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The rise in Bitcoin prices can be driven as much by a drying up of supply as by an increase in demand.
This is because Chinese miners are struggling to sell their cryptocurrencies in ways that would quickly get them much-needed cash in the face of a government crackdown on local exchanges.
“The lack of supply has fueled the trend of this rally very well, without any of the big sell-downs typical of mining in the past,” Singapore-based trading firm QCP Capital noted in its Telegram channel.
QCP’s interpretation of the rally is simpler and less exciting than some other popular explanations, which cite macro factors such as the demand for hedging against monetary and fiscal indiscipline, an imminent rise in inflation in the developed world, and the search for yield as the primary reasons for the rise in prices.
Miners operate primarily using cash and dump their bitcoin holdings on the market almost daily to finance their expenses, mainly electricity costs, which must be paid in the local currency (yuan, in the case of those operating in China). This makes the selling miners constant and their actions influence the market price.
However, Chinese miners, who control over 70% of bitcoin’s hashrate or mining power, have faced challenges in liquidating their cryptocurrencies for cash as many are finding that their bank accounts and cards are frozen like part of the Chinese government’s national crackdown on telecom fraud and money laundering through cryptocurrency deals.
Currently, 74% of miners find it difficult to liquidate their holdings to meet electricity bills, a Chinese crypto observer who goes by the name Wu blockchain mentioned in his Weixin blog, according to QCP Capital. Thomas Heller, former global business manager at the F2Pool mining pool and now chief operating officer of the mining and media company HASHR8, confirmed the plight of Chinese miners earlier this week, saying it is currently a “challenge” for Chinese miners. convert bitcoin and tether into cash.
Read more: Chinese crypto miners struggle to pay electricity bills as regulators huddle over OTC banks
The industry has suffered since the Chinese authorities started freezing bank accounts in June, and the situation has worsened over the past two months.
“Mining pools were selling large chunks of bitcoin in early September through exchanges, but this was hastily halted as their last remaining off-ramp fiat roads were impacted by the shutdown of big change heads like Star Xu and others. [over-the-counter] broker, “QCP Capital said.
The sale of miners pushed bitcoin lower, roughly from $ 12,000 to $ 10,000, according to QCP Capital. The supply, however, dried up after cryptocurrency exchange OKEx’s accounts were frozen in October.
This, coupled with higher institutional holding or large buy in the spot market, created a tight supply, allowing for an exaggerated bullish move.
Bitcoin is currently trading at $ 17,700, which represents a gain of over 140% year to date. Prices are under $ 2,500 compared to the record high of nearly $ 20,000 achieved in December 2017.
Overloaded rally?
Strong price gains are often accompanied by a large jump in the funding rate, the mechanism used by exchanges offering perpetual securities (futures with no maturity) to balance the market and steer the price of perpetuals towards the spot price.
The funding rate is positive, or long pay short, when perpetuals trade at a premium over the spot price, indicating greater buying pressure. Alternatively, when perpetuals are traded at a discount on the spot market, the funding rate is negative and the shorts pay the loan to the longs.
A very high funding rate is widely considered a sign of an excessive bull run and often paves the way for a price pullback. For example, the funding rate rose from 0.008% to 0.078% in the first half of August, when bitcoin rose to multi-year highs above $ 12,450. The cryptocurrency dropped to $ 9,800 by the second week of September.
This time around, the funding rate remained stable below 0.010%, which means the cost of holding long positions is still significantly lower than in mid-August. Therefore, a significant correction may continue to remain elusive, allowing for further upside in the near term, possibly above all-time highs.
As with QCP Capital, the spot market imbalance driving the price has allowed the leveraged financing market to remain stable during the recent bullish move.
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