A few thoughts - Tuesday, April 29, 2014

[Steve Sokolowski]

Today's thoughts about incompetence, good trading, and the effect of low prices:

1. It seems that I may have been right about the purposeful Chinese manipulation. There's a blog post circulating (http://bitcoinblog.de/2014/04/28/chines ... -too-tiny/) where someone states that the Chinese government recognized the risk of bitcoin early and has been trying to get a handle on it for a while.

2. If true, the funniest part of that post is that the Chinese are apparently getting frustrated that the price of bitcoins has not crashed as they intended it to. That might show that they are clueless as to how the technology actually works. It's amazing how many people in important positions who make decisions about this stuff don't take the time to learn about what they are regulating.

3. In other news, when the price rebounded to $500 a few weeks ago, I had warned that BTC China had not had any accounts suspended, and therefore there were more drops to come when they did, given that Bobby Lee was the face of Chinese bitcoins to the West. It should not be surprising to anyone that BTC China's cutoff caused a 10% drop.

4. There are still people who are trying to come up with insane business models for Mt Gox. The best I've seen so far is this recent plan where they posted a press release to /r/bitcoin, as if that is the first place that any professional lawyer would go when discussing bankruptcy proceedings. Mt Gox has no assets: they are in huge debt, their code has security problems, and their brand is worthless. There is no way that anyone can make money by buying Mt Gox unless they take a substantial portion of creditors' money. Plus, these people are suing in US courts, which is the wrong jurisdiction, and after the Japanese administrator has already been appointed and has begun the liquidation and distribution process. The best course of action for the creditors is to take the 10-15% they can get in liquidation and move on.

5. When bitcoinbuilder closed, Mt Gox bitcoins were trading for .03. Unless the bankruptcy administrator messes things up badly, the people who threw all their money into Mt Gox bitcoins at the last minute are going to make a 3x to 5x return over the course of a year. And people think that normal bitcoins are a good investment. The owner of bitcoinbuilder had most of his money in Mt Gox bitcoins, which now turns out to be the right side of the trade.

6. While the cryptocoinsnews authors have been correct so far, I still don't buy their predictions that bitcoins are in the "terminal phase of their decline," headed towards a bottom of $120. They base their predictions solely on analysis that is well-suited for stocks, but stocks are not exchanged for goods and services. There is a rising floor that is dictated by people who need bitcoins to buy stuff like Overstock purchases, illegal drugs, and porn. That floor is certainly above $120.

7. So far, nothing at all has diverged from the pattern displayed in any previous bubble. Look at /u/moral_agent's bubble charts and see for yourself. We would expect there to be little movement in May.

8. At this point, the #1 hindrance to bitcoins is now their low price. There are many companies who can't accept bitcoins because they would move the market too much. There are investors who want to buy big amounts, but they are limited in how much they can buy with how many they can obtain off-market. Low prices are forcing miners out of the market and shutting down mining companies. And developers are waiting before they sink millions into projects that might be useless due to a lack of liquidity.

9. The round of investments and innovations for this cycle is coming to an end quickly. After May, I doubt that we'll hear any big VC funding announcements for a while. There just isn't enough liquidity in the market at this price to support big players entering to accept bitcoins for commerce, or for entrants to try brand new business models. The number of bitcoin owners is simply limited at this price.

10. Therefore, the number one thing that big investors can do right now if they want to ensure the success of bitcoins isn't necessarily to build new exchanges or to launch a new Neo and Bee; they should just buy thousands of bitcoins. There is a time for founding businesses, but there is also a time for making it possible for people to get into bitcoins; it is NOT true that speculators who buy bitcoins are "leeches" who aren't helping the technology. Once the price rises, new players who have wanted to get into the game will be able to do so. In the meantime, people with big plans are sitting on the sidelines, waiting to see if they will ever be able to deal in the amounts of money their business models require.