Lessons on Bubbles from Bitcoin | Hacker News Reader

Lessons on Bubbles from Bitcoin

bloomberg.com

114 pointskgwgk65 comments

Is analysis of the crypto market and the price of various coins even possible? A lot of articles seem to approach the price of coins as something that can be rationally discussed, however at the same time we all know the market is a) unregulated b) has wash trading going on and c) is heavily dominated by a handful of actors. I mean, hell, even think about the enormous power the completely unregulated exchanges hold - they could literally behind the scenes be betting against you on any single trade using knowledge you don't have.

In such a market the price of any coin may not even be set by a plurality of participants. It can be set by a single motivated participant who's motivations cannot be divined (except maybe the single driving motivation: make more money for me and fuck everyone else).

If you're trading in the crypto space today, you're crazy - you're sitting down for a card game expecting there to be fairness and rules, but there aren't any. The dealer can stack the deck however they want and change the rules of the game while you're playing, etc.

> In such a market the price of any coin may not even be set by a plurality of participants.

Since you can take/give physical delivery of the coin that is not entirely true. Meaning that if you force the price to an unsustainable level (either too high or too low), other smart people will definitely take the other side of the trade.

Not when the buyer and seller are one and the same person.

There's extensive evidence to suggest wash trading, as it's known, is endemic in the crypto space.

It's worth remembering Ben Graham's 1949 parable on Mr. Market:

https://www.fs.blog/2013/11/mr-market/

Basically, every market is basically an insane, irrational, manic-depressive, uncaring business partner who gives you the option to buy his share or sell yours every day, as long as market hours are open (in the age of cryptocurrency, this is 24/7). You are under no obligation to take the transaction, though. If you believe the price is too high, sell. If you believe the price is too low, buy. If you don't believe anything, hold.

Crypto and the stock market are no different in this regard. The short-term price is equally irrational in both. (There's pretty good evidence that wash trading is endemic in the stock market as well - wasn't Goldman Sachs caught taking both sides of a transaction in the 2009 financial crisis? And many derivative strategies explicitly rely upon being both long and short at the same time.)

The difference is that stock market investors have mostly figured out how to value stocks on fundamentals: the intrinsic value of a stock is all the discounted value of all future cash flows accruing to the equity investors. The intrinsic value of crypto is zero, unless, of course, it manages to replace the dollar as the world's reserve currency, in which case its intrinsic value is infinite, or more accurately the dollar's value is zero. Your estimate of the fundamental value of a cryptocurrency should be based on your assessment of the likelihood that it will replace the dollar as currency.

If cryptocurrency replaces the dollar, there's no reason it can't replace the Euro, so maybe a valuation should be extended to the likelihood it replaces all global currency.

A cryptocurrency could replace the dollar; if the Fed decided that it should. My guess would be that this would be called The Dollar, but that some of The Dollar would be issued via the banking system and some of The Dollar as crypto. For this to happen the Fed would need to see that there was a non bank system use case that was economically positive. I see no usecase right now but someone else might think of one.

The same for The Euro - they won't be the same crypto just as they aren't the same fiat now.

Whatever, the chances of Ripple, Ether or Bitcoin being the new dollar or euro are 0, regulators and governments would be literally insane to attempt this, and would be nearly immediately replaced, imprisoned and executed if they did try. So you are correct the valuation for these based on them being the new dollar or new euro or both is the same.

I think it is possible for the fed to make a crypto for a couple reasons. 1) hyperinflation in the regular dollar and they need a method of escape 2) to combat cryptos if they really take off, they would make bitcoin illegal and provide their alternative

Not sure how a new crypto would help in scenario 1, unless is was a "limited tokens" deal like bitcoin, but if cryptos really did go mainstream 2 is likely for me - and a strong reason to be very bearish about the current crop.

I'm not sure the Fed needs to decide if Bitcoin can replace the dollar. Did someone 'decide' that html, http and smtp would become a worldwide standard for citizens interacting with governments and business, covering ~95% of those usecases?

> wasn't Goldman Sachs caught taking both sides of a transaction in the 2009 financial crisis?

Um, no? What are you talking about?

