alleged 'illusion of bitcoin liquidity'? Citation requested. [LWN.net]

alleged 'illusion of bitcoin liquidity'? Citation requested.

Posted Jan 12, 2018 23:37 UTC (Fri) by anselm (subscriber, #2796)
In reply to: alleged 'illusion of bitcoin liquidity'? Citation requested. by Garak
Parent article: Welcome to 2018

As far as my understanding goes today, anyone holding a (key to) a solid bitcoin can open a Coinbase(tm) account, and get >$10,000 of USD in exchange for that bitcoin.

Possibly. But whether they will get an amount that is closer to $12,000 (like today) or closer to $19,000 (like four weeks ago) is anyone's guess. Next week it might be $10,000 or $20,000, or for that matter $5,000 or $50,000. The problem is that the Bitcoin trading volume is generally so low that single transactions can raise or drop the exchange rate by tens of dollars. You may be able to sell one Bitcoin every so often but selling larger amounts at one go risks a “flash crash” – in April 2017, trades of only 100 Bitcoin, together with a configuration error, briefly sent the exchange rate on the GDAX exchange from $1180 to $0.06 (which was good for those people who managed to pick up some Bitcoins at that price at GDAX, and, because the general Bitcoin price index depended to a fairly large extent on the GDAX price, not so good for people whose Bitcoin positions were automatically liquidated while the “crash” was going on; fortunately these people were eventually reimbursed by the exchange). There were periods in the recent past when trading volume was so low that, in order to keep the price up, some exchanges resorted to “painting the tape”, i.e., having bots do back-and-forth transactions in order to pretend that there are trades going on, which given that Bitcoin does have transaction volume issues is a nuisance because these transactions tend to clog the block chain.

It should also be noted that there is no single universal exchange rate for Bitcoin; what is posted as “the” exchange rate is really a weighted average of Bitcoin prices at various exchanges. The actual spreads can be considerable and that of course is an incentive to clever programmers to engage in automated arbitrage, so actually converting Bitcoin to real money can in fact be more difficult than it seems.

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alleged 'illusion of bitcoin liquidity'? Citation requested.

Posted Jan 13, 2018 0:49 UTC (Sat) by Garak (guest, #99377) [Link] (12 responses)

"The problem is that the Bitcoin trading volume is generally so low that single transactions can raise or drop the exchange rate by tens of dollars."

Yeah, at $10K+ that really doesn't sound like a significant problem to me.

alleged 'illusion of bitcoin liquidity'? Citation requested.

Posted Jan 13, 2018 2:20 UTC (Sat) by anselm (subscriber, #2796) [Link] (11 responses)

To be exact, that was tens of dollars when Bitcoin was around $1000. Make that hundreds of dollars now – it may be insignificant for you, but many people don't like that sort of volatility a whole lot. Anyway, it doesn't detract from the fact that converting larger amounts of Bitcoin into real money is difficult because it tends to mess with the exchange rate more than it ought to for a purported “currency”.

The fact of the matter is that Bitcoin, for all the hype, is mostly uninteresting for people who want to buy or sell legitimate stuff in the real world. Why would anyone want all the hassle, the delays, and the volatility when one could just as easily use actual money (or for that matter PayPal or a credit card) and be done? Even vocal Bitcoin supporters apparently prefer to hang on to their Bitcoin over using their Bitcoin to buy goods. OTOH, those companies that do offer Bitcoin payment usually arrange it such that Bitcoins go through an exchange and they receive their money in a real currency, like US dollars – they never want to touch actual Bitcoins.

Many companies which dipped their toe into the water accepting payment in Bitcoin have stopped again simply because the actual (very low) number of customers who want to pay in Bitcoin doesn't justify the complications. For example, the soap manufacturer WhollyHemp introduced Bitcoin payment and found that, after an initial burst, only around 0.2% of their total sales were paid for via Bitcoin. In fact they conducted A/B testing on their site and noticed that when customers were advised that payment in Bitcoin was possible, gross sales went down by nearly 6%. Not a great incentive. (The Mozilla Foundation ran similar tests in 2014 and found that adding a “Donate in Bitcoin” button to the main campaign form would have cost them $140,000 over the course of their campaign, simply because the added complexity tended to turn away potential contributors.)

alleged 'illusion of bitcoin liquidity'? Citation requested.

Posted Jan 13, 2018 2:46 UTC (Sat) by Garak (guest, #99377) [Link] (10 responses)

your comment reads as someone who doesn't appreciate that technology improves over time. Which seems weird here on LWN. Here over the years we watch all kinds of software based technology evolve over years from buggy fragile proof of concept, to relatively rock solid. I'm not dissuaded by your limited anecdotes. For every problematic scenario you describe, there are 100X more ordinary successful transactions. This is why the market cap of the top ten cryptocurrencies is in the hundreds of billions of dollars. Yes, no doubt a lot of unwise speculation along the lines of the 2007ish bad loan ponzi scheme that led to the bank bailouts, which apparently in turn led to the text message the creator of bitcoin first embedded in the deployment. But it's still hundreds of billions of dollars worth of confidence that the system basically seems to be functioning. And I haven't heard nearly as much complaint about users of litecoin/etherium/dogecoin. From my perspective, it sounds like those are functioning well for a lot of people. Maybe they too have their anecdotes of problematic days amongst the years. NYSE and Nasdaq have been known to take days or hours off from time to time.

