A few thoughts - Thursday, January 15, 2015
Posted: Thu Jan 15, 2015 12:41 pm
Good morning! A few thoughts for today:
An alternate outcome of lower prices
For the past few days, I've been proposing one likely scenario of an extended period of lower prices, where many bitcoin businesses fail because of a lack of revenue. It came to me that there could be an alternate scenario that comes to pass, where there is an extended period of low prices, all the media articles declare that the industry is dead, and everyone is surprised that somehow, few businesses are failing.
I would imagine that such a scenario would be very bullish for the future. Once people recognize that the bitcoin industry is still surviving despite lower prices, there would be a buying frenzy.
If prices remain low, and somehow companies manage to avoid bankruptcy, then another test will have been passed. The 2011 crash, while severe, didn't have a huge infrastructure at risk. If it is proven that the large industry that now exists can survive crashes like this, then I would be much less concerned that future panics would pose a risk to bitcoin's viability.
Can price maintain lows without huge market sells?
The pattern for the past few weeks has been huge market sells, followed by a period of slow increase, followed by another huge market sell that drops price to a lower level. The increases are becoming more pronounced after every huge sell, with this most recent rally providing a stunning, if temporary, recovery.
It doesn't seem possible to me that prices of $150 can be supported for the long term, given that there is a significant amount of economic activity, even if only on the darknets. The people executing these enormous sells are artificially lowering price below sustainable levels because they create slippage that exceeds rational activity. I'm not going to speculate on why these entities are simply not writing bots to sell a few coins at a time for months on end rather than losing tens of thousands of dollars to slippage.
While people complain that much of the transaction volume is not indicative of economic activity, these sells are not indicative of normal market activity either. If they were, they would not occur with such regularity (i.e. on Sundays and the early morning hours UTC). We would also see matching buys. Panic selling is normal, but this regular selling is not a pattern that we would see if there were a lot of participants making trades with each other.
For now, I think that price is artificially depressed. As soon as the sells dry up, price will rise to whatever is necessary to sustain equal supply and demand, then go above it in a small bubble, and then crash back down to it. The regular sells are providing the excess supply that allows the drug dealers to obtain their bitcoins at the current price; as soon as this supply dries up, look for a small rise once that supply is no longer available and irrational investors pile in. This doesn't mean that there will be a bubble yet, but something more like what happened in November.
Also, the publicity this crash is providing is good. There is no such thing as bad publicity. The worst thing that can happen to any technology is that people aren't being exposed to it. Even reading the usual articles about scams and crime is better than bitcoin falling out of the spotlight.
The death of altcoins?
One of the common themes recently is that altcoins are going to go away. I laugh at this. There are 500 altcoins out there, and there are altcoin generation sites where anyone can pay a few bucks and have a new coin created for himself. Altcoins come and go constantly. We were able to extract almost 2 bitcoins from buyers in the Junkcoin market by mining them until it crashed. Likewise, we pulled 4 or 5 bitcoins from a single buyer in the Elacoin market before destroying it with an enormous market sell.
People may not be aware of the CryptoPumpGroup, which is responsible for a lot of shenanigans in the altcoin markets. The group goes to the trouble of sharing nice diagrams with annotated charts describing their activities. They bid up the price of coins slowly, then place huge buy orders to prop up the coin. People are supposed to buy in above the walls and profit on price rises. They offer a subscription-based service where they identify the coins and the exchanges where the next pump will be. Unfortunately for them, we have made it impossible to do this on Cryptsy because we mine every coin offered there and would quickly take all their money. They still try it on Poloniex and other exchanges.
Note: before I published this, the group's website has been replaced with a "this account is suspended" webpage, so I can't link to it.
Litecoin's death is also exaggerated. Unlike bitcoin, litecoin hasn't even fallen below the low reached during the last litecoin bubble of 0.006. There's nothing new here; litecoin always has been more volatile than bitcoin and once bitcoin prices start rising again, people will start looking for better returns in a more volatile market.
People make the mistake of assuming that altcoin prices are somehow determined by their potential. For a minority of coins, like Darkcoins, that is true. But most altcoins are simply a reaction to market sentiment at the time - nothing more and nothing less. Nobody expects Junkcoins to become the next bitcoin. Instead, they have bot wars with each other to try to earn pennies on $2 orders. We take advantage of bot behavior, as it is very predictable. All you have to do is a large market sell to take out 20% of the market value, and then buy orders start appearing up to 2/3 of the preceding price like clockwork. If you sell gradually, you never trigger any bots and you extract less total value from mining activities before the market crashes.
Altcoins are a more attractive form of penny stocks. Their lack of regulation allows investors to play games with them, and as more people find out about them, I see the altcoin trading community becoming just as large as forums where people share advice on trading penny stocks. The only difference between the two is that there is no risk of fines if you break the rules with altcoins.
