This article from Bloomberg talks about a “surge in customer complaints”…up to 293 about Coinbase. The article proceeds to use terms like “scam” and says that people who sold Bitcoin aren’t getting their money in the time frame quoted by the company.
First I’d like to say I have no idea if any of the below is either:
B) If it is true – that it results in Bitfinex blowing up.
This is a notification that if you use Bitfinex you should be doing some homework.
The general outline is that Wells Fargo cut off Bitfiniex – and Bitfinex started to leverage Tether for their funding. Tether is a currency their sister company started. Since April there has been a 400% increase in the amount of Tether. A second site offers that this Tether can be used for margin trading and this could be influencing the price of Bitcoin.
The CFTC approved a Bitcoin Derivatives exchange “LegderX” several weeks back. Because Van Ecks ETF will rely on that rather than Bitcoin it means that clearing and moving funds will arguably be more transparent and secure because the derivatives settle in cash. The SEC and CFTC understand cash better than they do Bitcoin.
I personally thing the challenge the SEC has with the Winklevoss ETF is that they cannot wrap their heads around how the storage of Bitcoin will take place and where the funds will held. There are lots of security issues here which needs to be addressed and that makes for a lot of challenges.
There is “GBTC” which is not actively managed and usually trades at a very high premium to Bitcoin – see here.
The CBOE is now launching Bitcoin Futures in a plan with the Gemini exchange. I am not certain what the implications are of this for the Bitcoin ETF that the Winkelvoss were working on. Launching Futures is a much easier task for the CFTC and/or SEC to wrap their heads around as the Future just has to track the Bitcoin price. Whereas with ETF the SEC has to figure out how actual trading and settlement of the Bitcoins underlying the ETF would work.
One could argue that the Bitcoin ETF would have had a much bigger impact on price that the Future. But inevitably there will be players in the market which are arbitraging Futures versus the underlying. This means more capital flowing into the cryptocurrency space. It also means more legitimacy for Bitcoin wherein regulators and stock exchanges are grasping and embracing the products.
The chart below shows a good move up in the S&P500 (an Index of the US stock market) and Ethereum. Both moves occured right in the 10:11-10:12AM EST time frame. The top chart is Ethereum from GDAX and the bottom is the S&P500 (SPX).
Clearly there are good sized traders out treating Ethereum and Bitcoin as an asset class like equities…
Its more than apparent that hedge funds and banks are pushing into the Bitcoin and crypto markets. Today I noticed that both Bitcoin and Ethereum prices gapped up at 9:30AM EST. Coincidentally thats when the US stock markets open for trading. Forgive the terrible notation in the GDAX charts below, I was in a rush.
There is no obvious reason why the two would be linked, I suspect it has something more to do with some traders who have algorithms for the US stock markets. When their machines flip on they also have Bitcoin and Ethereum in their portfolios, so they begin trading them, too.
I don’t currently have the time to backtest this, but I wanted to post something as a reminder.
There is a lot of action in Bitcoin and Ethereum trading – intra-day volatility can be huge. One thing that is frequent in crytpo trading is buy or sell “walls”. I great example happened today on the GDAX exchange.
You can see at the bottom section of the chart below you have an aggregate of buy and sell volume at various prices. On the left in green is the amount in total that people are willing to buy at various prices. On the right in red is the amount sellers are wishing to unload. As you can see there is a massive amount of Ethereum for sale around $230 ETHUSD. This is almost 8,000 ETH units for sale at $230/ETH which is roughly $1.8 million USD.
For the price of Ethereum to move over $230 there needs to either be very strong buying demand to “tear down that wall”, or the large seller(s) need to pull back.
Buy and sell “walls” is something you will see frequently in crypto trading.
In addition to the continuous trading order book, each of the order matching engines conducts two Auctions (or “crosses”) every day, one at 4:00 p.m. Eastern Time (20:00 UTC during EDT and 21:00 UTC during EST) and one at 7:00 p.m. Singapore Time and Hong Kong Time (20:00 JST, 11:00 UTC). This provides an opportunity for both buyers and sellers to trade in an instant of elevated liquidity and price discovery. All active orders (including resting limit and MOC orders) may interact with the Auction and influence the final auction price, which is determined by finding the price at which the greatest aggregate buy demand and sell demand are fulfilled. All participating, eligible orders are fulfilled at the final auction price. (We use a mechanism similar to the New York Stock Exchange’s Arca marketplace, Nasdaq, Bats, and other large stock exchanges throughout Europe and Asia, which is sometimes called Walrasian equilibrium.)
In the stock trading world Auctions are useful because it allows you to trade “size” (aka large orders) without (hopefully) having much impact on the stock price. If you are a large hedge fund and need to offload 5 million shares you can really push the price of a stock down, especially if you are a large part of the volume. Theoretically the auction might allow you to cross (aka match in the auction) with a large buyer without having a major impact on the price of the stock.
