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Bitcoin Crashed. Again.

Monetary Metals's picture




 

When writing about economics (as opposed to trading), one does not expect to be proven right within days of publishing something. Things can take years to play out. On Monday, February 25, we published What Drives the Price of Gold and Silver? In that article, I wrote:

If there is a credible rumor that the Fed is planning to further extend its “Quantitative Easing”, how would you expect the monetary metals to react? Typically, the gold price would rise and the silver price would rise even more. The question is why.

Traders read the headlines and they know how the price “should” react to such news, and they begin buying. For a while, the prophecy fulfills itself. But then what happens next? It may take an hour or a month, but sooner or later some of the new buyers begin to sell. What can be bought on speculation using leverage must eventually be sold.

On Tuesday, Fed Chairman Bernanke testified before the Senate. Sure enough, the prices of gold and silver rose sharply. The next day, the prices were back down. By Thursday the price of silver was lower than it had been prior to his announcement.

On March 3, we published a video asking Is Bitcoin Money? While I appreciate many aspects of the cool technology behind it (being a software developer in a previous career), and noting that it has several features that uniquely suit it for certain markets, I concluded that it is an irredeemable currency, but not money (i.e. the most marketable commodity). I received much feedback on the video, some of it negative, though mostly thoughtful and engaging.

At the time of the video, Bitcoin was trading around under $40. Since then, it rose to about $48. 

I was surprised to read that yesterday it fell to a low of $37. It has mostly recovered though it is now a few dollars below its high of $49. What happened?

The technical term is that the “blockchain forked”. In the video, I was very careful not to criticize the digital currency on technical grounds such its cryptographic technology, peer-to-peer networking, its data formats, methods of validating transactions, or communications over Internet Protocol, etc. I wanted to keep the discussion about monetary science. There is a point that I could have made, and will now make here.

If a currency is subject to Internet availability or other technological considerations, it simply is not money. It may still be useful for enabling commerce that would otherwise not be feasible—this is not an attack on Bitcoin as such. But (at least) one key characteristic of money is missing. Money must be beyond question by everyone and at all times. By nature, gold never becomes “unavailable” (though one could entrust it to an institution that suffers from unavailability of course).

When its “blockchain forked”, Bitcoin’s essence was called into question. Suddenly there were possible competing claims to the same coin, possible loss of coins, and certain lack of availability of the currency at least until engineers fixed the problem.

It has crashed before, too. On August 17, it moved from about $15.50 to $10.50 in a few hours. There were previous crashes before that, and there will likely be more (no this is not a prediction for next week!)

Technology aside, there is another factor that contributes to so-called “flash crashes”. If there is a wide bid-ask spread and/or the stack of bids is sparse, then it does not take much selling pressure to cause the price to collapse. For purposes of this discussion, let’s focus on the. While it is possible for the price to rise explosively, there is an important asymmetry between bid and ask: in times of extreme stress, it is always the bid that is withdrawn, never the ask.

Imagine if the US Geological Survey said that there would be a massive earthquake in Los Angeles, estimated to be 15 in the Richter Scale and which would not leave anything taller than a fire hydrant standing. There would be no lack of offers to sell real estate. What would be gone would be the bids. Anyone who needed to sell would have to accept peanuts, if he could even get that.

As I pen this, late Tuesday evening, I see a bid of $45.02 and an ask of $45.1377. This does not seem that bad, $0.1177 spread or about 26 basis points. But the bid looks thin to me! At $45.02, there is around 600 bid.

This is a screen capture I just took from Bitcoincharts.

Bitcoin Quote

 

$600 X $45 = $27,000

There is about twice the depth a whole DOLLAR lower. And then again there is another 1200 or so bid a bit lower than that. Even assuming that there is little liquidity at 1:30am EST, this is not a picture of a highly marketable good, much less the most marketable good. One lone trader who needs to sell $100,000 worth of Bitcoin could drive the price down about 2.5%.

To put this in perspective, a copper future is 25,000 pounds and copper is currently $3.55 per pound. One copper future is worth almost $90,000.  I am reasonably certain that selling a copper future (or 10!) at this time of night would be but a small blip. In fact, in a few seconds, I watched the May copper future trade 25 contracts, or $2.2M. Copper is not money, of course.

So what’s the take-away?

