2017 November 13 - Volume.1 Issue.3

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2017 November 13 - Volume.1 Issue.3

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Bitcoin Selling at Premium as Turkish Lira Continues Decline

The Turkish Lira continues its decent against the greenback and Euro. As a possible support for its embattled currency, the Central Bank of Turkey (CBRT) has added a near $5Bn worth of gold to its stash. Meanwhile, Bitcoin is trading at a premium on Turkish Exchanges.

The Turkish Lira continued into free-fall against major currencies the week of November 6, reaching an all-time low against the Euro, and a near record-low against the US Dollar (See Graph 2 & 3). The downward pressure the Lira is facing against the Euro and US Dollar can be attributed to multiple possibilities; the US Federal Reserve’s interest rates hikes, the increasing yields on two-year US treasuries, and continued political controversies from Washington and Berlin.

Bitcoin Premium

Bitcoin is trading at a whopping 6.0-8.0% premium versus Bitfinex rates based on the three main Turkish Exchanges BTCTurk, Koinim and Paribu (See Graph 1). The Brazilian Real has the most expensive Bitcoin premium at a massive 11% (See Graph 1). Localbitcoins average at time of writing was also around 6%. Total trade volume from these three exchanges currently amount for less than 1%, however Diar has been informed by sources that there has been an increased interest in new accounts.

Central Bank Positive On Bitcoin…or Not?

In a bit of a bipolar statement to local news Vatan, CBRT President Murat Cetinkaya stated, that the Central Bank has established a group to further research Bitcoin and cryptocurrencies as they “may contribute to financial stability.” He also said however, that while there are no current laws in place against Bitcoin, that citizens should refrain from using them.


A driving factor for increased demand, and the premium price on Bitcoin, could possibly be the rising inflation that Turkey is facing. Standard & Poor’s (S&P) analysts estimate that inflation could be as high as 10.8% through to year-end, while dropping slightly to 7.9% in 2018. While the CBRT estimates it at a whole percentage point lower, official statistics place inflation at an eyeballing 11.2% in September 2017. CBRT Governor Murat Cetinkaya said "the rise in oil prices and the depreciation of the Turkish lira elevated the cost pressures in the third quarter.”

Gold Reserves Grow

In a speech last December Mr Erdogan said “those who keep US Dollar or e=Euro currency under their mattress should come and turn them into Liras or gold.” In 2012, the CBRT allowed commercial banks to store their required deposits in the form of metals. And while this has swelled gold reserves, its evident that the CBRT is hoarding gold at an increasing rate (See Graph 4). Consumer demand for gold in Turkey is up 73%; gold imports are close to 7 times as much as last quarter.

Deteriorating Economically…and Politically

In early October, the US suspended its travel visa program in Turkey and only in early November did a partial return of the service begin. The White House greeted Turkish Prime Minister Binali Yildirim in a meeting last week with US Vice President Mike Pence. While the two countries expressed their hope for the strengthening of bilateral relationships and constructive dialogue, Mr Pence also expressed concern for a spate of arrests that lack transparency (including Americans) in Turkey, which remains under a state-of-emergency following a failed attempted coup last year.

The relationship with Germany, who is by and far the largest economic partner driving $36Bn in bilateral trade, is also witnessing strain. While Berlin hasn’t formally announced restrictions, they have used their influence to cut off private funding to Turkey. Germany alone accounts for about 11% of total foreign loans sent to Ankara, following the U.K. Much like the US, Germany is also concerned about Turkeys treatment of its journalists, and German citizens following the contentious Turkish Referendum in April that gave President Recep Tayyip Erdogan broad powers.

1: Bitcoin Trading At 6-11% Premium Against Weaking Currencies*

Notes: *12:30PM EST 10 November 2017 - Source: CoinMarketCap

2: EUR/TRY Exchange Rate

3: USD/TRY Exchange Rate

4: Central Bank of Turkey Gold Reserves (Mn USD)

Source: World Gold Council

Cash-Settled Bitcoin Futures Ushers in Institutional Tools

Following lasts weeks announcement that it will start Bitcoin Futures Contracts by year-end (Diar, 6 November), the Chicago Mercantile Exchange (CME) followed-up this week with the release of their contract specifications that have the earmarks of other CME cash-settled products, including circuit-breaker rules in order to rein in any major day-to-day swings.

