
Lessons on Bubbles from Bitcoin - kgwgk
https://www.bloomberg.com/view/articles/2018-04-10/bitcoin-was-prone-to-bubbles-until-bears-could-bet-against-it
======
nsainsbury
Is analysis of the crypto market and the price of various coins even possible?
A lot of articles seem to approach the price of coins as something that can be
rationally discussed, however at the same time we all know the market is a)
unregulated b) has wash trading going on and c) is heavily dominated by a
handful of actors. I mean, hell, even think about the enormous power the
completely unregulated exchanges hold - they could literally behind the scenes
be betting against you on any single trade using knowledge you don't have.

In such a market the price of any coin may not even be set by a plurality of
participants. It can be set by a single motivated participant who's
motivations cannot be divined (except maybe the single driving motivation:
make more money for me and fuck everyone else).

If you're trading in the crypto space today, you're crazy - you're sitting
down for a card game expecting there to be fairness and rules, but there
aren't any. The dealer can stack the deck however they want and change the
rules of the game while you're playing, etc.

~~~
21
> In such a market the price of any coin may not even be set by a plurality of
> participants.

Since you can take/give physical delivery of the coin that is not entirely
true. Meaning that if you force the price to an unsustainable level (either
too high or too low), other smart people will definitely take the other side
of the trade.

~~~
nsainsbury
Not when the buyer and seller are one and the same person.

There's extensive evidence to suggest wash trading, as it's known, is endemic
in the crypto space.

~~~
nostrademons
It's worth remembering Ben Graham's 1949 parable on Mr. Market:

[https://www.fs.blog/2013/11/mr-market/](https://www.fs.blog/2013/11/mr-
market/)

Basically, every market is basically an insane, irrational, manic-depressive,
uncaring business partner who gives you the option to buy his share or sell
yours every day, as long as market hours are open (in the age of
cryptocurrency, this is 24/7). You are under no obligation to take the
transaction, though. If you believe the price is too high, sell. If you
believe the price is too low, buy. If you don't believe anything, hold.

Crypto and the stock market are no different in this regard. The short-term
price is equally irrational in both. (There's pretty good evidence that wash
trading is endemic in the stock market as well - wasn't Goldman Sachs caught
taking both sides of a transaction in the 2009 financial crisis? And many
derivative strategies explicitly rely upon being both long and short at the
same time.)

The difference is that stock market investors have mostly figured out how to
value stocks on fundamentals: the intrinsic value of a stock is all the
discounted value of all future cash flows accruing to the equity investors.
The intrinsic value of crypto is zero, unless, of course, it manages to
replace the dollar as the world's reserve currency, in which case its
intrinsic value is infinite, or more accurately the dollar's value is zero.
Your estimate of the fundamental value of a cryptocurrency should be based on
your assessment of the likelihood that it will replace the dollar as currency.

~~~
lmm
> wasn't Goldman Sachs caught taking both sides of a transaction in the 2009
> financial crisis?

Um, no? What are you talking about?

~~~
samsonradu
Correct me if I'm wrong, but towards the end of the bubble (2008) GS had
insured (bet against) the CDOs that it had previously been propping up.

[1] [https://www.huffingtonpost.com/david-fiderer/the-cdos-
that-d...](https://www.huffingtonpost.com/david-fiderer/the-cdos-that-
destroyed-a_b_499875.html)

~~~
lmm
They had insurance on assets they held, sure. They bought the CDOs from some
parties and sold (CDS on) them to other parties, like any middleman in any
industry. A wash trade is something quite different: buying something from
yourself, with no other parties involved in either transaction, to show a
trade that manipulates the price.

There's nothing wrong with being in the middle of a line of trades. The crime
is when that line becomes a loop and nothing is actually changing hands at
either end.

------
lvturner
I'm pretty new to trading concepts and financial markets so I may very well be
missing something obvious... but from what I can make out, both CBOE and CME
futures are cash settled, so you can't actually "short" bitcoin on them, just
a derivative.

Further, the total volume of contracts for March works out at somewhere around
0.01% of Bitcoin's total market cap, maybe I'm missing something, but this
just doesn't seem like something that could be held responsible for BTC
dropping from 20k to ~7k - the only impact I could see it having is a
psychological value, but then, Bitcoin has had futures from both BitMEX and
OKCoin for quite some time (fee concerns and institutional accessibility
aside) with significantly higher volumes.

~~~
nosuchthing
The Bitmex and Bitfinex futures markets are settled in BTC and it's been
blatantly clear that someone (most likely the exchange operators) are
consistently manipulating the futures market (most likely to wipe out margin
traders who don't know better) with short squeezes that return back to the
norm within hours.

[https://i.imgur.com/LpgnksQ.png](https://i.imgur.com/LpgnksQ.png)

CBOE and CME futures being cash settled is a joke, and removes any incentive
for the risk associated with the long position actually acquiring BTC, further
proving the large traders just want to play with the tool for speculative
market volatility and not actually facilitate using or acquiring the asset
itself.

[https://medium.com/@bitfinexed/latest](https://medium.com/@bitfinexed/latest)

~~~
21
It's not the exchanges who are behind those spikes.

