Bitcoin, why I am still interested

The Not-so-Great News

Bitcoin has been in a (mostly) negative trend from its high (~1175) to, as of today, a low of 165, since early 2014.  It has also been associated with negative news across the year, concerning: bitcoin theft, shoddy exchanges, illicit uses, etc.

Bitcoin has been a victim of its own “success” in terms of asset valuation.  The ascent to the > 1000 price was largely built in the Nov – Dec ’13 period, and naturally the coin is reverting to sustainable levels.

Unfortunately, the ascent to 1000+ was associated with a period where 2 algos were aggressively buying ~600,000 BTC from Mt Gox.   It is believed (though not confirmed) that these algos may have been used to perpetrate the fraud that stole the similar amount of bitcoin from Mt Gox (and its user base).   In other words, the algos may, through aggressive buying, have set up the momentum that took the price from sub $200 to over $1000.  The whole movement may have been ignited and sustained by a fraud.  See this analysis.

Bitcoin now is in the perfect storm of:

  1. likely slow liquidation of stolen bitcoin (how much is left, hard to know)
    1. Evidence showed that above algo started to liquidate in early 2014, however could not have liquidated the complete holdings (unless through another agent).
  2. liquidation of mined bitcoin as miners are desperate to recover what they can in a fallen valuation
    1. A significant amount of mining infrastructure was invested in on the basis of inflated BTC valuation.   With adjustments to hash difficulty this may normalize, but for now should pressure miners to liquidate.
  3. financial markets in disarray, triggered by the falling oil -> commodities -> EMG, Equities, etc.
    1. Expect this to leak into the BTC market as well.
  4. More news of stolen bitcoin

I believe Bitcoin and cryptocurrencies in general will recover however.  The negative impact of all of the above makes it very likely that BTC will sink further before it recovers (so far today it hit a low of $165).

The shake-out from this has and will increasingly give rise to more secure financial technology as opposed to the quick-and-dirty implementations (such as Mt Gox’s php travesty).  That said, developing carefully and with appropriate safeguards is not easy, especially in the context of a startup racing to get a product out the door.

So why am I (still) interested

Bitcoin is one of the most transparent marketplaces (if not the single-most).  For example:

  1. trades are labeled in terms of which side aggressed (buy or sell)
    1. buy/sell imbalance
    2. orderbook resiliency
  2. orderbook information is very useful (not as obfuscated with the games in other markets)
    1. OB slope & resiliency
    2. OB prediction modeling

Where it lacks:

  1. low-liquidity compared to more traditional assets (but enough for smaller operations)
  2. futures / forwards market is very low liquidity
  3. shorting can be difficult

In short, like many new markets & asset classes, there is often wider opportunity for earlier participants.   Markets tend to tighten as they mature.

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7 Comments

Filed under strategies

7 responses to “Bitcoin, why I am still interested

  1. gigi

    I’m not so sure about that bot.

    I followed bitcoin since 2011, but in Octomber 2013 I realized another spike was imminent, and I liquidated my “traditional” trading account (forex, …) and moved everything into bitcoin. In February 2014 I sold all the bitcoins (300% profit) because it was obvious that Mt Gox was gonna blow and didn’t touched it since. Unlike 2013, now I can enter bitcoin again in 3 days if I so wish, and I’m watching it again for signs that the bottom is in.

    So what I’m saying is that there was genuine new money into the market. Other anecdotal evidence supports this (heavy delays on exchange account verifications, Chinese craze, search/media interest).

    Regarding new markets, I’ll mention just this: binary options. As in fixed payout (24option.com, binary.com, …), not Nadex style.

    If you get over the general consensus (scam, bucket shop, …), you’ll see that they are incorrectly priced by design (fixed payout no matter the actual move probability) and easily exploitable. The problem is getting the money out from the broker, but if you are smart about this and do your homework…

    • tr8dr

      I agree that the (possibly fraudulent) algo was not the single player that built the Bitcoin bubble, however, I do think was very likely the catalyst in keeping the momentum going and probably accelerated it. As noted in the article I linked to, the algo clearly bought BTC out of weakness where it could have reverted significantly, in addition to pumping in >> 1M$ / day in buying in the late 2013 / early 2014 period.

      However, with concerted buying, one can build momentum in just about any market, really depends on size and market liquidity. It does require that there are other participants willing to be the sheep in the herd. Certainly there was (and still is) excitement around the rise of bitcoin that was fuel to the momentum in the bubble.

      With regard to binary options, I traded (for fun) on hedgestreet (which was later bought by CME group I believe). In the early days of the marketplace, people did leave coins on the table which I was easily able to pick up. I have not looked at these marketplaces for quite a few years though. What sort of underlying assets are you trading in these? I was trading precious metals at the time.

      • gigi

        Hedgestreet is now Nadex, this is exactly the type of binary options I was not referring to. These are priced according to standard models (black-scholes, …)

        The options I’m talking about are not. They ALWAYS have the exact same price, can’t be sold before expiration, and can have ultra-short expirations (15 sec, 60 sec, 1 hour). I’m not heavily trading them yet, I’m still busy with spot forex right now, but the potential is clear. Usually forex. However just like bitcoin, it’s far from a safe environment – there are max account and bet sizes (like in a casino), 90% of brokers are scams with clauses like “automated trading or using external software for analysis is prohibited”.

  2. gigi

    BTW, I’m not sure if you are aware, but on Bitstamp it’s easy to get not only trades, but also individual order creation/destruction.

    I have collected the full feed (orders & trades) since Jan 2014.

    {“event”:”order_created”,”data”:”{\”price\”: \”908.62\”, \”amount\”: \”0.01000000\”, \”datetime\”: \”1390262398\”, \”id\”: 15688268, \”order_type\”: 0}”,”channel”:”live_orders”}
    {“event”:”order_deleted”,”data”:”{\”price\”: \”839.55\”, \”amount\”: \”0.20850000\”, \”datetime\”: \”1390262355\”, \”id\”: 15688227, \”order_type\”: 1}”,”channel”:”live_orders”}
    {“event”:”order_deleted”,”data”:”{\”price\”: \”908.62\”, \”amount\”: \”0.00000000\”, \”datetime\”: \”1390262398\”, \”id\”: 15688268, \”order_type\”: 0}”,”channel”:”live_orders”}

    • tr8dr

      Nice, I’d love to get my hands on a data set like that and test some observations. I took a peek at their websocket API and HTTP APIs. Seemed like it only provided sampling (i.e. you could get a snapshot of the top 20 levels of the OB). I did not see transactional data as you have above. Perhaps you can clue me in as to which API provides this? cheers.

      • gigi

        There’s an undocumented API Websocket channel. It was commented out in their site HTML source code and it’s known around. My feeling is that they wanted to provide this information for HFTs.

  3. tr8dr

    @gigi: thanks for the pointer re: the HFT market data. Re: the binary options sites you mention, unfortunately living in the US again, so sites like this are closed from the US due to regulatory issues here. Was curious to see what is going on in those marketplaces.

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