Bitcoin Is The New Housing Market

exchange comparison

Trade volume % per exchange

Since Nov 8th the price of Bitcoin went from $400 to $800. The chart that Kevin Rose (Serial Entrepreneur and co-founder of Digg) didn’t see was that for 3 to 4 weeks prior to his post trading in Chinese Yen went from a 5-10% share to 50%+. The significance of this was something that I could not comprehend at the time because despite Bitcoin being a global market, internalising what that means is an intuition myself and everyone else have yet to experience and realise.

 

1-505x400-1Near the Bitcoin Kiez (neighborhood) in Berlin there used to be a bar that every Tuesday would have one ping pong table that everyone in the room would play on simultaneously. Rotating around the table the person that missed the last shot was out, the table reset, rotation resumed with the remaining players. The last two standing then played one round of first-to-3-points to determine the winner. I’m sure this form of play has many names but around here it was called “Chinese Ping Pong“. If you asked someone how this name was bestowed you would get a string of various stereotypes the most common being something like “a billion people and not enough ping pong tables?“.

With common market dynamics Kevin Rose was not in error with his assessment leading him to go Bear on Bitcoin, if only briefly. A near doubling of Return-On-Investment in under two weeks is cause for suspicion with any other Exchange-Traded Fund known. The problem is that all our intuition of such dynamics applies only marginally to Bitcoin. Why? Because never, in recent history, has there been an introduction of a financial tool for storage of value so universally accessible as Bitcoin. This brings us to the housing market.

In the Bitcoin Reddit community there are three types of early adopters: Those waiting to sell in order to pay off debt, those waiting to pay for their house/apartment and those that are filthy rich. Outside of this community nearly everyone I know evaluates their savings and investments in a manner that ties to the first two: housing or debt reduction.

How is it that in 2013 the only form of storage of value that the middle-class has is housing? Sure one can diversify with stocks and other funds but housing still seems to be the staple for the middle-class. This is a result of many generations of constant rise in the value of housing making it one of the few ways people see to stave off the effects of inflation on their savings. This perception and trend has been supported, if not protected, by domestic economic policies. The result is a monopoly on the options the middle class perceive for storing value. Bitcoin’s value due to speculation may fool one into thinking otherwise but at its core it is deflationary. This may bring into question the age old monopoly housing has enjoyed.

Unlike housing Bitcoin is not a financial tool accessible only to the upper-middle-class. Bitcoin is one of the few (the only?) investment tools accessible to long-tail economies: classes of society that for whatever reason (lack of significant wealth, no official residence, hidden wealth, etc) cannot purchase a house. This is what is different about the Chinese Rush/Bubble currently happening.

Those that do not have the ability to utilise current value-storage tools often avoid saving at all. Ignore speculation for a moment and imagine an anti-inflationary storage of value accessible to every class of society. What effect would this have on those segments of society? While the price may relent and fluctuate, the unique disruption to the current class based financial tools at the hands of Bitcoin (or highly accessible deflationary instruments of the future) probably will not.

%10 price hike on MtGox, not what you think

Summary: The reason for the jump in price on MtGox between other exchanges does not, in my opinion, have much to do with the withdrawal issues at that exchange. I think it might be that some large investors in the Bitcoin ecosystems (either in companies or BTC holdings) are attempting to push the price up to validate their investments or bring in new capital. The reason this would cause a hike on MtGox and not other exchanges is because MtGox is still the only exchange were large amounts of FIAT have room to play.

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Bitcoin Days Destroyed – Post April Bubble retrospective

Someone on Reddit asked for an educated guess about the dramatic change in the Bitcoin Days Destroyed chart from blockchain.info. The answer is rather obvious. The spike directly relates to the April 2013 bubble and burst in bitcoin valuation. But examination of the data that proves this might be interesting for some.

Bitcoin Days Destroyed is a means for weighting the movement of coin between addresses by its age. It is an attempt to show when those holding coin for a long time start to move it.

If someone has 100BTC that they received a week ago and they spend it then 700 bitcoin days have been destroyed. If they take those 100BTC and send them to several addresses and then spend them then although the total transaction volume could be arbitrarily large the number of bitcoindays destroyed is still 700.

For example, on March 30th 2013 the 3rd richest bitcoin address 1Co6UHJmGHevWEHAPraSPRVkfGgG46EHwe moved the lions share of funds, 45,000K+ BTC, to a new address 17UUsmejDsjJEtbRcotd289ADp7ZdanH5k (making it the 2nd richest bitcoin address). The majority of BTC sat in 1Co6U for about 6 months. Slowly accumulating from middle 2012 until end of 2012 by what appears to be mining operations. The movement on March 30 of 45k would amount to around 7,000,000+ bitcoindays destroyed, by a rough guess.