On 31 October, CME Terry Duffy caved into what he called pent-up investor demand and officially announced that the derivatives exchange behemoth will be offering Bitcoin Futures Contracts by year-end. This week CME released their contract specifications for the cryptocurrency (See Table).

You Scratch My Back, I Scratch Yours

CME is awaiting approval from the US Commodity Futures Trading Commission (CFTC), which is most likely to be go ahead as the CFTC recently approved LedgerX to begin trading Bitcoin options. The CFTC, which views Bitcoin as a commodity, believes it is under its purview to regulate the trading of the cryptocurrency.

Last week, speaking to Reuters, Leo Melamed, Chairman Emeritus of CME said “We will regulate, make bitcoin not wild, nor wilder. We’ll tame it into a regular type instrument of trade with rules.” Melamed’s statement backs what Mr Duffy said in the past that CME will bring institutional tools to bring down the volatility.

And this view was also echoed by former CFTC Chief Bart Chilton who in an interview with Fox said that flash crashes will not “happen to that extent on the futures, because they will have…circuit breakers” – which effectively put temporary trading limits should the price of Bitcoin move either up or down beyond the established tiers.

The soft limits, which would trigger a two minute pause in trading would occur should the price of Bitcoin swing either way, first at 7%, and then at 13%. A hard limit at 20% would stop trading. The CME S&P500 Futures share the same characteristics.

Different Views

Many Bitcoin enthusiasts and advocates heralded with joy on the news out of Chicago, and sent the price of the cryptocurrency to an all-time high. With such an institutional endorsement, Bitcoin has achieved the status of a legitimized asset. And while this may be true, some however, have a different perspective on the effects this will have on Bitcoin.

Speaking to Diar, Wahid Chammas, Chief Investment Officer of TyreGate Capital, a sceptic of cryptocurrency valuations says so far “Bitcoin’s most bullish attributes resides with it being a scarce asset to peak at 21Mn coins, but when you start doing cash-settled futures, you’ve now introduced the concept of unlimited Bitcoin, similar to what happened with the financialisation of other commodity markets”

"Bitcoin’s most bullish attributes resides with it being a scarce asset to peak at 21Mn coins, but when you start doing cash-settled futures, you’ve now introduced the concept of unlimited Bitcoin, similar to what happened with the financialisation of other commodity markets"

Wahid Chammas, TyreGate Capital

Paper Gold 233x More Than Physical Gold Investments (Bn USD)

Source: Thomson Reuters, GFMS, SRSRocco Report

Mr Chammas who spent 19 years between Goldman Sachs and Janus Capital compares the upcoming Bitcoin futures market to other futures such as gold which in 2016 traded at 233x more than there is in actual physical investments (See Graph). Another example is a recent trend in China at times when more volume of copper or iron ore is traded every 24-48 hours than the volume of the physical commodity consumed by China annually.

“With no legal obligation of physical delivery, the cash-settled futures will bring in liquidity, and along with it, unlimited speculators with no resistance or need to ever assume delivery of an underlying asset.”

CME Selling Points

CME CEO Terry Duffy was hesitant to comment whether or not the Bitcoin Futures Contract will be a success, but was confident in expressing the institutional tools, limits, experience and technology that the exchange giant brings to the table in order to assist investors minimize risk - be it hedging or speculation. Most importantly, it will be the first major regulated institution to offer Bitcoin, without actually owning Bitcoin further reducing any fear investors may have on issues of liability and money laundering.

