[heading]Bitcoinomics, Chapter 15: Bitcoin Trading Analysis[/heading]
“Bitcoin is the most important invention in the history of the world since the Internet.” – Roger Ver
Many core Bitcoin sites went down at the end of that “bubble”, including Bitcoin Talk and Mt. Gox, just as happened during the run-up to $266 nearly two years later. In June 2011, its peak of $33 per coin fell to just $0.012 per coin before a tick to $0.70.
On June 8, 2011, the price of a bitcoin briefly hit its all-time high of $30 before a crash down to $10.25 and the incipience of a slow and steady decline that lessened its value by more than 93%.
After the correction and consolidation, Bitcoin stabilized at $5. This original “bubble” brought on Bitcoin’s initial coverage by mainstream media resulting in the first major paradigm shift.
Bitcoin was mentioned regularly in the mainstream, resulting in a skyrocketing of the number of people aware of Bitcoin in the tech and finance communities. In 2011, the Bitcoin economy was even more reliant on centralized providers in all sectors than it is today. In 2011, Dwolla, Mt Gox, MyBitcoin, DeepBit basically ran the show.
Very quickly, the price rebounded to $15 making the crash look as though it were a flash crash. But, the price would remain depressed for a time to come. Here are Gox’s updates regarding the crash:
[Update June 24 – 02:56 GMT] Pushing until 15:00 GMT.
We have found that balances on some older accounts look significantly incorrect when compared with the old database.
At this time we do not know what caused the balances to be off, or how many of the older accounts are affected. We haven’t touched the old backend or database, so we’re going to import the accounts again once we have found what caused the off-balances.
No money is lost, we still have the records of all transactions that happened prior to the bitcoin sell-off. All funds deposited are still in our bank accounts, and we’re going to try and get this resolved by 15:00 GMT.
We look forward to getting everyone trading within an hour of getting users logged in and accessing their accounts.
You can check your own balance using our status tool.
[Update June 24 – 02:39 GMT] Postponing the Relaunch 24 hours.
We’re seeing that the amount of claims that need review is much higher than what we had anticipated, and consequently it is taking us considerably more time to process the claims.
We want to be as accurate as possible when approving claim forms to ensure accounts are issued back to the original account holders, so we humbly ask for continued patience while we work through the outstanding claims. If we were to stick to the launch time of 3:00 GMT the majority of accounts will still not have access to Mt.Gox at the reopening. We want to ensure as many users as possible have equal access when we are ready to open the site again.
Email confirmation and rejections have started going out. If you received a “rejection” email, please go through the claim process again at claim.mtgox.com and add additional account information such as the account numbers of the services you used to deposit along with the amounts.
We understand many of you are eager to get access to your account, and we are doing our best to ensure this happens as quickly and with as much confidence as possible.
We will relaunch the site on June 25 at 3:00 GMT. Trading will resume at 4:00 GMT (same day).
Thank you for your patience and understanding, we are look forward to getting through the claims and continue trading as soon as possible.
Many were left to wonder, Is this the end of Bitcoin? It was not. What basically happened is that someone stole the password of someone who held a few million dollars worth of bitcoins and sold them all on the Mt. Gox exchange over the course of a very short time period. This dropped the price.
At the time, there was only a million dollars worth of bids, approximately, on the Mt. Gox exchange and once the thief took out all the bids, bitcoins were showing a “price” of $0.01 on the Mt. Gox exchange. The thief was only allowed to withdraw $1,000 worth of their sales before being identified. Mt. Gox quickly shut down the exchange and is now in the process of cancelling all trades that occurred after the thief began selling.
Bitcoin was not hacked. Someone just stole a password and sold the coins on an exchange. Two years later, there is more diversity already in the Bitcoin economy. Also, over the past two years, developers have focused on utilizing the add-on features that have been dormant. The possibility of shorting will provide a dampening effect on any bubbles, and it is likely such a service will be online and widely used in due time. What such a short selling would enable is the act of owning a negative quantity of bitcoins. But, when Bitcoin began garnering increased public attention in late 2012, the Bitcoin infrastructure was amateurish at best. This would lead to high price volatility from approximately March 15-April 10.
On April 10, Bitcoin climbed to a high $266 and closed at $124.9 the next morning before Mt. Gox, the leading Bitcoin exchange and de facto bitcoin price-fixer, went down for nearly a day.
When trading began Thursday, Bitcoin fell again to a low of around $65, before rebounding to sit around $100 through Sunday night trading.
It had outperformed all other assets Year-To-Date. The increased popularity was palpable via Google Trends.
The last six months of 2012, according to Google trends, saw countries the world over search the term “Bitcoin” for the second most amount of times since the digital currency was extremely volatile at the beginning of the 2011 summer. In December 2012, “Bitcoin” was searched the third most amount of times in its history, behind June 2011 (the peak) and just this past September.
