The big three Chinese exchanges (OKCoin, Huobi, and BTCC) have all disabled margin trading for all clients onshore in China. This is in response to the recent on-site “inspections” (aka Ride The Red Dildo) by the PBOC.
With margin trading eliminated, the question remains what happens with existing leveraged positions. If the PBOC forces the exchanges to unwind all positions, that will negatively impact the price. The CNY spot book of each exchange is a combination of leveraged and unleveraged traders. The ratio of leveraged longs to shorts is of interest. If the net leveraged positioning is long, that means a combination of leveraged shorts and long sells were matched against them. Given that we just witnessed a new all time high in the CNY price of Bitcoin, I estimate leveraged longs outnumber leveraged shorts. In the event of a margin call, as the exchange unwinds both sides, the net effect will be a drop in price. The magnitude of the drop depends on the size of the imbalance.
30% initial margin (3.33x leverage) was the normal amount of margin offered. The collateral will be exhausted if the price moves 30% below or above the entry price of longs and shorts respectively. Given that the exchanges themselves lent funds to speculators, should the price move further than 30% they would suffer a principal loss. For illustration purposes, assume that the long / short ratio is 100 XBT / 50 XBT. The 50 XBT shortfall was provided by long sellers of Bitcoin. If the book was unwound, 50 XBT would need to be sold into the order-book. Hopefully, the order-book liquidity is sufficient such that the average execution price is no lower than 30% (the initial margin) below the average entry price of all long positions.
However, now that margin is removed, the actual liquidity will be substantially lower. If the margin positions were to be unwound, it would happen at the worst possible time. Some white knight whale would need to fully fund purchases of Bitcoin as it was dumped onto the market. Last week the BitMEX Bitcoin / USD 100x leveraged swap, XBTUSD, traded a record of nearly 100,000 XBT over a 24-hour period. The actual open interest fluctuated between 10-20x lower than the recorded trading volume. Given that trading fees are 0 in China, I estimate open interest is 100x lower than recorded trading volumes.
The big three exchanges routinely traded around 5 million Bitcoin per day during the recent pump. Using a 100x divisor, assume that each exchange’s actual open interest of loans is 50,000 XBT. Also assume that longs represent 60% of that total, and shorts 40%. That leaves a net 10,000 Bitcoin of required selling on each exchange. 30,000 Bitcoin in total must be sold across all the exchanges. The differentiations between the exchanges is quite small, which means that they all have the same customers. It is also the same handful of market makers responsible for all the liquidity in China. As trades happen on OKCoin, liquidity will be removed from Huobi and BTCC simultaneously. Therefore, we cannot sum all the liquidity offered by each exchange.
30,000 Bitcoin is worth 268 million CNY. That is not chump change when you consider all purchases must be fully funded. If we take the most liquid order-book (OKCoin), how low would the price go if 30,000 Bitcoin were dumped?
Each day brings new developments on how the PBOC is constricting business operations of Chinese Bitcoin exchanges. The Fear, Uncertainty and Doubt (FUD) will depress buyer appetite further decreasing on-exchange liquidity. The pace of the forced margin call dictated by the PBOC will determine how far the price dips. I haven’t performed any extensive analysis on the order-book depth but my finger in the air estimation is a 10% to 15% drawdown from current levels. Hence my short term price target for Bitcoin is $650.
If and when the PBOC forces a China Bitcoin margin call, it will be an amazing buying opportunity. Without leverage, the only marginal sellers are Chinese miners. After the plunge, the marginal demand for Bitcoin will be higher than the supply offered by miners. The demand for a store of wealth not controlled by a government or central bank remains strong in China. I reiterate my call for USDCNY of 9.00 by the end of 2017. That would take Bitcoin substantially over its recent all time high of 8,895.98 CNY. It is still too early to tell whether the unwinding of margin positions will be orderly or chaotic. Much depends on exchange CEO’s fluffing skills. Get on your knees, boys: for the sake of Bitcoin.
reprinted from
Bitmex Crypto Tradernice analysis
i think its doubtful PBOC will order all positions to be closed within a 24 hour period... from what i hear they want to bring an element of stability and health to the bitcoin market, they want things to be done right... not be the source of investors losing there shirt...
and you have to understand that the reason why price has dropped recently is because of this FUD... market is saying " if shit hits the fan what should price be " and then moves close to that price before the shit actually hits the fan.
I suspect the PBOC will allow margins, but not naked shorts... I think they are more concerned with AML, capital flight, and that exchanges aren't about to go GOX.
at this point, price has priced in a negative outcome to all this PBOC regulation, i believe we might see more downward pressure if some shit comes out, but i dont see more then -15% and very temporary, after all once its all said and done what are we left with? PBOC approved bitcoin exchanges
, there also a not half bad chance that not much shit comes out of this at all, exchange have been doing the proper KYC, maybe they'll get more guidance on how to prevent capital flight, a few rules to fallow, some reports to file, and a slap on the wrist for running bots.