A currency trader’s take on Bitcoin

Posted by Tracy Alloway on Jun 27 12:41.

A major exchange for Bitcoin — Mt.Gox — was hacked last week.

The cyber-attack sent the virtual currency’s exchange rate temporarily reeling from about $17.50 to pennies. More importantly it sparked some fresh concern about Bitcoin’s reliability and security.

The hacked database, however, also gave a unique insight into just who has expressed interest in Bitcoin — enough to register on the Mt.Gox exchange anyway. There are a few accounts linked to email addresses from very famous investment banks and lesser-known volatility managers, for instance.

We spoke to one of them — a senior currency trader at a renowned bank.

Here’s what they told us about their (personal) interest in Bitcoin:

I jumped across to Mt.Gox after reading an article on a Swiss gossip paper a couple of weeks ago. As bull markets interest me in general, I’ve done some research, read through the concept and quickly got to the point where I felt that the only reasonable position would be to short such a bull market. Just like the Nikkei in 1990, the Nasdaq in 2000, and currently the silver market, they all follow a similar pattern.

Due to the limited availability (supply) of the coins and the tremendous publicity via newspapers, magazines, etc. the BTC obviously got to a very overpaid point so I tried to contact Adam at Mt.Gox to ask if they intended to implement a possibility to short the BTC. Due to the overload in mails they must have had, I never got an answer on my inquiry. At 17$ I would have been very interested in selling a couple of thousand. Further I think being able to short whatever investment vehicle will add to the liquidity of a product and as well give more stability. Otherwise you will always have a one-way market and a big collapse at some point. Limited liquidity and a big run on whatever product is never healthy, look at the Volkswagen squeeze in 2008 where it went to over 1,000 EUR/share, the most expensive stock in the world, and now it’s worth a tenth of that. Very limited free float, together with tremendous activity on derivatives, caused these massive moves.

The hacker-attack on bitcoins will in my opinion have a very bad impact on the concept itself. Even if all the transactions will be reversed, people will get out of it in masses. Confidence and security, are musts for whatever we touch, especially when money is involved. You can’t have a compromised system. All in all, it’s a very interesting project, with typical anomalies of human behavioural finance, but in my humble opinion, one with no future as the lack of regulation, money laundering risks and many other hurdles will at some point kill the project.

Actually, Bitcoin values have proved remarkably resilient –the exchange rate back at around US $17.30 per coin, according to Monday trade data from Mt.Gox. As blogger and MIT grad Star Simpson notes, the polarisation between Bitcoin’s detractors and supporters is pretty stark.

Many Bitcoin proponents are totally dismissive of any ‘advantages’ central banks or governments might provide, even as protection against cyber-attacks. Detractors, meanwhile, often go further than just predicting the crypto-currency’s collapse, labelling it as a geeky Ponzi scheme, as well.

We like the currency trader’s rather more nuanced take, and also Simpson’s own appraisal after using bitcoins to buy lunch (houmous and olives, if you were wondering) at a New York restaurant:

My Bitcoins have lost value since I bought them, but I’m not writing this to ask you to buy them from me. I’m completely content to be the greater fool. I’m writing this to emphasize that Bitcoin is an experiment, which is something very different from a Ponzi scheme. This experiment will probably fail at some point for reasons other people have already enumerated, and that’s fine. We’ll have learned an enormous amount from it … All fiat currency is imaginary sub specie (hee hee) aeternitatis and gets its value from psychology and various institutional arrangements. And that’s true of the currency in your wallet right now. It’s fair enough to point at the tremendous resources that might be brought to bear to defend the value of the U.S. dollar. Not much will defend the value of a Bitcoin once anything at all goes awry, and as Adam Smith might have said, there is a great deal of ruin in a currency. But I have no patience for theories that say that I couldn’t possibly have bought lunch with my half a Bitcoin or that the restaurant was crazy to accept it. It was a delicious thrill;

Related links:
Bitcoin arbitrage opportunities – NYSE.de group
How I bought lunch in Manhattan with bitcoins – Star Simpson’s blog
Virtual money, from real central bank mistrust – FT Alphaville

This entry was posted by Tracy Alloway on Monday, June 27th, 2011 at 12:41 and is filed under Capital markets. Tagged with , , , .

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