Egypt historical peak search volume, September 2012;
Saudi Arabia, second highest search volume, December 2012; Kazahkstan, 2nd highest search volume in December 2012; Pakistan, third highest behind February 2012 and June 2011; India, November 2012 second highest behind June 2011; Vietnam, August 2012 second highest behind June 2011; Turkey second highest December 2012 behind June 2011; In Spain, December 2012 is third largest search volume behind August 2012 by one point, and the peak June 2011.
During the price increase, Mt. Gox had been center-stage throughout a week of DDoS attacks on their server, failed customer service, locked funds and the volatile Bitcoin price largely due to how easy it is to disrupt the Bitcoin network by simply attacking the ecosystem center: Mt. Gox.
Mt. Gox held a Reddit “Ask Me Anything” after the crash for those worried by recent trading problems which had culminated with a 12-hour trading halt.
In April of 2013, when Bitcoin climbed to around $266 USD, 20,000 new Mt Gox accounts were being opened a day compared with the 60,00 opened in all of March 2013, according to the website. Mt. Gox explained some issues:
Our system was designed to handle 2~3x our normal load, but now we’re experiencing 10x the amount, which was difficult to prepare for (it takes weeks) with the sudden new accounts.
We have two problems: the DDos and volume related to new accounts. The trade engine is capable of accepting much more of a load.
Within 2~3 weeks we will completely rewrite the trade engine, in the meantime we shut down the system today and installed a new server with the current trade engine. Of course, if we didn’t have DDos everything would be fine, so now we’re dealing with two issues at once. Who is attacking Mt.Gox with a DDoS?
“We cannot disclose details, but we have some ideas…Basically because by naming them it makes our job harder because they will move to protect themselves.”
Trading Updates too much to ask for?
“We absolutely understand this. The fact is that we are programmers and engineers, not PR guys, and we are still building out our capabilities beyond technology and into servicing our customers better. So, yes, we’re moving on this now and have secured help.”
Question from pmarches on Reddit: Does mtgox run as a fractional exchange? Meaning, do you have 100% of the bitcoins your users have deposited in your system?
Answer: “NO. Everything is accounted for (BTC and money). Fractional reserve is absolutely against our principles. In fact 90~95% of BTC are held in cold storage.”
Despite the details that pour in after the fact, it is impossible to know if Bitcoin will rise and fall until an attack or sudden spike in demand falls upon the market.
As Erik Vorhees, an early adopter of Bitcoin, wrote: “Guessing short term price movements is a fool’s game.” In an Austrian’s eyes, some explanations for bitcoin’s price rise, which is really still the main story for Bitcoin in 2013, read as follow:
•The emergence of respected online merchants such as Mega, NameCheap, Reddit and others accepting Bitcoin has proven that businesses see its value, thus leading to the price increase. With that said, perhaps merchant adoption hasn’t been what it could.
•Europe’s confiscation of Cypriot bank accounts have led to an influx in Bitcoin purchasers, not so much in Cyprus, but in North America and Europe. This has led to greater levels of speculation upon the price of Bitcoin, with cliques of buyers-and-sellers pumping the price only to sell all at once, and buy in the aftermath of the ensuing panicked selloff.
Downloads of Bitcoin-related apps started rising in Spain during the Cyprus bail-in.
For instance, Bitcoin Gold spiked in the Spanish iPhone Finance category from 498 to 72, while another app called Bitcoin Ticket zoomed from 526-52 in just one day. Leading service, Bitcoin App, jumped from 194 to 151 from Friday and Sunday while Spaniards took notice of Cyprus.
•FATCA regulations have driven individuals to bitcoin for privacy.
•Venture Capitalists and other private investors, now moving into Bitcoin, also want Bitcoin at the best prices. While their bitcoin purchases help explain the price rise, they could also explain the volatility and even DDoS attacks on key websites. To DDoS a website, it costs under $500.
•Gold and silver buyers, moreover, have moved into the Bitcoin market. Largely thanks to the work of Trace Mayer, many former gold-and-silver bugs have seen the parallels in Bitcoin to precious metals.
•The recent FinCEN ruling could have been made at the request of venture capitalists who did not want to put money into Bitcoin only to see it shortly thereafter outlawed. Now, people can be assured the government sees it as just another financial instrument.
•Mainstream press interest in Bitcoin has been parabolic. This has led to incredible “hype” around Bitcoin.
•Many, many people who simply do not understand Bitcoin are buying bitcoins due to its media-hype.
Moreover, much changed in the Bitcoin market-space between December 2012 and April 2013.
As of December, 7 2012 in the eurozone, Bitcoin-Central joined PayPal and WorldPay by becoming a registered payment services provider (PSP) under European law.
The deal was made in France with the investment firm Aqoba and the Crédit Mutuel bank, and, because Bitcoin-Central now had an international bank ID number, the network can send and receive transfers to and from other banks and issue debit card for users.
“At Paymium [Bitcoin-Central’s parent] we spent lots of time and energy talking about Bitcoin to our regulating bodies, the Banque de France, the ACP (French equivalent of the American SEC), TRACFIN (AML French supervising body) etc.
