Professional Traders Show Interest in Bitcoin

http://www.reuters.com/article/2012/04/01/traders-bitcoin-idUSL6E8ET5K620120401

by mrb • 14 years ago

101 103 14 years ago

reuters.com

api• 14 years ago

Bitcoin's "demise" is greatly exaggerated. I still think it's a big thing.

keen3• 14 years ago

Agreed.

It will be interesting to see what happens at the end of this year when the block reward halves.

javert• 14 years ago

What do you expect to happen? What are the possibilities?

ScottBurson• 14 years ago

There's a great punch line if you read all the way to the end. But I'll save you the trouble. The set up:

Banking and payment expert Simon Lelieveldt believes [Bitcoin users] are living on borrowed time. "There is always a power base underlying a currency," he said, speaking at the Digital Money Forum in London in March. "Bitcoin is not going to fly because there is no central bank or power base. It's doomed to fail."

And then, at the end:

"To be clear, I would say the same about the euro," said payment expert Lelieveldt.

otoburb• 14 years ago

I thought this link was a Reuter's April Fool's joke.

stuhood6• 14 years ago

Dated April 2nd.

gfodor• 14 years ago

It would be interesting to hear a real quants take on the utility of having bitcoin as a (small) asset class in your portfolio. How much correlation does bitcoin have to any other asset class? I'd wager very, very little, making it a strong candidate for diversification. That said, it's overall volatility might offset the reduced expected volatility you'd see in your portfolio by holding some.

nandemo2• 14 years ago

I'm not a quant, but you also have to consider the operational and regulatory risk of dealing in bitcoins. The people who are currently trading bitcoins don't necessarily have to follow the same regulations that banks and trading houses do.

Also, consider that over 80% of the foreign exchange market is accounted by 6 currencies or so: US dollar, yen, euro, British pound, Swiss franc and Australian dollar. Traders barely bother with the Brazilian real or Indian rupee, even though these currencies are much more likely than bitcoin to be around in 5 years.

jerguismi3• 14 years ago

> even though these currencies are much more likely than bitcoin to be around in 5 years.

How so? As bitcoin is a p2p network, it is likely to be around whatever happens. The only thing that could happen would be that internet breaks down - pretty unlikely, I think. Even when internet breaks in several pieces, each "local internet" will just use their own bitcoin - the block chain will be split in to several. After the two "local internets merge", the blockchain which has more computation behind it, will win.

In discussion, you should separate two things a) bitcoin's economic value/utility b) bitcoin network itself. I'm pretty sure that bitcoin itself will be here about forever, however it is pretty unclear if anyone will use it.

clarkmoody• 14 years ago

As for portfolio allocation, you are right about the volatility being high, thus the allocation being small.

At this point, Bitcoin is being treated as a speculative instrument. It does not share the same status as gold, being a store of value, and thus it will not move based on the fears and hopes of fiat currencies. From that standpoint, it should be entirely uncorrelated from the fiat banking system and traditional investments. Be careful if you are trading for Bitcoins denominated non-USD, as those prices will move with exchange rates as well.

From a regulatory standpoint, Bitcoin is in limbo. Right now, it's no different than trading bottle caps, but when the regulators come down on it, there will be a different story.

In short, the two forms of investment risk you face are volatility price risk and regulatory risk.

JumpCrisscross4• 14 years ago

I was a quant prop derivatives trader at an investment bank.

The correlation between MtGox/USD [1] and GLD daily returns over 12 April 2011 - 30 March 2012 is 0.02; a linear regression produces a 0.151 beta (GLD daily returns independent) with a coefficient of determination of 0.0004. GLD had a period return of 14% with an average daily return (standard deviation) of 1.4% (0.1 percentage points); MtGox/USD had 531% with 10.2% (1.3 percentage points). It thus seems like it could have a place in a portfolio above (in terms of risk) small cap and emerging market stocks (on your worst day in GLD you lost 5.5%; in MtGox/USD 35.8%. Also, GLD delivered 2.7 times the return per unit of risk). Methodology note: since MtGox trades every day and GLD only on trading days, I used closing prices for trading days.

Bitcoin takes the monetary system back essentially a hundred years. We know how to beat that system. In fact, we know how to nuke it for profit. Bitcoin is volatile, inherently deflationary and has no lender of last resort. Cornering and squeezing would work well - they use mass in a finite trading space. Modern predatory algos like bandsaw (testing markets by raising and suddenly dropping prices), sharktooth (electronically front-running orders), and band-burst (creating self-perpetuating volatile equilibria in a leverage-sensitive trading space, e.g. an inherently deflationary one), would rapidly wreak havoc. There is also a part of me that figures regulators will turn a blind eye to Bitcoin shenanigans.