Correct me if I'm wrong, but towards the end of the bubble (2008) GS had insured (bet against) the CDOs that it had previously been propping up.

[1] https://www.huffingtonpost.com/david-fiderer/the-cdos-that-d...

They had insurance on assets they held, sure. They bought the CDOs from some parties and sold (CDS on) them to other parties, like any middleman in any industry. A wash trade is something quite different: buying something from yourself, with no other parties involved in either transaction, to show a trade that manipulates the price.

There's nothing wrong with being in the middle of a line of trades. The crime is when that line becomes a loop and nothing is actually changing hands at either end.

Well, the whole "muppet case" is about GS screwing its customers.

Sure, it's not "taking both sides of the transaction" but it's still screwing investors as a regulated(!!!) banking entity.

https://www.theguardian.com/business/2012/oct/22/goldman-sac...

There is no "muppet case"? The article just seems to be unsubstantiated allegations from someone who didn't get a promotion he wanted and is now trying to sell his book?

The only substantiated thing in that article is the Abacus case which is quite different: the counterparty there was IKB, who are a sophisticated investment bank, a million miles away from "one of these philanthropies or endowments or teachers' retirement pension funds in Alabama or Virginia or Oregon". They didn't get screwed, they bet on the US housing market and lost.

Oh, you're correct.

I read some sarcastic financial blogs and let's just say the "muppet" theme there is recurring when it comes to the "squid" :)

> Your estimate of the fundamental value of a cryptocurrency should be based on your assessment of the likelihood that it will replace the dollar as currency.

Which, for the most part, is impossible. The various blockchain currencies aren't scalable enough to do that.

IMO, most people investing in cryptocurrency don't understand distributed systems programming and money. The rest of the people are just running pump and dump schemes.

Or, what I like to tell people, "if you're investing in cryptocurrency you're either running a pump and dump scheme or you're the sucker."

Are you referring specifically to certain Chinese exchanges where this could be done without a commission? Have there ever been any accusations that U.S. exchanges like Coinbase and Gemini engaged in wash trading?

Are you claiming that in an unregulated market, because of wash trading, it can become generally known that an asset is mispriced such that the mispricing is arbitrarily high?

It seems to me that the market efficiency of unregulated markets depends on many things and your claim is too strong.

This doesn't apply in exchanges really either. They maintain their own ledger so what comes in and out of the blockchains publicly can be whatever they decide. You would need an accurate ledger from inside the operation.

It applies to all these transactions:

https://coin.dance/volume/localbitcoins

There's no way to verify those transactions are actually real, or any indication that multiple people are participating or buying.

Many sting operations have targeted traders on localbitcoin as illegal money transmitters and money launderers.

I think "not entirely true" is an understatement. Bitcoin has a 115 Billion dollar market cap and is traded all around the world in arms length transactions for local currencies and is treated as fungible. Like to gold market people loudly insist that its manipulated but I don't understand how it could be to any large degree when I can go to a pawn shop and buy or sell it anywhere in the world. I'm not sure what central regulatory body would give any greater confidence than that fact.

What's the point of market cap here? It's just (current price)*(number of bitcoins), so if some speculators drive the price up, even if there are low volumes on the exchanges, the market cap will rise by a corresponding percentage.

Hypothetical example: If there is a single trade at say twice the current price, the market cap will double.

It absolutely does not represent how much adoption Bitcoin has.

I would like to see how much "actual" usage there is to Bitcoin as a currency (i.e., sending bitcoin to another person in exchange for goods or services). You seem to believe it's a lot; I don't believe that.

My point only is that the total value is relatively very high and its price would be as difficult for one individual to move around as a large cap stock.

Your hypothetical 1 trade a day isn't reality. Click this link and look at the depth chart. You would need millions of dollars to move the price from 6925 to 6950. https://www.gdax.com/trade/BTC-USD

I don't think its used a lot as a currency now. I think there is a lot of investment in it based on the belief that it will be used as a currency in the future or that it can act as a store of wealth.

  You would need millions of dollars to move the price from 6925 to 6950.

That's not entirely true, the operators of Bitfinex, tether, or any of the early adopters who control a major percentage of BTC could push the market with the amount of influence on the ecosystem they control.