CME Bitcoin Futures Contracts Specifications

Specification Description
Contract Unit 5 bitcoin, as defined by the CME CF Bitcoin Reference Rate (BRR)
Minimum Price Fluctuation Outright: $5.00 per bitcoin = $25.00 per contract. Calendar Spread and Basis Trade at Index Close (BTIC): $1.00 per bitcoin = $5.00 per contract
Trading Hours CME Globex and CME ClearPort: 5:00 p.m. – 4:00 p.m. CT Sunday – Friday. BTIC: 5:00 p.m. - 10:00 a.m. or 11:00 a.m. CT (4:00 p.m. London Time) Sunday - Friday
Product Code Outright: BTC. BTIC: BTB.
Listing Cycle Nearest 2 months in the March Quarterly cycle (Mar, Jun, Sep, Dec) plus the nearest 2 "serial" months not in the March Quarterly cycle. Contract months for initial listing: Dec 2017, Jan 2018, Feb 2018, Mar 2018.
Termination of Trading Last Day of Trading is the last Friday of contract month. Trading in expiring futures terminates at 4:00 p.m. London time on Last Day of Trading.
Position Limits Spot Position Limits are set at 1,000 contracts. A position accountability level of 5,000 contracts will be applied to positions in single months outside the spot month and in all months combined.  The reportable level will be 25 contracts.
Block Minimum 5 contracts
Price Limits Price limits for a given Business Day are made by reference to the most recent Bitcoin Futures settlement price, settled at 4:00 p.m. London time each Business Day. Special price fluctuation limits equal to 7% above and below prior settlement price and 13% above and below prior settlement price and a price limit of 20% above or below the previous settlement price. Trading will not be permitted outside the 20% above and below prior settlement price.
Settlement Cash settled by reference to Final Settlement Price, equal to the CME CF Bitcoin Reference Rate (BRR) on Last Day of Trading.

Source: CME

Bankers, Regulators Continue Sounding Alarm Bells

A flurry of opinions and views on Bitcoin and Initial Coin Offerings (ICOs) from big money and regulators from various government bodies have been circulating in the past several months (See Table Below). While most comments are bearish, with the advent of Bitcoin Futures, institutions, while hesitant, might find opportunity in the new asset class.  

Bitcoin and cryptocurrencies continue to garner the attention of big institutions and government, but little decisive action has been taken in terms of mass investment, or regulation and law except for China and South Korea who have banned ICOs.

Views and opinions on the matter continue to change, sometimes quite rapidly. In late September, speaking to Bloomberg, Chicago Mercantile Exchange (CME) President Bryan Durkin said the derivatives exchange giant would not be introducing Bitcoin Futures in the near future. A month later, CME announced that indeed they will be starting Bitcoin Futures Contracts by year-end on the back of  heavy investor demand (Diar, 6 November).

Goldman Sachs CEO Llyod Blankfein has been diplomatic in his statements. Even though the Blue-Chip Wall Street giant executive isn’t “comfortable with” Bitcoin, he wouldn’t preclude opening a trading desk for the cryptocurrency.

It does seem that the main concern that is troubling bankers and regulatory bodies is Bitcoins anonymity and how it may be used for illicit activities and money-laundering. This is a valid concern for banks; since 2009, banks have paid in excess of $321Bn in Anti-Money Laundering (AML) fines (See Chart).

Global Lenders Payout $321Bn In AML Penalties Since 2009 (Bn USD)

Source: Bloomberg, BCG

However, with Bitcoin Futures coming of age, were the underlying asset isn’t going to be required to trade as it will be cash-settled (See Story Above), this may open the doors for bigger investment by Wall Street.

What is clearly evident, is that all organisations, private and government, have taken the rise of Bitcoin, and ICOs very seriously.

Diar collected some of the various comments that have been said by executives and heads from regulatory bodies, banks and investment houses in the table below.

