Monday, May 15, 2017

Bitcoin market dynamics: A few ideas

It is quite easy to obtain data on the cryptocurrency market. Most of the lesser known coinage is linked to bitcoin (BTC) and fluctuates with BTC value. The total market is valued at $53B currently and we can see that most of that is in the BTC.

If you look at the BTC price chart, one can see see how the BTC valuation has been through one speculative bubble.  We can also see what appears to be another one building up. Speculative bubbles usually occur when there is interest in a financial instrument but the market is unsure of its true value. In such situations, speculative impulses in the market run wild as traders attempt to find push up the value of the BTC for as long as it is willing to go. The trigger for such bubbles is usually a sudden upsurge in demand for that financial instrument. The apparent scarcity of the asset is usually sufficient to induce investors to pay more for it. This in turn creates a feeding frenzy as more and more investors jump into the market and try to buy up increasingly scarce assets.

This has happened with BTC before in October 2013. Prior to October 2013 confidence in BTC was fluctuating wildly. Some people were adopting BTC as a form of payment, others were wondering if governments would ban it outright. That is not the kind of uncertainty that causes bubbles. In my opinion the trigger for this price rise was the FBI seizure of 26000 BTC held by the Silk Road website. The FBI widened its net to 140000 BTC, as the FBI took these coins out of circulation and held them for an indefinite period with the publicly stated promise of auctioning them at a later date, the people who those BTC belonged to had to purchase more coins. The sudden rise in demand coupled to the immediate shortage drove up the price. I feel this is what triggered the bubble.

Unless the FBI has been seizing BTC again and publicly promising to release them soon, I don't see a similar scarcity driving up the BTC valuation today. So my guess that the second bubble we are seeing emerging is driven off a different trigger. Something happened around April 15th of this year that made people start buying and selling BTC increasing quantities and at higher prices. The only major event on my tracking system was Prime Minister May's decision to go in for a snap election.

I can't see why that would induce a huge increase in the demand for BTC.

However there is something that does presage a massive upsurge in demand for BTC and that is WannaCry. WannaCry or WannaCryptor is a ransomware that makes use of a MS specific tool in a leaked NSA kit. As you may recall a set of tools allegedly belonging to the NSA's Tailored Access Operations Office (TAO) had been seized by a hacker group calling itself "The Shadow Brokers (TSB)". Most of us who follow these mattes strongly suspect that TSB is an RIS front operation - though it is extremely difficult to know such things for absolute certain. The Shadow Brokers sold the tools online. The creators of WannaCry demanded payment in BTC. As the ransomware spread across the world affecting critical systems like hospitals, the demand for BTC rose. The attack ultimately stalled and failed as a kill switch was accidentally discovered and activated by a 22 yo programmer in Britain. A repacked version of WannaCry (2.0 as they call it) is doing rounds and BTC is slowly working its way down from the ~$1800 peak.

I think it is important to note that the value of BTC spiked to about 2x its value a month ago. I strongly suspect that the people who planned this attack decided to hedge their bets. The began to stealthily purchase BTC in the month prior to the attack and likely sold a vast amount of it in the bubble. This way of doing it is pretty fool proof this way even if the attack fails, they still make a bunch of money off the BTC the bought and sold.

I am reminded of @CherylRofer's prescient words about the threat of cyber aggression from Russia. As the Trump madness winds its way through the seven circles of Hell, our nation is leaderless. What we have seen in the WannaCry is a small sample of what lies ahead.

Note the complete silence of the Trump Admin on this event. Surprising? not really - he did say he fired the FBI director because he wanted the TrumpRussia investigation to stop.

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