The software and it's design will improve over the years. The fact that it works as much as it does, already, is something the marvel at. Nobody here is hyping it as 'ready for primetime', or 'done and perfect'. We do however see that it in fact is a functioning system already. And quite stable. For all the complaints about volatility, I see something that for most weeks of it's several years of life has been very stable.

I'm still in awe that it has already got years under its belt of having achieved it's initial design intent. I consider that pretty fucking amazing and cool. About how I felt about Linux in 2000. And Linux in 2010 and 2018 kick the living shit out that. I'm looking forward to seeing what cryptocurrencies look like 5 and 10 years from now. I think a lot of people will be very impressed (unless Trump launches too many nukes before then).

alleged 'illusion of bitcoin liquidity'? Citation requested.

Posted Jan 13, 2018 10:33 UTC (Sat) by anselm (subscriber, #2796) [Link]

Perhaps the Bitcoin guys will eventually get their act together and figure out some way to fix the more egregious problems. But how often do you want to fork the blockchain getting there?

The difference between Bitcoin and Linux is that for Linux to advance, all that needs to happen is Linus Torvalds putting new changesets into git. With Bitcoin, you need to convince a large swathe of the user base that what you want to change is actually a good idea, and there is people's money involved (even if to a considerable degree it is only Monopoly money). This means that even changes that are fairly simple from a technical POV (like increasing the block size) become huge issues when viewed from the social/political angle, and it tends to limit the scope of technical fixes you can actually accomplish within an existing crypto-“currency”. Imagine what would happen if whenever Linus Torvalds was to publish a new version of the Linux kernel, more than half of the existing user base had to decide to adopt that new kernel before it could become official (and that's without these people having a financial stake in the old kernel).

OK, so you say that at some point there will be a completely new cryptocurrency that takes care of all of Bitcoin's problems and starts without Bitcoin's historical baggage, and we will all be using that instead of Bitcoin. Leaving aside the fact that it is unclear whether taking care of all of Bitcoin's problems is even possible, the problem with that is that Bitcoin takes up not just considerable mindshare but also billions of dollars' worth of people's “money”, and that makes it even more difficult for new alternatives to gain traction. Bitcoin had the big advantage that when it came out it was basically the only game in town, but anything new and different must be obviously better than Bitcoin to get anywhere at all – and that means “obviously better” to people who even now have no clear picture of how Bitcoin actually works and where its problems really are. If businesses have a hard time justifying buying into the major incumbent cryptocurrency, what makes you think they'll go for the flavour of the week instead? (Since you're so fond of comparing Bitcoin to Linux, imagine where Linux would be if when it came out people hadn't already been used to using Windows, and the computer industry hadn't been convinced – by hook or by crook – that Windows was the way to go. After all, in the real world, the fact that Linux was obviously better than Windows in various important and tangible respects, like being virtually virus-proof, didn't help its widespread adoption at all. Now imagine that Windows is Bitcoin and Linux is your favourite new cryptocurrency.)

alleged 'illusion of bitcoin liquidity'? Citation requested.

Posted Jan 13, 2018 21:01 UTC (Sat) by nix (subscriber, #2304) [Link] (8 responses)

For every problematic scenario you describe, there are 100X more ordinary successful transactions. This is why the market cap of the top ten cryptocurrencies is in the hundreds of billions of dollars.

That doesn't follow. As I've noted repeatedly, all the market cap indicates is that bitcoin is being mined, and that people are piling into it and pushing its exchange rate with the dollar up. It does not indicate that any actual transactions are happening (which would not affect the market cap, whatever the hell a "market cap" is supposed to be for a currency: that's a term you'd use for instruments being invested, which rather proves my point). Transactions for actual goods in a currency (as opposed to in and out of it) affect neither the amount outstanding nor its exchange rate.

I'm still in awe that it has already got years under its belt of having achieved it's initial design intent.

Insofar as the initial design intent included statements by its early adopters that it would allow effortless microtransactions, have transaction fees so low as to be imperceptible and certainly far lower than, say, Visa, and be a useful store of value, it has totally failed.

alleged 'illusion of bitcoin liquidity'? Citation requested.

Posted Jan 13, 2018 22:05 UTC (Sat) by anselm (subscriber, #2796) [Link] (7 responses)

As I've noted repeatedly, all the market cap indicates is that bitcoin is being mined, and that people are piling into it and pushing its exchange rate with the dollar up. It does not indicate that any actual transactions are happening

Right. “Market capitalisation” makes sense if, for example, you're talking about a publically traded company, where it tells you how much money you would need to buy all the stock (IOW, what the company is “worth”). With crypto-“currencies”, this is obviously silly since you can't buy or sell Bitcoin-the-currency the way you could a company. Bitcoin's “market cap” doesn't reflect the money that has been put into it nor the money that you could reasonably get out of it – there may be 300 billion dollars in Bitcoin according to its “market cap”, but if anyone tried to sell Bitcoin to the value of even an appreciable fraction of that, the dollar price of Bitcoin would just crash. For crypto-“currencies”, “market cap” is a bogus measure that crypto-“currency” advocates like to sling around but it doesn't tell you anything interesting or worthwhile.

