Bitcoin Markets Blog

This week markets fell from $390/BTC to $280/BTC, before coming up to $330/BTC where it sits today.  Once again, I maintain that this and previous drops have little to do with fundamentals and everything to do with short-term order flow imbalance.  There are three major factors at play: consumer buying pressure, merchant selling pressure, and miner selling pressure (most dominant).

• Consumer Buying Pressure
• Consumer adoption has generally been slower to grow than merchant adoption.
• Consumer adoption could see growth soon due to Circle and Coinbase opening their brokerage business internationally once they ramp up.
• Large funds (e.g. GABI) looking to get into bitcoin might have been buying on the way down and they might be waiting on an even lower price to fully buy in. They possibly contributed to eating through the 30k sell wall we saw over the weekend.  More on this later.
• Merchant Selling Pressure
• Merchant adoption continues to grow.  Coinbase seems to be focusing on fewer large merchants while Bitpay seems to be doing both large and small merchants across the board.
• There's some nuance here on why merchant adoption would actually cause selling pressure when it has to be true that those bitcoins spent at these merchants must have been bought at some point in the past (or it may have been bought immediately before the purchase directly for the purpose of buying goods and services from the merchant).  In other words, any sell order processed by the merchant must have had a matching buy order by the purchaser sometime in the past.  So merchant adoption only creates net selling pressure if, on average, spenders do not replenish their spent bitcoins with corresponding bitcoin buy orders.
• I would imagine that most bitcoin spenders are bitcoin believers and would actually replenish their spent coins thus capturing positive value in whatever bitcoin discount the merchant offered minus the fee paid to the broker.
• But this could be a different situation for early adopters who, having not declared their gains on bitcoin to the government/IRS, are now spending bitcoin at merchants en masse to "cash out" without having to pay taxes they otherwise would have been subject to if they liquidated to cash first, especially if they have a lot of bitcoin.
• I should say, as a disclaimer, that I do not condone tax evasion but this narrative would explain why merchant adoption creates strong net selling pressure and coincides well with the ideologies of many early bitcoin adopters.
• Miner Selling Pressure
• As difficulty continues to ramp exponentially, the cost of producing a bitcoin will also increase in proportion.
• As the price continues to drop, it will eventually reach equilibrium with the marginal cost of producing a coin.
• Then miners' profits are driven toward 0, all but the most efficient miners exit, and selling pressure subsides.
• The fixed costs of mining hardware does not factor into this since those costs are sunk and the miner's decision to mine is solely based on whether the marginal cost of producing a coin (electricity; hosting) is cheaper than the market value of that coin.
• Side Note on Mining Economics
• Although for each miner with a fixed number of ASICS, bitcoin quantity produced decreases exponentially as difficulty ramps exponentially, for the mining industry as a whole, bitcoins are produced at a constant rate (a block every 9.5 minutes) and thus selling pressure is mostly linear with respect to time.
• Miners have incentive to sell all their coins as soon as they are mined in an environment where consumer adoption is growing slower than the net inflation of the bitcoin money supply from mining (~3800 BTC per day). 
• Actually this is still not counting other net outflows like merchant adoption growth.
• There could also be a point above the break-even point where miners will actually choose not liquidate their coins if freshly minted coins carry a premium over circulated coins.

30k BTC Bear-Whale

Sunday, we saw a 30k BTC sell limit order at $300/BTC in Bitstamp's sell wall.  There's been a lot of speculation on why it appeared, who was behind it, and whether it was manipulative.

At the time, some speculated that this was manipulation, that the whale was really a buyer and tried to use his sell wall to drop the price in order to buy cheaper coins.  Others speculated that this was an OTC play where the whale put up the 30k wall to keep the price low in order to buy a huge quantity of bitcoin OTC.  Yet others have said it was an early adopter who is naive about markets and how a large sell wall would net him worse a price than he could have gotten if he had broken his order into smaller chunks (or maybe the whale just didn't care).

Eventually, the wall got eaten by a number of market buy orders over the course of about 6 hours.  There were even some buy orders as large as 2.2k BTC.

I'd like to take a minute here and talk about this idea of "manipulation".  Everyone is always talking about manipulation in the bitcoin markets as if it were a simple thing to do like you might see in the movies or read about in a New York Times Best Seller.  I don't think this is the case.

