Incoming Bitcoin & Altcoin Buy Wave?

Disclaimer: This is just rampant speculation. I own crypto.

A thought struck me today as the crypto market has been fairly quiet the last few days compared to the mayhem a week ago. Many crypto currencies like Litecoin and Ethereum were up 50-100% last week, only to trim gains this week. CBOE Bitcoin futures didn’t appear to have much impact on price at all in the first week of trading either. In hindsight its clear to see that the market needed to cool, but I have a feeling that the “cooling” might be over for a bit.

I dont think that price is down because demand is down. I suspect what we saw was the first “wave” of another to come.  Why is it “to come” and not “here”? People can’t get in fast enough. Exchanges are overwhelmed with new signups.

For example, Coinbase which is now the #1 App on Apple added over 780,000 new users THIS MONTH.

Bittrex shut off applications for new users because of demand.

People tell me they can’t get their accounts open pretty much anywhere. Amazing, if true.

All these people are coming online, desperate to make gains. Should a little rally spark FOMO will kick in and we could see a big move in the market.

 

Here’s One Way the Bitcoin Bubble Doesn’t Burst

Lets Face It, This is A Bitcoin Litecoin Ethereum Bubble

Coinbase is the #1 App on the Apple App Store and your Barber/Grocery Clerk/Grandmother are all buying in. Prices have surged unbelievable amounts in the past few days (let alone year). My hunch is that most people buying in now are trying to get rich and are not trying to escape the grasp of the evil Wall Street empire.

Keep in mind, just because there is a price bubble doesn’t mean the technology isn’t awesome. The prices of Bitcoin or Litecoin could go down 90% and the tech would be just as mind blowing.

Its also possible I’m wrong and that prices just keep going up. Many point to this chart showing internet adoption:

Bubbles that did not pop

The key to all these tech was ADOPTION – people used them. This chart is also talking about ADOPTION and not PRICE. These are two different things, but brings me to a point:

People drawn in by trying to get rich might just stick around and ADOPT crypto tech.

Clearly millions of people are flooding into the crypto space, and if they don’t SELL but start to transact with each other using Bitcoin or Litecoin – then prices might not come back down.

Bitcoin Needs A Killer App

Just as email is what made people use the internet Bitcoin doesn’t have that killer app. Its hard to buy and sell crypto – its confusing. Coinbase has done just an OK job of being a Bitcoin gateway for people and they are crushing it. But still – sending payments from Coinbase to another person isn’t obvious. Thats not what Coinbase was designed for (it was designed to overcharge you for crypto purchases).

Enter: Square.

Maybe this is the App that turns Bitcoin into “Venmo” and drives adoption. Square’s founder and CEO is Jack Dorsey the CEO of Twitter. I couldnt find anything about the number of Square Cash users, but here is some insight on the app network.

Square Bitcoin App

The reviews claim that buying Bitcoin on the app is very easy and intuitive. People also trust Square.

All these people speculating on Bitcoin price could suddenly find themselves transacting quickly and easily using Bitcoin. They could adopt it. That might keep prices up, or even be a catalyst for higher prices.

In the end we’re in the first or second inning of all this tech. Prices will do what they will but its clear that crypto is here to stay.

What Bitcoin Futures Means for Bitcoin Price

Trying to forecast which direction Bitcoin futures will push Bitcoin prices is strictly a roll of the dice. What I can estimate with seemingly better certainty is that Bitcoin futures will start to damped the volatility in Bitcoins prices.

Bitcoin Futures will Damped Bitcoin Volatility

The CME is using a 5 exchange Bitcoin price index and the Nasdaq is using a 20 exchange price index. This means that these exchanges pull prices from all these exchanges to calculate a blended Bitcoin price. Market makers and arbitrage players who provide liquidity for Bitcoin futures will then have to protect themselves trading the underlying Bitcoin versus the futures. This means that as they buy or sell futures they will sell or buy the actual Bitcoin on various exchanges. This probably means that all the prices on the bitcoin exchanges should converge to be in line with each other.

Currently there are arbitrage players out there doing this across various exchanges now, but there isn’t really a “master” bitcoin price to tie to. All the exchange move independently of each other. Futures means that all exchanges will start to tie to the futures price and to each other.

What Lower Bitcoin Volatility Means

Lower Bitcoin price volatility is a big deal for Bitcoin. For me its the key driver for Bitcoin to transfer from a vehicle for investment/speculation to a transnational currency. When merchants and service providers can count on Bitcoin prices being stable they will look to accept Bitcoin for their products and services. Currently its very difficult to count on what the Bitcoin price will be tomorrow much less three months from now. This makes Bitcoin unfit for payment methods in many circumstances. Stable bitcoin prices should change all of this.