Bitcoin is still apparently a great trade—a speculation—as it has risen more than 12% even from when I recorded that video. Bitcoin is still useful for certain transactions particularly across borders, and especially for those people unfortunate to live in countries with censorship, capital controls, or in which some kinds of goods are prohibited.

But it’s not money. It is not the good to hoard as the core of one’s savings, if one does not like the rate of interest or trust the banking system or feel comfortable about the future.

The good for this purpose remains gold.

 

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Wed, 03/13/2013 - 16:23 | 3327381 MrBoompi
MrBoompi's picture

Conspiracy theorist that I am, I am suspicious of anything that can experience "crashes" like this, which seem to smack of manipulation or insider trading.  It wouldn't surprise me one bit to discover some "major players" sold their bitcoins before they crashed, and bought them back right afterwards.

Wed, 03/13/2013 - 21:08 | 3328198 TraderTimm
TraderTimm's picture

As others have noted, market depth on the exchanges isn't anywhere near the equity or currency markets. I'd say it is pretty good right now compared to 2011, and certainly not bad for a currency that was founded in 2009.

But, I guess some would rather focus on the bad instead of the potential.

Wed, 03/13/2013 - 16:35 | 3327430 labestiol
labestiol's picture

No need for conspiracy, it's just a tiny market with prone-to-panic players. The info on the fork was available to everyone, nobody tried to hide it (quite the contrary).

Wed, 03/13/2013 - 12:53 | 3326306 ZDRuX
ZDRuX's picture

BitCoins are created by people who run a BitCoin "mining" application on their computer which is trying to solve a mathematical equation.

Because these equations are so hard to solve, it would take you months for your computer to mine even 1 bitcoin. People link computers over the internet to mine in together in batches and then if their mathematical "block" is solved, they split the bitcoin between the members.

The mined bitcoin is added to the pool of the entire BitCoin network after the solved "block" is verified by the BitCoin software of multiple users on the entire peer-to-peer network. This prevents people from just "inserting" BitCoins into the pool, you would never have the right verified algorithm unless you legitimately solved the equation in the first place.

The mathematical problems increase in complexity as additional blocks are solved (or "mined"), meaning the supply of BitCoins will get progressively slower and slower as time goes by.

There is no central "server" or entity that controls BitCoin, it is a distributed decentralized piece of software that runs on the computers of BitCoin users. 

Nobody can create BitCoins out of thin air because thousands of people on the network would validate your mathematical equation and nullify it since you do not have the proper solution. 

Wed, 03/13/2013 - 15:32 | 3326974 Half_A_Billion_...
Half_A_Billion_Hollow_Points's picture

Oh look, bitcoin crashed and came back and it's now at an all time high.  Let's just go with the first part, shall we?  And let's not mention that Litecoin is going to reach dollar parity this year, as it was $0.07 last month and now is $0.70.  

Bitcoin is the nuclear weapon that will bring fiat-fractional-QE down.  There is no need for banks anymore.  

But as in all high-tech, only a few people can understand it.  

Only nuclear physicists knew what they were messing with in WWII.  Just as the Japanese generals worried not about a nuclear mushroom (which they were simply unable to imagine/understand/grasp/visualize), the Keynesians have no idea what's in store for them.

Wed, 03/13/2013 - 12:39 | 3326258 fuu
fuu's picture

Dr. Keith Weiner can suck a bag of dicks.

Wed, 03/13/2013 - 12:31 | 3326238 orangegeek
orangegeek's picture

What an awesome scam.  These bitcoin cons have their following all ginned up on a "crashing US Dollar", while the US Dollar continues to climb.

 

http://bullandbearmash.com/chart/dollar-weekly-closes-closes-resistance/

 

Better than Madoff, better than Ponzi.  "Give us your hardened currency and we'll give you a bag of nothing".  Like selling a Ruble for a Buck in the 1990s.

Wed, 03/13/2013 - 21:06 | 3328193 TraderTimm
TraderTimm's picture

@orangegeek

I'm a bit embarrassed for you, because you don't even show any comprehension of what is going on with the US dollar. You realize that Bernanke is issuing $85 Billion a month, right? You also should realize after being on this website for a bit that the dollar is actively losing value, right?

You should also be aware that every other nation is actively racing toward the bottom by debasing their currencies, right?

As for your ponzi comments, that's the tired old trope every troll uses, so I'll just point you at the wiki and especially all the Decentralized parts of bitcoin.