[1] http://bitcoincharts.com/charts/mtgoxUSD#rg60ztgSzm1g10zm2g2...

nl• 14 years ago

This post deserves to be read much more widely than it probably will.

MrMan2• 14 years ago

/bitcoin

let's move on to something else

_k2• 14 years ago

You can say that about the gold market as well, no ? It takes you back a hundred years and you can corner and squeeze it.

Estragon2• 14 years ago

Your post raises a couple of questions for me:

1) If you know how to nuke the bitcoin system for profit, are you doing so? It's not clear to me that you personally would be able to corner and squeeze as easily as you think, because I believe most bitcoins are held by a small group of people with a long term interest in a viable bitcoin economy.

2) HFT is usually justified by its practitioners as improving the stability and liquidity of the market, but here you characterize it as a fundamentally predatory tool if applied to bitcoin. What do you think about it in general?

moldbug3• 14 years ago

BS.

How do you "corner and squeeze" a market that can't be shorted? You can manipulate GLD down by issuing naked shorts (essentially counterfeited against collateral). But you can't counterfeit Bitcoin. If you want to drop the market price of Bitcoin, you have to sell actual BC that you had before and don't have now.

Then, to actually profit, you have to find a way to buy those BC back for less than you sold for. This isn't going to happen unless your smart algo finds an equal and opposite stupid algo that it can rape. Who gets raped and why?

(If you ask me, it's BC that's a well-designed market and Wall Street that's a funky, broken anachronism. A lot of stupid pointless volatility would go away if we eliminated synthetic securities and lenders of last resort, and replaced the ancient order-matching system with a central limit-order book. Then, you'd have to actually add information to the system in order to profit - rather than profiting by raping other algos, and more plausibly retail traders, with "sharktooth and band-burst.")

SonicSoul• 14 years ago

Interesting post.

wouldn't it be difficult to cause such HFT havoc on a currency that is not that frequently traded (relative to big exchanges)? After all, someone has to be on the other side of all those HF trades. Also, since it's heavily decentralized wouldn't that make it more difficult to execute trades in high quantities?

JumpCrisscross4• 14 years ago

EDIT: MtGox/USD returns 0.12 points per unit of standardised risk in a simplified environment; GLD 0.05 (both these numbers are very low). Thus, Bitcoin delivers 2.7 times the return per unit of risk as GLD; I got it backwards in my post. Sorry about that.

3pt141593• 14 years ago

Bitcoin is mathematically flawed. There are at least two attack vectors that someone with a million bucks or less could pull that would require manual overrides on the code, which, as nobody likes to talk about, is possible.

edit: Disclosure: I made a bunch of money getting in on bitcoin early and then selling out at around $22. It was at that point where I looked at the whole system and determined the attack vector.

Also the only way to get bitcoins securely is to buy and sell them for cash. And even then there are ways of figuring out who is who.

The next thing will be the right thing, but this isn't it. The long term picture for bitcoin, unless completely overhauled, is bleak.

sgornick2• 14 years ago

Care to describe further this attack vector? A 50% + 1 attack is about in the $10+ million range, but still doesn't "override the code".

3pt141593• 14 years ago

You don't need majority. And the attack isn't about stealing money, its about taking down the system and making people lose faith in it. Remember: to make money all you need is some unlikely put options and for knowledge of market instability.

mrb2• 14 years ago

You are off by an order of magnitude. It would take $9M of FPGAs to have a clear probability of performing a majority attack https://bitcointalk.org/index.php?topic=67969.msg821634#msg8... This is without even counting hosting costs: power, cooling, space.

3pt141593• 14 years ago

It isn't a majority attack. Infact, today, it would probably be cheaper since bitcoins are a third of what they were when I found it. All you need to do is crash the market and buy put options against it, you don't need to create nonvalid transactions.

unimpressive2• 14 years ago

The cost of such attacks will go down as bitcoin ages.

As I understand it the bitcoin rewards of mining go down over time. If the rewards go down over time, eventually it won't be profitable to mine bitcoin. So the speed of transactions goes down and the network becomes weaker because theres less cooperating computer time on it.

Maybe I just don't get bitcoin. But if true that seems like a fundamental problem.

ewillbefull4• 14 years ago

Block rewards are not the only way to earn from mining bitcoins. You also earn transaction fees of processed transactions. As block rewards dissipate, transaction fees will naturally increase to compensate.

skylan_q2• 14 years ago

"If the rewards go down over time, eventually it won't be profitable to mine bitcoin."

Yes.

The idea is the following: If the amount that can be mined per unit of computation is decreased, then fewer will be created. And if there are less of them being created and more of them demanded, then their value increases. So this balances out. Also, computational power gets cheaper with the passage of time.