An alternate outcome of lower prices
For the past few days, I've been proposing one likely scenario of an extended period of lower prices, where many bitcoin businesses fail because of a lack of revenue. It came to me that there could be an alternate scenario that comes to pass, where there is an extended period of low prices, all the media articles declare that the industry is dead, and everyone is surprised that somehow, few businesses are failing.
I would imagine that such a scenario would be very bullish for the future. Once people recognize that the bitcoin industry is still surviving despite lower prices, there would be a buying frenzy.
If prices remain low, and somehow companies manage to avoid bankruptcy, then another test will have been passed. The 2011 crash, while severe, didn't have a huge infrastructure at risk. If it is proven that the large industry that now exists can survive crashes like this, then I would be much less concerned that future panics would pose a risk to bitcoin's viability.
Can price maintain lows without huge market sells?
The pattern for the past few weeks has been huge market sells, followed by a period of slow increase, followed by another huge market sell that drops price to a lower level. The increases are becoming more pronounced after every huge sell, with this most recent rally providing a stunning, if temporary, recovery.
It doesn't seem possible to me that prices of $150 can be supported for the long term, given that there is a significant amount of economic activity, even if only on the darknets. The people executing these enormous sells are artificially lowering price below sustainable levels because they create slippage that exceeds rational activity. I'm not going to speculate on why these entities are simply not writing bots to sell a few coins at a time for months on end rather than losing tens of thousands of dollars to slippage.
While people complain that much of the transaction volume is not indicative of economic activity, these sells are not indicative of normal market activity either. If they were, they would not occur with such regularity (i.e. on Sundays and the early morning hours UTC). We would also see matching buys. Panic selling is normal, but this regular selling is not a pattern that we would see if there were a lot of participants making trades with each other.
For now, I think that price is artificially depressed. As soon as the sells dry up, price will rise to whatever is necessary to sustain equal supply and demand, then go above it in a small bubble, and then crash back down to it. The regular sells are providing the excess supply that allows the drug dealers to obtain their bitcoins at the current price; as soon as this supply dries up, look for a small rise once that supply is no longer available and irrational investors pile in. This doesn't mean that there will be a bubble yet, but something more like what happened in November.
Also, the publicity this crash is providing is good. There is no such thing as bad publicity. The worst thing that can happen to any technology is that people aren't being exposed to it. Even reading the usual articles about scams and crime is better than bitcoin falling out of the spotlight.
The death of altcoins?
One of the common themes recently is that altcoins are going to go away. I laugh at this. There are 500 altcoins out there, and there are altcoin generation sites where anyone can pay a few bucks and have a new coin created for himself. Altcoins come and go constantly. We were able to extract almost 2 bitcoins from buyers in the Junkcoin market by mining them until it crashed. Likewise, we pulled 4 or 5 bitcoins from a single buyer in the Elacoin market before destroying it with an enormous market sell.
People may not be aware of the CryptoPumpGroup, which is responsible for a lot of shenanigans in the altcoin markets. The group goes to the trouble of sharing nice diagrams with annotated charts describing their activities. They bid up the price of coins slowly, then place huge buy orders to prop up the coin. People are supposed to buy in above the walls and profit on price rises. They offer a subscription-based service where they identify the coins and the exchanges where the next pump will be. Unfortunately for them, we have made it impossible to do this on Cryptsy because we mine every coin offered there and would quickly take all their money. They still try it on Poloniex and other exchanges.
Note: before I published this, the group's website has been replaced with a "this account is suspended" webpage, so I can't link to it.
Litecoin's death is also exaggerated. Unlike bitcoin, litecoin hasn't even fallen below the low reached during the last litecoin bubble of 0.006. There's nothing new here; litecoin always has been more volatile than bitcoin and once bitcoin prices start rising again, people will start looking for better returns in a more volatile market.
People make the mistake of assuming that altcoin prices are somehow determined by their potential. For a minority of coins, like Darkcoins, that is true. But most altcoins are simply a reaction to market sentiment at the time - nothing more and nothing less. Nobody expects Junkcoins to become the next bitcoin. Instead, they have bot wars with each other to try to earn pennies on $2 orders. We take advantage of bot behavior, as it is very predictable. All you have to do is a large market sell to take out 20% of the market value, and then buy orders start appearing up to 2/3 of the preceding price like clockwork. If you sell gradually, you never trigger any bots and you extract less total value from mining activities before the market crashes.
Altcoins are a more attractive form of penny stocks. Their lack of regulation allows investors to play games with them, and as more people find out about them, I see the altcoin trading community becoming just as large as forums where people share advice on trading penny stocks. The only difference between the two is that there is no risk of fines if you break the rules with altcoins.