Traders and bots will attempt to arbitrage other exchanges which have unverifiable volume and possibly large amounts of counterfeit capital.

That's not how it works. Most of that liquidity it's anchored at a specific distance away from the price. When the price moves up/down, that liquidity will move with it.

Thus you need much less to move the market, because the liquidity will get out of your way.

regulation, wash trading and whales aside, there's no way to really gauge the 'fair market value' of cryptocurrencies like Bitcoin. Sure, you can take the store of value and gold argument and say that Bitcoin's market cap should be at least that of gold, but with it's volatility it's nowhere close to being a safe store of value. Ask the people who bought Bitcoin as a store of value at $20k

The innovations and tech in the crypto space however has its merits. Regardless of what Bitcoin's price is, there is definitely value in the technology and the r&d that has come after it. People are so focused on the price and the speculation that it's ballooned into a classic bubble burst which is playing itself out right now.

I'd actually argue that people trading the crypto space are actually less crazy than people 'investing' and 'hodling' their cryptocurrencies. Sure, there are degenerate gamblers who overleverage and get wiped out in a single trade, but the true traders are the smart ones. IMO it's crazy to invest in something where it's nearly impossible to ascertain a fair value or quantifiable fundamentals.

> regulation, wash trading and whales aside, there's no way to really gauge the 'fair market value' of cryptocurrencies like Bitcoin

I think you mean "intrinsic value".

"Fair market value" is the value determined by the market, and thus is easily available for Bitcoin (especially if you exclude regulation and wash trading, although the latter has little to no effect on pricing). The fair market value is determined by the real world market, not by any sort of technical analysis of what the price "should" be.

If you did mean "intrinsic value", it's worth noting that this is very much an unsolved problem for almost anything. One of the most interesting market phenomenon out there are "close-ended funds" -- mutual funds that no longer issue new shares, but trade on the open market, much like ETFs. They have a value, the "net asset value" that represents the combined value of their holdings, which are fixed. Where things get strange is that they do not trade at their NAV -- they almost always trade at a discount or premium to that value. If you bought all the shares, then you could liquidiate the company for exactly the value of the NAV, so they should be worth that much, but for some reason, they are not.

Find a person that understands how close-ended funds are priced, and you will find the next Nobel prize winner in economics.

> IMO it's crazy to invest in something where it's nearly impossible to ascertain a fair value or quantifiable fundamentals.

I'd say this fairly accurately described early Facebook

> they could literally behind the scenes be betting against you on any single trade using knowledge you don't have.

There are huge suspicions they are doing it. Those big sudden changes in prices are a good way for them to steal leveraged traders

Large sportsbooks balance their risk by tracking whales and sharps and doing this in secret on other sportsbooks

So you are saying that no one knows what is going on but you are making a statement that tells us that you know what it is going on?

Unless you are holding a leveraged position on an exchange, there is no way the exchange can pressure you into a particular trade.

If you have been trading crypto professionally, you'll know that there is around $1bn worth of derivatives market that is hedged against spot exchanges.

Any exchange trying to manipulate the market is at risk of implosion. As these guys are hedged by other trades it has no knowledge and control of.

I'm pretty new to trading concepts and financial markets so I may very well be missing something obvious... but from what I can make out, both CBOE and CME futures are cash settled, so you can't actually "short" bitcoin on them, just a derivative.

Further, the total volume of contracts for March works out at somewhere around 0.01% of Bitcoin's total market cap, maybe I'm missing something, but this just doesn't seem like something that could be held responsible for BTC dropping from 20k to ~7k - the only impact I could see it having is a psychological value, but then, Bitcoin has had futures from both BitMEX and OKCoin for quite some time (fee concerns and institutional accessibility aside) with significantly higher volumes.

Ya, this article doesn't really make sense in this particular case as an explanation for Bitcoin's behavior. Though in general I do agree that shorting is important for the health of a market, this Bitcoin bubble played out exactly like every other Bitcoin bubble, and in all those previous cases shorting was as difficult as its ever been (which, actually has never been that hard, to be frank - people always insist that shorting Bitcoin is so hard, but it's not at all and never has been).

