Why bitcoin is really plunging

Bitcoin has lost $1,000 dollars over two trading sessions of double-digit losses in a sharp reversal of the push to as high as $7,450.

Reports that US investment bank Goldman Sachs was putting on hold plans to set up a crypto desk hit the market hard just as people thought the bottom was in. 

There was no hard evidence in the original Business Insider report on the supposedly mixed trading desk that has been blamed for sparking the sell-off.  

Yesterday Goldman chief financial officer Martin Chavez rebuffed the report: "I never thought I would hear myself use this term but I really have to describe that news as fake news," he said in remarks he made at the TechCrunch Disrupt Conference in San Francisco.

In fact, far from not opening a trading desk, Goldman is in fact creating its own tradeable instrument for bitcoin. It sounds like the venerable investment bank is going all in. 

Chavez explained that the bank was in the throes of constructing a bitcoin derivatives product – of a type known as a "non-deliverable forward". 

"The next stage of the exploration is what we call non-deliverable forwards [NDFs], these are over the counter derivatives, they're settled in US dollars and the reference price is the bitcoin-US dollar price established by a set of exchanges," Chavez continued.

NDFs are used in foreign exchange trading, especially in less liquid markets, because the physical product never changes hands (hence non-deliverable). Instead, the two parties to a trade settle on the basis of currency movements, by one of the parties making a netted cash settlement. Unlike with normal futures, the settlement takes place before the expiry date of the contract.

The bitcoin futures traded on the Chicago Board of Exchange, and its much larger competitor, the CME, are cash-settled at the expiry date.

The Goldman chief said it was planning a crypto offering because "clients want it", but that the bank's work "would be evolving over time" to no set timeline. 

Chavez added:

"Maybe someone who was thinking about our activities here got very excited that we would be making markets as principal and physical bitcoin, and as they got into it they realised part of the evolution but it’s not here yet."

He described it as a "long road" to a physical bitcoin product because of the custody issues yet to be resolved.

To be clear, then, if an institution is developing a tradeable instrument it is likely to be setting up a trading desk. 

As it happens, Goldman has previously said in a boilerplate statement that they haven't reached a conclusion about their "digital asset offering", which is not quite the same thing as not setting up a desk. 

Crypto watchers would be well advised to stay alert for more crypto news from Goldman Sachs. 

Recovery from here?

This pullback confirms strong support at $6,000 and, following the Goldman off-on story, an expectation that the price will recover from here. 

If the market does drop to $6,000, it would take us back to levels last seen in October and an indicator that more of the hot speculative money that entered then is nearing the end of the process. 

Bitcoin is currently trading at $6,498, 1% higher in the past 24 hours.

If the meltdown was at least partly down to Goldman, the market should presumably steady from here and resume the assault on $7,000, a battle which market participants hoped had already been won.

Market manipulation – mystery "whale" wallet to blame?

However, Goldman Sachs does not entirely explain the gyrations of recent days.

As already seen in recent weeks, short positions – where traders borrow an asset with a view to selling it and buying it back later at a lower price – may have played a part in the speed of the movements, as those with long positions were forced to close their orders.

The simple truth, however, is that the crypto markets are hugely volatile because, on the one hand, it is a new and immature market dominated by retail investors, and on the other it is a new technology the worth of which is hard to assess – that historically has always been a recipe for speculation.

It is thought that a mere 1,000 individuals or entities own about 40% of all bitcoin and, in a market that is a rounding error compared to the size of equity and bond markets, it doesn’t take much to move the price on the low trading volumes in crypto at the moment.

A wallet with $800 billion worth of bitcoin has been the subject of sleuth-like investigations by crypto enthusiasts over the past few days.  

The wallet is thought to be associated with either the Silk Road darkweb marketplace, taken offline by the FBI in 2013, or the bankruptcy trustee appointed by the Japanese court as the custodian of client funds in the Mt.Gox exchange bankruptcy of 2014. Bitcoin from the wallet has been moved to exchanges over the past few days. It could be one of the whales that has triggered the sell-off.

