SERVING THE QUANTITATIVE FINANCE COMMUNITY

 
User avatar
ISayMoo
Posts: 351
Joined: September 30th, 2015, 8:30 pm

Re: End of bitcoin?

November 14th, 2017, 8:59 am

Thank you, Captain O!
 
User avatar
Traden4Alpha
Posts: 22966
Joined: September 20th, 2002, 8:30 pm

Re: End of bitcoin?

November 14th, 2017, 1:22 pm

Perhaps the reason there are no fiat currency analogs of the miner's fee is because fiat currency transaction systems seldom (never?) hit their capacity limits on transaction rate. For cash transactions, the capacity seems to scale linearly with the number of participants. In theory, all 7.6 billion people in the world could give some money to the person next to them at the same synchronized time for a peak rate in the billions of transactions per second. Each retail outlet has some capacity limits (with queueing at the cash register) although they have strong incentives to minimize such queueing. (Are their any retailers that let one pay to jump the queue to the cash register????)

Centralized electronic transaction systems do have limits. The Visa network claims to be able process 56,000 transaction messages per second although the average rate is only 1,667 tps(http://www.altcointoday.com/bitcoin-eth ... er-second/). Yet I'd think Visa would suffer public relations and customer relations nightmare if it frequently hit it's capacity limits. For fiat currencies, most consumers have a choice of multiple compete transaction systems (cash, Visa, Mastercard, Amex, check, etc.) which put strong incentives on each system to be sufficiently over-designed to handle surges in transaction rates.

In contrast, as of April 2017, Bitcoin's theoretical max transaction rate was 7 tps but was typically running only 3-4 tps. One could say there is a flaw in the blockchain concept in that miners have significant incentives to favor a capacity-constrained system. Visa is penalized if it's system saturates but miners are paid more if blockchain system saturates.
 
User avatar
Alan
Topic Author
Posts: 9172
Joined: December 19th, 2001, 4:01 am
Location: California
Contact:

Re: End of bitcoin?

November 20th, 2017, 4:45 am

Bitcoin price discovery apparently takes place largely in unregulated exchanges such as Bitfinex, which has some serious questions raised about manipulation, see here.  Well aware of problems with off-shore exchanges, 6 months ago the SEC rejected the Winklevoss application for an ETF. If the price discovery is substantially manipulated, then it just gets passed through to Coinbase/GDAX.  Ditto for the upcoming CBOE and CME bitcoin derivative markets. Also, the SEC is said to be reviewing their earlier ETF rejection, so we may get an ETF yet. 

I believe this putative manipulation is an open secret. If so, I will guess the typical bitcoin trader thinks of this much like some Madoff fraud investors -- yes, things seem fishy, but let's play along for the ride. After all, there are many plausible rationales for why it's not 'too good to be true'. And, since all traders think of themselves, like the children of Lake Wobegon, as all above average, they're pretty sure they'll be able to cash out before a serious crash. And, even if not, there's no legal liability attached to coat-tailing some off-shore manipulators.

OK, so now we are at $8000. 

Question -- if you were pretty certain a market was being manipulated to the stratosphere, would you invest?   
 
User avatar
Traden4Alpha
Posts: 22966
Joined: September 20th, 2002, 8:30 pm

Re: End of bitcoin?

November 20th, 2017, 2:54 pm

It depends of the type of manipulation.

If it's short-term manipulation (e.g., front-running) that bleeds bitcoin day-traders and medium-of-exchange transactions, then manipulation would not forestall investment. In theory, long-term gains would overcome the short-tern round-trip loss from manipulation.

If it's a long-term manipulation (e.g.,a giant Ponzi pump-and-dump), then it's a matter of seeing if one can estimate where things are in the cycle in terms of the rate of influx of new patsies and potential saturation of the market. (Note that many in the bitcoin world would insist that all fiat currencies are manipulated into the stratosphere.)

Unlike other sovereign currencies, bitcoin has no natural pool of users that thus no captive set of investors and users. No one is actually required to bitcoin -- it is a currency of collective convenience. There really is nothing to prevent it from dropping to zero. Worse, the bitcoin protocol has no "monetary policy" clauses for withdrawing coins to protect the value of the currency.
 
User avatar
Alan
Topic Author
Posts: 9172
Joined: December 19th, 2001, 4:01 am
Location: California
Contact:

Re: End of bitcoin?

November 20th, 2017, 8:59 pm

Well, the alleged manipulation is spoofing (link above) and wash trading.

  
 
User avatar
ppauper
Posts: 64814
Joined: November 15th, 2001, 1:29 pm

Re: End of bitcoin?

November 21st, 2017, 10:18 am

lots of markets are manipulated.
We've just seen a whole bunch of banks fined for manipulating the forex market, there was a libor scandal a while back, oil and gold have had their issues, and so on.
 
User avatar
Traden4Alpha
Posts: 22966
Joined: September 20th, 2002, 8:30 pm

Re: End of bitcoin?

November 21st, 2017, 4:37 pm

Alan wrote:
Well, the alleged manipulation is spoofing (link above) and wash trading.

  
That does not seem bad at all.

No one forces anyone to ascribe any price implications to the open orders in the order book. And surely every decent HFT algo would quickly learn to discount order book contents if said contents were unreliable.
 
User avatar
Alan
Topic Author
Posts: 9172
Joined: December 19th, 2001, 4:01 am
Location: California
Contact:

Re: End of bitcoin?

November 21st, 2017, 8:39 pm

Yeah, in the short-run it sounds benign. But, in the long-run I think it poses some contagion issues. 

Let's say the current price of BTC/USD in the absence of historical manipulation was $100 (just making up a figure), and the going forward growth rate would average 5%. But, in the presence of manipulation, we have the current $8000 and the growth rate (until the manipulation ends) averages 100%/year -- until it crashes. 

