7/10/19: Bitcoin, ethereum and ripple: a fractal and wavelet analysis

Myself and Professor Shaen Corbet of DCU have a new article on the LSE Business Review site covering our latest published research into cryptocurrencies valuations and dynamics: https://blogs.lse.ac.uk/businessreview/2019/10/07/bitcoin-ethereum-and-ripple-a-fractal-and-wavelet-analysis/.

The article profiles in non-technical terms our paper "Fractal dynamics and wavelet analysis: Deep volatility and return properties of Bitcoin, Ethereum and Ripple" currently in the process of publication with the The Quarterly Review of Economics and Finance (link here).

20/9/19: New paper on Cryptos pricing

Our paper "Fractal dynamics and wavelet analysis: Deep volatility and return properties of Bitcoin, Ethereum and Ripple" is now available in The Quarterly Review of Economics and Finance - early stage print version - here https://www.sciencedirect.com/science/article/abs/pii/S1062976919300730.

28/12/18: BTCD is neither a hedge nor a safe haven for stocks

A quick - and dirty - run through the argument that Bitcoin serves as a hedge or a safe haven for stocks. This argument has been popular in cryptocurrencies analytical circles of recent, and is extensively covered in the research literature, when it comes to 2014-2017 dynamics, but not so much for 2018 or even more recent period dynamics.

First, simple definitions:

1. A financial instrument X is a hedge for a financial instrument Y, if - on average, over time - significant declines in the value of Y are associated with lower declines (weak hedge) or increases (strong hedge) in the value of X.
2. A financial instrument X is a safe haven for a financial instrument Y, if at the times of significant short-term drop in the value of Y, instrument X posts increases (strong safe haven) or shallower decreases (weak safe haven) in its own value.

So here are two charts for Safe Haven argument:

The first chart shows that over the last 12 months, there were 3 episodes when - over time, on average, based on daily prices, stocks acted as a strong hedge for BTCUSD. There are zero periods when BTCUSD acted as a hedge for stocks. The second chart shows that within the last month, based on 30 minutes intervals data (higher frequency data, not exactly suitable for hedge testing), BTCUSD did manage to act as a hedge for stocks in two periods. However, taken across both periods, overall, BTCUSD only acted as a weak hedge.

The key to the above is,  however, the time frame and the data frequency. A hedge is a longer-term, averages-defined relationship. Not an actively traded strategy. And this means that the first chart is more reflective of true hedging relationship than the later one. Still, even if we severely stretch the definition of a hedge, we are still left with two instances when the BTCUSD acts as a hedge for DJIA against two instances when DJIA acts as a hedge for BTCUSD.

People commonly confuse both hedging and safe haven as being defined by the negative symmetric correlation between assets X and Y, but in reality, both concepts are defined by the directional correlation: when X is falling, correlation myst be negative with Y, and when Y is falling, correlation must be negative with X. The downside episodes are what matters, not any volatility.

Now, to safe haven:

Again, it appears that stocks offer a safe haven against BTCUSD (6 occasions in the last 12 months) more often than BTCUSD offers a safe haven against stocks (2 occasions).  Worse, the cost of holding BTCUSD long as a safe haven for stocks is staggeringly high: some 60-65 percentage points over 12 months, not counting the cost of trading.

In simple terms, BTCUSD is worse than useless as either a hedge or a safe haven against the adverse movements in stocks.

7/12/18: Seeking Alpha Market Outlook features a recent blogpost

My post on Bitcoin price dynamics and trading http://trueeconomics.blogspot.com/2018/12/51218-bitcoin-sell-off-is-structural.html has made it SeekingAlpha Market Outlook:

5/12/18: Bitcoin: Sell-off is a structural break to the downside of the already negative trend

Bitcoin has suffered a significant drop off in terms of its value against the USD in November. Despite trading within USD6,400-6,500 range through mid-November, on thin volumes, BTC dropped to a low of USD3,685 by November 24, before entering the ‘dead cat bounce’ period since. The Bitcoin community, however, remains largely of the view that any downside to Bitcoin is a temporary, irrationally-motivated, phenomena (see the range of forward forecasts for the crypto here: http://trueeconomics.blogspot.com/2018/11/201118-bitcoins-steady-loss-of.html).