Source: someone who is working on a bot doing that kind of things

And because of the way the market works, there is no need to coordinate with
anyone else doing it (ie: those spikes are self synchronizing)

Those "manipulations" also happen in the traditional markets (forex, ...), but
due to liquidity and general sophistication they are much harder to spot, and
dangerous to do if you don't know what you are doing (dangerous from a
financial perspective, they are perfectly legal).

~~~
nosuchthing

       It's not the exchanges who are behind those spikes.
    

Please. If anyone is in a position to gain the most from market manipulation
like that, it's the exchanges and there's a bucket list of evidence and
malicious behavior from Bitfinex that would make it very surprising if it was
some random outsider causing these types of movements.

Bitfinex and Bitmex margin trading volume has increased significantly and for
the exchange operators have access to

    
    
      (1) order book + margin call data
      (2) ability to falsify trades and capital due to no audits
    

With those, it becomes insanely trivial to set some bait let the fish bite and
simply drain the water or pump it back in on a whim because the order book is
just a database and there's no accountability or auditing to keep the market
exchanges honest.

~~~
hw
There's also allegations about exchanges like Bitfinex where the
owners/management trade on their own exchanges [0]. With insight on order book
and people's stop prices there's an obvious conflict of interest there, as one
can easily go stop hunting and manipulate prices. It's an unregulated market,
and exchanges want to keep it that way (like how Binance's moving operations
to Malta)

[0]: [https://medium.com/@bitfinexed/wash-trading-bitcoin-part-
ii-...](https://medium.com/@bitfinexed/wash-trading-bitcoin-part-ii-who-and-
why-is-someone-wash-trading-on-bitfinex-e1c7b5e0b3bb)

------
DSingularity
I think the actors in crypto have no shame. I love crypto, love the potential
of the tech -- but does anybody doubt that coinbase, bitfinex, kraken,
poloniex -- all the exchanges just flat out robbed people? When the narratives
aligned they pumped/dumped.

Then they have no shame. Poloniex gets bought up. Coinbase/gdax announce
venture capital arm. Its almost like they sucked too much money selling hopes
and dreams to consumers, and now that SEC is watching closely they cannot keep
pump and dumping the market. Just look at the volume drop.

Honestly, the democratized/decentralized characteristics everyone promotes is
a bunch of bull until someone shows me a way democratically bootstrap
ownership without total failures like Satoshi owning 20,000,000,000$ worth of
BTC or a couple of whales owning 50% of the ETH supply because they bought
when it was worth pennies and after BTC went up 10-1000x.

This whole thing seems to just be another means for wealth transfer.

~~~
csomar
I can agree and discuss the wealth transfer mantra on the crypto scene today.
But what does exchanges have to do with that? They, supposedly, don't have any
stake at any coin. They make money with trading volume.

I assume, a reasonable one will understand that it is in their best interest
to have the market grow instead of spike trading volume on pump/dump events.

~~~
banderman
My understanding is that a good number of the exchanges currently operating
require payment to list new coins, often in the form of a significant stake in
the coin itself. At any point has any exchange ever stated that their company
and officers do not hold stakes in the coins that are traded? I haven't seen
it.

------
mathgenius
Volume traded on CME futures has been _insignificant until about two weeks
ago_ [1]. Click on the chart icon and look at the volume bar graph. Each
contract is worth 5 BTC. Looks like they are doing about 10,000 BTC per day
now. So I don't agree with this article at all.

CBOE bitcoin futures is much smaller, but they are also doing about 2500 BTC
per day [2].

[1] [http://www.cmegroup.com/trading/equity-index/us-
index/bitcoi...](http://www.cmegroup.com/trading/equity-index/us-
index/bitcoin.html)

[2]
[https://markets.cboe.com/us/futures/market_statistics/daily/](https://markets.cboe.com/us/futures/market_statistics/daily/)

------
tim333
While I see their hypothesis that the decline in bitcoin from 20k to 6k was
related to the introduction of the futures market there are lots of details
that seem iffy. For example:

Bitcoin had many crashes in previous years

The dotcom boom had a fine boom and bust in spite of there being a futures
market

The US housing bubble also did a big boom and bust without a good futures
market or way to short houses (yeah I know some people kind of did by proxy in
The Big Short but it was hard)

"price will be set by the most upbeat buyer" is kind of wrong. The price will
be set by dealing between the largest buyers and sellers. If people are
selling millions worth at $6k some guy who thinks its worth $100k but who only
has $1000 to invest isn't going to move the market