The only markets where you can short bitcoin are sketchy overseas exchanges with low volumes and a history of problems both depositing and withdrawing money.

No serious investor is going to be putting money in bitfinex or whatever to short bitcoin.

>The only markets where you can short bitcoin are sketchy overseas exchanges

probably because no reputable country's SEC equivalent would let that happen

>low volumes

bitfinex is one of the largest exchanges by volume

>a history of problems both depositing and withdrawing money.

if this is happening, it's not happening with any of the major exchanges that support margin trading. any time depositing/withdraw issues appear on an exchange, prices quickly deviate from the rest of the market as the supply of fiat/crypto diminishes.

You can short Bitcoin on the Chicago Mercantile Exchange:

http://www.cmegroup.com/trading/bitcoin-futures.html

But you can't... the future is a derivative of Bitcoin, not actual Bitcoin.

The Bitmex and Bitfinex futures markets are settled in BTC and it's been blatantly clear that someone (most likely the exchange operators) are consistently manipulating the futures market (most likely to wipe out margin traders who don't know better) with short squeezes that return back to the norm within hours.

https://i.imgur.com/LpgnksQ.png

CBOE and CME futures being cash settled is a joke, and removes any incentive for the risk associated with the long position actually acquiring BTC, further proving the large traders just want to play with the tool for speculative market volatility and not actually facilitate using or acquiring the asset itself.

https://medium.com/@bitfinexed/latest

It's not the exchanges who are behind those spikes.

Source: someone who is working on a bot doing that kind of things

And because of the way the market works, there is no need to coordinate with anyone else doing it (ie: those spikes are self synchronizing)

Those "manipulations" also happen in the traditional markets (forex, ...), but due to liquidity and general sophistication they are much harder to spot, and dangerous to do if you don't know what you are doing (dangerous from a financial perspective, they are perfectly legal).

   It's not the exchanges who are behind those spikes.

Please. If anyone is in a position to gain the most from market manipulation like that, it's the exchanges and there's a bucket list of evidence and malicious behavior from Bitfinex that would make it very surprising if it was some random outsider causing these types of movements.

Bitfinex and Bitmex margin trading volume has increased significantly and for the exchange operators have access to

  (1) order book + margin call data
  (2) ability to falsify trades and capital due to no audits

With those, it becomes insanely trivial to set some bait let the fish bite and simply drain the water or pump it back in on a whim because the order book is just a database and there's no accountability or auditing to keep the market exchanges honest.

There's also allegations about exchanges like Bitfinex where the owners/management trade on their own exchanges [0]. With insight on order book and people's stop prices there's an obvious conflict of interest there, as one can easily go stop hunting and manipulate prices. It's an unregulated market, and exchanges want to keep it that way (like how Binance's moving operations to Malta)

[0]: https://medium.com/@bitfinexed/wash-trading-bitcoin-part-ii-...

"CBOE and CME futures being cash settled in a joke"

How do you mean? The CME S&P e-mini is cash settled. In fact all of the equity indexes futures products are cash settled.

"...and removes any incentive for the risk associated with the long position actually acquiring BTC"

They contract settles to a VWAP of physical transactions of BTC and converges to this point at settlement. It currently has a bid/ask price that surrounds the bid/ask of Gdax. I would say the risk associated with the futures contract is... effectively the exact same as physical holdings, less the risk you have of keeping large amounts of USD or physical coins at the exchange.

"further proving the large traders just want to play with the tool for speculative market volatility and not actually facilitate using or acquiring the asset itself"

I think your logic up to this point is flawed and that the conclusion you are attempting to draw is both baseless and lacks a point. If the purpose of "large traders" was to just "play" for speculative market volatility then... so what? I suspect you don't think that markets require speculation in order to become liquid and fair, so perhaps we live in different worlds.

Additionally, "not actually facilitate using or acquiring the asset itself" -- just for giggles: how many people that you know that screw around in the coin space are actually there to _use_ the coins as currency? Effectively everyone I know is just trying to ride the rollercoaster and make a profit and don't really care about the far off future of the stuff.

