These Liabilities, “When Realize?”

So, all of the above leads to this section here.

Bitmain / Jihan, Roger, ViaBTC, et. al are extremely successful businessmen despite whatever personal feelings you may have for them. They have effectively hedged their bets with BCH vs BTC by using their massive profits in other endeavors and will continue to try and promote its existence / utility / vision. However, in doing so the last 7 months, these entities have accumulated a massive amount of BCH liabilities that have gigantic paper values, but have an extremely low probability of ever being realized.

Let’s stipulate that it’s these entities that are currently supporting the BCH price and making sure it doesn’t fall to levels that make BCH an unattrcative competitor / alternative to BTC. We can see this support throughout BCH’s history (as early as the $290-$300 price floor in the early days of BCH), but let’s look at the most recent example —

Hidden BFX bid wall keeps price right around $1200 USD for days

You can find these price ledges on the USD pair all throughout the BCH chart history and, if you’re inclined to watch the BCH orderbook closely, you’ll eventually see how these entities try and keep the BCH price competitive artificially. These charts show an asset that isn’t working as a truly efficient market and that there are entities willing to take on more liabilities for some greater, larger end goal.

However, at some point, enough is enough and your position’s liabilities become so great that without a drastic price increase, your liabilities will start to sink you.

Let’s see if we can’t figure out exactly how much BCH these entities are stuck with —

Best Case = 440,000 (Bitmain Wallet) + 89,000 (Miner Wallet) + 82,000 (Bitmain Second Wallet?) + 47,000 (Miner Wallet) + 6,000 (New Miner Wallet) = 664,000 BCH or $839,960,000.

Worst Case = Best Case + 250,000 (0 spend active wallet) + 115,000 (0 spend active wallet) + 101,000 (0 spend active wallet) + 73,000 (0 spend active wallet) + 71,000 (0 spends in last 3 months) + 56,000 (0 spends wallet) = 1,330,000 BCH or $1,682,450,000 (this worst case scenario only takes into account the top 25 BCH wallets on the BCH Rich List).

Daily Inflation / Issuance = 1800 BCH or $2,277,000 per day

So, in a market that naturally wants to go down, that is being artificially supported by entities to keep the price inorganically high, these same entities are sitting on anywhere from 664k to 1.33 million BCH that they currently have no way to actually sell plus the daily issuance of BCH through mining rewards that requires a constant inflow of investment to maintain the current price. What happens when these entities want to try to even attempt to cash out?

No OTC Market or “Who is Buying BCH Off Market?”

First, there’s virtually no OTC market for BCH right now so there’s no real off-market big quantity purchases occurring like there are with BTC (if you’re purchasing a ton of BCH OTC, I sure hope you have an exit strategy because current buy demand is extremely weak).

Weak Daily On-Market Volume

Second, if you look at the non-zero fee trading volumes on-market, there’s weak volume on these exchanges by evidenced that the 4th largest “market cap” (quotes because market cap is a terrible metric) coin only has around the 7th highest daily volume and almost a third of that volume comes from one exchange, OKex. There’s virtually no appetite for BCH volume on exchanges like Gdax or Binance which do huge amounts of BTC volume, but little BCH volume.

Everyone is Watching Your Wallets

Third, every active BCH trader basically has an alert on the 4 major BCH wallets for when those coins eventually start to move. Once these coins move, if these coins make their way to an exchange, any trader speculating on BCH is going to rush to the exits and there won’t be an artificial price floor to keep BCH from plummeting (most likely, these entities will have to create price floors over and over as they scale out, but there will almost certainly be so much sell pressure that they will have to wait out the initial waves of selling).

The Ripples in the Altcoin Pond

My belief is that the BCH supporters will do everything they can to protect the value of their BCH liabilities and they will throw liquidity pools at an asset that, currently, needs some inorganic assistance in maintaining its price levels.

However, with decreased revenue from fees, greater Segwit adoption, more economic nodes batching txs, Bitmain taking USD now instead of just BCH and a depressed BTC price preventing much of the cryptocurrency space from being bullish, I expect that “something has to give” and its probably other altcoin projects supported by these same individuals feeling the brunt of these cutbacks due to BCH’s current price situation. You can make the argument you’re already starting to see those effects.

Let’s take a daily DASH chart as an example since we know that DASH was a prominently Roger Ver backed coin.

Where has the volume gone to roammmm?

Not only has the DASHBTC pair underperformed from a high of .092 to a current level of .055 since 12/20/2017, more importantly, the daily volume is just dead. This is a good example of a market where the liquidity to get in and out of positions with is shrinking and only a return to a very bullish cryptocurrency ecosystem may be able to save some of these altcoin projects from a liquidity standpoint.

There’s only so much liquidity to spread around and if BCH is going to demand additional attention because you need something has to suffer — there’s a finite amount of resources these entities have to invest in these lesser liability projects.

Help Us Crypto Herpes Cat, You’re Our Only Hope

Ok, so if I was a BCH supporter what would I do to try and really limit the potential downfalls of all of the above —

  1. Hope that the cryptocurrency ecosystem gets mega bullish again and BTC’s price rise drags you along for the ride. A much higher price solves almost all of the BCH woes in an instant.
  2. Start moving / splitting these huge wallets up and keep them moving around so that traders can’t sit and watch 4 wallets to know your entire gameplan you dopes.
  3. Get that loser Calvin Ayre to get gambling operations to sign on to start using BCH because BTC fees are too wildly unpredictable. Do something to increase the buy demand for BCH. Offer better BCH bonuses on gambling deposits. But, more generally, get adoption increased so that there’s more organic buy pressure.
  4. Building on points #1 and #3, many people would say “they could raise fees again by ‘spamming’ the mempool” (spamming in quotes), but BCH supporters should probably want BTC to stay as attractive as possible until BTC price fully recovers and hopefully a bullish BTC price run drags BCH up with it. Once BTC is at a price level that won’t be too drastically effected by rising fees, turn on the “transaction generator”.
  5. Call up Barry “Shillbert “ and get a Grayscale Bitcoin Cash Investment Trust created.

Conclusion and Predictions

BCH isn’t going to die overnight — that’s not what this analysis is saying. In fact, I’d wager that there’s going to be a pretty nice BCH pump heading into and during the upcoming Satoshi Vision conference.

However, it’s important for traders to understand the entire ecosystem and how money is flowing from certain BCH entities to both the BCH coin itself as well as other altcoin markets.

Bullish to mega bullish cryptocurrency price action will cure many of the woes we are seeing develop for main BCH supporters, but a continued sideways move (or worse, downwards continuation) by BTC could increase the pressure on certain entities so much that we may start to see these BCH liabilities cause ripples throughout parts of the ecosystem.

I suspect we’ll continue to see much of the same — “elevators up, staircases down” for BCH as we see inorganic price support, but we should continue to monitor major BCH wallet holdings that haven’t spent any coins to see if those coins start making their way to exchanges to have profits realized.