The address (1933phfhK3ZgFQNLGSDXvqCn32k2buXY8a) the funds were moved from may be related to the Silk Road – the dark web marketplace that was taken down by the FBI in October 2013. The last time there was a transaction associated with the wallet was four years ago.

However, sick_silk, the username of a person on discussion forum website Reddit who has been investigating the movements, says it doesn't explain why the transactions are being disguised. 

According to sick_silk:

"The methodology of transfer does not match in my opinion, it looks that the owner tries to hide the movements by mixing the coins".

The other possibility is that the wallet address may be from the failed Mt.Gox exchange. 

The Japan-based exchange was hacked in 2014, with a loss 850,000 bitcoins (200,000 were later "found" by exchange boss Mark Karpelès).

A Tokyo district court ruled in June that the funds must be returned to creditors. The sum concerned was valued at $1 billion at the time – a similar amount to the mystery wallet (given shifting exchange rates). However, the wallets held by the trustee were thought to be all known, with websites monitoring their transactions.

Dividing the bitcoins into parcels of 100, the wallet containing 111,114.62 BTC was drained in a period of three days. 

Further investigation by the sleuth has found that coins are being moved onto to the Binance and Bitfinex exchanges, neither of which provide a fiat exit route. The owner seeking to convert crypto into cash would have to sell and eventually transfer to exchanges with fiat trading pairs.

Altcoins bleeding, especially ETH

Altcoin are being hammered in the current climate with bitcoin's dominance of the space now rising to 54.5% of total cryptocurrencies market capitalisation.

Most top altcoins are down around 20% on the week. Ethereum is off 19.5% as it struggles with software upgrades and doubts surface about the future of the network because of issues around scaling and governance. 

There are growing worries about the downward pressure on ETH because of Gas. Smart contract developers have to pay Gas transaction fees in ETH to run apps.

An argument has broken out between Jeremy Rubin (a bitcoin core developer), who sees problems ahead for ETH, and Ethereum inventor Vitalik Buterin.

In an article on TechCrunch Rubin has some radical ideas.

Instead of paying for Gas in ETH, developers could make every BuzzwordCoin [his example coin] transaction deposit a small amount of BuzzwordCoin directly to the block miner’s address to pay for the contract’s execution. Paying for Gas in a non-ETH asset is sometimes referred to as "economic abstraction”" in the Ethereum community.

There is no a priori reason why a contract has to pay ETH for Gas fees. Rubin says why not pay with a token chosen by a "rational" actor and in doing so avoid “substantial risk, third-party dependency, and artificial downwards pressure on the price of the underlying token”.

Rubin concludes the price of ETH will continue to fall because of the economics of the network.

Buterin, agrees, sort of, and sees changes coming that will safeguard the platform's future.

“In Ethereum as it presently exists, this is absolutely true [downward pressure on ETH price. And infact if Ethereum were not to change, all parts of the author’s argument… would be correct,” he replied on Reddit.

Other news…

China's supreme court has ruled that blockchain data can be used to verify evidence as authenticate, in a further sign of the authorities split view of the industry, in which crypto generally is bad but blockhain, in particular, is good. 

Other crypto news saw the Iranian government throw its weight behind crypto mining as a legitimate activity, which led to a spike in the price of bitcoin in the country briefly touched $25,000 on over-the-counter exchange Local Bitcoin.

Stellar has reached the significant milestone of hitting 1 million accounts on its network. Stellar has a number of projects ongoing with IBM, including developing a health data app, as reported by CoinDesk this week. Stellar is a fork from Ripple and matches its transaction speeds but at much lower cost. Its technology is being developed for use with Tempo Money in Europe for cross-border remittance payments.

In South Korea 2,600 investors lost a total of $8 million after handing over their money to an initial coin offering project that claimed it was going to raise a "Russian treasure ship". The Ship was a phantom and investors' money has gone with the wind.