If CBOE and CME traders on the long position had to take BTC, that would be more indicative of the market interest in the asset. Instead what exists now with CBOE, CME, GDAX, Bitfinex, Bitmex, etc is an ecosystem ripe for any insiders at the exchanges to front run, falsify volume, and manipulate the order books to margin call.

  just for giggles: how many people that you know that screw 
  around in the coin space are actually there to _use_ the 
  coins as currency? Effectively everyone I know is just 
  trying to ride the rollercoaster and make a profit and 
  don't really care about the far off future of the stuff.

Exactly. Agreed.

I think the actors in crypto have no shame. I love crypto, love the potential of the tech -- but does anybody doubt that coinbase, bitfinex, kraken, poloniex -- all the exchanges just flat out robbed people? When the narratives aligned they pumped/dumped.

Then they have no shame. Poloniex gets bought up. Coinbase/gdax announce venture capital arm. Its almost like they sucked too much money selling hopes and dreams to consumers, and now that SEC is watching closely they cannot keep pump and dumping the market. Just look at the volume drop.

Honestly, the democratized/decentralized characteristics everyone promotes is a bunch of bull until someone shows me a way democratically bootstrap ownership without total failures like Satoshi owning 20,000,000,000$ worth of BTC or a couple of whales owning 50% of the ETH supply because they bought when it was worth pennies and after BTC went up 10-1000x.

This whole thing seems to just be another means for wealth transfer.

The Satoshi example isn't very interesting until or unless those coins start moving. Short of that, over time he has done the broader Bitcoin community a tremendous service by restricting the maximum potential supply of sellable coins. His position, and that it will likely never be dumped, has acted as an anchor of some stability. It's a vast supply of coins that the market doesn't have to worry about torpedoing the price. Seeing as it appears to be permanently locked up, and the market very clearly believes that, the market is distributing his value to other Bitcoin holders (equivalent to destroying those coins).

If those coins had been fully distributed, the condition of the Bitcoin market would be that much worse presently.

Of course, the condition of the Bitcoin market would have been much better if Satoshi had set a hard limit of 1 bitcoin instead of 21 million.

I can agree and discuss the wealth transfer mantra on the crypto scene today. But what does exchanges have to do with that? They, supposedly, don't have any stake at any coin. They make money with trading volume.

I assume, a reasonable one will understand that it is in their best interest to have the market grow instead of spike trading volume on pump/dump events.

My understanding is that a good number of the exchanges currently operating require payment to list new coins, often in the form of a significant stake in the coin itself. At any point has any exchange ever stated that their company and officers do not hold stakes in the coins that are traded? I haven't seen it.

Volume traded on CME futures has been insignificant until about two weeks ago [1]. Click on the chart icon and look at the volume bar graph. Each contract is worth 5 BTC. Looks like they are doing about 10,000 BTC per day now. So I don't agree with this article at all.

CBOE bitcoin futures is much smaller, but they are also doing about 2500 BTC per day [2].

[1] http://www.cmegroup.com/trading/equity-index/us-index/bitcoi...

[2] https://markets.cboe.com/us/futures/market_statistics/daily/

While I see their hypothesis that the decline in bitcoin from 20k to 6k was related to the introduction of the futures market there are lots of details that seem iffy. For example:

Bitcoin had many crashes in previous years

The dotcom boom had a fine boom and bust in spite of there being a futures market

The US housing bubble also did a big boom and bust without a good futures market or way to short houses (yeah I know some people kind of did by proxy in The Big Short but it was hard)

"price will be set by the most upbeat buyer" is kind of wrong. The price will be set by dealing between the largest buyers and sellers. If people are selling millions worth at $6k some guy who thinks its worth $100k but who only has $1000 to invest isn't going to move the market

You've been able to short bitcoin on BitMex since 2015, though using crypto rather than fiat

totally trash, an average people can check real influence of that "futures" thing by himself here: http://cfe.cboe.com/cfe-products/xbt-cboe-bitcoin-futures there is actually more volume in cash on localbitcoin in a rural village in India in an hour than there in a whole day...

ps, also to short something you need to borrow the asset and pay for the time of the borrowing, this is bitcoin is really difficult, because pricing can be really high, holding means covering you from the risk of losing next "bubble", if you lose that for a miserable 1%/day you are losing all the point of that asset basically, so these things can happens only in the naive minds of wall street traders than don't have a real model for bitcoin yet, but just go on bitfinex and see by yourself if it's good to you to borrow bitcoin to people who want to short, as i say before, everything in this space can be checked, this old people with they old analysis are just extremely boring and meaningless.