The spike however that the Reddit author noted is not from an individual movement such as 1Co6U but rather the result of the volatility from the bitcoin crash of April 10th 2013. The following shows two charts from blockchain.info. Gray is Bitcoin Days Destroyed and the Red is the BTC price.

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7 day average. Gray=Bitcoin Days Destroyed. Red=BTC to USD price

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Raw values

April 1st was a major upward trend in the exchange rate of BTC. April 10th was the burst of a bubble. April 12 it hit bottom. April 16 it hit bottom again. By April 19 things stabilised. If you relate this to the bitcoin days destroyed you’ll see major movements from April 1 to April 19.

The author on reddit hypothesised that the movement of Bitcoin Days Destroyed seems to indicate that major holders were dumping shares for a while but stopped recently. Their conclusion was that the price stabilisation around $120 of the past few weeks was a result of this activity and that one should expect it to rise now that Bitcoin Days Destroyed has stabilised. This is a misplaced assumption. From the data one sees that the dramatic change in Bitcoin Days Destroyed was a result the volatility and crash. It stopped around April 19. To speculate on why the $120 exchange rate has held, or is changing, one will have to look elsewhere.

Bitcoin Utility and Speculation

At the end of 2012 a great deal of data and information concerning the utility of Bitcoin came to light. At that time we had information on the turnover of SilkRoad – total market revenue at $1.2m per month. Reports on profits at Bitcoin based casinos – Satoshidice profits at >$500k in six months and BitZino profits over $160k. Profits from Bitcoin based ecommerce – Bitcoinstore market valued at >$500k in less than 6 months and market reports from Bitcoin based payment processors – BitPay processes $5.2m in March. Additionally the beginning of the year brought news of various markets moving to accept Bitcoin for payment – Reddit, 9flats, WordPress. But much the noise for 2013 related to speculation in Bitcoin as a store of value.

While the speculative nature of Bitcoin brings interesting discussion — we have never seen the worth of FIAT currencies evaluated like a traditional ETF as we have in recent months with central banks QE measures put beside Bitcoin — still filtering utility from the noise helps gauge the growth and health of the market. Speculation can be divorced from Bitcoin no more easily than it can from a traditional ETF like GOOG or AAPL. However, for companies and individuals that truly believe in the future of Bitcoin releasing numbers (profit, loss, volume), both positive and negative, helps in bring a more mature understanding of Bitcoins future and growing pains.

With the data available it is possible to provide different views on utility. In its short history we have already seen speculative value dwarf discussion and crash twice. The buildup and crash of June 9th 2011 was a preview of the recent bubble from April 10th 2013. Prior to the 2011 crash the only dataset available concerning utility was that of SilkRoad. With SilkRoad opening its doors on February 2011 and prior to the speculative bubble, a single Bitcoin was valued around $1. In the April and May lead-up up to the June bubble only minor publicity could be found. At that time Google’s news index had next to nothing on Bitcoin. May 29th saw a nod from the New York Times. June 1st brought SilkRoad into the spotlight via Gawker and by June 8th, one day prior to the crash, The Register reported that two US Senators were calling for a crackdown on Bitcoin. The value took a slow walk from the high of $30 down to $3 by the end of 2011 and hovered in shock around $5 until the middle of 2012.

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SilkRoad opened Feb. Walk prior to speculation

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Speculative walk prior to 2011 bubble

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2011 speculative bubble and slow walk down

This already provides a view on the resilience of Bitcoin to speculation and government intervention. A utility requiring the use of Bitcoin was enough to hold it to pre-speculation value (or more, $4 rather than $1). The 2011 Bitcoin crash should show law makers that harsh intervention on Bitcoin or other p2p crypto-currencies will do nothing more than wipe out the savings of those gambling on it as a store of value, doing little to its actual utility.

Numerologists can use this data to play fortune-teller in dividing speculative movement from utility. One such riddle might go: SilkRoads yearly revenue was $14.4m a year. With 8.25m coins in circulation at the time the utility value of Bitcoin was $1.74 (14,400,000 / 8,250,000 = $1.74). The speculative run up 7 days before the crash to $10 saw a multiplication factor of 5.7. In the height of the bubble, $30, that factor was 17.2. After the crash the multiplier to utility settled at 3 to 4x ($4).

