Bitcoin continues to demonstrate how bad of an investment it is, losing 15% of its value in under 36 hours:
A $1000 point drop in just a few hours and a $500 point drop in just a few minutes.
Some will respond, “But…but…it’s up 1000% since early 2017!!”
…and my response is, “but …but …it’s not 2017 anymore!!”
This is 2018. Bitcoin has lost almost half of its value since peaking in December 2017.
To get an idea of how easy it is to manipulate crypto currency and why Bitcoin and other currencies fall so quickly, here is a simple calculation:
Based on the order book, instantly selling 100 Bitcoin ($1,000,000) on GDAX will cause the price to instantly fall about 1%.
GDAX is the biggest exchange by liquidity as measured by market order book depth. The smallest of the ‘top 10’ exchanges is ItBit, which has about 1/5 the liquidity as GDAX.
Subsequently, other exchanges will copy this selling. If ‘Tom’ on GDAX sells 100 coins and Bitcoin falls 1% to $10,000, then ‘Bob’ on Bitstamp will also sell enough coins to make it fall to $10,000, and this process will continue on all the exchanges until the price is roughly $10,000. This is about $1.8 billion of Bitcoin market capitalization gone. (1% of $180 billion)
But the alt coins will mirror this because everything is highly correlated. This means a total of $5 billion in Total Market Capitalization is destroyed (1% of $500 billion).
So a $1,000,000 sell order destroys about $5 billion of total coin value. $1,000,000 is tiny relative to $500 billion. This is a ratio of 1-5,000. What this means is for every $1 of Bitcoin converted into cash, $5,000 of paper wealth is destroyed, and this loss is distributed among all holders of cyrpto currency. There are many people with wallets that have 100+ coins, so one can see that if everyone who wanted to sell tried to sell, very few sellers be able to sell at anywhere close to current prices.
But this is the most optimistic scenario. I’m assuming that GDAX, which has the most liquidity, leads the other exchanges. Generally, the biggest market will lead the smaller ones. If a low-liquidity exchange such as ItBit is doing the leading, then the ratio may be a low as 1-25,000. If one takes the average of the top-10 exchanges, the ratio is around 1-10,000.
But this works the opposite way too, but possibly even more so because the order book is not symmetric; rather, it requires fewer coins purchased to make the price rise 5% than sold to make it fall 5%.
One way to bypass this problem is through off-exchange transactions. The recent $400 million Bitcoin purchase was likely done off an exchange. But if the mystery buyer were smart, he would have only bought $300 million or so and then kept the $100 million in cash on exchanges like Gdax and Bitstamp to prop up Bitcoin long enough until he can find someone to sell the $300 million off-exchange at a higher price. As the math above show, it requires little $ to make Bitcoin go up.
Overall, to reiterate, no one is making money with crypto currency anymore even though the media keeps hyping it. Only have 20% of my original position left after selling between $19,000 and $10,500. Don’t be a sucker who buys high and sells low. Wait until the correct signals and then buy, which I will provide when the time comes. Bitcoin is no good. I would not touch it with one of those 12-foot ceiling light-changing poles.
Regarding the post a few days ago about Bitcoin analyst Tom Lee, he cannot be fired because he’s the co-founder of the very firm that employs him (Fundstrat Global Advisors). Another option is to convince major financial networks such as CNBC, Bloomberg, and Fox Business News to stop giving him free advertising. A few commercial slots on a major financial network such as CNBC costs over a million dollars, so this free press is worth a lot. Without this free publicity, Fundrat’s ability attract new clients is severely hindered. Then these networks pass off this content as ‘original programming’ and ‘financial insight’ when it’s really just thinly-veiled advertising. Also, if you go to Tom Lee’s Twitter profile in his bio it says “Analysis not opinions. Data science speaks louder than gurus,” yet his absurd Bitcoin price targets are opinions.
Maybe I’m being too hard on him, but analysts need to be held accountable for being wrong. What do you think will happen when Bitcoin is at $4,000 or so in 8 months….all these analysts who were pumping Bitcoin will find the ‘next big thing’ to pump in order to promote their firms, while being let off the hook for being so wrong about Bitcoin and other stuff. Because these analysts and fund managers such as Peter Schiff, Ari Paul, and Tom Lee own the firms, they cannot be held accountable in the same way an employee who messes up is. That means it’s the job of ‘good Samaritans’ to spread the word so others are not duped.