Who Is Saying What About Bitcoin & Cryptocurrencies

Organization Name Position Comment / Statement Date
Securities & Exchange Commission (SEC) Jay Clayton Chairman I have yet to see an ICO that doesn’t have a sufficient number of hallmarks of a security. 8-Nov
U.S. Treasury Department Steve Mnuchin Secretary So, if you’re a bitcoin dealer in the United States, you have […] customer requirements and BSA requirements. And those are issues I’m discussing with all my international counterparts. So, our number one issue is, we wanna make sure that this is not used for illicit transfers of funds. 9-Nov
BaFin (Federal Financial Supervisory Authority) Germany - - Due to the lack of legal requirements and transparency rules, the consumer is left on their own when it comes to verifying the identity, reputability and credit standing of the token provider and understanding and assessing the investment on offer. It can also not be guaranteed that personal data will be protected in accordance with German standards 9-Nov
Canadian Securities Administrators (CSA) - - Every ICO/ITO is unique and must be assessed on its own characteristics. For example, if an individual purchases coins/tokens that allow him/her to play video games on a platform, it is possible that securities may not be involved. However, if an individual purchases coins/tokens whose value is tied to the future profits or success of a business, these will likely be considered securities. 24-Aug
Banque du Liban Riad Salameh Governer These [bitcoin] are not currencies but rather a commodity whose prices rise and fall without any justification. For this reason, BDL has banned the use of this currency in the Lebanese market. The digital currency will be issued by BDL and will be available in the next few years 27-Oct
European Central Bank Benoît Cœuré Ex. Board At the moment cryptocurrencies don't pose any monetary risk because the amounts involved are marginal. They are speculative financial instruments which create risks of a financial or even criminal nature. 29-Oct
Reserve Bank of Australia Tony Richards Head of Payments The use of bitcoin and other digital currencies as an actual method of payment remains relatively limited in Australia, as elsewhere. From the Bank's payments policy mandate, digital currencies do not currently appear to raise any pressing regulatory issues. 27-Oct
Monetary Authority of Singapore (MAS) Ravi Menon M.D. It is a known fact that cryptocurrencies are quite often abused for illicit financing purposes. And so we do want to have anti money laundering controls, countering the financing of terrorism controls in place. So those requirements apply to activity around cryptocurrency rather than the cryptocurrency itself. 25-Oct
UAE Central Bank Mubarak Rashed Al Mansouri Governer Some nations have announced that they are not using Bitcoin, and consequently its value sharply plummeted. In addition, it can be easily used in money laundering and in funding terror activities, 23-Oct
Banco Central do Brazil Ilan Goldfajn President Bitcoin is a financial asset with no ballast that people buy because they believe it will appreciate. That is a typical bubble or pyramid [scheme].
Bank of America Brian Moynihan CEO There ought to be a hard look at the policy of anonymous currencies, because the ability to track information of money flowing is one we use seriously against terrorism and as [a tool] against improper, illegal behavior 26-Oct
Goldman Sachs Lloyd Blankfein CEO Maybe in the new world, something gets backed by consensus ... If we went into the future and bitcoins were successful, I would be able to explain how it's a natural evolution of money. 2-Nov
Citigroup Michael Corbat CEO It's likely that we’re going to see governments introduce, not cryptocurrencies – I think cryptocurrency is a bad moniker for that – but a digital currency. 9-Nov
UBS Global Paul Donovan Chief Economist Amsterdam 1636. Cash-settled futures markets in tulip bulbs start. Prices soar. Amsterdam February 1637. Tulip bubble bursts 2-Nov
JPMorgan Chase Jamie Dimon CEO The currency isn’t going to work. You can’t have a business where people can invent a currency out of thin air and think that people who are buying it are really smart. 21-Sep
Wells Fargo Tim Sloan CEO In terms of it as a cryptocurrency, I'd probably rather own a dollar than a dollar of bitcoin 18-Oct
Credit Suisse Tidjane Thiam CEO I think most banks in the current state of regulation have little or no appetite to get involved in a currency which has such anti-money laundering challenges 2-Nov
BlackRock Larry Fink CEO Bitcoin just shows you how much demand for money laundering there is in the world. That's all it is. 13-Oct
Berkshire Hathaway Warren Buffett CEO You can’t value bitcoin because it’s not a value-producing asset. 29-Oct
Morgan Stanley James Gorman CEO The concept of anonymous currency is a very interesting concept -- interesting for the privacy protections it gives people, interesting because what it says to the central banking system about controlling that. 27-Sep

Sources: Wall Street Journal, Reuters, Bloomberg, ECB, SEC, CNBC, RBA, BaFin, BcSc, MarketWatch, CoinDesk, CoinTelegraph

Bitcoin Segwit2X Suspended Amid Weak Support

The SegWit2X hard fork which was aimed at addressing the blocksize, has been cancelled in an email written by BitGo CEO Mike Belshe. As one of the main proponents of the SegWit2x project, Belshe expressed that the project has not built sufficient consensus and if the planned hard fork were to go through, it could divide the community even further and hinder Bitcoin’s growth.

