The first transaction in bitcoin was 10,000 bitcoins for a pizza. Hope it was Chicago style. It reminds me of the assignment Craig Wortmann gives students. He has them barter a pen for a few weeks to see what they can get for it. At the time of this transaction, bitcoin was basically worthless. If the person on receiving the bitcoin would have held them, they’d be worth $10M USD today.
We are entering a new age in bitcoin.
There was a lot of hype in the beginning. It was confined to the techie community. It’s made it’s way into porn and video games. Now it’s ready to do some “real business”. But, there aren’t a lot of applications out there yet for bitcoin to perform. Personally, while I am bullish on the sector I am a bit bearish on the price. The reason is the Peter Lynch principle. If he went to a cocktail party and everyone was talking about stocks, it was time to sell. More and more, people that I know normally wouldn’t give a whit about the price of bitcoin are asking me about it. In the US stock market, traders are starting to buy the VIX. They expect the US stock market to retrace a bit.
Bitcoin fanatics will tell you that it’s just going to keep going up. If the US stock market goes up, more money is available to buy bitcoin. If the US stock market goes down, more people will want to own bitcoin. No matter what happens everything is rosy. Markets just aren’t that way. The one thing Bitcoin bulls have going for them is that supply is limited and demand is growing. Here is a chart of what a vertical supply line looks like with rising (or falling) demand so you can visualize it.
The one piece of the Bitcoin ecosystem that is interesting to me is exchanges. So far, most of the action has just been people scalping it. Some trading firms are trading it. Many firms are avoiding it because if they took a loss in it they’d have to have a very tough conversation with their LPs. A lot of the action has been on Chinese exchanges. I am watching them closely, because the rules on those exchanges are very fast and loose. In many cases, they don’t charge. They have special deals. They pay for order flow. Many of them don’t margin correctly, and there is counter party risk. They also wash a lot of trades. This means a lot of the volume is fake. Bitcoin exchanges adopted the “Fake it till you make it” credo a long time ago.
Here is what TechCrunch recently wrote:
Exchanges will become a source of scrutiny
Regulators will keep a light touch on the technologies behind cryptocurrencies, but they will look more closely at exchanges, which is where traditional banking meets the new world of cryptocurrencies.
While exchanges are an excellent resource, allowing people to conveniently buy and sell digital currencies with ease, they also centralize risk. This makes them a virtual honeypot for hacks and thefts. So increasingly we will see governments stepping in to oversee how they operate with an eye on consumer protection. Some regulation will include new ways to confirm identities and block money laundering—and in extreme cases, block exchanges all together. Take the case of Colbitex, the first bitcoin exchange in Colombia, which the Colombian government closed down in August, claiming bitcoin was not real money and therefore unregulated.
Setting up and operating an exchange looks relatively simple. Putting together an Automated Trading System (ATS) isn’t hard for a good programmer. The trick with exchanges is making sure the back office processing is handled seamlessly. That’s really hard. The other difficult thing with electronic exchanges is making sure you have a clean, fair, transparent marketplace. It’s easier to hack trading in the electronic world than it was in the manual world.
The CFTC and SEC are going to have their work cut out for them.