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Bitcoin Crashed. Again.
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.
$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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By golly, I think you just added a new line to my definition of money.
Money is inherently untraceable.
Want to know some other awesome concepts? Perpetual blowjob funds, bottomless milkshakes, neverending hot chicken wing baskets, and skittle-shitting unicorns.
Hey Popo,
#1 I don't like your handle. lol dont take it personally, I just dont like the word. lol
#2 I read your points above, and respectfully, I see them as half truths.
Yes, the BTC market could be cornered. But didn't the Hunts corner the silver market. Yet now 30 years later we still love silver, even more than Gold. Just because something can be cornered doesn't mean it's fatally flawed. Yes/no? I could be totally wrong in my thinking but there it is.
As far as security is concerned you are ABSOLUTELY correct. For now. BTC is only four years old. And perhaps you are unaware but there are legions of brilliant computer folks creating solutions. One example is the "web of trust" system. Another is good old fashion due diligence obviously. You are correct that at this point in time, in order to not get scammed, hacked, or otherwise lose our BTC we must have above average knowledge of computer security systems. But there are people working to make this a much simpler process.
Also, you are correct about Mtgox being hacked, but this isn't a flaw in BTC. The analogy I see here is, way back in 1949 "banks" we're robbed all the time. There was an incentive to rob banks right, valuable money was in there. Just because banks got robbed doesn't mean gold was a bad form of money. I means that users of gold as money had to decide for themselves which banks to do business with to protect their money. Today, after years of development we have awesome vaults, and very few metal bars set in concrete.
Thirdly again your correct that BTC is tracable.... to an extent. The tracable nature of BTC is actually a strength since the only things that are tracable are a pseudonymous address and the amount of bitcoin transferred. No one can say "Popo transferred 7 BTC to Prisoners Dilemna and they live at the addresses etc. All they can say is FADGHTWRTY#%&%^&U$% sent 7 BTC to IHGD(*&^E#JHDKJH. But because we CAN say that we can prevent double spending and keep BTC finite in supply.
Finally, I'm going to Florida in a few weeks. I'm really looking forward to using BTC to by my ddinner at Whiskey Dicks in Orlando. Then I'm gonna buy the old lady a pair of boots at Heidi Jo's Boutique. Since I don't use wordpress I wont pay them any BTC. But I did just hire a computer programmer to build a shopping cart on my website for me.
Respectfully,
P.D.
Edit: not to be snarky but....
You won't find any tungsten filled BTC. :) Like I said above, Gold buggery is my middle name. But bitcoin is working as a medium of exchange for me.
How the hell would you corner the bitcoin market? 90% of the bitcoins are being held for the long run by people who mined them and have been saving them since bitcoins were worth 100,000 BTC to get one pizza. If no one is selling, how can you buy it all up? You could capture 10% of the market, tops. And then you would need to buy all the new coins, constantly, as they get mined and used.
Other than that, good points.
the future of btc, imo, is all about confidence which still needs to be earned. if the confidence in btc can be shaken enough as to be shown as unstable (volatile), the btc is done.
how about this scenario in a world where central banks coordinate their actions and may perceive btc as a formidable threat which they want to get rid of: 1) all cb's print as much confetti as needed to purchase, let's say, 40-50% of the btc supply and run-up the price of btc to the moon (create tulip mania/bubble) at the same time; 2) then, announce that digital sdr is coming online and the sdr will be limited in quantity, let's say a pre-defined % of each currency (usd, euro, jpy, ..) and that's it. no more; each participating country supports it. 3) then, all cb's start selling btc for sdr, plus naked-short sell btc (no delivery - settle trans'n in cash) = crush btc to the ground; and the result? 4) good buy tulips. it was a pleasure to know you.
I like your proposed scenario but I'm not sure it would play out as you're expecting. Some clarification is needed.
Step 1: CB's print confetti and buy up as much of the btc supply as they can - check
Step 2: CB's announce that digital sdr is coming online - limited quantity, supported etc..
Question, When you say it is "limited quantity" do you mean that is merely a statement a politican makes or that this limited quantity would actually be enforced in the source code of the software that will be used to operate this new sdr currency? If it is enforced in the source code, and the source code is open source and the software runs peer to peer and allows unchecked non-capital controlled, cross international borders sending of money then congratulations, you've successfully replicated Bitcoin and perhaps the market will like your invention. If not, then the market will probably shun your invention like the plague for the superior qualities of Bitcoin. Do you think your central authority will gladly create and support such a capital-control free currency or did you just contradict yourself?
Step 3: CB's start selling BTC, plus naked-short selling BTC
At this point, BTC holders would see a tremendous buying opportunity and scoop up all the BTC at a steep discount, unless your SDR currency was actually a viable alternative to Bitcoin having equal or superior qualities that the market would accept.
Step 4: good bye tulips
Ah, if it were only that easy. Guess we'll see what the future brings.
i dont prentend to know; i just painted a possible scenario how central banks might destroy confidence in the btc because if left unchecked and btc gained traction, btc could undermine effectively and perhaps even eliminate today's power structure. thus:
in this scenario, what matters is that the sheeple would be made believe that the sdr would be restricted either by political will or technology; just like today the sheeple believe that printing confetti is making them wealthy
one would think that that would be the logical reaction; however, when cb's are shorting (paper) gold, sheeple pile in and short it even more. go figure that only a few see value and tremendous buying opportunity...which is still not enough to lift the price of gold
2 websites, bitspend.net and some other one, recently have come out and let you buy anything on the internet with bitcoins, for a small fee.
