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Bitcoin's Value Plummeted Overnight and No One Knows Why (slate.com)
Jacob Brogan, writing for Slate: While the Western Hemisphere slept, Bitcoin plummeted. Just after midnight Eastern Time on Friday, the cryptocurrency was valued at a little over $15,000, on the digital currency exchange Coinbase. At that point, it was already well below the $19,783 all-time high it had hit the week before. Over the course of the night, Bitcoin began to decline erratically, occasionally spiking but following a general downward trend. Around 9:22 a.m. Eastern, it hit a temporary floor, valued at a mere $10,400. By that point, it had declined more than $6,000 from its short-term peak the morning before, having lost more than one-third of its value. Bitcoin wasn't the only currency hit by a sharp drop. Tech Crunch's Jon Russell reports that most other prominent cryptocurrencies also fell, including Ethereum, Litecoin, and Bitcoin Cash (which is, confusingly, separate from Bitcoin proper). As Russell notes, it's hard to say why this is happening, "in the same way that nobody knows exactly why bitcoin's price has [shot] up from a touch under $1,000 at the start of the year."
It was overvalued and a bubble. Next question?
Bitcoin is no different than Pork Bellies.
Except it makes lousy bacon.
It is very different than pork bellies.
Pork bellies have an intrinsic value. It's food. You can eat it. That gives it a value. Bitcoins, not so much.
I heard an economist during the housing bubble point out that you could rent a house for substantially less than it would cost to buy it. He said we were in real trouble, and he was dead on. The rent value was the real value - the value that reflected its actual value.
Most of us will always pay five bucks for a pack of bacon. So that's its floor as a commodity value. Bitcoin has none.
Some could argue the dollar also has none, but that's another discussion.
There is something you guys should understand about Wall Street (particularly Goldman Sachs a.k.a. The Vampire Squid) getting into the cryptocurrency futures market. You would think on the surface, if you write (or go short) a Gold, or Oil, or even Cattle contract, that you have to come up with the goods when the futures contract matures. However, there is the little discussed option of "Cash Settlement". If you can't meet the obligations of the futures contract, you can simply pay the owner of the contract what those goods are worth in US Dollars. The markets tout this as good thing for all market participants, but in reality, it is a gross perversion of the market in general. It effectively turns your Cattle, or Oil, or Gold market into a US Dollar market.
And now they're doing the very same thing to the BTC market. When people are short BTC futures and have to come up with the goods, they don't have to worry about spiking the spot market looking for BTC. They just have to shell out USD. And the Powers That Be have LOTS of USD to spend on either side of that trade.
For those not familiar with either the term or the practice, here's a primer:-
Imagine you think that Bitcoin is in a bubble and hugely over-priced. All it would take would be a sharp pin to burst the bubble and the price will plummet... Well, good for you if you don't have any in your portfolio, but how can you use that to make a shed-load of money?
You sell short in the hope of starting a run. Here's how it works. You go to the market and you sell say, $100,000,000 of Bitcoin that you don't actually possess... Markets will allow you to do this, as long as you settle all your accounts by the end of the current trading period [i.e. by market close on the day]. So what happens is this:
You have no cash to buy, and no Bitcoins, but you "sell", $100,000,000 of coins in to the market at say 20% below the currently trading price. Let's keep the numbers simple - imagine the prevailing price was $20,000/coin and you sell for, ooh... $16,000, which is the 20% drop point. The sheer size of your transaction - perhaps done because you've seen a couple of other big sales do the same thing - spooks the market. Suddenly all the traders who have been buying in to the currency are worried and they want out as quickly as possible. They start to offer their holdings for sale at steep discounts, each sale taking place way below the buying price.
In no time the price of Bitcoins falls through the floor... Everyone wants to sell, nobody wants to buy. Except, perhaps, the suckers who had "buy orders" programmed into their trading platforms if ever the price was "foolish" enough to dip below their target price. Suddenly all those folk with automated buy positions get their trades executed, even while the price continues to tank.
You watch the price plummet. $19,000, $18,000, $17,000, $16,000, $15,000. Eventually it hits $14,000 and the "dead cat bounce" starts - the price starts to look soooo stupidly attractive that more nuanced traders begin to buy back in. The price rallies. You buy enough coins to cover the "sale" you made at the beginning of the day. Except that you "sold" for $16,000, but you bought back in at $14,500...
Now let's do the math and figure out how much you made [before transaction fees]. You "sold" $10,000,000 at $16,000 each, which means that you sold 625 coins. Then the price dropped to $14,500 and you bought 625 coins to cover your earlier sale. But because you only had to pay $14,500 for them, you actually pay out $90,625,000. So you've made $9,375,000 with "Other People's Money" - all in a single day.
Congratulations, you've just passed "Banking 101"....
Oh, and for those who read this and think, "That's all well and good in theory, but it would never happen in practice..." I'd remind you that roughly 20 years ago, "Black Wednesday" happened, which absolutely devastated the value of UK Sterling on international exchange rates - and in the process made George Soros, who bet "against" the Pound in *exactly* the way I've just described here, a billionaire.
Until the practice of "short selling" - what I've just described in this post - is made illegal, there is *nothing* to stop this happening with Bitcoin, or with any other traded commodity. Bitcoin is no longer operating like a currency [if it ever truly did], but is now operating exactly like a "bubble" commodity, just like the dot-com boom, like antique cars, like works of art, like vintage wine.
It's difficult to know for sure, but this event has all the hall-marks of someone attempting to burst the bubble and make a killing. I reckon if there was some short selling in this window that someone might have made a noteworthy profit, but unlikely what we saw George Soros make. Whoever it was, they'll get it right next time...