This could secure Bitcoins place as the defacto global payment method. That would be big.

Pigs Get Slaughtered: Margin Trading Bitcoin

There is a famous saying “a fool and his money are soon parted”. One thing that bothers me about the Bitcoin space is all that all of the people catching this rising tide think they are the Warren Buffet and can’t lose. News flash: you aren’t a great trader. When every crypto goes up everyone looks like a genius. Then they get cockier and their false bravado builds pushing them to trade on margin making even more money.

Then suddenly a sharp drop in price hits a few margin players as the exchange forces them out of their position. This creates cascading margin sales as other people are then forced out.

This article on BI talks about the guys hurt in Bitcoins recent flash-crash. They trade using margin on Bitfinex and when the price tanks they get liquidated at prices they say aren’t fair. Its possible they were forced out at bad prices – but they still would have lost a lot of their holdings. Keep in mind these guys are using margin (very dangerous) on an exchange which is completely unregulated and has major rumors of shady behavior. This accident was waiting to happen.

This brings us to a well known trader saying to all those in the crypto space:

“Bulls make money, bears make money, pigs get slaughtered”

Bitcoins All Time High Price

Why are Bitcoin prices rising exponentially? I think this is “retail” buying all with a fear of missing out (FOMO). I mean, who wouldn’t look at this chart and think “now is the time to buy?”

 

Anecdotally I can say that Coinbase has been trading at higher prices relative to other exchanges over the past several days even weeks.  Coinbase is arguably the easiest platform for “retail” investors to buy Bitcoin. News broke recently that Coinbase now has more users than charles schwab.

This tells me that the small retail buyers are pushing in trying to get in on the action. For reasons I’ve discussed earlier its impossible to try and call a top – even a temporary top.  Big dips have happened, but there have been buyers eagerly awaiting entry. This is reinforcing new buyers who feel getting into bitcoin is a “can’t lose” proposition. Maybe these buyers are right and we’re witnessing a paradigm shift to Bitcoin as the new “money”. Or, maybe prices have gotten ahead of themselves. Who knows.

Anyone that claims to knows what happens next is a liar. Just don’t trade with more than you can afford to lose, and enjoy the ride.

Bitcoin Popular with Preppers & They’re Wrong

Much has come out recently about Bitcoin becoming more popular than Gold as a hedge against calamity. This makes inherent sense to me for “mainstream” investing. Bitcoin is outside of the banking system and control of government. Its (on its way to becoming) universally accepted and has shown great utility for people in escaping governments which are collapsing (see Zimbabwe and Venezuela).

Whats odd to me is when the Preppers come in and we see stories that they are looking to Bitcoin as an alternative to gold for use in a doomsday scenario. Bloomberg highlights this here:

Across the North American countryside, preppers like McElroy are storing more and more of their wealth in invisible wallets in cyberspace instead of stockpiling gold bars and coins in their bunkers and basement safes.

They won’t be able to access their virtual cash the moment a catastrophe knocks out the power grid or the web, but that hasn’t dissuaded them. Even staunch survivalists are convinced bitcoin will endure economic collapse, global pandemic, climate change catastrophes and nuclear war.

“I consider bitcoin to be a currency on the same level as gold,” McElroy, who lives on the farm with her husband, said by email. “It allows individuals to become self-bankers. When I fully understood the concepts and their significance, bitcoin became a fascination.”

On one side she exhibits a true understanding of the value of Bitcoin – becoming a “self-banker”. This to me is the greatest value of Bitcoin. On the other points I am lost.

If the power grid goes out for a sustained period or there is a nuclear war then forget Bitcoin. Firstly the Bitcoin network would most likely grind to a halt particularly if the power problem is in China or any other place where mining is concentrated. If they can’t run then the network crashes and you can’t trade those precious bitcoins. In a true doomsday scenario you are going to want food, toilet paper, etc and are going to want to trade for things with true utility.

What I suspect is happening is people are jumping on the bandwagon here for bitcoin as a speculative investment betting that prices will rise. They then claim that Bitcoin is useful (even if the power grid is down) to support their speculation. If you are a truly wanting to get out of the system you can convert all of your fiat cash to Bitcoin and use Bitcoin exclusively to buy and sell everything (get a Bitcoin Visa card). I don’t get the impression that is what preppers and others like them are doing.