Dynamically, Bitcoin has been trading down, on a persistent. albeit volatile trend since January this year. Based on monthly ranges (min-max for daily open-close prices), the chart below shows conclusively that as of mid-November, BTCUSD has entered a new regime - consistent with a new low for the crypto.

This regime switch is a relatively rare event in the last 11 months of trading, singling that the BTC lows are neither secure in the medium term, nor are likely to be replaced by an upward trend. While things are likely to remain volatile for BTCUSD, this volatility is unlikely to signal any reversal of the downward pressures on the crypto currency.

Consistent with this, we can think of two possible, albeit distinctly probable, scenarios:

1. Scenario 1 (the more likely one): BTCUSD will, in the medium term of 1-3 months, drop below USD3,000 levels, and
2. Scenario 2 (least likely one): BTCUSD will repeat its December 2017 - January 2018 ‘hockey stick’ dynamics.

Noting the above dynamics, the lack of any catalyst for the BTC upside, and the simple fact that since mid-November, larger volumes traded supported greater moves to the downside than to the upside, current trading range of USD3,900-4,100 is unlikely to last.

Scenario 2 supports going long BTC at prices around USD3,800, but it requires a major, highly unlikely and unforeseeable at this point in time, catalyst. A replay of the 2017 scenario needs a convincing story. Back then, in September-October 2017, a combination of the enthusiastic marketing of bitcoin as a 'solve all problems the world has ever known' technology, coupled with the novelty of the asset has triggered a massive influx of retail investors into the crypto markets. These investors are now utterly destroyed, financially and morally, having bought into BTC at prices >$4,000 and transaction costs of 20-25 percent (break-even prices of >$5,000). The supply of new suckers is now thin, as the newsflow has turned decidedly against cryptos, and price dynamics compound bear market analysis. Another factor that led BTC to a lightning fast rise in December 2017 was the promise of the 'inevitable' and 'scale-supported' arrival of institutional investors into the market. This not only failed to materialise over the duration of 2018, but we are now learning that the few institutional investors that made their forays into the markets have abandoned any plans for engaging in setting up trading and investment functions for their clients. In the end, today, the vast majority of the so-called  institutional investors are simply larger scale holders of BTC and other cryptos, unrelated to the traditional financial markets investment houses.

Scenario 1 implies you should cut your losses or book your gains, by selling BTC.

20/11/18: Bitcoin's Steady Loss of Fundamentals

Base rate fallacy is one of the key behavioral heuristics or biases in economics and finance, defined as a cognitive error whereby too little (or too much) weight is placed on the base (original) rate of possibility (e.g., the probability of A given B). In behavioral finance,

• Base rate neglect is the case of giving not enough weight to the prior/original fundamentals in analyzing a complex phenomena, focusing analyst's attention instead on more proximate/more recent trends. Put differently, analysts tend to assign greater weight to a rare category / outrun when tested with a single symptom whose objective diagnosticity was equal for all possible outruns; and 
• The inverse base rate fallacy is the case when too much weight is given to the complex priors / original fundamentals, downgrading newer information. In other words, people tended to give higher probability to a rare outrun when tested with a combination of conflicting priors or cues.

Some research has shown that the key effect of the base rates on judgement error is that base rate presence distorts our analysis by making more frequent outruns of uncertain events more important in our analysis. Thus, more common realizations of the uncertain gambles are magnified in perceived frequency, overriding either the original priors (neglect) or the changing nature of the priors (inverse neglect).

You really can't avoid stumbling on both of these manifestations of the fallacy in today's Bitcoin markets analysis.

Take for example this:

A 'guru' of Bitcoin investment world has been issuing absurd forecasts like a blind drunk armed with an AK47: fast, furious and vastly inaccurate.