Despite the “suspension”, Belshe added that the team still believes in the need for a larger block size and as Bitcoin’s fees continue to increase, it will “eventually become obvious that on-chain capacity increases are necessary”. The email was also signed by Bloq’s Jeff Garzik, Shapeshift’s Erik Voorhees, Bitmain’s Jihan Wu, Blockchain’s Peter Smith and Xapo’s Wences Casares.

The Bitcoin upgrade was scheduled for November 16, 2017 and was designed to increase the block size to 2MB or rather the block weight to 8MB, which would consequently increase the amount of transactions that get confirmed in each block. More than 80% of miners were signaling their intention to upgrade to SegWit2X but the upgrade lacked support of majority of the Bitcoin community. 

The opponents called SegWit2x a hostile takeover resulting from the New York Agreement that was negotiated behind closed doors. The most common criticisms were the lack of replay protection, rushed development and centralization of miners resulting from a block size increase. Many of the people that are against increasing the block size believe that, as of now, Bitcoin is a store of value rather than a payment network. They argue that an off-chain solution such as Lightning Network will be implemented when the technology is ready, which will allow Bitcoin to function as a payment network.

On the other side of the spectrum, the proponents of larger blocks think that Bitcoin must scale to function as a medium of exchange even for smaller transactions so it doesn’t lose its advantage over altcoins. Because there are more transactions than the current block size can handle, the average conformation times of each transaction are increasing. Currently, it takes more than two hours on average to confirm each transaction but it has been as high as 7 hours in June. Longer confirmation times are logically driving the fees that have now hit an average all time high of $19. High fees fully eliminate people from low-income countries, for which it becomes uneconomical to make any transactions.

1. Bitcoin Average Fees Hit All Time High

2. Alternative Coins Average Fees

Businesses that rely on making a lot of smaller transactions may opt to switching to alternative cryptocurrencies such as Litecoin, DASH and Bitcoin Cash, which forked from Bitcoin before the implementation of SegWit. Roger Ver, CEO of Bitcoin.com, stated in July that “in the unlikely event that the 2MB block size increase portion of Segwit2x fails to activate, Bitcoin.com will immediately shift all company resources to supporting Bitcoin Cash exclusively.”

$150Mn Stuck In The Aether From Parity Bug

A security vulnerability, which has unofficially rendered as much as $150 million in ether inaccessible was discovered on November 6 in Ethereum’s client Parity. Parity, a multi-signature wallet, is Ethereum’s second most popular client developed by Parity Technologies, a London-based startup. 

A developer, said to be new to smart contracts claims that he accidentally deleted the code library and then reported the bug on GitHub. Parity confirms some 573 users have been affected. All multi-sig wallets use a single library which was not initialized properly, effectively allowing anyone to own it and then self-destruct it.

According to Parity, the vulnerability affects all the users that hold assets in a multi-sig wallet created in Parity Wallet that was deployed after 20th July. A mult-sig means that more than one key is required to authorize a transaction. Patrick McCorry, a research associate at University College London, found that approximately 500,000 ether are affected, which is about 0.5% of Ethereum’s market supply. Parity claims that 584 wallets and 573 of users are affected. In the meantime, Parity warned users from sending funds to already existing Parity wallets and also to avoid creating new multi-sig wallets.

Earlier in July, a different multi-sig vulnerability was found in Parity’s code that led to a $30Mn hack. The vulnerability that led to this week’s fallout was still present in the same code even though Parity asserts that they have high standards of development including peer reviews and a bug bounty program.

According to Ethereum Foundation’s security lead Holst Swende, the only option to retrieve the frozen funds would require a hard fork of Ethereum. Ethereum has undergone a very similar and quite controversial hard fork in 2016 in response to The DAO hack, which stole approximately $55Mn in ether. The hard fork in 2016 resulted in a split to two cryptocurrencies, Ethereum and Ethereum Classic. The two camps argued about the integrity of the Ethereum network when problems are rolled-back. The possibility of a hard-fork has again caused a community backlash which is against a hard fork to fix a vulnerability of a third party team. Another hard fork could set a precedent that smart contracts are reversible under certain circumstances.

