Bitcoin Markets Blog

This week markets tumbled from $480/BTC to $400/BTC, dipping as low as $380/BTC at one point.  Merchants and miners continue to exert downward pressure on the price.

Miners, in particular, create a positive feedback loop whereby the number of bitcoins that need to be sold to fund operations increases as the price drops since each bitcoin is worth less per unit.  Thus a miner who sells a large block creates a lower price on the market which, in turn, causes the next selling miner to have to sell even more bitcoin to receive an equal amount of cash.

As an aside, at this point mining is turning into a real arms race with some operations moving the Arctic, others moving to places with cheaper electricity, liquid immersion cooling, ever smaller chips, etc.  Seems very similar to the HFT arms race.  It seems that the "arms dealers" are the ones making the easiest money as miners compete themselves toward zero profits much like the HFT space.

I've heard a number of other theories as to why the price dipped this week: 1) the dollar strengthening (and thus bitcoin weakening relative to it) due to the Federal Open Market Committee (FOMC) announcing they would continue with QE tapering and 2) investors are cashing out of bitcoin to buy into the Alibaba IPO.  I don't buy either of these narratives.

On the first point, there was nothing unexpected about continuing with the QE taper so it should be already priced in.  In fact, the FOMC September meeting press release's overall sentiment was "dovish" in that "...it likely will be appropriate to maintain the current target range for the federal funds rate for a considerable time after the asset purchase program ends".  Also, and in general, fluctuations in the strength of the dollar are not large enough to account for BTCUSD dropping by 17%.  Bitcoin's price is dependent almost entirely on idiosyncratic bitcoin properties or events rather than broad macro properties or events.  The last macro event that arguably moved the bitcoin needle was the ECB taking deposit rates negative and even then the price jump was less than 3%.

On the second point, since it takes at least a day or two to move cash out of bitcoin and into your brokerage to buy Alibaba, the timing seems inconsistent.  Alibaba IPOed on Sept 19 and the majority of the bitcoin drop came on Sept 18 and 19.  It seems there wouldn't be enough time for the bitcoins sold to be converted into Alibaba stock.  If a large whale did indeed sell bitcoin in anticipation of buying Alibaba, we likely would have seen a sharp drop at least a number of days earlier and less of a drop closer to Sept 19.

News:

• Trendon Shavers (pirateat40) was fined $40m for operating the largest bitcoin ponzi scheme in the history of bitcoin (Bitcoin Savings & Trust) from November 2011 to August 2012: http://bit.ly/1pp1jSj.
• $40m seems low.  From what I remember, he absconded with over 150,000 BTC which by today's prices is much more than $40m.
• When he was running the ponzi, pirate offered 1% guaranteed daily returns, which is simply too good to be true.  Back in those days bitcoin was already appreciating at about 20% per month (though with high volatility), yet there were many people greedy for even more.  There were even pirate pass-through (PPT) funds where investors could pool their BTC together to meet the minimum investment for BS&T and to get the best rate from pirate after paying the pass-through operator a small cut.
• Bitcointalk and #bitcoin-otc were rife with scams like BS&T. I was once offered 10% daily returns by a #bitcoin-otc regular.  Fortunately, those wild west days of bitcoin are past and the bitcoin world has come a long way in terms of professionalism since those times.
• (Rumor) BFL raided by US Marshals: http://bit.ly/1sVnn9b.  So far the rumor is unsubstantiated.
• Disacoin is an app being built that would allow you to share your internet access/bandwidth with people around you for micropayments in bitcoin: http://bit.ly/ZDQKWC.
• Still in the very early stages but the concept is a good application of bitcoin for micropayments.
• MIT students face subpoena over web browser bitcoin mining tool: http://wrd.cm/1C3OZjg.
• Apple will restrict NFC antenna and TouchID for Apply Pay only: http://bit.ly/1oerFqL.
• That's unfortunate since TouchID would have been a good anti-fraud and KYC tool to better allow consumers to buy bitcoin at brick and mortar shops.
•  Square Register will integrate bitcoin: http://bit.ly/1ri3POu.
  
• (Rumor) A group of MIT students are working on bitcoin option pricing.
• A few thoughts on that...
• Black-Scholes seems particularly bad for bitcoin due to strongly leptokurtic returns.
• In one of my earlier market updates, I suggested using the Levy alpha-stable distribution for modeling returns instead of the normal.
• Dana Hobson from bitnet suggested to me some literature which found the truncated Levy distribution (TLD) to be an even better match to empirical data.
• Since real world option pricing theory has come a long way from Black-Scholes, bitcoin can benefit from those advances without having to rediscover the wheel.
• There's also something to be said for a veteran option trader's intuition which quantitative models may not be able to capture.
• Peercoin jumped 40% on Nubits announcement: http://bit.ly/1B2tDjU.
• What does Nubits do?  Supposedly something related to getting rid of market volatility.  No one really knows
• It might also be related to Peershares which is something of a crypto-equity platform built on top of Peercoin that the Nubits team was working on prior to Nubits.
• In any case, I'll believe it when I see it.  Pie-in-the-sky claims are plentiful in the cryptospace. 
• (Rumor) Monero crashed 40% due to a supposedly fatal exploit in it's anonymity mechanism discovered by a reputable hacker: http://bit.ly/1v1ERo7.
• BCX, a pool operator with a strong reputation in the cryptospace, claimed that Monero had an exploit which allows attackers to hijack addresses which cannot be fixed without compromising anonymity (Monero's killer feature).
• BCX has a good track record for calling out exploits in a number of altcoins (most notably Auroracoin) and also attacking them with his mining pool.
• Others suggest that this is all FUD by BCX for the purpose of crashing the price and buying Monero cheap.
• Another forum member, TheFascistMind claims to also have found the exploit but claims, contrary to BCX, that it is fixable.
• BCX announced in btc-e's trollbox that he will be attacking the Monero exploit on Sept 24.
• If the exploit exists and it exists at the CryptoNote protocol level, it means the other CryptoNote coins like Boolberry, Ducknote, Bytecoin, etc. are also vulnerable.  Yet none of the other CryptoNote coins showed a significant dip in price.
• If the exploit exists and it exists at the implementation layer of Monero, the market reaction makes more sense.
• I'm interested in seeing what happens in the coming days.
• GABI deploys first round of client capital: http://bit.ly/1pphzCL.
• Depending on their AUM and how much capital they intend to deploy into BTC (mandate is at least 75% of AUM in bitcoin at all times), this could be the counterbalancing buying pressure to merchant and miner selling pressure we have been looking for.