Saturday, May 26, 2012

Bitcoin's Liquidity: A Third Look

Back in November 2011, I wrote about Bitcoin's liquidity, and how it had improved from six weeks prior. Let's take a look at how we're doing, six months since:

On October 16th, a $50,000 purchase would have moved the price from $3.40 to $3.92, a 15.3% increase. A sale of $50,000 worth of Bitcoins would have taken the price down to $3.03, or a 10.9% drop.



On November 27th, a $50,000 purchase of Bitcoins on Mt.Gox would have moved the price from $2.46 to $2.60, a 5.7% increase. A sale of $50,000 worth of Bitcoins would have taken the price down to $2.30, or a 6.5% drop.


So, how is it looking now?

The market is looking considerably more stable. Today, a $50,000 purchase would only move the price from $5.11 to $5.16, a 1% increase, and a sale of $50,000 would drop the price to $5.06, also a 1% move.



In the last seven months, the Bitcoin market has clearly matured significantly, making it increasingly stable and usable as a currency; something many merchants have been waiting for before deciding to accept Bitcoin. Hopefully this will translate into wider acceptance and growth of the economy.

16 comments:

  1. The price is even stable enough for semi-fixed rate. Personally I value 1 BTC to 40 UAH in my small online shop.

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  2. How and why did Bitcoin get more liquid? I don't know much about Bitcoinica because I never used the service. But apparently it provided a lot of liquidity to the market. Now that it no longer exists, what will be the result?

    Can you just help explain to me why Bitcoin has become more liquid?

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    1. I was surprised that the market reaction to Bitcoinica was so mild. This is definitely a good sign.

      Perhaps this means that the word is spreading slowly. There doesn't necessarily need to be a big news event to spur adoption. And I'm sure the bad news elsewhere helps. Aside from all the bitcoin drama (and there is plenty of drama), bitcoin's real story stands in stark contrast to that of its fiat predecessors. There is no end (almost) to the troubles in store for all the fiat currencies.


      When you think about it, fiat was the experiment, and bitcoin is the result.

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    2. People like me are fed up with the theft of our hard earned value through fiat currency, government budget deficits, fractional reserve trickery, and gifting to banksters. Voting them out won't work because > 50% of the population are on the dole taking it from me and benefit from this corrupt system. I vote only for whomever promises to spend the least. I have 2/3 of my bitcoins in active ladder quotes on a bitcoin exchange to provide this liquidity and adjust them several times a day. It's the only way to nuke the thieves from orbit as not enough people like gold and silver coins.

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    3. What you are going to find out, Brian, is what a "liquidity arbitrage" looks like when it collapses.

      Pirate, the BTCST, and the feeder and pass-though funds are engaging in a massive liquidity arbitrage. They are promising huge - ever-increasing, really - rates of return on an ILLIQUID asset - Bitcoins - and "hedging" that exposure against a liquid asset - US Dollars, the fiat currency you disparage but which is what people use in the real, non-Ron-Paul world.

      Such an enormous change in APPARENT bitcoin liquidity without any underlying change in the economy (save a massive increase in speculation) is NOT a good thing. What it means is that the liquidity arb is reaching a maximum.

      Soon, huge buys and sells of Bitcoins will have NO effect on the "value" of Bitcoins, because the relationship between Bitcoins and USD will have completely decoupled. At that point, people will start to close their pass-though accounts because...for whatever reason...and the liquidity bubble will pop.

      Shorts will get paid - in Bitcoins. Longs will lose - in Bitcoins. Nobody will be able to trade Bitcoins for dollars, however, so it won't matter. Then you can try to trade your Bitcoins directly for gold and see what happens

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    4. I have a proposition for solution: separate the BTC and currency exchange rates by an "event horizon" of actionable economic news and dealmaking; represent the decoupled portion in complexity dynamics as compute enablers of human resource reclamations ("illiquid" resources in the form of software and utility "timewasters" good for literacy, recreation, aesthetics, and overall human welfare as a function of digital "human resources" as opposed to "human capital"), let the reals represent provably taxable and taxed economic events of liquid nature, let the imaginary iterations represent -- by their use dynamics in above softwares accepting bitcoins for the purpose of illiquid resource reclamations from capital in the form of research, design and pattern information signal matching activities of the user bases -- decoupled illiquidity as a hedge against attempted "liquidity trap subversion" of bitcoin currency coupling, and let the conjoint iterations represent complex real and imaginaries in together as conjoint ratios of potentials of human resources in availabilities of illiquid resources reelated to BTC markets in terms of both illiquidity in human resources recreation at the btc virtual side (imaginaries) and their counterpart reclamation of resource leisure from "human capital" in the real production economy ("illiquidity" in the form of value traps of such things as social services and welfare dependency etc).

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  3. Bitcoin is up 8% in 2012, yet down 27% from its 2012 high (~$7) and up more than 21% from its 2012 low ($~4.10).

    Though you are seeing some stability now, bitcoins still can't efficiently be hedged or shorted. So we'll probably see some spikes followed by some turbulence in the following wake.

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    1. Ummmm...nothing can by hedged or shorter with any certainty, but you can most definitely hedge and short bitcoin 'efficiently'. What about it is inefficient?

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  4. In recent months, bitcoin has fluctuated less with respect to the us dollar than the euro - the worlds second largest currency! Also less than the yen.

    Granted, there's no greece in bitcoin land - and there cannot be thanks to the absence of fractional reserve bitcoins (so far) - but still, this stability is yet another argument to take bitcoin seriously!

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    1. What calculations/source did you use for that?

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  5. I believe bitcoin is a better currency today than it was last year. Also more stable.

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  6. I think the growing confidence in the security of the system, both the blockchain itself and places to store bitcoins like MtGox, must help in stabilizing things.

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  7. By observing the order stack, I'd say that the reason for the increased price stability is the growing presence of automated market-making programs, similar to what exists for stocks... they simply place shares above and below the current price and profit from "making the spread"...

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  8. the current 1% that $50,000 would move is only there because of the 40k & 60k BTC walls, once things start moving with any volume they'll probably move too or disappear - it's a bit of an artificial situation atm, a stand off which wasn't happening last Oct or Nov

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  9. Loss of volatility is not necessarily a good thing. Please see following discussion.

    https://bitcointalk.org/index.php?topic=80174.0

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  10. Is there a bitcoin browser?

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