This brings me to my final point. Bitcoin can be a beautiful answer to much of what is wrong in this fiat/central banking dominated system. If people all started to use  bitcoin rather than hold it because it will make them rich – then Bitcoin has a real future. I suspect that it will take a systemic shock to get people to switch to using Bitcoin to transact. An event wherein everyone sees the value of being outside the banking system.

For now it appears Bitcoin is more of a “get rich quick” scheme.

This Guys Math Says Bitcoin Put in a High

I like to read different methods of pricing bitcoin. I came across this one on reddit which points to $7,500 as a top. Permanent or short term top, who knows. But his logic is interesting. Remember – see both sides.

From Reddit

Bitcoin Will Crash Below $3000. https://bitcointalk.org/index.php?topic=2396770.0

Bitcoin rises from $611, June 2016, to the current price of near $8000. This is an exponential rally, a rise with an accelerated rates. Such a rally defines a market bubble as it will very quickly reach a level that cannot be sustained – when the bubble must burst crashing the market. The past examples are the Dutch Tulip Bubble of 1637 and the Dot.com bubble of 2000. Such bubbles always bring prices to levels where it started.

That exponential markets must crash may be just a simple law of nature. In order for such inflated prices to be maintained, there must be some support from the underlying fiat money supply. The maintenance of trading volume means generally a greater money supply allocation to such a market; it is likely such cannot be maintained at a point in time causing the market to burst.

I have done an exponential curve fit of bitcoin prices from 2016/10/6/611 to 2017/11/16/7843. Extrapolation of the exponential curve (y = A exp (kx)) is done and the figures shown below.

Data: coindesk.com 1 year data number of points = 25 curve fit : y = 501.428 exp (0.006268 x)

2016/10/6/611 0, 611 2016/11/19/751 44, 751 2016/12/26/903 81, 903 2017/1/26/915 112, 915 2017/2/26/1180 143, 1180 2017/3/16/1173 161, 1173 2017/4/23/1284 199, 1284 2017/6/1/2452 238, 2452 2017/6/28/2584 265, 2584 2017/7/30/2746 297, 2746 2017/8/19/4206 317, 4206 2017/8/26/4387 324, 4387 2017/9/11/4190 340, 4190 2017/9/13/3874 342, 3874 2017/9/22/3603 351, 3603 2017/9/28/4185 357, 4185 2017/9/30/4353 359, 4353 2017/10/6/4370 365, 4370 2017/10/12/5439 371, 5439 2017/10/24/5519 383, 5519 2017/10/28/5733 387, 5733 2017/10/31/6447 390, 6447 2017/11/9/7146 399, 7146 2017/11/15/7280 405, 7280 2017/11/16/7843 406, 7843

days 0, 2017-11-16, $6389 days 10, 2017-11-26, $6802 days 20, 2017-12-6, $7242 days 30, 2017-12-16, $7710 days 60, 2018-1-15, $9306 days 90, 2018-2-14, $11231 days 120, 2018-3-16, $13555 days 150, 2018-4-15, $16359 days 180, 2018-5-15, $19744 days 210, 2018-6-14, $23829 days 240, 2018-7-14, $28759 days 270, 2018-8-13, $34708 days 300, 2018-9-12, $41889 days 330, 2018-10-12, $50556 days 360, 2018-11-11, $61015 days 540, 2019-5-10, $188558 days 720, 2019-11-6, $582704 days 900, 2020-5-4, $1800738 days 1080, 2020-10-31, $5564849 days 1260, 2021-4-29, $17197135 days 1440, 2021-10-26, $53144558 days 1620, 2022-4-24, $164233406 days 1800, 2022-10-21, $507532895

The extrapolation data may be used to predict when the bitcoin bubble may burst. The method is to make use of proof by contradiction. It makes an assertion X; then it uses deduction logic starting from X to arrive at other statements of truth. If if arrives at a statement such as : 3 < 2, which is clearly false, then a contradiction exists refuting the assertion X. We can us this method on the extrapolation data.

Assertion : Bitcoin can reach $507,532,895 in five years, by 2022.

Unlike in mathematics, we cannot here make deterministic deduction using pure logic. We can only make a judgment based on our common sense and intuition and say how likely something may happen.

Most of us very likely would dismiss bitcoin at $507,532,895 by 2022. So we try other extrapolation figures. Say we also dismiss $5,564,849 in 2020, 3 years from now. So when is this bitcoin bubble likely to burst.