The largest caveat I see there is the part about more of them being demanded. (or equivalently, the market equilibrium of demands for bitcoin holdings shifting towards greater demand)

dfc• 14 years ago

So you are sitting on two closehold, major 0days in bitcoin? I do not mean any disrespect but why would we believe you?

Unrelated Question: Why do you have a pgp cast5 encrypted message in your profile?

sgornick2• 14 years ago

"A spokeswoman for the German Bundesbank told Reuters it was not classifying Bitcoins as e-currency.

She said EU law required only euros to be accepted as legal tender, but this was superseded by German law that allows those involved in a contract to determine its content. So Bitcoin is at least not illegal there."

It wasn't even a year ago when the German organization BVDW (The Federal Association of Digital Economy) put out an alert: "We assume that, on substitute currencies' like Bitcoins sooner or later be banned by legislation,"

- http://bitcointalk.org/index.php?topic=11061.msg158226#msg15...

soup102• 14 years ago

Bitcoin has several huge flaws that make it just a toy. The first is that it is insecure. As seen by the constant incidents of stolen and lost bitcoin's. Physical currency is much more secure than a string of bits sitting on a hard drive, the solution to this is having bitcoin banks that assume responsibility for the bits, but that defeats the purpose. The second is that it's much less convenient than cash. The third is that the distribution system is set up as ponzi scheme where early adopters reap enormous amounts of wealth if they recruit more bitcoin users(which is why the bitcoin astroturfing is so persistent), people generally don't like participating in ponzi schemes.

In addition to this the implementation is known to be technically flawed and vulnerable to attack. The system is easily disrupted by a sufficiently interested and funded party.

ewillbefull4• 14 years ago

I don't know if this is a troll post, but I'll humor it anyway.

> The first is that it is insecure. As seen by the constant incidents of stolen and lost bitcoin's.

If this is the standard by which you deem a currency insecure, you may want to be more specific. Physical goods are also susceptible to theft.

> Physical currency is much more secure than a string of bits sitting on a hard drive

This isn't really substantiated by anything, and I implore you to read about paper wallets. But you're also ignoring another useful characteristic of bitcoin: coins cannot be counterfeited, unlike any other currency. They are crytographically ensured.

The security of your funds is not inherently endangered by the network by any means. I can accept bitcoin donations anonymously and there is no way they can be targeted without additional context. With physical transactions, there is always location.

> The second is that it's much less convenient than cash.

Cash is much less convenient than digital transactions. Have you heard of a credit card? Cash is only useful for anonymity.

> The third is that the distribution system is set up as ponzi scheme where early adopters reap enormous amounts of wealth if they recruit more bitcoin users(which is why the bitcoin astroturfing is so persistent), people generally don't like participating in ponzi schemes.

The currency incentivizes its own operation, yes, but this is not even close to a ponzi scheme -- you should look that term up. The technology does not distinguish early adopters from other participants.

politician2• 14 years ago

You'll admit, though, that a bitcoin lost is lost forever, and that at some point the rate of lost bitcoins will exceed the rate of newly minted bitcoins. Even if it attains 100% adoption, the current system will simply dissipate.

In that sense, if not insecure, it certainly isn't resilient.

jarek10• 14 years ago

> But you're also ignoring another useful characteristic of bitcoin: coins cannot be counterfeited, unlike any other currency. They are crytographically ensured.

That's not a useful feature for me. Receiving counterfeit currency is very low on my list of concerns in life. It is a useful feature for governments, who would no longer need to ensure its currency isn't being counterfeited, but governments don't like this currency for a number of other reasons.

soup102• 14 years ago

> If this is the standard by which you deem a currency insecure, you may want to be more specific. Physical goods are also susceptible to theft.

Theft and loss of bitcoin is much much more common than theft and loss of any normal currency. Insecure.

Bitcoins are data, and data is very easily lost. What if the hard drive with your wallet on it fails? When a hard drive fails at a bank your money is still secure. Storing bitcoin on a home computer is not even close to as secure as storing money in a bank.

>Cash is much less convenient than digital transactions. Have you heard of a credit card? Cash is only useful for anonymity.

Bitcoin is much less convenient than cash and credit cards. Nobody accepts bitcoin as payment. And as far as I know there is no existing way to link a bitcoin account with a credit card. I'm not saying the flaws are unfixable just that they are huge flaws with bitcoin. I'm criticizing bitcoin for what it is, not what it could be.

>The currency incentivizes its own operation, yes, but this is not even close to a ponzi scheme -- you should look that term up. The technology does not distinguish early adopters from other participants.

The bitcoin distribution system is a big problem. Whatever you call it, it is an unfair and unstable system where early adopters profit when more people adopt the currency, and late adopters end up holding a risky asset with unstable value. Without a backing authority stabilizing the price, alternative currencies are just toys and far too risky for normal people to get involved in.

dsrguru• 14 years ago

"The Royal Canadian Mint ... said Bitcoin's biggest problem was that it is not backed by anything."