Reference: https://en.bitcoin.it/wiki/Main_Page

Wed, 03/13/2013 - 13:17 | 3326366 labestiol
labestiol's picture

You should obviously not take seriously people who say that dollars are crashing because BTC/USD is increasing. It's pretty clear that the component which makes the price increase is BTC value.

 

 

Wed, 03/13/2013 - 12:52 | 3326304 riphowardkatz
riphowardkatz's picture

continues to climb relative to other trash., gee great. And your post is just dumb considering that the dollar is obviously not climbing relative to bitcoin.

Wed, 03/13/2013 - 12:20 | 3326180 Pseudo Anonym
Pseudo Anonym's picture

well said; and this is the essence:

But it’s not money. It is not the good to hoard as the core of one’s savings,

i see btc used for specific transactions as a medium of exchange but not as something to entrust one's savings in it.  trade it, speculate in it while keeping your eye on the exit door

Wed, 03/13/2013 - 12:54 | 3326309 riphowardkatz
riphowardkatz's picture

not defending bit coin but outside of the gold standard there is no safe store of value.  

Wed, 03/13/2013 - 12:34 | 3326251 labestiol
labestiol's picture

To me, money is all about properties, price is just the present market opinion about it. Both PMs and bitcoins have valuable properties as money, and both have a place in the future monetary system.

Anyway, our opinion is not important, so let's agree to disagree, and see what the market decide.

Wed, 03/13/2013 - 11:20 | 3325977 gaoptimize
gaoptimize's picture

Nothing against nerds (no self-hatred here), but it seems to me BitCoin will always be dominated by a small nerdy group.  It leads to deflation, which is not conducive to high velocity exchanges.  Those of us who have bought 100 oz silver bars and coins, against the better judgement of our wives, have had an easier time making additional purchases once they have nestled that cool shiny bar between their warm breasts or thighs.  BitCoin, not so much.

Wed, 03/13/2013 - 11:54 | 3326098 All Out Of Bubblegum
All Out Of Bubblegum's picture

Once my lady fair saw the metal coming in from my Bitcoin trades, she became a big believer in Bitcoin.

Not all women are anti-geek.

Wed, 03/13/2013 - 10:44 | 3325855 Rusty Trombone
Rusty Trombone's picture

Ones and Zeros stored on servers is not money.

Wed, 03/13/2013 - 21:00 | 3328180 TraderTimm
TraderTimm's picture

@Rusty Trombone

Yeah, better pull all your money from your bank, they tend to store your balances on hard drives.

If you're going to troll, at least put *some* effort into it.

Wed, 03/13/2013 - 16:31 | 3326477 labestiol
labestiol's picture

Money is whatever the market finds valuable to use as money.

Wed, 03/13/2013 - 12:05 | 3326131 All Out Of Bubblegum
All Out Of Bubblegum's picture

There are no servers in Bitcoin. It's a peer to peer network.

Wed, 03/13/2013 - 10:23 | 3325746 Lost Wages
Lost Wages's picture

What I want to know is this: Who "fixed" the glitch?

Who is the bitcoin tech support team?

Obviously bitcoin is not some amorphous blob that just came out of nowhere. It was invented and controlled by someone and they don't want you to know the full truth about it.

Wed, 03/13/2013 - 12:45 | 3326277 labestiol
labestiol's picture

This is actually a very good question.

The main bitcoin software is coded by a team of developers, who noticed the fork, and decided collectively what was the best way to fix it.

Then, they contacted the main mining pool operators and advised them to do the necessary fix (software downgrade).

Everything was voluntary and transparent. They DO want you to know the full truth about it.

Wed, 03/13/2013 - 12:07 | 3326140 All Out Of Bubblegum
All Out Of Bubblegum's picture

> Who is the bitcoin tech support team?

Glad you asked! You should learn how to use Google.

http://bitcoin.org/about.html

 

Wed, 03/13/2013 - 10:48 | 3325874 Papasmurf
Papasmurf's picture

 

What I want to know is this: Who "fixed" the glitch?

Who is the bitcoin tech support team?

Every ponzi has someone at the top.  So I assume your question was retorical.

Wed, 03/13/2013 - 20:59 | 3328178 TraderTimm
TraderTimm's picture

@Papasmurf

Missing the point entirely. Again.

This is a free system. Nobody had to do anything. It was suggested that they did - and good reasons were offered, but if it wasn't convincing - or they simply didn't feel like it - they didn't have to.

But luckily we have a community that is smart and understands the technical underpinnings.

