Market efficiency of bitcoin trading still a long way off

Schermafbeelding 2013-03-01 om 21.24.19

My bitcoin wallet address

Earlier this year I bought a fraction of a bitcoin. Getting a bitcoin wallet app (Blockchain) was easy enough. Getting it loaded with bitcoin was not a hell of a job but it was not an instantaneous proces either. Understanding the mechanism to send or receive was not difficult while not ready for mainstream in my opinion at the time. (see blogpost)

Since dropping the ball on my blog – due to professional bustle – on which I was covering bitcoin at the time I basically forgot about this fraction of a bitcoin. Just last week I was reminded about it and had a look at the wallet again. It turned out that the Euro equivalent had increased 30 times in value. 30 times a fraction is still not a huge amount but it certainly was a shocker to see this rise expressed in clear Euro’s.

In my opinion a currency that rises – or potentially declines in value so fast as the bitcoin can not be of real economic relevance other then for speculation purposes. In this sense the bitcoin is just an other „black tulip”

As a professional I have known about bitcoin for some years now. 2,5 years ago I met with people who were heavily involved in developing the bitcoin exchange possibilities and I can still remember the enthusiasm I had about the meeting and even more about the concept. I am probably the worlds worst speculator: I do not see an opportunity even if it is screaming at me. But it never occurred to me to just buy a few…. spilled milk.

So there I was, looking at a part of a bitcoin representing real money. What to do next? I decided to take it for a spin and see if I could increase the amount of bitcoins by trading with it on one of the bitcoin exchanges. Bitcoin seemed to be fluctuating enough to just use the old „sell high – buy low” strategy. Just dipping my tow in to the pond, so to say.

Opening an account at a bitcoin exchange was easy enough, although I was lucky to start with one that did only ask for additional information. With MtGOX for example you have to file documents and ID’s to start. At Kraken this only comes applicable after a certain amount of money/bitcoin in your account. (NB you are not anonymous in the land of bitcoin any more if you want to make use of exchanges)

An important aspect of an exchange is whether you can get money in and out of it with ease (fast, low cost). MtGox claims getting money out of the exchange by SEPA can take up to 4 WEEKS (seriously?). Kraken does it within a day. I decided to have a go at Kraken and added a little playing money via SEPA transfer. My very first trade turned out my only good/lucky move: I bought at the lowest possible point after coming down quite a bit for some days and the value has risen ever since. But then what? Looking at graphs and try to see patterns emerging? There are no fundamentals, there is no relevant underlying information on the value of the currency.It is just gambling…

At the same time MtGOX can go up, and Kraken can go down (and vv) the spread between them can be up to 30-50 Euro per bitcoin. (update 16 jan ’14 16:55 inserted below illustration: actual spread €52,03 with a almost €60 spread on the averages of the day.)
Screenshot 2014-01-16 16.55.34

The time it takes to transfer bitcoin is hours (due to the confirmation it needs). Hopping from one exchange to an other is therefore impossible for arbitrage purposes. The volumes traded per exchange are pretty limited, at Kraken so limited (300 bitcoin per day) that people can influence the rate by feeding very small amounts (0.0001 bitcoin or less) to bring the value up or down.

So no real arbitrage, no liquidity, no underlying fundamentals. After some manoeuvring I decided to take the playing money out and only play with the paper gains from the original inlay.

In the end I had the same amount in Euro that I started with playing around, but the bitcoin rates had run away from me (I went into a Euro position at the wrong moment.) In Euro I only suffered an opportunity cost, in bitcoin my position was reduced 30%. Luckily I can buy an ice-cream for my kids with Euro, not so with bitcoin…

NB If I would just have left the bitcoin in my wallet it would today have been worth 40 times my initial investment at time of writing.

For more on Bitcoin at Red Planet Dust:
The RPD Bitcoin files

2016-11-16T10:46:41+00:00November 22nd, 2013|Categories: Bitcoin, Electronic Wallet, Next Payments, Payments|Tags: , , , , , |