Noted for Your Evening Procrastination for February 26, 2015

How Nuts Are Markets? "Buttcoin" Edition

Live from La Farine: Izabella Kaminska: "How Nuts Are Markets When the Most Reasonable Analysis of an Asset Class Pumped by the Great and Good in Tech Is a Parody Sub-Reddit Entitled 'Buttcoin'?"

I missed this when it went by last September...

Bitcoin Price Index Real time Bitcoin Price Charts

BitCoin's blockchain: wonderful, promising innovation in distributed trustworthy computing. BitCoin: not a safe liquid store of value--hence unlikely to be a durable unit of account, or even medium of exchange...

Izabella Kaminska (September 19, 2014): Cult Markets: When the bubble bursts: "Today’s low so far on the Bitstamp exchange... is $399 and $383 on BTC-e exchange (changing quickly!).... We’re going to stick our neck out at this stage and call this the end of Bitcoin...

...The reason being, the positive-feedback loop forces which drove Bitcoin to $1124.76 have now become the same very same which will drive it down to the bottom. And what are those magnifying forces? Partly the fact that the mechanism that ensures coins cannot be overproduced to benefit from high prices also prevents supply from being contracted when prices/demand collapses. Partly also the fact that in a race to the bottom it doesn’t pay to switch off your mining machine if you’re the most efficient miner.

So how did we find ourselves on this delusional joy ride to begin with? Well it’s the same old story of frivolity, irrational exuberance, hysteria and of course the mistaken belief that something like a free lunch is truly possible.... We’re sure we may still see a few deep pocketed VCs or “believers” throw more money at defending the dream, but chances are we’ve now gone through the exponential break point. Time and money would probably be better spent trying to pump up Bitcoin V.2...

Izabella Kaminska (January 5, 2014: Who needs caveat emptor when you’ve got Bitcoin?: "What did you miss?...

...That thing about China’s other currency du jour. We’re talking, of course, about Bitcoin--production of which China dominates in. Prices of the cryptocurrency tanked during the Holiday period, with a low of $255 per Bitcoin being reached on the Bitfinex exchange just this Sunday. Now, we don’t want to show too much schadenfreude following the learned responses we got to posts explaining the fundamental flaws of the scheme back in September, when Bitcoin prices were still tottering around the $400s. Buttcoin Reddit is doing a fine job of that already. (Btw--how nuts are the markets when the most objective and reasonable analysis of a new asset class pumped by the great and the good in the tech world comes by way of a parody sub-Reddit entitled Buttcoin?)

What we want to dwell on is how totally untested, only-running-for-a-couple-of-years, never posted a single regulatory filing Bitcoin-exchange companies like Bitstamp are coping with the situation.... The totally objective cryptocurrency press believes the real angle here is Bitstamp’s inability to take new deposits, not the withdrawal problem. Fear not, though, we are to be reassured because the bulk of the company’s Bitcoins are held in ‘cold storage‘.... What’s really interesting, we think, is the apparent failure of caveat emptor effects in the digital age. After all, it was only in February 2014 that Bitcoin’s primary exchange Mt. Gox filed for bankruptcy protection. You’d think the community would have learned a lesson about investing money in totally unproven, opaque companies operated by individuals with little to no financial management experience? But no. Within a matter of days the community had--through the magic of ‘crowd wisdom’--decided that Bitstamp was a worthy replacement for all their wealth....

So, what do we know about Bitstamp and how it manages all that illiquidity risk? Well, first of all, we know it started life in Slovenia as the brainchild of... two Slovenian wunderkids... ‘libertarian, entrepreneur, Bitcoin enthusiast, co-founder and CEO of Bitstamp’ Nejc Kodric on the left, born February 27, 1989 and Damian Merlak, ‘Bitcoin enthusiast, software developer, investor, co-founder and CTO of Bitstamp’ on the right, born April 27, 1986. Solid credentials for managing liquidity risk and running an exchange platform, we suppose. We also know the company was UK registered on July 25, 2012 at a service address at this location: 5 Jupiter House, Calleva Park, Aldermaston, RG7 8NN, and then re-registered in August 2014 to 5 New Street Square, London, United Kingdom, EC4A 3TW. Sadly, other than that, we don’t know much more than what the company tells us on its website, which isn’t very much.... We also know from its July 2014 filing that in October 2013 (before the mega rally and Mt. Gox collapse which dramatically popularised the exchange) it had shareholder funds of $834,961, with cash at bank and ‘in hand’ of $65,667,026 and amounts falling due within one year of $64,866,995. However, it’s fair to assume things have changed significantly since then.

Anyway, before anyone claims it’s unfair of us to pick on this particular young and innovative company... we’ll happily concur. We don’t at all mean to pick on Bitstamp, and we agree that everything we’ve noted applies in equal measure to companies such as Coinbase and Bitpay. We’ve only highlighted Bitstamp because sadly they’re the first to have suspended operations.... The key issue we want to stress is how much do we really know about any of these companies? Given the lack of publicly available information does it really make sense to entrust one’s wealth to people with little in the way of financial credentials or public credit information?

Richeightyeight: Who needs caveat emptor when you’ve got Bitcoin?: "Bitcoin is heaven's oops, sorry, Darwin's way...

...of making Libertarians poor. Please do not denigrate it publically as you might interfere with this important social function. Instead, keep touting how it is the little guy's way of getting the hated government, which only wants to take resources from hard-working folks and give it to Those People, off their backs. And hyperinflation, and much higher interest rates due to profligate central banks, are just around the corner. Any second now. Really.

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