The dude, armed with 'fundamentals' (unknown to anyone in the finance research universe, where predominant consensus is that Bitcoin has no defined price fundamentals), has predicted BTCUSD at $22,000-$25,000 for the end of 2018 some months ago (back in January). He upped the ante around March by 'forecasting' BTCUSD at $91,000 some time before the end of 2019, and scaled this back to $36,000 in May. He then re-iterated his $25,000 target in July, just around the same time another 'Hopium sniffing' 'analyst' - Julian Hosp - put a target of $60,000 for BTC in 2018. Four days ago, Lee scaled back his 'forecast' for the end of 2018 to $15,000. This comes on foot of the guru adding lots of mumbo-jumbo to qualify his optimism, saying in early November 2018 that he was "pleasantly surprised" by Bitcoin's stability around the newly found price floor close within the $6,400-$6,500 range.

Taking decreasing doses of the sell-side drug-of-choice, Mike Novogratz was a bit more 'reserved'. In November 2017, struck by the recency bias (the fallacy of not even bothering considering any information other than hyperbolic BTC price dynamics around the end of 2017), he 'forecast' Bitcoin to reach $45,000 by November 2018. This 'forecast' was trimmed back to $9,000 for the end of 2018, issued by Novogratz on October 2, 2018.

There were madder ravings still on offer this year. Mid-April 2018, Tim Draper and CNBC's Brian Kelly pushed out (separately) 'research' arguing that BTC will be hitting $250,000 by 2022. Lee's prediction for 2022 target was $125,000 per BTC mid-January 2018, and advised investors to follow his alleged strategy: "We expect bitcoin's major low to be $9,000, and we would be aggressive buyers around that level... We view this $9,000 as the biggest buying opportunity in 2018."

Note: this drivel has been reported by the likes of Bloomberg, CNBC, et al - the serious analysis folks, employing a bunch of CFAs. I mean, you wouldn't be conflicted if you employed institutional investors trading in Bitcoin as your analysts, would you? Of course, not! Next up: CNBC to hire Wells Fargo sitting executive to analyse Wells Fargo.

But returning to the behavioral anomalies, both base rate neglect and inverse base rate effect can (and do), of course, take place in the same analysts' decisions and calls. Framing - conditioning on surrounding attributes of the decision making - determines which type of the base rate fallacy holds for which 'analyst'. Hence, this:

Ever since the collapse of the parabolic trend, Bitcoin price dynamics can be seen as a series of down-trending sub-cycles, with only one slight deviation in the pattern since mid-September 2018 (the start of the 6th cycle). I wrote about this back in August, suggesting that we will see new lows for BTCUSD - the lows we are running through this week.

When you look at liquidity (trading volumes), you can see that the 'price floor' period from mid-September through the start of November has been associated with extremely low trading. This runs contrary to the 'fundamentals' stories told by the aforementioned 'analysts': the increasing efficiency of the cryptos networks and mining, the growing rates of cryptos adoption in the real economy, and the rising interest in cryptos from institutional investors.

Put more simply, the period of 'calm' (and it wasn't really a period of low volatility, just a period of lower volatility compared to the internecine levels of volatility that BTCUSD investors have been conditioned to accept in the past) was the period when the Bitcoin Whales (large miners) stuck to their mine-and-hold strategies, so that pump-and-dump scams were running wreckage across smaller investors portfolios. The events of the last two weeks seem to have broken that pattern, removing the supports from one of the only two fundamentals Bitcoin has: the fundamental factor of cross-collaterlization a myriad of junky ICOs with Bitcoin capital.  (see volume dynamics below)

As the ICOs crash, their collateral Bitcoins are being dumped into the markets to recover some sort of liquidity necessary for a shutdown or a run from the creditors and regulators, the only floor that BTCUSD has is the floor of the Whales still sitting on large BTC holdings accumulated from mining. Which is not the good news the BTC 'analysts' can hang onto with their 'forecasts'. Cost of mining is rising (as local energy utilities are jacking up electricity rates on large scale mining operations). Just as profit margins on mining are turning negative (at current prices). This means that in the short run, Whales are going to start dipping into their BTC reserves to sustain operations. In the longer run, two things can happen:

1. If the miners shut down their operations to cut on variable costs of mining, BTC might find a new temporary 'floor' until another regulatory assault on Bitcoin takes place and the downward momentum returns; or
2. If the miners decide to double-down in hope of price stabilization and continue to beef up their fiat cash reserves to pay for loss making mining, there will be a new sell-off coming soon.