A person who puts up a 30k BTC sell wall with the intention of driving down the price is only successful if the market believes his intention of selling 30k BTC.  If instead the market reasons that this 30k whale is trying to get it to panic because the whale really just wants to buy cheaper coins, the market would actually try to buy instead of sell to get ahead of the whale's buying intention.  But you could go one step further and reason that maybe this is what the whale wants the market to believe so, in fact, the 30k sell order is real and the market should actually sell in a sort of reverse-reverse psychology.  Obviously there's an infinite regress here.  So really the question is, what does the market actually believe? 

This depends directly on the aggregation of the meta-thinking levels of the market's constituents.  A market filled with level-1 thinkers (30k sell wall implies time to sell because a whale is selling) will sell while a market filled with level-2 thinkers (30k sell wall implies time to buy ahead of the whale who is really a buyer) will buy and so forth.  If the odd levels dominate the even levels, the market sells and vice versa.  Of course, it's not the number of L1 or L2 or L3 thinkers that matters but how capital is distributed between the levels.  So from the manipulation angle, a market's reaction to something like a 30k BTC sell wall is based on the capital-weighted distribution of its participants across the various meta-thinking levels.

My contention is that since most of the weak hands have already exited in Q1 of this year, everyone holding bitcoin right now is on average 1) at a higher meta-level of thinking than the market from Q1 and 2) more likely to be true believers of bitcoin and thus less willing to sell since they have continued to hold through the fall in price over the past few months.

Trying to induce selling through manipulation just doesn't make sense in this kind of market environment.

Moreover, any type of manipulation in general requires outlaying capital in some form which entails risk for the manipulator.  If the market reacts against the manipulator, he or she could stand to lose a lot of money.

Manipulation in general is very risky for the manipulator and, in my opinion, rarely actually happens.

News

• Following a $50m Series B, Reddit announce it would 10% of the round's equity to its users: http://tcrn.ch/1rEahAJ.
• They could do this through one of the existing smart asset platforms or through their own cryptocurrency (likely PoS since mining for equity seems beside the point).
• Turns out they will probably not issue their own crypto: http://bit.ly/1xYrcBK.
• They are currently leaning toward colored coins: http://bit.ly/1uTm3K1.
• Might end up tying the new Reddit shares to Reddit Karma as a way to reward users who bring content as well as incentivize content finders away from "competitors" like (Fark, 9gag, StumbleUpon, etc.).  And even if we don't consider them competitors, any future possible competitor would have to contend to that as well as Reddit's network effects.
• If they do tie equity issuance to content generation, they will also likely face more users trying to cheat the system.
• Maybe they will decide to issue it based on a snapshot of karma at this point in time and then Reddit users with Reddit Shares can give microshares to other users as a kind of super upvote.
• In any case, a novel use of cryptocurrency and wonderful idea.
• CoinArch unveils bitcoin structured products: http://bit.ly/1s4RkXX.
  
• Although the article says one of the products (Maximizer) is a reverse convertible (they make it sound like one but it's not), it's actually an uncovered OTM put write.  The customer of the product is essentially selling a put to CoinArch.  The payoff has limited upside and unlimited downside for him.
• On the long side of the put, CoinArch hedges their BTCUSD exposure by buying BTC (delta hedge).  They dynamically increase and decrease their BTC holdings to stay delta neutral.  Of course, if the underlying gaps (gamma risk), their delta hedge will be off.  Given the turbulence of the bitcoin markets, gamma may be more relevant here than in most markets.
• Russia in process of issuing ban on the emission or issuance of money substitutes likely to include bitcoin and other cryptocurrencies: http://bit.ly/1vzGgRX.
  
• If pass in it's current form, the bill would fine individuals 50k RUB, officials 100k RUB, and businesses up to 1m RUB.
  
• If passed, it would likely go into effect in 2015.
  
• Deckbound brings collectible card games to the blockchain: http://bit.ly/1vBRE0B.
• Using Bitcoin automated micropayments to create a sensory data marketplace: http://bit.ly/ZBb8Id; http://bit.ly/1BO1AVH.
• Bitcoin SF Devs Seminar on CoinShuffle: http://bit.ly/1uy3QjC.
• Overstocked hires Counterparty devs to develop crypto stock exchange: http://bit.ly/1CR3Uh1.
• XCP jumped 100% on the news before settling at around 50% higher than pre-announcement: http://bit.ly/1s7ZUoZ.
• Ethercoin started trading on Bittrex.  Ethercoin is a claim on ETH to be delivered once Ethereum launches.
• The Ethercoin creators have proof-of-reserves showing that they did indeed buy 1m ETH during the presale.
• Currently Ethercoin (ETC) is trading at 3x the presale price in BTC which is about 1.6x the presale price in dollars.
• You can now buy animal feces delivery with cryptos: http://www.shitexpress.com/.