I feel bad for you, actually. If you have any wealth in sovereign currencies - the person at the 'top' can screw you pretty badly. And they already are.

If you're stacking precious metals, I feel sorry for you, because you don't realize what bitcoin can do to complement your wealth preservation.

Pity...

Wed, 03/13/2013 - 10:14 | 3325675 Mercury
Mercury's picture

But it’s not money. It is not the good to hoard as the core of one’s savings, if one does not like the rate of interest or trust the banking system or feel comfortable about the future.

The good for this purpose remains gold.

 

Yes, because we are after all living in a material world and it is best to be a material girl.

BTW -  in that San Fran earthquake scenario you want to bid on utilizable land as if the building on top of it weren't there (in this case maybe land near the railroads or docks).

You might be able to get an even better deal by going after a great location currently occupied by a less than ideal structure which would be prohibitively expensive or impossible (for environmental or historical preservation reasons for instance) to tear down.

then you buy up as many bulldozers as you can, sit back and wait for mother nature to do the dirty work.

Wed, 03/13/2013 - 10:35 | 3325803 Winston of Oceania
Winston of Oceania's picture

After a 15 on the Richter scale? Invest in cleanup equipment and maybe buy a lot for staging but thats's it. Won't be any docks or railroads or well anything...

Wed, 03/13/2013 - 13:28 | 3326414 Matt
Matt's picture

Trolololo a 15 on the Richter scale would mean the surface of the Earth moving up and down several miles , with energy equivelent to quadrillions of tons of dynamite. It would be like billions of 20 megaton nukes going off. There wouldn't be much to clean up. The whole planet would probably be disintegrated.

Wed, 03/13/2013 - 11:54 | 3326101 Mercury
Mercury's picture

Well there will still be a coastline and if you go back far enough the railroad tracks will be undamaged. The point is the new depots/docks will likely go where the old ones were. 

Wed, 03/13/2013 - 09:42 | 3325623 bigwavedave
bigwavedave's picture

Quantum Computing = Make your own money 

Wed, 03/13/2013 - 15:22 | 3327016 Half_A_Billion_...
Half_A_Billion_Hollow_Points's picture

>> Quantum Computing = Make your own money 

 

And this is how you embarass yourself and show how you don't have any understanding of cryptography and quantum computing.  

 

I'm telling you, these hyenas laughing right now are fucked.

Wed, 03/13/2013 - 11:13 | 3325948 ParkAveFlasher
ParkAveFlasher's picture

If you add value, then you earn value.

If BTC proves it can add value to society, good luck!

Wed, 03/13/2013 - 09:06 | 3325497 swissaustrian
swissaustrian's picture

http://www.google.com/trends/explore#q=bitcoin

Seems like there is a bitcoin mania in Russia

Wed, 03/13/2013 - 09:03 | 3325485 q99x2
q99x2's picture

Last price:$46.49999

Silver: 29.07

Wed, 03/13/2013 - 12:19 | 3326187 Long-John-Silver
Long-John-Silver's picture

Paper Silver is $29.07. Currently my physical Silver is priceless until I decide to trade it for some other physical commodity of my choice. 

Wed, 03/13/2013 - 10:19 | 3325713 orez65
orez65's picture

Just because it has value doesn't make it MONEY.

That is the root cause of our present financial crisis.

About 99% of Americans think that the US dollar is MONEY.

Even though it says on each dollar denomination that it is a NOTE.

That NOTE's value changes according to how many are counterfeited by the Federal Reserve.

Same with Bitcoin, their creators can increase their supply as they wish, in spite of their promises

Wed, 03/13/2013 - 10:41 | 3325836 Winston of Oceania
Winston of Oceania's picture

I have a $5.00 Treasury note from 1953; I wonder if I can convince anyone that it's worth what five bucks was back then?

Wed, 03/13/2013 - 09:16 | 3325525 Chupacabra-322
Chupacabra-322's picture

I'll keep stacking.  If I can't touch it, feel it, and grab it, it;s not worth shit.  Might as well have virtural sex or jag off in front of the computer. 

Wed, 03/13/2013 - 10:42 | 3325838 Winston of Oceania
Winston of Oceania's picture

That electronic clink needs work as well...

Wed, 03/13/2013 - 09:41 | 3325618 Prisoners_dilemna
Prisoners_dilemna's picture

Totally off topic but the words the kids use these days is "fapping".