Behaviorally, both mean that at some point in the future (no, I am not talking about end-of-2022 outlook, but something much sooner), the Whales will decide to cut losses and sell their holdings. As usual in such circumstances, first off, retail investors will step in to soak up some of the supply avalanche. The first sellers in this game will be the winners. The followers will be the relatively uninjured party. The hold-outs will end up with the proverbial bag in the end of the game. It is how all bubbles end up playing out in the end.

Now, go on, listen to the idiot squad of BTC 'analysts'. Everything will be fine. $15,000 --> $25,000 --> $36,000 --> $91,000 --> $125,000 --> $250,000 --> Takeover of the Universe. The Death Star is powering its lasers...

1/8/18: Dynamic patterns in BTCUSD pricing: is there a new down cycle afoot?

Bitcoin Cycles Analysis in one chart:

As the above suggests, BTCUSD dynamics are signalling continued structural pressures on Bitcoin prices and the start of the new double-top down cycle. The Great Unknown remains with the behaviour of the buy-and-hold investors who dominate longer-term BTC markets. Increase in market breadth with arrival of more active traders from the start of 2018 has not been kind to Bitcoin. More institutional investment flowing into the cryptos market has been, on average, a net negative for the crypto.

15/1/18: Of Fraud and Whales: Bitcoin Price Manipulation

Recently, I wrote about the potential risks that concentration of Bitcoin in the hands of few holders ('whales') presents and the promising avenue for trading and investment fraud that this phenomena holds (see post here: http://trueeconomics.blogspot.com/2017/12/211217-of-taxes-and-whales-bitcoins-new.html).

Now, some serious evidence that these risks have played out in the past to superficially inflate the price of bitcoins: a popular version here https://techcrunch.com/2018/01/15/researchers-finds-that-one-person-likely-drove-bitcoin-from-150-to-1000/, and technical paper on which this is based here (ungated version) http://weis2017.econinfosec.org/wp-content/uploads/sites/3/2017/05/WEIS_2017_paper_21.pdf.

Key conclusion: "The suspicious trading activity of a single actor caused the massive spike in the USD-BTC exchange rate to rise from around $150 to over $1 000 in late 2013. The fall was even more dramatic and rapid, and it has taken more than three years for Bitcoin to match the rise prompted by fraudulent transactions."

Oops... so much for 'security' of Bitcoin...

21/12/17: Of Taxes and Whales: Bitcoin's New Headaches

I have recently mused about the tax exposures implications of Bitcoin 'investments', and in particular, my suspicion that many today's BTC enthusiasts (retail investors speculating on BTC and other cryptos) are likely to be caught out with unexpected and un-covered tax liabilities arising from trading in currencies pairs that involve cryptos and regular currencies (e.g. BTCUSD pair). Normally, every trade in BTC that involves sale of BTC for USD is subject to capital gains tax. This is a nasty side effect of the BTC trading.

And here comes a new and a worse one: the GOP tax plan will make even trades between cryptos (e.g. BTCETH pair) subject to capital gains (https://www.bloomberg.com/news/articles/2017-12-21/tax-free-bitcoin-to-ether-trading-in-u-s-to-end-under-gop-plan). The GOP plan removal of the like-kind swap tax deferral provision for everything other than real property sweeps cryptos put of the deferral cover because back in 2014, the IRS designated cryptos as non-currency property-type assets, like gold.

In addition to catching many investors off-guard and leaving them facing potentially explosive tax bills, the new change induces more liquidity risk into the system: removal of the deferral imposes a de facto transaction tax on BTC and other cryptos. This is likely to reduce frequency of trading conducted by investors. Which, in turn, reduces liquidity of the BTC and other cryptos.

