Selasa, 02 Desember 2014


Too Many Bitcoins: Making Sense of Exaggerated Inventory Claims Too Many Bitcoins: Making Sense of Exaggerated Inventory Claims Tim Swanson (@ofnumbers) | Published on November 30, 2014 at 15:16 GMT Share 56 inShare 6 bitcoin inventory A year ago, Finnish bitcoin entrepreneur Risto Pietilä attempted to compile a list of the top publicly known bitcoin holders. Assuming his list is accurate (which it probably isn't), if you add up the alleged top-20 largest holders of bitcoin, these individuals control roughly 4.44m BTC. Yet when coupled with self-identification of organizational wallets (like Bitstamp did last year), plus anecdotal talks at meetups, conferences and parties, it becomes clear that the sum total of bitcoins people and companies claim to own is greater than 21 million – even though only 13.5 million have been mined so far. How can this be? What explains the exaggerated claims? To answer that we have to look more closely at the ecosystem and track down bitcoin flows. So where are the bitcoins? Due to its pseudonymous nature, the bitcoin network itself is, for all intents and purposes, a dark pool. That is to say, the network divvies out its limited trust fund (money supply) to nominally unknown players (miners) in a black box that we are slowly deciphering. Ownership is ephemeral (see Jonathan Levin's new pipe analogy). While an imperfect facsimile (a bitcoin is not equivalent to equity), one way to think of a real-world financial equivalent would be if Google issued its shares every 10 minutes to a pseudonymous dynamic-membership multi-party signature (DMMS), to use Blockstream's terminology. Or in other words, if Google issued its shares to random strangers on the Internet. Imagine if two or three years went by and a broker-dealer (or in the bitcoin world, an exchange) was tasked with pooling together all the small batches of Google shares? Their disparate nature would make tracking down and aggregating funds not only difficult, but potentially impossible. So, if you are trying to build a very large liquidity pool of Google shares, how do you track down funds to a non-identified source? How do you find the people who mined for the first couple of years and have forgotten they had them? Who do you call? One solution is trusted third parties called 'liquidity providers' or 'brokers' and, sometimes mistakenly 'OTC traders' (OTC stands for 'over-the-counter' and is inaccurately used in the bitcoin world, but we will let that slide for now). In reality, they are inventory dealers; people who know people who know people. Venture Scanner currently tracks 80 funded bitcoin-related companies that have raised $430m in total. Some of these companies hold inventory (bitcoins), others track the inventory for patterns, still others provide an API to access the inventory and there are even a couple that focus on hiring developers to build apps that interface with the inventory, and so on. Twenty-five of these startups are funded exchanges that have collectively raised $121m. Why have exchanges raised so much money? In order to use the bitcoin network you need bitcoins and while there are several ways to obtain bitcoins (e.g., mining, acting as a merchant and receiving them for goods and services), exchanges provide another method to obtain bitcoins and are often seen as the easiest option to not only quickly buy or sell coins but also to do so in bulk. How much activity does this include today? BraveNewCoin (BNC) aggregates and tracks the self-reported figures of bitcoin exchange volume globally. According to BNC, on any given day, from $40m to $200m (100,000 – 500,000 BTC at the time of writing) is said to be trading against 30 other currency pairs. However, there are a couple of caveats with this number. The first is that the Chinese-based exchanges drastically skew the BNC daily total in part because the largest exchanges effectively double-count certain transactions, allow wash trading to occur and simply have no trading fee. Not only do the doctored metrics above curtail tracking down accurate inventory of bitcoins, they may also expose some participants to market risks: if it costs you nothing to participate in an activity then there is no draw back to effectively 'spam' the exchange (which incidentally happened to the bitcoin network prior to the imposition of a 'dust limit' – now set at 546 satoshi). However, increased faux volume is misleading and ultimately shortsighted, as it distorts market information (level of trading interest) for new participants. After all, without transparency, how do new market participants know if their orders will be filled as stated or if it will lead to similar misrepresentations explored by Michael Lewis in “Flash Boys”? If trading fees are zero, there is no accountability for exchanges to show revenues as volumes go up. That means exchanges can fabricate volume without having to show revenues in their income statement. Even if the fee were some very small percent but positive, an exchange would have to show some revenue associated with the volume numbers they claim. It is worth bearing in mind that the 0% trading fee is analogous to that applied in the forex markets where it is usually 0%, with traders just paying the spread. A traditional exchange makes money by extracting some small payment for order flow from the market makers. Perhaps the most recent egregious example involves the futures products: in an effort to be perceived as competitive as their local peers, several of the large Chinese exchanges such as OKCoin and Huobi now offer margin trading with up to 20x leverage. Yet due to a lack of financial experience operating these (they originally all used the same futures software), a sharp change in volatility can have unforeseen consequences. For instance, two weeks ago Huobi (owner of the BitVC platform) ended up socializing losses across profitable traders to the tune of 46.1% to cover the losses of a levered 2,500 bitcoin trade. And (which was the first to allow over 20x) is now purportedly allowing 50x. In the months leading to its bankruptcy, Bear Stearns reached a 42:1 leverage ratio, thus another large ‘flash crash,’ “mistrade,” or blatant “manipulation” at 20x – not to mention 50x – could not only result in large socialized losses but also investigation from governmental organizations. Without a full audit, it is difficult to identify which exchanges operate in this manner, inflating their volume numbers, however, the Chinese exchanges are likely not alone, as these types of activities may actually be taking place industry wide.
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