The utility of Bitcoin in 2013 brings more to the space than SilkRoad. It would be difficult to provide a similar narrative of utility without consistent earnings reports from business in the space. However, another view can be provided using the Bitcoin company every couch based developer loves to hate: Satoshidice.

Satoshidice is a casino that uses the Bitcoin blockchain as it’s database, ledger and dealer. Because each block on the chain is limited in size many complain that Satoshidice is spamming the blockchain while others arguing that if Bitcoin cannot handle such a service things should change. In effect arguing that Satoshidice is proving an early measuring stick to test the network for when Bitcoin handles transactions for major financial spaces. What it might also provide is a window into increased utility as it provides a constant flow of transactions. As of now it accounts for more than 50% of blockchain transactions.

As utility has increased in the Bitcoin market with new businesses utilising it and new users Satoshidice has also seen an increase in use. But one would expect the increase use of Satoshidice to be minor in comparison to the other major companies and new users on exchanges that all bring more transactions to the Blockchain. However, data shows only minor divergence of late. The following shows the percentage of Satoshidice traffic per Blockchain Tx (requests) and size in Megabytes. (historical data provided by Dooglus)

txmb

Satoshidice still dominates the blockchain and new services are only now starting to make their presence known. Here are the same graphs but looking only at 2013:

tx_2013mb_2013

Perhaps the situation is changing and it is up to the reader and their inner numerologist to determine if this is a valid view by which to measure utility.

Bitcoin Arbitrage

bitcoin arbitrage

Arbitrage is the process of purchasing an item in one market and selling it another for a small profit. Making 0.5% per action could add up, especially if automated. Bitcoin markets are an interesting space to explore and understand Arbitrage due to the wealth of information and transparency. Questions of the invisible hand at play are coming into focus the more you watch it. Questions such as how exchanges attempt to keep their rates as close to Mtgox’ (the market currently with the highest volume).

I built a Google Apps/Scripts library Bitcoin Utlitilities (documentation) that provides functions to grab orderbook data directly from exchanges (not from bitcoincharts.com). Based on this i’ve built a public Bitcoin Arbitrage Google Spreadsheet that updates once a minute showing the spread between the major exchanges. Note, the table does not take into account exchange fees but for now use your own knowledge to gauge this (most exchanges charge between 0.5% and 1%). Also note that table is bias towards EUR and will convert opps to EUR whenever the currency differs.

The percentages shown in the table are based on the absolute lowest ask and highest bid for each exchange. This table is based on Arbitrage where you buy BTC based at the lowest ask (lowest price someone will sell at) and sell the BTC in another market for the higest bid (the most someone is willing to pay for BTC). The code goes further however to try to calculate the maximum profit by going into the order book. When you hover over each item with your mouse you will see the volume and maximum profit calculations.

What one quickly sees is that the opportunities where the lowest ask / highest bid are greatest do not always equal the best profit. For example the table shows a %3.03 difference between the ask price at btc24EUR (bitcoin24.com) and btceEUR (btc-e.com) but the code found that the profit margin was so low (lower than a few eurocent) that buy adding further orders in the orderbook one could get higher profit (0.04 cents) at a lower spread (1.43%).

buy at btc24EUR sell at btceEUR

Compare this to the other opportunities such as the 0.61% when buying at btceUSD and selling at mtgoxEUR and you will see that this lower spread on the first ask/bid in the order books yields greater profits when adding more ask/bids. The bot found that 121BTC could be purchased at btceUSD and sold at mtgoxEUR for a 11.40eu profit totally 0.63% of cost.

buy at btceUSD sell at mtgoxEUR

Of course after you take into account the 0.6% fee for mtgox and 0.2% fee on btceUSD the opportunity isnt worth it. But this illustrates that buyers and sellers should not look as much at the spread between highest/lowest ask/bid and instead look at an aggregate.

More interesting still is looking into the Arbitrage Log in the spreadsheet. Here one sees that some opportunities are alive for extended periods of time. It also shows that the spread and potential can change drastically and gives one an overview of total potential for a given period of time. One should notice that the potential yield over all is not that great. But in exploring the topic it brings up a lot of questions i’d like to look at further:

  1. If I’m an exchange is there a negative or positive benefit to having my lowest ask and highest bid differ or match MTGox? In either case an exchange could adapt and manipulate their order books (buy placing bids automatically) 
  2. I know that some exchanges do have their own order bots running, I’ve gone as far to reverse engineer the metrics some use. Is the issue of spread from MTGox one of the reasons for running such a bot? If an exchange bot provides advantage, even slight, to an exchange, can the bot itself be gamed to provide advantage to someone else?