Disclaimer: This is just rampant speculation. I own crypto.
A thought struck me today as the crypto market has been fairly quiet the last few days compared to the mayhem a week ago. Many crypto currencies like Litecoin and Ethereum were up 50-100% last week, only to trim gains this week. CBOE Bitcoin futures didn’t appear to have much impact on price at all in the first week of trading either. In hindsight its clear to see that the market needed to cool, but I have a feeling that the “cooling” might be over for a bit.
I dont think that price is down because demand is down. I suspect what we saw was the first “wave” of another to come. Why is it “to come” and not “here”? People can’t get in fast enough. Exchanges are overwhelmed with new signups.
Lets Face It, This is A Bitcoin Litecoin Ethereum Bubble
Coinbase is the #1 App on the Apple App Store and your Barber/Grocery Clerk/Grandmother are all buying in. Prices have surged unbelievable amounts in the past few days (let alone year). My hunch is that most people buying in now are trying to get rich and are not trying to escape the grasp of the evil Wall Street empire.
Keep in mind, just because there is a price bubble doesn’t mean the technology isn’t awesome. The prices of Bitcoin or Litecoin could go down 90% and the tech would be just as mind blowing.
Its also possible I’m wrong and that prices just keep going up. Many point to this chart showing internet adoption:
The key to all these tech was ADOPTION – people used them. This chart is also talking about ADOPTION and not PRICE. These are two different things, but brings me to a point:
People drawn in by trying to get rich might just stick around and ADOPT crypto tech.
Clearly millions of people are flooding into the crypto space, and if they don’t SELL but start to transact with each other using Bitcoin or Litecoin – then prices might not come back down.
The reviews claim that buying Bitcoin on the app is very easy and intuitive. People also trust Square.
All these people speculating on Bitcoin price could suddenly find themselves transacting quickly and easily using Bitcoin. They could adopt it. That might keep prices up, or even be a catalyst for higher prices.
In the end we’re in the first or second inning of all this tech. Prices will do what they will but its clear that crypto is here to stay.
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.
The alternative title for this post was set to be “Coinbase: Spread ’em!”, but its probably best to tone it down.
For those in the US, Coinbase is arguably the most convenient and mainstream way to purchase Bitcoin, Ethereum and Litecoin. They link to your bank account and will allow you to buy and sell crypto with the click of a button. They offer relative security in that they have “grade A” investors like the New York Stock Exchange. (This would be in comparison to some non US exchanges owned by…???) I personally use Coinbase and have recommended them to friends.
Coinbase is superficially a retail application that routes orders to their exchange, GDAX which offers more advanced functionality.
According to CoinMarketCap, GDAX is the 7th largest crypto exchange by volume.
With the recent price explosion in crypto, CoinBase has had many issues with downtime. Often when markets were at the jumpiest users would see the following screen:
Uptime aside, I think its important for users to really understand the price they are paying for this convenience and security.
How [I Speculate] Coinbase Works
Coinbase does not give users the ability to place limit orders – for that you have to use GDAX. Coinbase gives you a live price at which you can buy or sell the crypto of your choice. That price comes from GDAX, and that is where they “source liquidity” (i.e. actually buy or sell). When you buy they then pull money from your bank account or credit card. This opens Coinbase up to two principal points of risk
Price Risk – Coinbase guarantees you a price for a few seconds, during which the actual price could move. Coinbase still has to grant you the quoted price, even though the price may have changed between when they quote you and when you click “Buy”.
“Funding” Risk – Your crypto is not available under Coinbase has received the funds from your bank. However you could probably find ways to cancel the funds transfer and stick Coinbase with the crypto you bought. This leaves them with unwanted inventory and the associated risk. Coinbase caps how much you can buy or sell, and you need special permission for higher levels to greatly mitigate this risk.
This risk is baked into the price when you receive a quote and pay their fee. It appears in two places:
Crypto Pricing (Not Very Transparent): They “spread” you, meaning they increase the price over (buying) or under (if selling) where the actual market is trading. For example, the actual mid point price for Bitcoin might be $2,000, but Coinbase will sell you Bitcoin for $2,010. Note that if you use GDAX you can place limit orders and have better control of your price.
I surmise that when markets get really crazy, spreads widen out. Meaning the price Coinbase is quoting you will be father away from where actual market is trading. This is what happens in stock and options trading: market makers widen their bid/ask quotes to reduce their risk.
Here is a real time example using Coinbase on iOS:
Buy 1 Bitcoin:
Coinbase Offer Price: 2284.65
Coinbase Fees: $34.04
Simultaneous market on GDAX:
GDAX: Bid $2,268 x Ask $2,273
Therefore Coinbase is going to sell me 1 Bitcoin at $2,318.91, then simultaneously buy on GDAX for a worst case $2,273. They clear $45 from the trade or about 2%. For the security and convenience of using Coinbase, I’d argue thats not a terrible price.
Its possible that they also have a matching engine which would pair or match my buy order off against another Coinbase user that is selling. This means that they could fill both of our orders “mid market” (halfway between the GDAX bid/ask) which would be a price of $2,270. That adds a few more dollars of profit for them.
Not a bad business.
The Flash Crash
Last week Ethereum [ETH] prices “Flash Crashed” on the GDAX/Coinbase exchange. Price went from ~$320 to $0.10 and then back to the $300’s in seconds. Heaps of money were made and lost, and Coinbase is sorting it out trying to make it right. Clearly, this was not a good thing. Yet, even “mature” exchange (like the NYSE) can flash crash and have outages. The important thing is that Coinbase is trying to make it right and that in the end will build trust. How did it happen? From Coinbase:
On 21 June 2017 at 12:30pm PT, a multimillion dollar market sell was placed on the GDAX ETH-USD order book. This resulted in orders being filled from $317.81 to $224.48, translating into a book slippage of 29.4%. This slippage started a cascade of approximately 800 stop loss orders and margin funding liquidations, causing ETH to temporarily trade as low as $0.10.
Our initial investigations show no indication of wrongdoing or account takeovers. We understand this event can be frustrating for our customers. Our matching engine operated as intended throughout this event and trading with advanced features like margin always carries inherent risk.
We are continuing to conduct a thorough investigation and will keep customers updated with any resulting actions. With that in mind, it is important to note that these trades are final in accordance with our GDAX Trading Rules (Section 3.1). Honoring properly executed orders is critical to maintaining the integrity of an exchange.
In response to the large price movement we decided to temporarily halt trading of ETH-USD. Once we confirmed all systems were operating correctly, we restored trading in accordance with our Downtime Process(Section 5).
Because there really isn’t a linkage between global crypto exchanges I think the fallout was pretty minimal. Had other exchanges traded more in lockstep with GDAX we may have seen sustained issues from this event.
For US investors and those abroad with access to Coinbase I think they are best of pure from a purely “retail” or buy and hold (HODL) perspective. For active traders or those a bit more technologically inclined GDAX is a better alternative. Gemini is another US exchange which merits mentioning here as a US based competitor to GDAX. These platforms offer better security and a more regulated environment than not US competitors and while that may come at a slight cost, its valuable insurance.