What’s happening with Bitcoin Prices
Sure, we’re in a bubble, granted. But what’s that mean and what’s likely to happen? Here’s a few things at play:
- The Price
- The Trades
- Where the money comes from
The Price
Currently there’s two charts you need to understand with regard to Bitcoin. The first is the bubble graph and the second is the current price graph
The only thing that causes a chart like that is a large holding selloff that clears the market and pushes the price down. There’s enough limit orders to rebound the market almost instantly. But what if someone else does this again before new limit orders are placed?
You have this. The price drops in the large selloff but since there’s no limit orders to rebound it, it drops again, until it goes into the new territory where then it rebounds up to the previous bottom since there’s still no orders to fill those prices.
In Comes the General Public
The way the price rebounds this time is via the general public who doesn’t have triggers set or any notification system. They don’t do technical analysis and aren’t savvy enough to place limit orders.
Instead, this is in human time, as they check their phone apps about the price and then sees it’s down and buys. They gradually put more money into the market and this works so long as there’s a sufficient amount of time before the next selloff.
If the selloffs happen quicker and are larger than the human buying rebound time then you see the price drops.
The Trades: Exchanges
Ever wonder why some exchanges take about a week to “process” the sell? Or why you’re debited instantly but when you sell it takes a few days to be credited?
It might, but not necessarily be because these institutions don’t have the liquidity to actually pay you. The important thing to realize is the exchanges aren’t selling the Bitcoins on the open market nor are they transferring anything between wallets when you sell.
Instead there’s a database that says Alice’s balance is X. Then separately, on the side, the exchanges have a way to fund Alice’s account when she sells. This could be by selling Bitcoins, it could be by playing the horses, it doesn’t actually matter.
An easy way to get the money is through new investors. That is to say that they honor the debt obligations to the existing members only via new money coming in. Does this sound like anything we know?
The Great Pyramids of Bitcoin
BTC itself isn’t a pyramid scheme. MtGox was however. They lost their coins, told nobody, manipulated the market to get new investors, and then paid the people who were exiting with the new money coming in.
At any given moment, any exchange only needs a fractional reserve of the liabilities they have on the books. That is, until there’s a run on the market. In the banking world we have the FDIC to protect us against such issues.
In the Bitcoin world, there’s nothing. It is likely that at least one or more exchanges have mishandled their assets and liabilities and wouldn’t be capable of fully capitalizing.
Closing shop for a bit
If you’re a major market player, there’s a way around this! Whenever one of the larger exchanges website crashes, there’s a significant drop in the price because there’s currently more buyers coming in then there are sellers. When there’s a significant drop in the price, there’s almost guaranteed new capital coming in.
So if an exchange can’t meet the liabilities of a current price because they simply don’t have the actual assets they can take the site offline for a while, dropping the price. The customers will cry foul and go haywire. Then after a couple hours they can bring the site back online, getting the new money coming in, and then be able to meet the existing liabilities.
Recently on an unnamed exchange, their website was down, their phone app didn’t work, their trading API didn’t work, but their public price API was fast, responsive, and worked just fine. If they had intentionally taken down everything but their price monitoring system so they knew when to come back, this is exactly what it would look like. When the other services came back online, everything was fast and responsive immediately.
Nice trick! Speaking of that
The Next Crash
As of this writing, the BTC market cap is $300 billion. The 24 hour trade volume is 9.1% of the total market. This is about ¼ million dollars per second.
For comparison, the average 24 hour volume of AAPL is 0.58% and AMZN is 0.89%. Now if you were paying attention, the $24 billion per day in Bitcoin liabilities can be met so long as both the price was trending upward and the volume of incoming assets was sufficient enough to satisfy the expected liabilities from selling.
When there’s too many selloffs too close together, the market orders haven’t rebounded in time, and the general public goes into panic mode, this money will disappear quickly. Currently the general public is still in buy mode so you get a rebound in human time, so long as the sells aren’t too big and fast:
Where is all this cash coming from?
There’s many sources of revenue when investing, but the most dangerous one is to borrow money. For an overview, wikipedia has a list of market crashes so you can appreciate the common telltale signs of the potential for widespread cascading consequences. The big question is, is there a significant amount of borrowing-to-speculate going on in the BTC market?
If you head over to forums like /r/Bitcoin you’ll find people urging others to not buy BTC on debt with numerous responses that people already have and some even encouraging the practice. It’s healthy that a number of people are urging against the practice, but it appears that buying on credit isn’t uncommon.
Edit 2017/12/12: New reddit thread on people pulling out mortgages to buy BTC.
The other commonality to some of the most egregious financial crisis is when traditional banking, Wall Street firms and finance gets involved. If they are heavily leveraged in BTC, it could mean we are at risk of Financial Contagion. Are the professionals smart enough to avoid the problems and pull out early? They weren’t with real-estate nor with dotcoms and probably won’t be with cryptocurrency either. Greed has its way.
The general public and some institutions will invest poorly, especially with billions coming in every day. When some of the exchanges go broke because they can’t honor their liabilities due to a run on the market, the investors won’t be able to repay their debts and there will be system-wide repercussions.
Bitcoin is probably the source of the next general market crash
So we have hedge, speculative and ponzi borrowers and we’re under Minsky’s financial instability hypothesis. How long this can go however, is completely unknown. A lot of it depends on the general public’s appetite for investment.
In the financial crash of 2008, there were people ringing the alarm bells as early as 2005 and they were all correct but the public’s interest was able to float the market and fuel the frenzy another 3 years until the actual crash.
This was bad because the longer things go on, the larger the market becomes, the more highly leveraged inexperienced investors become, the more institutions become involved and thus the more things get disrupted when the price collapses.
Look out! There’s a storm coming.