Shorting futures doesn't require borrowing bitcoin. You usually also get paid on it (though recently the market has been on backwardation, so you pay). But the cost is kind of upfront.

> Was this a coincidence? Maybe.

Most likely. Here's Arthur Hayes, CEO of Bitmex, explaining it:

> "The short pressure at its logical maximum emanating from the CME and CBOE contract holders is meaningless. Therefore, the effect on the broader market in actual flows is negligible. The contracts mainly bolster traders’ bullish sentiment....In terms of trading volume, BitMEX continues to blow both of these contracts out of the water. In the year to date, the BitMEX XBTUSD, XBTH18, and XBTM18 products traded a combined $53.14 billion versus CME and CBOE combined Bitcoin futures volume of $4.48 billion. BitMEX is 12x more liquid."

And:

> "The large financial institutions do not own Bitcoin in large quantities, if at all. They are hamstrung by KYC/AML concerns surrounding Bitcoin. That means that if they wanted to sell Bitcoin, they would need to borrow it from a credible counterparty. Hey, Cumberland Mining, can we borrow $100 million of Bitcoin?......Assuming banks borrowed Bitcoin with the intention of shorting it, they would need to sell it on an exchange. Given the skittishness that inhibits counterparties globally from placing large amounts of capital on an exchange, I highly doubt any compliance department at a bulge-bracket bank would approve opening an account.

> Let’s suspend reality and assume they allowed trading desks to open accounts on the largest Bitcoin spot exchanges. The maximum the desk could make is 100% if Bitcoin went to zero. But, if the market instead face-ripped them by 50% on a $100-million position, that loss would reach the global head of trading and of the investment bank.

> If you were the line executive that green-lit that trade, you would lose your job. You shorted Bitcoin, and lost a huge sum of money. That would make it into the financial press; you and your bank would be ridiculed."

> The maximum the desk could make is 100% if Bitcoin went to zero.

That's an interesting statement coming from someone whose exchange allows x100 leverage. You can make more than 100% of your initial investment if you leverage more.

You can do that fairly easy when you are trading on a 10k account. It is more difficult with a 100 million account when you are a bank.

The total open interest of Bitmex + okex is around $1bn of futures. That's $1bn of shorts open on bitcoin.

Bitfinex has around half a billion of Bitcoins borrowed.

I'm not saying $100m is easy, but it is definitively doable in todays crypto space.

He is talking about short selling bitcoin, not selling swap contracts. You don't have to borrow bitcoin to sell swap contracts 100x leveraged. However, to short sell bitcoin 100x leveraged, you would need to borrow 100 times more bitcoins

> The housing bubble is another example where betting against the asset in question was extremely difficult.

Interesting - while you can sell your shares in company X, you wouldn’t sell your house because you think the market might go down.

On the other hand, if there were futures options on the housing market, would that help to lower prices?

REITs.

You can sell your house and move to a rented one, some people do that when they think the market will go down.

Can futures really affect the price of Bitcoin when they're settled in USD?

more usual weak analysis from Bloomberg, which has become another showcase for mediocre internet writers

OK..I proclaim myself the most enthusiastic person ever about bitcoin. Now why isn't the price at 20,000. By the author's logic it should be.

The price fell from $20k to $6k . that is evidence that shorting is not necessary for prices to fall a lot. look at beanie babies..same thing...no short seller was needed there either. If widgets are selling for $200 dollars and no one one wants to pay $200 , then prices fall or no widgets are sold.

You haven't bought at $20000, so your optimism is irrelevant. If you continued to buy at any market rate under $20000, then the market rate would rise towards $20000 until you either went bankrupt or bought out every seller less optimistic than you, at which point you would no longer be the most optimistic buyer.

You can short bitcoin, and many have during the crash from 20 to 6.

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