All Aboard the Hype Train

It’s time. It is officially time. It’s the next big thing. It’s going to the moon. It’s time for the believers to be vindicated. Shun the non-believers. HODL your coins and hang on to your butts, a bunch of techno-libertarians are about to have enough money to finally move out. Bitcoin’s next bubble is upon us, and the euphoria can barely be contained.

The price of bitcoin is a fickle mover, reacting to seemingly minor events and failing to react to salient and noteworthy events. The most likely driving forces behind bitcoin, as pegged by the Wall Street Journal, are Chinese bitcoin exchanges, OKcoin and Huobi, which offer no fees for trading. Why are these exchanges the best indicator of bitcoin price? For one, the trading quantities they claim account for over 90% of the bitcoin exchange market. Because there are no fees there is no disincentive for traders engaging in price fixing, wash trading, or exchanges that tamper with spreads to make quick money. An easy example of an exchange abusing its own power is the ability to see highly leveraged trades on the order book, and to quickly move the price up or down in order to force the trader to cancel the trade, losing their leveraged bet. A trader making a bet with 20X leverage risks losing their investment for price movements as minimal as $15, depending on the type of bet. Since there is zero regulation, zero transparency, and establishing a price floor and then moving the floor is well within the ability of an exchange not shackled by rules, no outside observer can really say what is happening on the major Chinese exchanges.

We can say what is going on elsewhere. In Europe, KnCMiner shuttered its doors claiming there is no way Chinese miners can be earning the returns they claim. This statement is interesting because it poses the problems of modern, regulated nations against the solutions found in China, where political connections or favoritism can propel a business farther than sound management. In the U.S., a bizarre incident involving Dan Morehead of Pantera Capital, a bitcoin investment fund, marked a return to the pseudo-religious rhetoric surrounding bitcoin, which has only increased due to the developing price bubble. Mr. Morehead rewrote some old literature with bitcoin and blockchain comments, invoking clearly religious references and history, in a confusing post on Medium, a sharing site. An inquiry into the health of Mr. Morehead went unanswered.

Rules and government are for the non-believer, the bitcoin faithful will tell you. It’s the free market, and every hack, theft, scam, and bankruptcy is simply in someone’s rational self-interest. The believers are now prepared to ascend into bitcoin heaven, with dreams of $10,000 bitcoins dancing in their heads. Amid the anarcho-capitalist and techno-anarchist arguments, keep a lookout for anyone inviting bitcoiners to Guyana. Blind faith is dangerous, and faith in bitcoin technology is no different. It is in the rational self-interest of everyone to approach this technology with patience, thoughtfulness, and due diligence.

Image credit – Public domain image by Web-dev-chris