This tax change, in part, likely explain why the BTC and other cryptos concentration is falling: the whales, who used to control up to 40% of the entire BTC issuance to-date, are selling, and selling at speed (https://www.bloomberg.com/gadfly/articles/2017-12-21/bitcoin-whales-are-cutting-back).  Ordinarily, this would be a good thing (lower concentration risk, increased liquidity), but cryptos are not your ordinary assets. The problem with whales selling is that one of the key arguments in favor of cryptos is that crypto-enthusiasts and pioneers are market-makers who prefer mine-and-hold strategy. In other words, to-date, the argument has been that the whales simply will never sell their holdings before BTC issuance reaches its bound of 21 million units.

That reasoning is now going, like the proverbial hot air out of a punctured balloon:

18/12/17: Of Winners and Whiners: Bitcoin's Path to Value

One of the key Bitcoin issues is concentration of miners. Concentration in Bitcoin markets occurs primarily due to high cost of energy used in mining. Bitfury, one of the largest miners on the market today already holds roughly 11 percent of the total mining power and is planning a major expansion. In mining equipment, Bitmain is estimated to hold some 70 percent of the market share worldwide. Here is the map - by country - of Bitcoin and other cryptos mining operations:

Source: http://www.scmp.com/tech/start-ups/article/2120373/chinas-bitcoin-miners-wary-tighter-government-scrutiny-make-plans.

The above shows not only the traditional concentration risk (with China and Georgia dominating the market), but also the unsavoury nature of geopolitical risks links. China is a highly unregulated, non-transparent market with production of miners linked closely to access to energy that can be easily shut down by the Government, were it to decide to pull the plug on cryptos and their potential distortion of the markets for Renminbi. Georgia is a country with archaic energy grid and political regime with low degree of predictability.

Current market structure for Bitcoin is skewed, in terms of financial returns, in favour of a small number of large miners, mining equipment makers, exchanges trading Bitcoin and Bitcoin payments processors. The second tier of earners - due to high transactions costs - are local dealers, a handful of leveraged investment funds and earliest holders of Bitcoin (who are, predominantly, early stage BTC companies principals).

Which means that BTC’s primary function is transfer of money from investors to intermediaries and miners.

Current technology behind the Bitcoin is also skewed. Miners - who hold their own wallets and require no exchanges - are secure in their asset holding to the point of their own security. Exchanges are security pressure points for smaller investors who cannot efficiently transfer BTC to their own wallets (due to time lags and costs involved). Intermediaries are secure only to the point of holdings transferred to own wallets, and are not secured for any trading accounts held on exchanges. In fact, they are in the worst possible state, because their exchange accounts are larger in volume (more lucrative target for attacks).

Which means that BTC’s secondary function is transfer of funds from retail investors and traders to cyber criminals.

In neither part of the transactions chain there is any value added created, except for those ‘investors’ using BTC to launder money or evade capital controls. Other returns are pure speculation on BTC’s volatility and its trend (separately for both). As information/data storage and processing platform, BTC is useless: mining - which in theory supports both functions - happens irrespective of meaningful information arrival, which means that any blockchain functionality of BTC is ad hoc, or put differently, at best accidental. This is one of the key reasons why BTC is the worst thing that could have happened to blockchain and also why it is the best thing that could have happened to private blockchain.

Because BTC has no value-added component to it, there is also no possibility for price gains (capital gains) over and above those warranted by its function as illicit money transfer mechanism. Otherwise, BTC would have had an effect of creating financial value out of zero real value-added. Which is impossible outside pure behavioural hype and speculation.

When someone compares the BTC, in the above terms, to stock markets, they are simply revealing massive degree of ignorance. Stock markets have two functions: (1) Primary issuance that raises capital for the firms, and (2) Secondary trading that determines future Weighted Average Cost of Capital for the firm. As such, stock market creates value-added. It might be not exactly what drives stocks valuations all of the time, but in the long run, it is what determines these valuations to a large extent. Stock is a claim against current and future dividends and/or sale/M&A value of the firm assets. Speculation overlays the fundamentals for BTC. In the BTC case, speculation is the only fundamental.

