08 December 2017

Peak Monetary Goofiness: One Thousand People Own 40% of Bitcoin Market

"About 40 percent of bitcoin is held by perhaps 1,000 users; at current prices, each may want to sell about half of his or her holdings, says Aaron Brown, former managing director and head of financial markets research at AQR Capital Management. (Brown is a contributor to the Bloomberg Prophets online column.)   What’s more, the whales can coordinate their moves or preview them to a select few.  Many of the large owners have known one another for years and stuck by bitcoin through the early days when it was derided, and they can potentially band together to tank or prop up the market...

As in any asset class, large individual holders and large institutional holders can and do collude to manipulate price,” Ari Paul, co-founder of BlockTower Capital and a former portfolio manager of the University of Chicago endowment, wrote in an electronic message. “In cryptocurrency, such manipulation is extreme because of the youth of these markets and the speculative nature of the assets.”

Olga Kharif, Bloomberg: The Bitcoin Whales: 1,000 People Who Own 40 Percent of the Market

'As in any asset class, large individual holders and large institutional holders can and do collude to manipulate price,'

Amen brother.  That's why we need regulators and oversight that is not 'captured' by those same very large institutions and wealthy political donors who are in such a good position to manipulate those markets.

And they are going to be bringing out a futures market and ETFs based on these digital chili beans.  This reminds me so much of the tech/internet bubble.

Gold and silver, I suspect, are going to be remembered as one such market segment that fell victim to the canard of free and naturally efficient markets and the natural rationality and fairness of financial and economic actors.  It is pretty hard to miss, particularly in silver.

My son and I had some time to discuss a number of things the past few days. He is a much better mathematician than I was at his age, and that makes sense because what he is doing at his level for Electrical Engineering starts to become very heavily dependent on mathematics.  I was much more of a boy programmer and systems architect at his age.

He was 'mining' his own bitcoins some years ago using a rig he set up using a video card and a few things he threw together just as a learning exercise.  We discussed the blockchains and how mining worked at some length back then.

I was curious to know about these 'forks' and where that was shaking out. Each new technology and bubble has its own set of jargon and technicalities.  As you may know, a Bitcoin has a memory block of a certain size. As a transaction in bitcoin occurs, that transaction is broadcast to the ENTIRE community of bitcoins, and is updated on them. I did not realize that is how it is set up.

The 'forking' is the usual scalability story, a fix to address a structural memory shortage, as we saw in the internet when we started running out of IP addresses based on the original IP block architecture.

Now I understand why bitcoin transactions can take so very long to complete, and why they are not being used in day to day transactions. And they are not, despite the hype.  They are used primarily for speculation and hoarding.

What I did not understand was how highly concentrated bitcoin ownership is by its nature, and why the 'bitcoin' market is becoming increasingly fragmented with different groups with their own architecture creating their own non-interchangeable types of bitcoins and crypto-currencies.

The key to this is obviously going to be the middlemen, the exchanges.  And I do not believe that they are particularly well founded or regulated.

I was a little surprised when he explained to me why and how a small group of oligarchs with access to enormous computing power were essentially in control of the future of the market. The early adopters are essentially along for the ride.  The technocrats are essentially making it up as they go along, and they do not necessarily agree, or have to agree, with each other.

And then today the story broke which I quoted above and below. And then the whole thing kind of fell together for me.

I cannot believe that the regulators have allowed the CME to bring out futures for these things, which apparently they are going to do over the weekend. Futures on a very immature, unregulated commodity which is closely held by about 1,000 people, most of whom know each other.

Bitcoins are not self-sufficient, naturally constrained, or universal.  That they are 'digital gold' is at best a reach, and more likely one of those passing fancies that become popular then fade.   Bitcoin is just a unit, a value bucket, that requires someone else to stand behind it in its particular manifestation.  And that is the key.

Gold is gold, and has 'worked' since the days of Alexander.  Cryto-currencies are just a new form of a very old enthusiasm.   The Bitcoin market seems much more like the very early over-the-counter stock market under the buttonwood tree.  Or perhaps even tulipmania.

I am not saying that everyone involved with this is acting in bad faith.  Not at all.  And something like a cryptocurrency *could* become real money some day.   It needs someone with a lot of financial clout to stand behind it with sufficient full faith and credit at a stable value of exchange for some particular flavor of crypto-coin.

This is just my own, certainly fallible, judgement.  But based on everything I know this is nuts.  And it is going to end very badly.

"Roughly 40% of the cryptocurrency is owned by 1,000 people, claims Aaron Brown, head of financial markets research at AQR Capital Management. In such an unregulated market, Brown said large holders of bitcoin could potentially be working together to orchestrate price changes. Given bitcoin’s recent spike, now could be a great opportunity for these users to part with a portion of their bitcoins, locking in the near 1600% price increase since the start of the year.

Bitcoin appears to be making its way into mainstream investing. Last Friday the US regulator gave the CME group and CBOE Global Markets the green light to launch bitcoin futures. Just yesterday, London-based digital banking company Revolut launched Bitcoin, Litecoin and Ether trading for their users.

As the cryptocurrency becomes a more mainstream investment and demand for it rises, these bitcoin ‘whales’ will be able to part with their bitcoins for a hefty profit. This could leave new investors with an asset in the midst of a bubble.

Roger Ver, a well known early adopter of bitcoin said, regarding ‘whales’ working together, “I suspect that is likely true, and people should be able to do whatever they want with their own money.”

Read the entire story at Market Mogul here.