What you really need to look at to gauge interest in a crypto-“currency” is its trading volume, and for Bitcoin that is really slim, especially considering that these days most Bitcoin transactions are between Chinese day traders.

alleged 'illusion of bitcoin liquidity'? Citation requested.

Posted Jan 14, 2018 7:27 UTC (Sun) by Garak (guest, #99377) [Link] (6 responses)

"What you really need to look at to gauge interest in a crypto-“currency” is its trading volume, and for Bitcoin that is really slim,"

I wouldn't personally characterize millions of transactions per month as 'really slim', but I can understand how others are dismissive. Again, this is just one cryptocurrency. There will be more in 2019 and beyond, by my prediction. The technologies will continue to improve. The politics will remain interesting to watch.

https://en.wikipedia.org/wiki/Bitcoin#/media/File:BTC_number_of_transactions_per_month.png

alleged 'illusion of bitcoin liquidity'? Citation requested.

Posted Jan 14, 2018 11:10 UTC (Sun) by farnz (subscriber, #17727) [Link] (2 responses)

To put that number into perspective, existing cash alternatives like credit and debit cards between them handle millions of transactions per hour. In the UK, there are around 3.7 billion card transactions per quarter, which is nearly 2 million transactions per day. Put another way, this means that every single person in the UK (adults and children between them) averages a card transaction every 2 days. One million transactions per month implies that Bitcoin as-is could only replace cards for 70,000 people (globally) or so at current rates of trading.

This would not be an issue if Bitcoin was set up such that transaction fees and time would fall if there were more users; however, that's not how Bitcoin works, and transaction delay and fees are already higher than card networks.

Where this does compare adequately is with shares - it's about the same trade rate as the average NASDAQ security. But then, that leads to the question; what, exactly, is Bitcoin, if it's supposed to be compared to shares in something, not to currency instruments?

alleged 'illusion of bitcoin liquidity'? Citation requested.

Posted Jan 15, 2018 9:56 UTC (Mon) by james (guest, #1325) [Link] (1 responses)

I think you mean nearly 2 million transactions per hour -- two million per day is way too low!

alleged 'illusion of bitcoin liquidity'? Citation requested.

Posted Jan 15, 2018 10:04 UTC (Mon) by farnz (subscriber, #17727) [Link]

I did, yes. Off-by-one when counting my time units. Thanks!

The rest of my maths looks OK - it's just that one that I broke when confirming units, so the point still stands that Bitcoin isn't set up to serve a town of 100,000, let alone a country.

alleged 'illusion of bitcoin liquidity'? Citation requested.

Posted Jan 14, 2018 11:35 UTC (Sun) by anselm (subscriber, #2796) [Link] (2 responses)

The interesting thing to note about that picture is how the number of transactions isn't going up the way it used to (which it presumably would if Bitcoin was really catching on). This is because Bitcoin is running up against its built-in transaction limit. Credit card networks can typically handle 10,000 times the transactions per unit of time that Bitcoin can, and unlike Bitcoin they can build out their capacity if they have to.

alleged 'illusion of bitcoin liquidity'? Citation requested.

Posted Jan 18, 2018 3:01 UTC (Thu) by Garak (guest, #99377) [Link] (1 responses)

but bitcoin isn't the only cryptocurrency. Hopefully wikipedia will have (or already has) stats on all the top cryptocurrencies. And I expect bitcoin and its competitors to continue working on and solving their scaling problems. To the point that the political challenge will come more into focus. (Nations pushing back against the competitors to their traditional currency)

alleged 'illusion of bitcoin liquidity'? Citation requested.

Posted Jan 18, 2018 9:24 UTC (Thu) by anselm (subscriber, #2796) [Link]

So far nations don't appear to have a lot to worry about, and until crypto-“currencies” become useful to let normal people buy legitimate stuff that is actually worth having, with less hassle than doing it with actual money, a credit card, or PayPal would require, that is unlikely to change.

The problem with Bitcoin is that the issues it is facing now are mostly built into the system by design and are difficult to fix because the fixes require not only technical solutions but also political buy-in from entities that are strongly invested in the status quo (remember that something conceptually quite simple like increasing the block size resulted in a blockchain fork that gives no indication of going away). This also impacts other crypto-“currencies” because many of them basically hang off Bitcoin in some way (if only that you can only buy them using Bitcoin).

Remember that the people who benefit most from a crypto-“currency” are the ones who get in on it early and can hoard a comparatively large share of the available “coins” while they are still easy to acquire. The fabled Satoshi Nakamoto, for example, apparently sits on more than 1 million Bitcoins, which would be a nice retirement package if you could actually convert it, or an appreciable fraction of it, to real money (which you can't). Similar considerations apply to most other “coins”, where the main idea behind an ICO is to get people to give you free money without your having to deal with pesky entities like the SEC.