This kind of prospect sucks in a lot of money that otherwise wouldn't be there. At some point it can de-stablilize the 'regular' financial markets. After all Wall Street is notorious for ramping up stuff like this until the inevitable explosion and then everybody asks --  well where were the regulators and how did this bitcoin thing stomp on my IRA, when I never even heard about it, etc? 

The toxic securities of the last Financial Crisis were not something the proverbial man on the street was invested in -- yet the spill-over effects first took down the banks, and then the broad markets. This is an over-simplification. Yet, are we watching the next Financial Crisis in the making?    

Now More than 120 Crypto-currency Hedge Funds

 
 
User avatar
outrun
Posts: 3913
Joined: April 29th, 2016, 1:40 pm

Re: End of bitcoin?

November 21st, 2017, 9:33 pm

I've read the links (thanks Alan!) and this is exactly the stuff that HF bot builders are proud of accomplishing, manipulate the orderflow and make a profit.

When I was a floor trader people were doing this all the time: huge bids or offers in the orderbook. Sometimes they would get an accidental fill and stress out. 

Another thing that happens in practice is that a lot of order are there because of other orders in (other) orderbooks. If there is a huge bid then you can go long because you can always sell to the bid (or so you think). 

Looks are very fishy though! Just like the HFT business.
 
User avatar
ISayMoo
Posts: 351
Joined: September 30th, 2015, 8:30 pm

Re: End of bitcoin?

November 21st, 2017, 9:44 pm

outrun wrote:
I've read the links (thanks Alan!) and this is exactly the stuff that HF bot builders are proud of accomplishing, manipulate the orderflow and make a profit.

When I was a floor trader people were doing this all the time: huge bids or offers in the orderbook. Sometimes they would get an accidental fill and stress out. 

Another thing that happens in practice is that a lot of order are there because of other orders in (other) orderbooks. If there is a huge bid then you can go long because you can always sell to the bid (or so you think). 

Looks are very fishy though! Just like the HFT business.

I was an HFT trader. We didn't do any of that.
 
User avatar
outrun
Posts: 3913
Joined: April 29th, 2016, 1:40 pm

Re: End of bitcoin?

November 21st, 2017, 10:10 pm

ISayMoo wrote:
outrun wrote:
I've read the links (thanks Alan!) and this is exactly the stuff that HF bot builders are proud of accomplishing, manipulate the orderflow and make a profit.

When I was a floor trader people were doing this all the time: huge bids or offers in the orderbook. Sometimes they would get an accidental fill and stress out. 

Another thing that happens in practice is that a lot of order are there because of other orders in (other) orderbooks. If there is a huge bid then you can go long because you can always sell to the bid (or so you think). 

Looks are very fishy though! Just like the HFT business.

I was an HFT trader. We didn't do any of that.

You're a gentleman. The few I know they do
 
User avatar
Traden4Alpha
Posts: 22966
Joined: September 20th, 2002, 8:30 pm

Re: End of bitcoin?

November 21st, 2017, 10:15 pm

The open issue is whether this spoofer is destabilizing or stabilizing BTC (and whether that's good or bad).

The funny thing is that the linked article posits spoofer behavior that is consistent with someone wanting to stabilize the market by halting overly-rapid price movement. They are acting like a market maker. Spoofer seems to be knocking out momentum traders and that seems like good thing unless one thinks that BTC should be required to have high volatility so people lose their shirts and leave before the cryptocurrency gets too big.
 
User avatar
Alan
Topic Author
Posts: 9172
Joined: December 19th, 2001, 4:01 am
Location: California
Contact:

Re: End of bitcoin?

November 22nd, 2017, 12:25 am

The problem is that the Spoofer may be planning a "Big Short" to exit at the appropriate time. (I would). So, past behavior may seem benign, stabilizing, driving the market higher and everybody is happy -- until the exit is triggered. CBOE & CME derivatives may play into this very nicely if that is the plan. 

A Crypto Fund King Says Bitcoin Will Be the Biggest Bubble Ever

Ride the wave, babe :D
 
User avatar
Traden4Alpha
Posts: 22966
Joined: September 20th, 2002, 8:30 pm

Re: End of bitcoin?

November 22nd, 2017, 1:51 am

Well, anyone can be planning a "Big Short." And if anyone with $2 million can become the big whale in the bitcoin ponds, then it would seem that thousands of people have the resources to be a Spoofer too adn soem could be a 1000X larger whale if they wished.

"Exit at the appropriate time" always seems to be the magic lynchpin in these scenarios. I think we all know it's easy to postulate that an asset is wildly overpriced only to have said asset continue to appreciate for days, weeks, or month. LTCM was right in the end but they lost everything on there "correct" bet. It seems almost inevitable that Spoofer will botch the timing and get crushed when prices don't dance to his tune or some other bigger whale jumps in to buy BTC "cheap" during the crash.

Has anyone estimated the approximate distribution of the movements induced by Spoofer? And has anyone analyzed how Spoofer's strategy scales?
 
User avatar
Traden4Alpha
Posts: 22966
Joined: September 20th, 2002, 8:30 pm

Re: End of bitcoin?

November 22nd, 2017, 1:56 am

BTW, the US housing bubble created a $6.3 trillion implosion in housing values alone. BTC would need to reach something like $350,000 (and lose 100% of it's value) replicate just that small portion of the total damage induced by the 2008 fiesta of financial foolery.
ABOUT WILMOTT

PW by JB

Wilmott.com has been "Serving the Quantitative Finance Community" since 2001. Continued...


JOBS BOARD

JOBS BOARD

Looking for a quant job, risk, algo trading,...? Browse jobs here...