Bitcoin - Forex Combo Strategy: The Lightning Network
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Bitcoin - Forex Combo Strategy: The Lightning Network
Welcome back traders to this week’s exciting edition of the Bitcoin - Forex Combo Strategy. Bitcoin has struggled to extend its bounce off of support and traders as well as hodlers should prepare for the potential of more downside. The three lower highs offered a strong bearish signal and the $8,870 - $9,927 support area will be key to watch. A breakout below this could lead to a faster descend to $6,550 as I have mentioned during last week’s edition “Bitcoin - Forex Combo Strategy: Regulated Ripple”. Overall I remain bullish on Bitcoin, but a bit of caution is warranted. So far support levels have held and remain well bid.
As geopolitical tension rise and the global economy slows, traders and investors seek safe havens and Bitcoin is carving out its very own sport amongst this asset class. It joins gold and silver from the commodity sector and the Japanese Yen as well as Swiss Franc from the forex market. I have mentioned on numerous occasions that Bitcoin should be compared to gold and some started to refer to it as “Digital Gold”. While Bitcoin was initially created to compete as a remittance tool, it has since proven better as a store of value. Look at it this way: It’s great to have gold, but you wouldn’t use it to pay for groceries or to pay bills. The same is true for Bitcoin.
Before diving in today’s topic of the Lighting Network, Bitcoin’s attempt to be less like gold and more like a currency, let’s take a quick look at my cryptocurrency portfolio. I hodl 500 Bitcoin at an average entry price of $8,500, 40,000,000 Ripple at an average entry price of $0.3388 and 20,000 Litecoin which I bought at $77.00. Bitcoin has struggled, but Ripple is under intense selling pressure after descending below its ascending triangle formation. Litecoin has joined the major coins to the downside, but overall I believe that we will see a move higher after touching major support levels. The three charts below show my Bitcoin, Ripple and Litecoin holdings.
Lightning Network Explained
One reason why Bitcoin is not great for transactions is because it takes too long and is too expensive. This was one of the primary reasons for the hard fork which created Bitcoin Cash. On average, Bitcoin can process 7 transactions per second. You can compare this to Visa which can process 65,000 transactions per second. There is a big scalability issue with Bitcoin which resulted in the launch of the Lightning Network. In theory, it was supposed to address the time and costs of sending Bitcoin from wallet to wallet. With the rise in popularity of micro-payments, Bitcoin decided to act.
The Lightning Network is basically a set of rules on top of the Bitcoin blockchain in order to facilitate micro-payments. The idea was first introduced in 2015 and development has started the same year. The idea was that small transactions such as micro-payments don’t need to be recorded on the main blockchain. These off-chain transactions are enabled through payment channels which are created between two wallets and the funds are transferred instantly and without fees. Once all the micro-payments are concluded, one final on-chain transaction is executed and all previous transactions are settled.
The Lightning Network requires both parties to deposit a security deposit before using the payment channel. The deposit needs to be equal to or larger than the total amount which intends to be transacted. For example, if the total amount of micro-transactions will total 1 Bitcoin, both partied will make a security deposit of 0.5 Bitcoin each. This is the only transaction which will be recorded on the Bitcoin blockchain. All micro-payments can now flow in the payment channel without fees and are settled instantly. In order to discourage fraud, there is a harsh anti-fraud mechanism in place which sends the deposit from the fraudulent party to the counter-party.
The Lightning Network Does Not Scale
While the Lightning Network was deployed as a second layer on top of the regular Bitcoin blockchain in order to address scalability issues, opponents of it claim that it doesn’t scale and is very limited. Those limitations are set to increase as the network grows and one of the biggest issues remains routing of transactions. Even Lightning Network’s own 57 page White Paper mentioned routing in one paragraph without outlining how it will address this issue. A separate report by research company Bitfury on the topic of routing consisted of 38 pages. Either way, the total amount of users appears to be limited to just 100,000. So if the Lightning Network doesn’t scale, what does it do and is it even necessary to have?