As in  fap fap fap fap. lol

Wed, 03/13/2013 - 09:01 | 3325481 madcuban
madcuban's picture

i am missing something.  Can someone explain this to me properly?  how is bitcoin any better than the printed money from the ben bernank?  ben prints his money (or creates digital ones and zero and transfers them to us and foreign banks).  bitcoin IS just digital ones and zeros and furthermore "purchased" using ben's dollars.  if its sole creation comes from us dollars (which are infinite in volume) then bitcoin is not limited either.   bitcoin is not based on something limited and tangible like gold.  its merely just a speculative money, no different than using vegas chips as currency wehnyou tip a waitress at the bellagio.  so why is everyone hyped on an alternative that is no different than fiat?

Wed, 03/13/2013 - 10:27 | 3325767 orez65
orez65's picture

Because they are not taught in our educational system what MONEY is.

I had to learn it on my own and I had the advantage of experiencing a currency collapse in Latin America.

When I explain it to Americans they look at me like I'm crazy.

That's why It is going to be so traumatic when the dollar collapses, Americans will be totally unprepared.

Wed, 03/13/2013 - 10:45 | 3325859 Winston of Oceania
Winston of Oceania's picture

I would suggest von Mises "Theory of Money and Credit" available at www.mises.org

Wed, 03/13/2013 - 09:22 | 3325545 Goner
Goner's picture

You are missing a few things. Bitcoin does not need Ben to help create it. You can buy bit coin with fiat but the supply of Bitcoin is limited. Bitcoins are not produced at random when there is more need. Its NOT gold (and should not be bought for the reason you buy gold) but it maybe easier to think of it as digital gold vs digital fiat.

The biggest difference is that bitcoin is not produced by a Bank and there are no transaction fees when you use bitcoin.

https://en.wikipedia.org/wiki/Bitcoin

Wed, 03/13/2013 - 10:40 | 3325833 madcuban
madcuban's picture

but if you buy bitcoin with fiat, then how is the supply of bitcoin limited?  did bitcoin come out and say we only "created" x amount for purchase adn that will be it forever and ever?  and if so, how long will that lasti if everyone in the us were to pile in and buy a few dollars worth?  doesnt that mean supply must go up or the price will inflate through the roof?  it may not be produced by a bank, but it is produced out of thin air.

Wed, 03/13/2013 - 11:41 | 3326060 Abaco
Abaco's picture

Yes, the number of bitcoins is strictly limited.  All bitcoins have not been "created." Bitcoins have to be "mined" by solving a math problem which becomes more difficult (requires more computing power) with the mining of each coin. It is not possible to simply create bitcoins out of thin air as is done with fiat currency.  Bitcoin is in many ways the antithesis of fiat money. Since fiat can literally be created out of thin air the value of each fiat unit inexorably diminishes. Inversely, the value of each bitcoin inexorably increases (assuming gorwth in use or growth in economiic production). Much like gold and silver.  Bitcoin is inferior to gold and silver as money in that bitcoins are not intrinsically physical. However, Bitcoin is superior to gold and silver for transactional purposes because it is not physical and can be used for electronic transactions.

Wed, 03/13/2013 - 12:56 | 3326316 madcuban
madcuban's picture

um, being able to pay for things electronically does not make it superior.  it makes it able to be erased  into oblivion.  i still maintain this is not money nor a substitute.  it is simply a vegas chip that has no meaning outside a certain boundary.

Wed, 03/13/2013 - 13:30 | 3326385 labestiol
labestiol's picture

it is simply a vegas chip that has no meaning outside a certain boundary.

If it's a vegas chip, it's one that is impossible to counterfeit, that you can send instantly and securely regardless of distance, and for which you know exactly how much exists in present and future. And his boundaries are the boundaries of the internet.

One hell of a chip !

Wed, 03/13/2013 - 13:14 | 3326360 Matt
Matt's picture

fair enough, except that boundary grows larger every day. How is this different from, say, rubles or baht? 

Wed, 03/13/2013 - 12:50 | 3326298 labestiol
labestiol's picture

I would add that, contrary to fiat money, every information about the present and future money creation is transparent, known by everyone.

Wed, 03/13/2013 - 10:31 | 3325789 orez65
orez65's picture

The supply of Bitcoin is limited as long as its creators don't create anymore.

Just like the US dollar was supposed to be limited to $35 per ounce of gold.
Until their creator, the Fed, decided to exceed their limit.

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