There are a bunch of stats on the Gemini Auction here.
On the stats page, there are a few interesting things. There are about 340 data points and the average “Absolute Difference” between the midpoint on the “continuous market” (aka normal price) vs where the Auction Matched price is 0.27%. With Bitcoin at ~$2,500 thats about $7. The highest spread though was 3.83%, with a standard deviation of 0.41%. Remember, these are ABSOLUTE numbers, so you don’t know if the auction price is higher or lower.
A real statistician would rip my math apart here, but basically this says that you have a 66% chance of achieving a price thats almost 1/2 a percent from where the continuous market is trading.
For the average joe, this isn’t worth much. The price of Bitcoin or Ethereum can move 1/2% in a few seconds so you’re opportunity to lock in an arbitrage seems a random. But, if you are a market maker or an arbitrager using an API to trade instantly its pretty interesting. Not only could I use the difference in price between the “continuous” exchange on Gemini and the Auction mechanism, but I could also arbitrage between any one of the other exchanges like GDAX, kraken, OKCoin, etc.
First, some caveats. I spot checked exchange websites to verify these prices. It appeared like I could trade the Bitcoin/USD pair on each of these exchanges. How the exchanges adjust their local currency into USD could cause the price differences. For example, the Chinese exchange might use a delayed quote to adjust their price from Yuan to USD for advertising purposes. Then, when you try to trade you’ll see a different quote. What follows below is just a thought exercise – do not take it as anything more.
Want to make ~10% of your money instantly?
Buy bitcoin on Poloniex and sell on LakeBTC. Poloniex lists themselves as a Wilmington, DE company whereas LakeBTC is Chinese. So if that geographical difference bothers you, then flip to GDAX or Gemini vs Poloniex where the arbitrage is closer to 5%.
Why is the Price Difference Between Bitcoin Exchanges so Big?
There is no real linkage between various Bitcoin Exchanges. Historically stock exchanges didn’t have linkages either and it was market participants who made their living arbitraging between exchanges. As more arbitrage players step in the price spread between exchanges shrinks. More players, more competition, smaller (aka “tighter”) spreads.
Why haven’t arbitrage players/market makers jumped into Bitcoin?
Well, many have. There are players in the arb game already but there are some challenging barriers to entry.
Exchanges often have API’s which allow you to connect and with a bit of code you could be on your way. Now the fun part.
Bitcoin wallets are local to the exchange.
There is no “central” wallet (that I’m currently aware of) which all the exchanges connect to. If you are trading on OKCoin you have to have a bunch of funds on that exchange. If you want to arbitrage against Gemini you need funds there, too. What happens if you buy a bunch Bitcoin on OKC and then need to sell a bunch on Gemini? Suddenly you’d be out of cash on OKC and flush with cash on Gemini. You then need to either transfer cash or Bitcoin to OKC so you can buy more on that exchange.
Great, lets transfer more cash to OKC:
This can be time consuming – will the exchange take in the funds instantly? When arb’ing time is of the essence. Additionally, many exchanges won’t take US customers. Some find ways around this of opening local companies and local bank accounts. Enter in the issue of currency.
If you’re primarily in USD’s you might have to account for the currency conversion to the local exchnages currency. OKC is in China, so you have to get USD into Yuan and factor that into your arbitrage. When the price spread is $200 between exchanges this might not matter much – but when that spread gets tighter it may become a problem.
Option two: send Bitcoins from Gemini to OKC: Generally this is cheap and efficient. BUT, Bitcoin has been known to have some network issues that slow down the transfer of Bitcoin from one wallet to another. Particularly when the prices are really moving fast. As an arbitrager its when markets are moving fast that you’re most likely to have to move Bitcoin between wallets. Lets say you need funds at OKC immediately because you sold some at Gemini – a 5 minute delay in sending coins could wipe out your arbitrage.
Keep in mind – most arbitrage players want to trade on many exchanges simultaneously not just two. You can see how this could get confusing quite quickly.
These problems are solvable, but far from trivial.
Enter Bitcoin Exchange “counterparty” risk.
Alright, you need to keep a bunch of funds distributed to all the various exchanges on which you trade. As any long time Bitcoiner will tell you, keeping funds on an exchange brings a lot of risk. You’re exposed to everything from hackers hitting the exchange (see Poloniex) to the people that own the exchange just deciding your funds are theirs (see Mt. Gox). Certainly exchanges are getting better and more secure as they evolve. Buy lets say the Konim exchange messed up your wire transfer. They’re Turkish – do you speak Turkish? There are also plenty of stories involving US Banks which aren’t wild about your evil cryptocurrency related money transfers. So they hold up your funds.
These and others are all risk that you have to consider.
All that aside, it appears there is money to be made. Its also a safe bet that more players are going to pile in, technology will improve and the price difference between exchanges will close up. For most of us normal “buy and hodlrs” that means more efficient markets.