So you can bet on BTC at any valuations you fancy for yourself, but be aware: if you are betting on it speculatively, you are facing a severe liquidity risk. If you are betting on its fundamentals, your bet is that more people around the world will embrace it as a vehicle for tax evasion, capital controls evasion and/or money laundering. Which might be fine in theory, except that theory assumes status quo ante of zero regulation, enforcement and oversight over BTC. Which, of course, is rapidly changing, as the countries like France are calling on G20 to impose global oversight over BTC, and countries like Japan, China, U.S. et al are either imposing increasing degree of tax and regulatory controls over investors in BTC or considering imposition of such. At any rate, does global drugs trade need a USD300 billion payments technology?..

But, hey, don’t just take my word for it. Read this: http://www.businessinsider.com/one-of-the-co-founders-of-bitcoincom-has-sold-all-of-his-bitcoin-2017-12?r=UK&IR=T.

13/12/17: Why cryptos might not prevail? Because of their supporters...

Why cryptos might not prevail? Because of this:

Or, put differently, because the entire hype around cryptocurrencies, and increasing also blockchain technology, is based on myths.

Let's tackle the above, shall we?

Are cryptos a liquid market? No. In fact, the markets are illiquid (see here: http://trueeconomics.blogspot.com/2017/12/81217-coinbase-to-bitcoin-flippers-you.html) and worse, transactions costs for even basic movement of Bitcoin across accounts are atrocious today (in markets without a direct liquidity squeeze, amounting, sometimes to 15%). See https://www.bloomberg.com/view/articles/2017-11-14/bitcoin-s-high-transaction-fees-show-its-limits and https://www.bloomberg.com/news/articles/2017-09-29/paying-15-to-send-25-has-bitcoin-users-rethinking-practicality. Imagine what these can balloon to in a liquidity squeeze event. And then there is concentration issue: http://www.zerohedge.com/news/2017-12-08/bulgaria-government-shocked-discover-it-owns-3-billion-bitcoin and the 1,000 'whales' problem. Oh, no, these are not liquid markets.

Are cryptos global? Yes, if you consider Venezuela, China, Japan and other places where either hype or regulatory evasion or hyperinflation are driving demand for BTC. Yes, if you consider markets for illicit funds flows to be global. No, if you consider usability of BTC in standard sense of money (as a medium of exchange). See https://www.bloomberg.com/gadfly/articles/2017-12-01/bitcoin-is-hot-until-you-actually-try-to-spend-some. It turns out that as a medium of exchange (one function of money) it is utterly useless. It is also useless as a unit of accounting, which is another function of money (no one accepts 'bitcoin-priced accounts' and its volatility makes any attempt at preparing bitcoin-based accounts futile). And bitcoin is horror who as a store of wealth (third function of money), because so far, it has a combination of sky-high volatility, positive correlation with interest rates and upward trend, while also having sky-high volatility to the downside, which suggests that any trend reversal will be really ugly. Now, you do not store wealth over one month (as arguments in favour of bitcoin go), but you store it over the years. And here, bitcoin is untested at best, recklessly dangerous at worst. Take you 'happy middle' pick.

Are cryptos less susceptible to corruption? You need your head examined to believe in this: cryptos are subject to waves and rounds of pump-and-dump scams, potential insider theft, and insider hacks. Worse, they are clearly being used (at least to some extent) to sustain illicit trade and finance flows, and to launder money. Cryptos 'whales' can collude at any point in time to fix the markets in their favour. If bitcoin is susceptible to corruption, a free-for-all unregulated bazar crossed with the Silk Road would be a 'well functioning exchange'.

Possibility of a fractional ownership is clearly available to bitcoin 'investors'. No doubt. So is possibility of fractional ownership for those buying elephants as pets or condos in Bahamas. Hell, you can even have a fractional ownership of a few acres on the Moon. End of story.