The price based on the exponential trend has the figure $6389, days 0, 2017-11-16. We are now doing at $7800 at this point which seems too high above trend. In the least there should be a significant correction – or it may even mean this:

Bitcoin bubble may burst any time now.

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Could the CME delay Bitcoin Futures?

CME Bitcoin Futures Risk

The CEO of Interactive Brokers, Thomas Peterffy issued a letter to the CME requesting delay of the Bitcoin futures launch citing volatility which threatens the entire CME futures system.  The CME has installed bitcoin futures halts for price moves greater than 7%, but Bitcoin has shown it can move much more than that.  Peterffy does raise a good point – if Bitcoin does drop 25% or more in a matter of hours could this “blow up” one of the CME institution leading to margin calls, etc?  The CME has stated that it wants to require much higher margin than other products:

CME Bitcoin Futures Proposed Margin
CME Bitcoin Proposed Margin

I’d surmise that is probably not enough. The main reason is that Bitcoin does not yet have enough correlation with other assets to hedge. If you are long corn and short soybeans there is probably a correlation there that works for some type of hedge. Not so for Bitcoin. There is not yet a verifiable way to hedge a long position in Bitcoin Futures, either. Therefore if major losses are taken in Bitcoin the traders will have to liquidate other positions like oil, or even S&P futures. You could then surmise that a massive loss in Bitcoin futures could hit the stock market overall if traders have to liquidate S&P futures.

CME Bitcoin Price Index

The second issue with all of this is how the CME is creating its Bitcoin Price Index. (FYI The CME provides a reference paper here). Originally the CME included Bitfinex and OKCoin exchanges in addition to 4 others (GDAX, itBit, Bitstamp, Kraken). Bitfinex and OKCoin had to be dropped as they decided to punt US customers. Kraken on the other hand has had major tech issues. A quick search on reddit reveals irate customers complaining for months that you cannot login or place orders. Bloomberg too has picked up on this story here.

I bring this up because the CME is basic its prices on exchanges which may or may not be in existence in the very new future. When Bitcoin traders start to fear the viability of an exchange the Bitcoin price on that exchange can move way out of range relative to the other exchanges (see here).

At the end of the day Bitcoin Futures make sense, but they shouldn’t be launched hastily.  If it launches and breaks, that could end up badly for all those involved and be a permanent black eye for Bitcoin on the institutional level.

If You’re a CEO just say “Bitcoin”

Update 12/14/17 – Had to note this one: “Rich Cigars Inc” is now going to be a blockchain tech company. Makes sense. Stocks up….850%!!!!

Rich Cigars Is Now A Blockchain Tech Co
Rich Cigars Is Now A Blockchain Tech Co

 

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Squares CEO Jack Dorsey (also CEO of Twitter) announced Square is going to add the ability to buy Bitcoin through its app and the stock is up ~3% today.

square bitcoin chart
square bitcoin chart

There are other examples here where stock news comes out including buzzwords like “bitcoin” and “Blockchain” which sends the stock soaring. If the recent Bitcoin/Bitcoin cash debacle proved anything its that this crypto space is rapidly changing and highly speculative. If you’re a CEO you can’t possibly predict your revenue from adding Bitcoin. Bitcoin is growing slowly as a payment method but its dominated by traders and holders. Yes “blockchain” is a revolutionary idea that will change business but I question the incremental value of Square adding Bitcoin purchases. Don’t get me wrong, as a holder of Bitcoin its great news. But is it really going to move the needle for Square in the near future?

I am not sure if the people buying Square on this news are just bullish on Bitcoin and its a way to express that, or if they think this is really going to boosts Square’s business. I wonder if the launch of Bitcoin Futures on the CME this December will cool this off a bit.

To me it reeks of speculation when stocks rip up just using these catchphrases and is something that helps build the Bitcoin “bubble” case.

Crypto Derivatives CFD’s

Embarrassingly this is the first I’ve come across a crypto derivative contract called contracts-for-differences, or CFDs. So all those gamblers betting on horses or Manchester United can now play Bitcoin or other cryptos without having to actually buy the crypto.

Apparently these things are like options or futures contracts, only you make them directly with your broker. They’re also traded on margin so the losses can mount quickly, especially in crypto land where things move 20% in a blink. You also have major counterparty risk because depending on whom you trade with – they might not be able to pay you back. Or, they might just refuse to.

Good article here. Apparently these things are coming under heavy scrutiny from regulators. Seems best to stay away.