Bitcoin rally could be caused by a supply crisis in China

Soaring Bitcoin prices may be due as much to a drying up of supply as to an increase in demand.

This is because Chinese miners find it difficult to sell their crypto in a way that they can quickly get the cash they need in the face of government crackdown on local exchanges.

“The lack of supply has fueled the trend of this rally extremely well, without any of the large drops typical of miner activity 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 of the other popular explanations, which cite macroeconomic factors such as demand for a hedge against monetary and fiscal indiscipline, an impending rise in inflation. in the developed world and the search for yield as the main one. reasons for soaring prices.

Miners operate primarily using cash and unload their bitcoin holdings in the market almost daily to fund their expenses, mainly electricity costs, which must be paid in local currency (yuan, in the case of those operating in China) . This makes miners constant sellers and their actions influence the market price.

However, Chinese miners, who control over 70% of bitcoin’s hash or mining power, have faced challenges liquidating their crypto holdings for cash, as many find their bank accounts and cards frozen in. as part of the Chinese government’s nationwide crackdown on telecommunications fraud and money laundering through cryptocurrency transactions.

Currently, 74% of miners are struggling to liquidate their holdings to meet electricity costs, a Chinese cryptocurrency observer by the name Wu blockchain mentioned on his Weixin blog, according to QCP Capital. Thomas Heller, former global commercial director of F2Pool mining pool and now COO of mining and media company HASHR8, confirmed the plight of Chinese miners earlier this week, saying it is currently a “challenge” for miners Chinese to convert Bitcoin and Tether to cash.

Read More: Chinese Crypto Miners Struggle To Pay Their Electricity Bills As Regulators Lock Down On OTC Desks

The industry has suffered since Chinese authorities began freezing bank accounts in June, and the situation has worsened in 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 fiat runway avenues were affected by the arrest of large exchange heads. like Star Xu and others. [over-the-counter] brokers ”, stated QCP Capital.

The sale of miners pushed bitcoin down from around $ 12,000 to $ 10,000, according to QCP Capital. The supply, however, dried up after the accounts at the OKEx cryptocurrency exchange were frozen in October.

This, combined with increased institutional stake or large purchases in the spot market, created a tight supply, allowing for an exaggerated bullish move.

Bitcoin is currently trading at $ 17,700, which is a gain of over 140% since the start of the year. Prices are $ 2,500 lower than the record close to $ 20,000 reached in December 2017.

Large price increases are often accompanied by a sharp increase in the funding rate, a mechanism used by exchanges offering perpetuals (futures without expiration) to balance the market and steer the price of perpetuals towards the spot price.

The finance rate is positive, or long pay shorts, when perpetuals are trading at a premium to the spot price, indicating greater buying pressure. Alternatively, when perpetuals are trading at a discount to the spot market, the finance rate is negative and the shorts pay the finance to the buyers.

A very high finance rate is widely seen as a sign of an excessive bull run and often sets the stage for prices to fall. For example, the funding rate fell from 0.008% to 0.078% during the first half of August, as bitcoin hit multi-month highs above $ 12,450. The cryptocurrency deflated to $ 9,800 in the second week of September.

This time around, the funding rate has remained stable below 0.010%, meaning the cost of holding long positions is still considerably lower than in mid-August. Therefore, a significant correction could continue to remain elusive, allowing a continuation of the near-term upside, perhaps above all-time highs.

According to QCP Capital, the imbalance in the spot market driving the price has allowed the leveraged finance market to remain stable throughout the recent uptrend.