Highly secure networks are not a feature of cryptocurrencies, as we all know. Frequency of hacks and other cyber events involving cryptos exchanges this year exceeds the same for large corporate IT infrastructures, according to our research data. Put differently, cryptos appear to be more frequently targeted by cyber crime and/or are more vulnerable to attacks and theft than larger publicly listed corporations. Now, notice that, for now, vulnerability is in wallets and exchanges, not in blockchain itself. 'For now' is the key bit. We do know that cybercriminals are incentivised by abnormally high returns to crime (see https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3033950) and we know that cybercrime is evolving rapidly to acquire ever-expanding capabilities, tools and strategies. It is simply inconceivable that blockchain will remain 'unhackable' into the near future. More importantly, current evidence of the lack of efficient corruption of the blockchain itself rests on the assumption that it is technology that is a barrier to entry for the cyber criminals. This is an untested proposition. In reality, most likely, the reason for lack of efficient penetrations into blockchain system itself is the existence of the low-hanging fruit in the form of exchanges and wallets, as opposed to the impenetrability/security of the blockchain itself.

Blockchain 'changing incentives structure' is the daftest argument in favour of anything, including the blockchain. There is no 'incentives structure' difference between holding/investing in a BTC and holding/investing in any other speculative asset. None. Full stop. Bitcoiners and blockchainers did not change human nature. They did not rewrite our positive and negative incentives systems. To claim otherwise is to impose such a vast range of assumptions on our behavioural incentives and constraints as to make basic economics 101 sound like a reality-hugging discipline of empirical rigour.

'Code wins against theory' is another 'incentives change' mumbo-jumbo. Code, in the case of Bitcoin and cryptos, is theory. Not because it is physically disembodied from the currency. But because it is the basis for the key assumption (axiomatic theory, idiots?) of 'trust'. Bitcoiners are quick to point that there is no 'mistrusted' Central Banker behind the BTC, because there is a 'trusted mathematical algo' behind it. I rest my point, folks. Because you know 'trusted' and 'mistrusted' terms are (1) the defining terms of the bitcoiners' logic, and (2) these terms have nothing to do with logic or mathematics: they are purely subjective. 'Code is theory', morons, because it only matters as long as we believe it matters.

Do bitcoin or cryptos remove 'systems inefficiencies'? Doh! See transactions costs above, lack of exchange medium function, above, lack of storage and exchange security, above. The promise of the blockchain is to reduce systems inefficiencies when it comes to registering and storing information. This has nothing, repeat, nothing to do with BTC or cryptocurrencies. Besides that, there is a host of major problems with market efficiency of bitcoin (see https://www.forbes.com/sites/francescoppola/2017/07/26/the-fundamental-conflict-at-the-heart-of-bitcoin/2/#527d30435aac and https://arxiv.org/abs/1704.01414).  In basic terms, today, Visa and Mastercard are vastly more efficient (in cost, time and security of transactions sense) than BTC is. Worse, as bitcoin rage evolves, efficiencies of the crypto to act as an information clearing platform are further reduced by system congestion. If anything, the boom we are witnessing is 'creating inefficiencies' rather than reducing them.

Finally, there is the last argument that 'enough talented people believe' in cryptocurrencies to warrant their rise to power. Oh, dear. Enough talented people believed in the property bubble, in the dot.com bubble, in every bubble, to drive the respective assets to mad levels of valuations and the eventual crashes. Enough talented people believed that the Sun revolves around the Earth at some point in time too. Talented people beliefs are not exactly a decent test for resilience or sustainability or success of anything. Let alone, cryptos. Why 'let alone'? Because in cryptos case, 'enough talented people' pool of believers is a highly skewed pool of 'talent' defined by affinity for one type of technology. In a way, 'enough talented people' here is equivalent to the Church of Scientology. They define their own breed of 'talented people' by identifying them as believers in the Church. It is a circular argument, folks.

So, no, none of the above arguments are either necessary or sufficient to establish the future of cryptocurrencies or the BTC. Try again. Try harder.

8/12/17: Coinbase to Bitcoin Flippers: You Might Flop

If you need to have a call to 'book profit', you are probably not a serious investor nor a seasoned trader. Then again, if you are 'into Bitcoin' you are probably neither anyway. Still, here is your call to "Go cash now!" https://blog.coinbase.com/please-invest-responsibly-an-important-message-from-the-coinbase-team-bf7f13a4b0b1?gi=f51a107183c9.

In simple terms, Coinbase is warning its customers that "access to Coinbase services may become degraded or unavailable during times of significant volatility or volume. This could result in the inability to buy or sell for periods of time." In other words, if there is a liquidity squeeze, there will be a liquidity squeeze.