I don't think that's why consumers would fear it being unstable. It's probably more that they're afraid most of the current users aren't using it for its intrinsic advantages over regular currencies, but are rather investing in it as speculators (and will, therefore, eventually pull out). Since it was designed in a way that made early adopters super rich, it lends the appearance of being the very kind of investment bubble that Bitcoin advocates criticize the banking industry for creating.

kylebrown4• 14 years ago

> it lends the appearance of being the very kind of investment bubble that Bitcoin advocates criticize the banking industry for creating.

The quote encoded in the genesis block by Satoshi (creator of bitcoin) was probably a criticism of fractional reserve banking rather than investment bubbles per se. "The Times 03/Jan/2009 Chancellor on brink of second bailout for banks"

But there are plenty of bitcoin advocates who tirelessly criticize bitcoin speculators for causing its price volatility. Not that price volatility is unique to the bitcoin market (its the same with oil, stocks, gold/silver, commodities in general, real estate, bonds, etc. etc.).

adrianwaj• 14 years ago

I have a gut feeling that the bitcoin price will eventually explode. I don't know when, how or why, nor am I putting my money where my mouth is, so I don't say it. But unless some other substitute system is devised, I suppose the crash of fiat currencies would cause it. But in this case I think gold would be better.. or would it?

add: I heard someone talk about India buying oil from Iran using gold now - if gold replaces the petrodollar, that might trigger something. The sanctions on Iran could ultimately affect bitcoin by way of new oil trade with Iran in gold that doesn't include the Western bloc of nations. Oil4bitcoin might make an interesting website.

Iv• 14 years ago

To be fair, everything that has a price vraying in time will interest traders.

jakejake2• 14 years ago

I've read about Bitcoin various times and I'm confused about what "mining" is. Maybe somebody could set me straight? Are Bitcoins currently generated by anybody who wants by solving difficult math problems? If so, is this CPU power being used for something, or just a way to tie the value of the currency to something tangible?

user03982• 14 years ago

The CPU cycles are contributing to global warming, and are a means for controlling the rate at which new coins are mined. Unless you have a large dedication to hardware tuning and a decent amount of real money, attempting to mine is of no use unless of course your heater is broken and you need your computer to keep you warm.

stevenwagner3• 14 years ago

https://en.bitcoin.it/wiki/Mining

Animus72• 14 years ago

Mining is peculiar in that is serves multiple goals.

On the one hand, it solves the problem of seeding the network with coins. Otherwise, how could you kick this off in a fair way?

Secondly, mining "solidifies" transaction blocks, which acts as transaction verification for the network. Mining basically acts as prevention of "double spending" of coins.

Finally, mining keeps the money supply scarce (necessary for any currency) because despite everything just being bits, you can't just fake new coins without expending enormous amounts of computing power -- you need to prove you've done the work by solving hashes.

The bitcoin wiki has pretty good technical explanations of all of this.

jakejake2• 14 years ago

thanks for the info, i guess i was wondering if all the computational power was being used for some purpose like the SETI project. It sounds like at least part of it is used for maintaining the bitcoin network itself.

user03982• 14 years ago

Bitcoin has already served it's purpose anyway. It already is a currency that people exchange for goods and other government issued currencies. It doesn't really metter what anyone thinks. Bitcoin has already succeeded. The only question that you need to ask is; Is it something you should invest in?

My personal answer? No. But who cares what I think. It's simply non productive, and frankly non-scientific, to stand up and say "Here's why bitcion is going to fail..." because it doesn't matter, it has already served its purpose.

wisty• 14 years ago

That's great news, as they are sure to stabilize it, right?

patrickk• 14 years ago

A GitHub project for trading bitcoin:

https://github.com/viorels/mtgox-trader

I've no interest in trading bitcoin, but I am interested in learning about making Python bots (in order to hack web games for fun and profit), which is how I found this project.

A quick google search turned up this blog about bitcoin trading for those who are interested:

http://btctrading.wordpress.com/

_k2• 14 years ago

Two questions: 1. When a country limits capital flow, it sometimes becomes impossible to move your money out of that country. Doesn't Bitcoin solve that problem? 2. I have very little knowledge about how it actually works and how secure it is. How secure is Bitcoin ? Are governments via ISPs able to recognize packets that contain Bitcoins ? Or do you need to use ssh ?

wmf2• 14 years ago

OK, so you want to give cash to some guy who will give you Bitcoins in exchange. But then he's stuck with cash that he can't move out of the country, so he has to charge very high fees if he's willing to deal at all.

stuhood6• 14 years ago

Bitcoin runs well over Tor: https://en.bitcoin.it/wiki/Tor

Professional Traders Show Interest in Bitcoin

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