Swende said that because the ethers are frozen and thus non-spendable, there is no rush in finding a solution that will have consensus amongst the Ethereum’s community. Ethereum Foundation will work on identifying any possible solutions to the problem and then work with the community to choose the best solution. Ethereum founder Vitalik said on Twitter: “I am deliberately refraining from comment on wallet issues, except to express strong support for those working hard on writing simpler, safer wallet contracts or auditing and formally verifying security of existing ones.”

If the funds are not recovered, a possibility, it is inevitable that individuals that lost a large amount of their funds will sue Parity and attempt to hold them liable for their losses. A class action lawsuit could set a precedent and hold wallet developers to the same security standards as conventional financial institutions.

Bitcoin Cash Supporters Get Vocal With Vested Interest

Shortly after the news of holding off on the planned Segwit2X hard fork, the supporters of block size increase have rallied together and voiced their support for Bitcoin Cash. The result was massive price swings with Bitcoin Cash reaching its all time high.

Bitcoin Cash supports 8MB blocks and its transaction fees are not higher than $0.35. Bitcoin, on the other hand, still only supports 1MB blocks. Bitcoin currently has more than 120,000 unconfirmed transactions and the average transaction fee is $19 (See Charts Above). There are several teams working on multiple off-chain scaling solutions such as the Lightning Network but implementation is said to be still far away. And the adoption of SegWit has declined from nearly 18% to about 12%. The Segwit2X hard fork was supposed to temporarily solve the scaling problems until the off-chain scaling solution was ready to be implemented.

Meanwhile, with a very little chance of on-chain scaling on Bitcoin, supporters have turned to Bitcoin Cash. Rick Falkvinge, a software developer and a founder of the Swedish Pirate Party, said on Twitter: “With recent developments, I'm putting all available dev resources to retool my software for Bitcoin Cash. I suspect I'm far from alone.” Gavin Andresen who was designated by Satoshi Nakamoto to lead Bitcoin’s development said: “Bitcoin Cash is what I started working on in 2010: a store of value AND means of exchange.” Ryan X. Charles, co-founder and CEO of compensated content sharing platform Yours, said: “Bought my first bitcoin for $6 in 2011. Sold my last bitcoin for $6227 in 2017. Bitcoin has been taken over by people who do not share my values. Bitcoin Cash is the vision I signed up for in 2011. The possibility of financial freedom for everyone.” Erik Voorhees, CEO of Shapeshift, said that his idea of "freedom from corrupt banks didn't include transaction fees that forced 99% of the world's population to keep using banks.” Bitcoin Cash is still heavily supported by an early Bitcoin investor Roger Ver and Jihan Wu who is a co-founder of Bitmain.

The decision to indefinitely suspend Segwit2X hard fork resulted in a lot of backlash from some in the Bitcoin community. This caused a steep increase in Bitcoin Cash’s traded volume and consequently also a sharp price appreciation. The price started to grow immediately following the Segwit2X announcement. In just three days, the price rose from $600 to $2500. For some time, it overtook Ethereum as the second most valuable cryptocurrency. Vitalik Buterin, founder of Ethereum, congratulated Roger Ver and Jihan Wu for the accomplishment. 

The price has since corrected to $1100 at pixel time. Roger Ver said that “the jump to Bitcoin Cash is an order of magnitude easier than the jump to the lightning network would have been.” During the bull run, the price of Bitcoin dropped from its all-time high of $7,800 to $5,500. It has since recovered to $6,500.


1: Bitcoin Cash Week-On-Week (USD)

Source: DiarCoinMarketCap

2: Bitcoin Cash (BCH) Has 57x Lower Fees On Average vs. Bitcoin (BTC) In November 2017. ( BTC vs. BCH Average Fees - Multiples)

Source: Diar, CoinMarketCap

For a brief time, Bitcoin Cash also surpassed Bitcoin in terms of hashrate as miners switched to the most profitable coin. After the price dropped and mining Bitcoin Cash became less profitable, miners switched to Bitcoin again. Bitcoin Cash has a planned hard fork on November 13, which should not result in a coin split. The planned upgrade is designed to stabilize the problematic difficulty adjustment algorithm. It will introduce an emergency difficulty adjustment (EDA), which will dynamically adjust the difficulty to make mining more profitable to attract miners.

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