Bitcoin As A Metaphor For Market Structure Philosophy

this turned into kinda a bizarro philosophical market structure meta-post.  but anyway…

I’ve deliberately avoided writing a post about Bitcoin because, well, I’m not nearly informed enough to pontificate about it.  If you want to read a “gently” explained lesson in the history of the thinking behind Bitcoin, check out Nemo’s series at Self-Evident.

Anyway, the reason I’m writing this post is because They tell me that Mt. Gox, the main exchange where Bitcoin is traded, is halting the trading of BTC for 12 hours.  I think they’re doing this to catch up with massively increasing numbers of new registered users who want to trade BTC. (Edit: it’s actually “to allow the market to cool down following a drop in price” ??? really?)

I pondered aloud on Twitter, yesterday, “What do merchants who accept Bitcoin for payment do when the price of BTC is plummeting?”  As you can see from the following chart via Clark Moody, the price of Bitcoin has been volatile.

hourly chart. left-most point is from 4/8/2013

hourly chart. left-most point is from 4/8/2013

Now, rapidly rising prices are one thing – that doesn’t hinder one’s desire to accept BTC as payment for goods or services.  But plunging prices?  That’s something else entirely.

I’ve never “owned” Bitcoins, used them, or accepted them as payment, so I’m not exactly sure how people who use them view them, but the way I see it, there are a few possibilities (I’m talking mostly about merchants, here – but anyone who has accepted BTC as payment for something should feel free to weigh in in the comments).

1) When you accept BTC for payment of goods, do you look at the current USD exchange rate, put in a little margin of safety for yourself, accept the BTC, and then exchange them into dollars?

2) in rapidly rising markets, you might not worry about the margin of safety, or about the immediate exchange – you might be more likely to be willing to accept BTC and hold it?

3) but in rapidly falling markets, what do you do? Do you build in a huge margin of safety?  do you stop accepting BTC altogether?  The answers to these questions probably depend on how you view BTC as a currency/store of value/ etc etc – on your outlook for the future “value” of $BTC.

4) how about in markets where the prices aren’t publicly displayed, like we currently have at this moment with the largest exchange being shut down?    Now, I’m told that you can indeed trade BTC on other exchanges right now, but the liquidity is probably diminished, the volatility greater, and the logistics more difficult if you don’t have accounts at the other exchanges.

My long-winded point, which I’m arriving at, is that I kinda *love* the Mt. Gox trading halt because it forces BTC users to value the product on their own, not based on the current displayed exchange rate.   Now, in a way, that’s what a “market” is – you buy stock in $AAPL because you think that The Market is valuing it wrong – that you value it higher than The Market does.    In other words, this kinda forces the answer to my question above:  will merchants who accept BTC place some value on it?   If they want to continue to accept it, they’ll be forced to do so.  Alternatively, will they just give up and stop accepting it because the market isn’t telling them what to think?

There is of course a corollary to a basic market structure philosophy of mine here.  I’ve noted in some previous posts about HFT and dark pools that I think the ideal philosophical market is one that is almost entirely dark.   Why do we need to see bids and asks and sizes?  Do we even really need to see last price?  In the philosophically “perfect” market, we’d just enter the price we were willing to pay into a big black box, and if there was a matching order on the other side, a trade would happen.  I don’t expect this market structure to become reality, of course, but I’d urge you to think about the possibility from a philosophical perspective.

In other words, I think that the current market structure has become more and more dependent on the perceptions related to the *current* price of, well, EVERYTHING.  (A bizarro interpretation of heteroscedasticity? or maybe the very definition of it? or something else entirely?)    Contrast this to my philosophical dark market, where it would be about the current *value* of everything, as perceived by the conglomeration of orders known collectively as The Market.

There was a situation I remember from a year or two ago – I’ve forgotten the stock (I want to say it had something to do with Rhino something or other?), but the stock was halted for an extended period of time, including an options expiration.  I remember reading comments like “This is ridiculous – if they don’t open it before earnings, how will we know if we should exercise our puts?”   I, on the other hand (not involved in this situation at the time), was thinking “This is the *perfect* way for markets to work: the people who have the options need to make their own evaluation of whether or not they should exercise them, based on *their own* evaluation of what the news means for the price of the stock.   They have no “market” to rely on – they have to actually do the work themselves.”

That’s kinda how I view the current situation in BTC, from the perceptive of merchants who accept Bitcoin for payment.

Bitcoin users, feel free to weigh in below – I’d love your insights.  Has the recent volatility affected the ease with which you can use Bitcoins?    Have you noticed any changes in merchant behaviors?  Merchants: have you changed your behavior? hedging? acceptance? pricing?

 

-KD

ps – my personal views of Bitcoin:  my concern is that I am not confident that I could use Bitcoin without being ripped off.  I am pretty confident that I’m in the top tier of general intelligence, but I am positively not in the top tier of internet/computer security and cryptography, and I would worry that my lack of expertise in those areas would make me vulnerable to being ripped off.   Oditorium wrote a post in response to a question from me along these lines, and I left a comment on that post which I also left elsewhere on the ‘web on a few Bitcoin articles:

“Izzy @ FT wrote: ”Unless you are a computer geek, an MIT grad or an algorithmic genius, it’s unlikely you will ever really understand.”

well, I AM an MIT grad – a math major, in fact – and I sure as heck don’t understand…

to me, the problem from the user point of view is: if you’re not a techno-geek, how do you gain comfort that you won’t be victimized? if you’re a master of encryption of computer security, this probably doesn’t bother you. but most of us are not such experts – even those of us who consider ourselves to be wicked smaht.

today, one of the online Bitcoin Wallet Companies was hacked… that’s kinda exactly what I’m talking about.

related: I guess people use browsers like Tor to anonymize their internet travels and make them safer? well, how do I know that Tor isn’t stealing all of my personal information from my computer as I use it?

I’m not paranoid about the ‘web, but these are the kind of concerns I think about when being offered new “safe” solutions to problems i’m not sure I even have…. “

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