Notes 2/8: Bitcoin Price, Binance Audit

Bitcoin price mirrored equity markets and jumped ever so slightly before falling in response to Fed Chairman Jerome Powell’s comments about inflation easing at the Economic Club of Washington, D.C. “The disinflationary process, the process of getting inflation down, has begun and it’s begun in the goods sector, which is about a quarter of our economy,” he said, before adding that it has a “long way to go”.

CoinDesk data shows that Bitcoin price reached a peak of $23,396.96, up 0.03% from its price earlier in the day, before commencing a downward movement. As of this writing, the cryptocurrency is changing hands for $22,833.20, down roughly 1% from its price a day earlier.

The macro explanation for the cryptocurrency’s price movement is the follow up commentary about the economy made by Chair Powell. He pointed to statistics about the labor market, which showed an uptick in hiring, as proof that the inflation story was not done yet. A strong labor market can spur further inflation because it means consumers have more income at their disposal.

A Speculator Driven Rally

Bitcoin price has moved in tandem with Fed speak and broader equity markets since January. The cryptocurrency registered one of its best monthly gains last month, leading observers to believe that the latest crypto winter’s worst is behind them.

But those gains were largely a result of speculative activity. According to data from CryptoCompare, derivatives volumes grew faster than spot trading volumes last month. Derivatives trading rose by 76% to $2.4 trillion. It now accounts for 70.3% of the overall volume in crypto trading markets.

Speculators pile into derivatives trading because it enables use of leverage for outsized gains in a short timeframe. Spot trading, especially for cryptocurrencies, can be a difficult and risky exercise, especially with challenges relating to custody and volatility due to rapid price changes. Previous research has shown that bitcoin price is mainly driven by price action at derivatives markets in Asia, and specifically at Binance.

A Tether Connection…Again

Binance is the world’s biggest exchange for trading cryptocurrencies. But it does not offer cash-settled derivatives. Instead, derivative trades at the exchange are settled using Tether – a controversial stablecoin. No wonder then, Tether beat Bitcoin to become the most-traded cryptocurrency last month.

Conducting a derivative trade settled in Tether leaves one holding a bag of a stablecoin that is worthless unless it is exchanged for a dollar. But it is difficult to redeem Tether.

When Audit?

We might have to endure more Proof of Reserves reports from Binance for the foreseeable future. The Asia-Pacific head of the world’s biggest cryptocurrency exchange by trading volume told Bloomberg that an audit of its balance sheet will take a “longer time” because there is a “learning curve” involved in analyzing cryptocurrencies.

Binance released a Proof of Reserves report last year but the firm that produced the report washed its hands off the final artifact and future work for the company. Part of the reason for this may have been the blowback it received after the report was released.

Another reason may be the difficulty in valuing worthless tokens like BNB and BUSD on the exchange’s books. The tokens have no practical utility outside Binance’s closed ecosystem. Their value and mechanics are controlled by the exchange itself.

In the case of the former, inflated prices are a source of profit to investors while the latter’s reserves – funds used to back up its tokens – are commingled. BUSD also circulates freely as a derivative on other chains, making its supposed peg to the US dollar even more suspect.

Making sense of this mess might be the “learning curve” involved in auditing Binance.

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