So, you can buy lots of things with bitcoin!
Your points about bitcoin security are almost laughable. It shows that you know absolutely about bitcoin other than a few superficial facts/ hacks. Those bitcoins were stolen from a 3rd party, Mt. Gox. If you hold your bitcoins yourself, you are secure. Period.
The fact that bitcoins market cap is small is either a benefit or an asset. You could still see 1000% gains in bitcoin. Gold, that's not going to happen.
Let me summarize your long winded comments
1. it can be manipulated,
and? what can't be?
2.its insecure, why?
because it's"p2p" ignoring all the reasons it is secure and insecure compared to what> storing money in yourhome vault, at a bank, with Corzine, with backing from a bankrupt FDIC?
3. its not liquid.
yet you can cash in as fast or faster than you can cash in stocks, bonds,gold, checks and anything else.
Every argument you have is always true about any currency or form of money. As Alan Greenspan said "outside the gold standard there is no safe store of value"
Silly rebuttal.
You completely missed the point. If you're discussing "cashing it in" (your words) then you're obviously not talking about a currency, are you. Bitcoin is not being promoted as an equity or a commodity -- it is being promoted as a *currency*.
It is simply not one.
By your argument then any stock in a small to midsize company would also be a valid currency.
Sorry about being too "long-winded". Didn't mean to exhaust your attention span.
I don't need to "cash it in". I can just spend it.
https://bitspend.net/
Can you "spend" a stock like that? So what was that you were saying about it not being a currency again?
yes and when chinese person has to cash in renimbi for dollars to buy American goods or a dollar holder cashes in to purchase renimbi for chinese good then those arent currencies either.
I didnt miss the point, you just ddnt have any valid ones.
BitCoin fans:
At last, your personal BitCoin mining computer hardware machine
Price USD $1,299 ... Strange, the price is in American fiatsco currency ...
http://www.butterflylabs.com/
Respectfully, this is another half truth. They also accept BTC in payment. There are other manufacturers such as AValon Asic that only accept BTC for their hardware.
Also, in order to use bitcoin all you need to do is download the FREE wallet software. You do not need to be a BTC miner to use BTC. You also don't need to be a gold miner to stack PMs.
Oh, they accept BTC? Great. How do I get BitCoin?
{{!!!{{{BRAIN EXPLOSION}}}!!!}}
I get my bitcoin with my computer.
And you got your computer with...
And how do you get gold? You buy it with USD, or you panhandle for it. How do you get your panhandling equipment?! OMG you BOUGHT it with USD!!!
Popo, you put the finger in the big currency wound. In a world awash with hyperleveraged speculative funds, the size of a currency matters
and this is the reason why 17 small and medium-sized european national currencies form a currency grid called EUR
said the swiss and the japanese and the americans and the chinese and the holders of euros
It's a currency; therefore it is risky.
Basicially what the gambling community has said about BitCoin in the last 2 years. It's just too dangerous to spend all that time making money, only to see it evaporate (it can blow up the other way, too).
I just think Max has a hard-on for the Federal Reserve Note, and the Fed, to fail. It's the quarterly anarchist hope-du-jour.....especially in what he does, anything to latch to an early sign of the system collapsing is a key "bio point" for what he does (and sites like this; ZH got on the map calling the housing bubble, for example). I'm sure he's made some money on it, too.
All currencies are a bubble. They wouldn't be currencies, if they weren't.
Keiser lost all credibility when he launched ad hominem attacks on Mises, Austrian Economics, and subsequently on Tom Woods when he corrected Max's glaring ignorance on the subject (which went as far as to misquote Mises in order to "prove" his point).
What he did prove was that he is just another attention whore, looking for publicity by trying to appear smart in areas he obviously knows NOTHING about.
The best thing I could say about Max is that he appears to be a self-propelled tool. Then again, his "buy silver, bust JPM" campaign is working in JPM's favor, as it creates a joke out of the whole subject.
From what I read here, it sounds as if he's doing the same with BitCoin.
Max Keiser was on The Alex Jones Jones Radio Show recently ranking on the The Fed and propping up BitCoin. He claims to have some patens on the trading or whatever.
I will say he didn't peep a word of Silver much of any as like he used to with his famous days of:
"Buy A Silver Coin, Destroy JP Morgan"
http://www.zerohedge.com/article/max-keiser-buy-silver-coin-destroy-jp-morgan
Very helpful, Thanks.
Still its an interesting concept in some ways that there would be this independent currency. Possiblly a concept worth supporting at least on the fringe. Still for me being uninformed the problem is that its value is not easily or clearly defined and therefor is subject to manipulation.
They should put Zuckermans face on them.
Thanks good stuff.
as far as we can tell, all the bitcoin shorts are merely hedges for clients and represent a matched book. we are investigating the recent volatility, but see no evidence of manipulation in the underlying commodity or of the various ETFs and derivatives that have exposure to it.
hugs,
garyG
note: some of the language in this communication may have been developed in collaboration with my colleague BM
Before long, Bitcoin will become a 2-bit coin.
International even
Zerohedge regarding bitcoin is starting to sound very similar to MSNBC regarding gold.
2 years ago headline headline "Bitcoin 'crashed' to $2"
1 year ago headline headline "Bitcoin 'crashed' to $5"
6 months ago headline "Bitcoin 'crashed' to $10"
yesterday's headline "Bitcoin 'crashed' to $37"