You've been able to short bitcoin on BitMex since 2015, though using crypto
rather than fiat

------
pietrod
totally trash, an average people can check real influence of that "futures"
thing by himself here: [http://cfe.cboe.com/cfe-products/xbt-cboe-bitcoin-
futures](http://cfe.cboe.com/cfe-products/xbt-cboe-bitcoin-futures) there is
actually more volume in cash on localbitcoin in a rural village in India in an
hour than there in a whole day...

ps, also to short something you need to borrow the asset and pay for the time
of the borrowing, this is bitcoin is really difficult, because pricing can be
really high, holding means covering you from the risk of losing next "bubble",
if you lose that for a miserable 1%/day you are losing all the point of that
asset basically, so these things can happens only in the naive minds of wall
street traders than don't have a real model for bitcoin yet, but just go on
bitfinex and see by yourself if it's good to you to borrow bitcoin to people
who want to short, as i say before, everything in this space can be checked,
this old people with they old analysis are just extremely boring and
meaningless.

~~~
csomar
Shorting futures doesn't require borrowing bitcoin. You usually also get paid
on it (though recently the market has been on backwardation, so you pay). But
the cost is kind of upfront.

------
factsaresacred
> Was this a coincidence? Maybe.

Most likely. Here's Arthur Hayes, CEO of Bitmex, explaining it:

> " _The short pressure at its logical maximum emanating from the CME and CBOE
> contract holders is meaningless._ Therefore, the effect on the broader
> market in actual flows is negligible. The contracts mainly bolster traders’
> bullish sentiment....In terms of trading volume, BitMEX continues to blow
> both of these contracts out of the water. In the year to date, the BitMEX
> XBTUSD, XBTH18, and XBTM18 products traded a combined $53.14 billion versus
> CME and CBOE combined Bitcoin futures volume of $4.48 billion. BitMEX is 12x
> more liquid."

And:

> "The large financial institutions do not own Bitcoin in large quantities, if
> at all. They are hamstrung by KYC/AML concerns surrounding Bitcoin. That
> means that if they wanted to sell Bitcoin, they would need to borrow it from
> a credible counterparty. Hey, Cumberland Mining, can we borrow $100 million
> of Bitcoin?......Assuming banks borrowed Bitcoin with the intention of
> shorting it, they would need to sell it on an exchange. _Given the
> skittishness that inhibits counterparties globally from placing large
> amounts of capital on an exchange, I highly doubt any compliance department
> at a bulge-bracket bank would approve opening an account_.

> Let’s suspend reality and assume they allowed trading desks to open accounts
> on the largest Bitcoin spot exchanges. The maximum the desk could make is
> 100% if Bitcoin went to zero. But, if the market instead face-ripped them by
> 50% on a $100-million position, that loss would reach the global head of
> trading and of the investment bank.

> If you were the line executive that green-lit that trade, you would lose
> your job. You shorted Bitcoin, and lost a huge sum of money. That would make
> it into the financial press; you and your bank would be ridiculed."

~~~
csomar
> The maximum the desk could make is 100% if Bitcoin went to zero.

That's an interesting statement coming from someone whose exchange allows x100
leverage. You can make more than 100% of your initial investment if you
leverage more.

~~~
lifty
You can do that fairly easy when you are trading on a 10k account. It is more
difficult with a 100 million account when you are a bank.

~~~
csomar
The total open interest of Bitmex + okex is around $1bn of futures. That's
$1bn of shorts open on bitcoin.

Bitfinex has around half a billion of Bitcoins borrowed.

I'm not saying $100m is easy, but it is definitively doable in todays crypto
space.

------
f_allwein
> The housing bubble is another example where betting against the asset in
> question was extremely difficult.

Interesting - while you can sell your shares in company X, you wouldn’t sell
your house because you think the market might go down.

On the other hand, if there were futures options on the housing market, would
that help to lower prices?

~~~
kgwgk
You can sell your house and move to a rented one, some people do that when
they think the market will go down.

------
pc2g4d
Can futures really affect the price of Bitcoin when they're settled in USD?

------
paulpauper
more usual weak analysis from Bloomberg, which has become another showcase for
mediocre internet writers

OK..I proclaim myself the most enthusiastic person ever about bitcoin. Now why
isn't the price at 20,000. By the author's logic it should be.

The price fell from $20k to $6k . that is evidence that shorting is not
necessary for prices to fall a lot. look at beanie babies..same thing...no
short seller was needed there either. If widgets are selling for $200 dollars
and no one one wants to pay $200 , then prices fall or no widgets are sold.

~~~
strken
You haven't bought at $20000, so your optimism is irrelevant. If you continued
to buy at any market rate under $20000, then the market rate would rise
towards $20000 until you either went bankrupt or bought out every seller less
optimistic than you, at which point you would no longer be the most optimistic
buyer.

