What’s happening with Bitcoin Prices
The next recession could be weeks away
Sure, we’re in a bubble, granted. But what’s that mean and what’s likely to happen? Here’s a few things at play:
The Price
The Trades
Where the money comes from
The Price
We’re in Mania right now
Currently there’s two charts you need to be familiar with regard's to Bitcoin. The bubble graph and the current price graph
This is institutional investors pulling out
The only thing that causes a chart like is a large holding selloff(Someone selling a huge amount of Bitcoins) that clears the market and gets the price down. There’s enough limit orders to rebound the market easily. But what if someone else does this again before new limit orders are placed?
You have this. The price drops in the large selloff but since there’s no limit orders to rebound it, it drops again, until it goes into the new territory where then it rebounds up to the previous bottom since there’s still no orders to fill those prices.
Numerous large sell-offs in quick succession.
In Comes the General Public
The way the price rebounds this time is via the general public who doesn’t have cutoff's set or any notification system. They don’t do technical analysis and aren’t knowledgeable enough to place limit orders.
Instead, as they check their phone apps about the price and then see it’s down and buy instantly. They gradually put more money into the market and this works so long as there’s a sufficient amount of time before the next selloff.
If the selloffs happen quicker and are larger than the human buying rebound time then you see the price drops.
The Trades: Exchanges
Ever wonder why Coinbase takes about a week to “process” the sell? Or why when you buy on other exchanges you’re debited instantly but when you sell it takes a few days to be credited?
It’s mostly likely because these institutions don’t have the liquidity to actually pay you.The important thing to realize is the exchanges aren’t selling the Bitcoins on the open market nor are they transferring anything between wallets when you sell.
Instead there’s a database that says Alice’s balance is X. Then separately, on the side, the exchanges have a way to fund Alice’s account when she sells. This could be by selling Bitcoins, it could be by playing the horses, it doesn’t actually matter.
In practice, it’s most likely through new investors. That is to say that they honor the debt obligations to the existing members only via new money coming in. Familiar Enough ?
The Great Pyramids of Bitcoin
At any given moment, any exchange only needs a fractional reserve of the liabilities they have on the books. That is, until there’s a run on the market. In the banking world we have the FDIC to protect us against such issues.
In the Bitcoin world, there’s nothing. It is likely that at least one or more exchanges have mishandled their assets and liabilities and wouldn’t be capable of fully capitalizing.
Closing shop for a bit
If you’re a major market player, there’s a way around this! Whenever one of the larger exchanges website crashes, there’s a significant drop in the price because there’s currently more buyers coming in then there are sellers. When there’s a significant drop in the price, there’s almost guaranteed new capital coming in. So if an exchange can’t meet the liabilities of a current price because they simply don’t have the actual assets they can take the site offline for a while, dropping the price. The customers will cry foul and go haywire. Then after a couple hours they can bring the site back online, getting the new money coming in, and then be able to meet the existing liabilities.
Recently on an unnamed exchange, their website was down, their phone app didn’t work, their trading API didn’t work, but their public price API was fast, responsive, and worked just fine. If they had intentionally taken down everything but their price monitoring system so they knew when to come back, this is exactly what it would look like. When the other services came back online, everything was fast and responsive immediately.
Well Played! Speaking of that
The Next Crash
As of this writing, the BTC market cap is $300 billion. The 24 hour trade volume is 6.9% of the total market. This is large.
The average 24 hour volume of AAPL is 0.58%, AMZN is 0.89%. $17.5 billion in BTC exchanged hands in 24 hours. Now if you were paying attention, these liabilities can be met so long as both the price was trending upward and the volume of incoming assets was sufficient enough to satisfy the expected liabilities from selling. When there’s too many sell-offs too close together, the market orders haven’t rebounded in time, and the general public goes into panic mode, this money will disappear quickly. Currently the general public is still in buy mode so you get a rebound in human time, so long as the sells aren’t too big and fast:
Where is all this cash coming from?
If you head over to forums like /r/Bitcoin you’ll find people urging others to not buy BTC on debt with numerous responses that people already have and some even encouraging the practice.This along with news that Wall-Street firms and finance is getting into BTC means we are at risk of Financial Contagion.The general public and some institutions will invest poorly, especially with billions coming in every day. When some of the exchanges go broke because they can’t honor their liabilities due to a run on the market, the investors won’t be able to repay their debts and there will be system-wide repercussions.
Bitcoin is probably the source of the next general market crash
So we have hedge, speculative and ponzi borrowers and we’re under Minsky’s financial instability hypothesis. How long this can go however, is completely unknown. A lot of it depends on the general public’s appetite for investment.In the financial crash of 2008, there were people ringing the alarm bells as early as 2005 and they were all correct but the public’s interest was able to float the market and fuel the frenzy another 3 years until the actual crash.This was bad because the longer things go on, the larger the market becomes, the more highly leveraged inexperienced investors become, the more institutions become involved and thus the more things get disrupted when the price collapses.
Look out! The cloud is going to Burst.
Credit-C. McKenzie