Run.

So a couple of additions to this post, on foot of new stuff arriving.

One: Bloomberg-Businessweek report (https://www.bloomberg.com/news/articles/2017-12-08/the-bitcoin-whales-1-000-people-who-own-40-percent-of-the-market) that some 40% of the entire Bitcoin supply is held by roughly 1,000 'whales'. Good luck seeing through the concentration risk on top of the collusion risk when they get together trading.

Two: Someone suggested to me that ICOs holding Bitcoin as capital reserves post-raising are part problem in the current markets because by withdrawing coins from trading, they are reducing liquidity. Which is not exactly what is happening.

Suppose an ICO buys or raises Bitcoins and holds these as a reserve. The supply of Bitcoin to the market is reduced, while demand for Bitcoins rises. This feeds into rising bid-ask spreads as more buyers are now chasing fewer coins with an intention to buy. Liquidity improves for the sellers of the coins and deteriorates for the buyers. Now, suppose there is a sizeable correction to the downside in Bitcoin price. ICOs are now having a choice - quickly sell Bitcoin to lock in some capital they raised or ride the rollercoaster in hope things will revert back to the rising price trend. Some will choose the first option, others might try to sit out. Those ICOs that opt to sell will be selling into a falling market, increasing supply of coins just as demand turns the other way. Liquidity for sellers will deteriorate. Prices will continue to fall. This cascade will prompt more ICOs to liquidate Bitcoins they hold, driving liquidity down even more. Along the falling prices trend, all sellers will pay higher trading costs, sustaining even more losses. Worse, as exchanges struggle to cover trades, liquidity will rapidly evaporate for sellers.

It is anybody's guess if liquidity crunch turns into a crisis. My bet - it will, because in quite simple terms, Bitcoin is already relatively illiquid: it takes hours to sell and spreads on trading are wide or more accurately, wild. Security of trading is questionable, as we have recently seen with https://www.fastcompany.com/40505199/bitcoin-heist-adds-77-million-to-hacked-hauls-of-15-billion, and the market is full of speculation that some of these 'heists' are insider jobs with some exchanges acting as pumps to suck coins out of clients' wallets. The rumours might be total conspiracy theory, but conspiracy theories turn out to be material in market panics.

3/3/17: Gold vs Bitcoin: Prices vs Values

Marketwatch reported earlier that Bitcoin is currently being priced at above the price of gold in USD terms: http://www.marketwatch.com/story/bitcoin-is-now-worth-more-than-an-ounce-of-gold-for-the-first-time-ever-2017-03-02?siteid=bnbh

The comparative is somewhat silly, because, as Marketwatch article notes, Bitcoin market cap is much much smaller than that for gold, which implies that any valuation of Bitcoin to-date incorporates a hefty liquidity risk premium compared to gold. In addition - unmentioned by the Marketwatch - Bitcoin lacks key financial properties of gold, including:

1. Established safe haven properties: gold acts as a safe haven instrument against large scale or systemic risks. Bitcoin is yet to establish such property with any conviction. There are some indications that Bitcoin may be seen in the markets as a hedge against some systemic risks, e.g. capital controls in China, but this property is yet to be fully confirmed in data. Beyond such confirmation, there is no evidence to-date that Bitcoin acts as a safe haven for other systemic risks (e.g. sovereign debt crisis risks in the Euro area, or political risks in the EU, etc).
2. Hedging properties: Bitcoin shows no hedging relationship to key asset classes, in contrast to gold.

The above points mean that in addition to liquidity risks, Bitcoin price is also factoring in premium for lacking the broader safe haven and hedging properties.

While the continued evolution of Bitcoin is a great thing to watch and take part in, immediate valuations of Bitcoin are subject to severely concentrated risks, including the currently extremely elevated risk of Bitcoin demand being severely skewed to China (http://trueeconomics.blogspot.com/2017/01/18117-bitcoin-demand-its-chinese-tale.html) and the supply and legal rights issues with Bitcoin. Hence, as it says on the tin: the comparative to gold is silly, even if entertaining.