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Lightning Fails to Strike
The Lightning Network is still relatively small with $8 million worth of Bitcoin capacity and is currently home to about 830 Bitcoin. User “LNBIG” accounts for 40% of all capacity, but claims he only earns about $20 per month for locking over 336 Bitcoin away in the network. This raises centralization issues with the network and therefore once again with Bitcoin. “LNBIG” operates roughly 1,800 payment channels, but started to close inactive channels. He noted that “When you open a lot of channels, everyone scolds you that you are capturing the network. When you close, there are also concerns.”
Costs remain an issue as well. According to “LNBIG’ the costs of operating and maintaining the payment channels result in monthly fess of roughly $1,000. He states that he earns between 5,000 - 10,000 Satoshis per day. Some argue that in order for the Lightning Network to work, off-chain fees need to be as high as on-chain fees. Currently is appears that off-chain fees do not cover on-chain fees. In this case, the cost problem remains the same as with on-chain Bitcoin transactions. The only benefit from the Lightning Network would then be speed.
Since collateral is required to be locked into the Lightning Network to function, some has labeled it as 100% reserve banking. According to Cornell’s Sirer, the required collateral has rendered the Lightning Network economically broken. He stated that “The first and biggest problem is that it has limited capacity. The capacity of that network is unknown, despite so many years of noise around it, nobody has actually gone and done a scientific study. That emergent capacity is going to depend on the credit relationship between people and we don’t know what that’s going to be like. In that future world where they wanna do that, LN really takes off, a lot of coins are going to be tied into these payment channels.”
Forex Portfolio Updates
It’s time to take a look at my dynamic forex portfolio which as you all know by now provides the funds for my cryptocurrency trades. On August 16th 2019 I closed my 200 lots EURGBP short position at 0.9100 for a profit of 100 pips or $249,900. On August 19th 2019 I closed my 200 lots long position in the GBPUSD at 1.2145 for a profit of 100 pips or $200,000. My 100 lots long position in Silver which I took on July 26th 2019 at 16.400 for a margin requirement of $82,240 with a pip value of $5,000 remains open and unchanged. I added to my 200 lots long position in the EURUSD which I entered in August 14th 2019 at 1.1170 for margin requirement of $44,721 with a pip value of $2,000 by buying 400 lots at 1.1070 on August 16th 2019 for a margin requirement of $88,778 with a pip value of $4,000. The four charts below show updates to my trades I discussed during last week’s update.
On August 15th 2019 I bought 200 lots in the GBPCHF at 1.1740 for a margin requirement of $48,535 with a pip vale of $2,040.19. I acted on this trading recommendation “GBPCHF Fundamental Analysis – August 15th 2019”. Yesterday on August 20th 2019 I closed this trade at 1.1915 for a profit of $357,033. The chart below shows my complete trade.
Here is the summary of my Bitcoin - Forex Combo portfolio: I hodl 500 Bitcoins worth $5,070,150, 40,000,000 Ripple worth $10,236,000 and 20,000 Litecoin worth $1,436,800 plus a total cash portfolio worth $5,120,402. In addition I have the following forex positions in my portfolio: a 100 lots Silver long position worth $420,240 and a 600 lots EURUSD long position worth $95,499. My total Bitcoin - Forex Combo portfolio is worth $22,379,091, down $692,873 from last week’s balance of $23,071,964 and off of my all time record high of $24,651,811. The correction in Bitcoin and slump in Ripple as well as Litecoin have caused my overall portfolio to shrink, but with a healthy cash balance I plan to take advantage of any further weakness. Remember not to panic and that patience is key. Grow your balance with me at PaxForex and open your own PaxForex Trading Account today. Follow my Bitcoin - Forex Combo Strategy and comment below with any questions you may have. I will be happy to help you get started!
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