We engaged all these resources with one goal in mind: get these people to know Bitcoin, advocate our beloved crypto-currency and listen to them, help them think until they finally reach the same conclusion as we did: there’s nothing wrong with people being free.
There’s nothing wrong with people freely exchanging value, we don’t hurt anybody, we’re not forcing anyone to use Bitcoin, we simply want to see our dream and the future of money become a reality.”
Paymium’s CTO later noted that there would be no limitations regarding citizenship, but this is, of course, at first, as he did say that there would be a “learning curve.”
Essentially, over time, the system would have to adopt the dominant regulatory architecture. The development has been a vague one, and no questions regarding FACTA requirements have been answered.
Bitcoin Code Change After 10.5 Million Mark
Before the December decision in Europe, the number of bitcoins in circulation hit 10.5 million, which triggered a code in the digital currency drastically changing how many new bitcoins are being created. Basically halving production, one can see why by April the price had risen so definitively.
This came, moreover, at a time of heightened press for the new digital currency. The part of the system triggered is referred to as the “block reward” and determines how many bitcoins can be mined at a time, which, because of the Fall-Winter 2012 change, dropped from 50-25. In summation, price increases over the end of 2012 and first half of 2013 can be understood logically.
The fact that the Bitcoin payout was cut in half in the last half of 2012; the new generation mining machines were late getting into production (indeed, many miners had ceased mining and even sold off their equipment so as to prepare for the release of the new equipment, since the new equipment was to be substantially more efficient than the older generation equipment. That means there was a large decrease in the number of bitcoins generated, known in economics as a supply-side shortage); these aforementioned events, which led to a supply shortage, were joined by a large increase in speculative demand.
CoinLab: The Bitcoin Bank To Manipulate?
Venture capitalist backed Bitcoin Company, CoinLab, worked for one year to sign an exclusive deal with Bitcoin exchange Mt. Gox. Based in Silicon Valley, CoinLab would field all US and Canadian Mt. Gox traffic.
This means that US citizens and Canadians would have their funds repatriated. Why Mt. Gox signed this document, the Bitcoin company has definitely wondered aloud.
According to the CoinLab, they want to make it “safe” for US and Canadian investors to do large block trade of BTC. CoinLab was the first BTC company to get venture capital money – more than $500,000 – in 2012.
“80 percent of Mt.Gox traffic already comes from this area. We are essentially buying their book of traffic,” Peter Vessenes told Bitcoin Magazine. By March 22nd, customers’ money will be moved from overseas to Silicon Valley Bank by March 22nd. This would not be the case, and by Summer CoinLab would bring a lawsuit against Mt. Gox.
Large transactions were to be reported to FinCEN, for Coinlab wishes to observe US money laundering rules, as well as know-your customer laws. CEO Vessenes hopes to help customers with 250,000 to 500,000 blocks of Bitcoin to feel comfortable. Overall, he is not talking about many individuals in the Bitcoin network. Coinlab plans to store private key data in hard safes. These private keys will be split into three parts with only two needed to unlock your transaction. They won’t be stored in a compuer database but printed and placed in a vault. Whoever can open the vault will be divided up: meaning a read team vault opener won’t be able to open the blue team’s vault. Coinlab is also working on getting your data insured against loss, but Lloyds of London has yet to finalize an insurance agreement with Coinlab.
With storage insurance, Coinlab will then bring BTC more mainstream, they hoped. According to Vessenes, “Our deal with Mt.Gox means we just picked a retail customer but I care very much about the needs of the institutional investors.”
Coinlab’s strategy page has a nifty live action chart of Bitcoin liquidity featuring a buy and sell button. T
he company will also work on developing alerts to their customers regarding big price swings. But, there is one glaring problem for many Bitcoiners when it comes to the presence of Coinlab. Silicon Valley Bank, where CoinLab banks, states online:
Silicon Valley Bank is the California bank subsidiary and the commercial banking operation of SVB Financial Group. Banking services are provided by Silicon Valley Bank, a member of the FDIC and the Federal Reserve System. SVB Private Bank is a division of Silicon Valley Bank. SVB Financial Group is also a member of the Federal Reserve System.
Banks the world over are shutting down opportunities for US citizens to hold accounts abroad. International banks, in the face of FATCA, will follow the lead of those banks that have already made moves to cease the acceptance of US citizens.
One of the foremost gold storage vaults in the world, ViaMat, also ceased their acceptance of US citizens in 2012:
“We are currently experiencing rapid and substantial changes in the general regulations within this business.
The changes mainly relate to the tax structures and taxation systems of various countries. As a consequence of these changes VIA MAT INTERNATIONAL has taken the decision to stop offering this service at its vault [sic] outside of the US to private customers with potential US-tax liability.”
GoldMoney and Bullion Vault use ViaMat for storage. Many of the retail storage facilities, at the end, use ViaMat to store metals.