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The bitcoin rally may be caused by a supply crisis in China



The increase in bitcoin prices may be due to both a drying up of supply and an increase in demand.

This is because Chinese miners are struggling to sell their cryptocurrency in ways that would quickly bring them much-needed money in the face of government repression on local stock exchanges.

“The lack of supply has contributed extremely well to the trend of this rally, without any of the big sales typical of mining in the past,” said Singapore-based trading company QCP Capital in its Telegram channel.

The QCP̵

7;s interpretation of the rally is simpler and less exciting than some of the other popular explanations, which cite macro factors such as the search for a hedge against monetary and fiscal indiscipline, the impending rise in inflation in the developed world, and the search for profitability price jump.

Miners work mostly with cash and land their bitcoin holdings on the market almost daily to finance their costs, mainly electricity costs, which have to be paid in local currency (yuan, in the case of those operating in China). This makes miners constant sellers and their actions affect the market price.

However, Chinese miners, who control more than 70% of the hashrate or bitcoin’s mining power, face challenges in liquidating their cryptocurrencies, as many find their bank accounts and cards frozen as part of a national crackdown on telecommunications. Chinese government fraud and money laundering through cryptocurrency transactions.

Currently, 74% of miners face difficulties in liquidating their farms to cover electricity costs, a Chinese crypto observer named Wu Blockchain mentioned in his blog Weixin, according to QCP Capital Thomas Heller, former global business director at the digging pool F2Pool , and now chief operating officer of mining media company HASHR8, confirmed the difficulty of Chinese miners earlier this week, saying it was currently a “challenge” for Chinese miners to convert bitcoin and tether cash.

Read more: Chinese diggers struggle to pay electricity bills, while regulators restrict OTC offices

The industry has been suffering since Chinese authorities began freezing bank accounts in June, and the situation has worsened in recent months.

“Mining pools sold large chunks of bitcoin in early September through stock exchanges, but this was stopped quickly as their last remaining Fiat suburban roads were affected by the arrest of large stock market leaders such as Star Xu and others. [over-the-counter] brokers, ”said QCP Capital.

qcp-bitcoin

QCP Capital Notes on Bitcoin Prices, April 18 to November 18, 2020
Source: QCP Capital

Mining sales pushed bitcoins down from approximately $ 12,000 to $ 10,000, according to QCP Capital. However, delivery dried up after OKEx’s cryptocurrency accounts were frozen in October.

This, together with increased institutional participation or large spot market purchases, created a supply crisis that allowed for an exaggerated bullish move.

Bitcoin is currently trading at $ 17,700, which is over 140% profit for the year so far. Prices are as low as $ 2,500 from the record high of nearly $ 20,000 reached in December 2017.

Rally crucified?

The sharp rise in prices is often accompanied by a large jump in the percentage of funding, the mechanism used by exchanges offering perpetual (futures without expiration) to balance the market and direct the perpetual price to the spot price.

The financing rate is positive, or longs for short-term payments when the perpetuals are traded at a premium to the spot price, indicating stronger pressure on the purchase. Alternatively, when perpetual traders trade at a discount on the spot market, the funding rate is negative and the shorts pay debt financing.

eternal-btc

Bitcoin perpetual futures financing rate (all exchanges)
Source: Glassnode

A very high funding rate is considered a sign of an overstretched bull and often paves the way for price declines. For example, the funding rate jumped from 0.008% to 0.078% in the first half of August as bitcoin rose to multi-month highs above $ 12,450. The cryptocurrency fell to $ 9,800 by the second week of September.

This time, the funding rate remains stable below 0.010%, which means that the cost of holding long positions is still significantly lower than in mid-August. Therefore, a significant correction may remain elusive, allowing for further increases in the near future, possibly above record highs.

According to QCP Capital, the imbalance in the spot market, driving the price, allowed the lever financing market to remain stable during the last bullish move.




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