December 7, 2017: ‘A Date Which Will Live In Bitcoin Infamy’

Anyone want to take a stab at explaining Thursday’s Bitcoin bonanza?

That’s a joke. There’s no explaining it. At least not by way of anything that even approximates rationality. It’s like a FOMO/greater fool theory hybrid. It’s “fear of missing out” on the opportunity to get in ahead of the next “fool” in the chain. It’s the (block)Chain of Fools.

“The rationales for the straight-up move: bitcoin futures start trading on Sunday, the backlog of accounts opened over the Thanksgiving weekend are coming online, and the same old FOMO force that’s driven the rally all year,” Bloomberg’s Camila Russo wrote on Thursday evening, after the midday madness finally gave way to some semblance of (temporary) stability.

 

But as absurd as Thursday’s action most assuredly was, it’s worth documenting for posterity. It is entirely possible that when people look back on this bubble years from now, December 7, 2017, will be “a date which will live in infamy.”

Here’s the two-day chart that plots Bitcoin’s inexorable ascent:

That’s eight round numbers in less than 48 hours. Thursday’s action marked the biggest intraday rally in two years according to Bloomberg’s data, but even that is apparently debatable because have a look at the following chart based on data from CoinDesk and CoinmarketCap:

Now consider another mind-boggling anecdote from Thursday. Bitcoin crossed $16,000 by Bloomberg’s pricing at 10:23 a.m. New York time. Exactly 59 minutes later, this hit:

• BITCOIN PT BOOSTED TO $20,000 FROM $15,000 AT CASCEND

Bitcoin very nearly hit Cascend’s new price target within 5 minutes of it being issued.

During the 20 minute window when the fireworks were going off on GDAX, prices soared more than $2,000 only to drop by damn near $5,000 over the subsequent half hour.

Think about what this means for futures trading. As Bloomberg notes, “CME stipulates a two-minute trading pause if the price of the contract rises or falls 7% from the prior day’s settlement price, there’d be another two-minute pause if the gap widened to 13% [and] no trades can occur at prices higher than 20% from the settlement.” So this thing would have triggered circuit breakers pretty much all day long on Thursday.

“People are looking at a video game as a regular market and it’s clearly not, otherwise it wouldn’t be where it is already,” Walter Zimmerman, a technical analyst at ICAP TA told FT, adding that this is “beyond abnormal, it’s unprecedented. Every other commodity has natural sellers.”

Yes, “it’s unprecedented.” And compounding the confusion was the disparity between pricing on different exchanges. Have a look at a few examples contrasted with Coinbase:

Meanwhile, it looks like the infrastructure here is starting to fold under pressure. When GDAX went down, things just kind of froze for 30 minutes:

Gemini had issues:

And Bitfinex:

And Coinbase:

And then there was Trezor:

You get the idea.

If there were any lingering questions about whether this is a mania and/or about whether this is dangerous, they were answered definitively today.

Speaking of this being dangerous, remember what Thomas Peterffy, the billionaire founder and chairman of Interactive Brokers and the “father of HFT” said in his open letter to Christopher Giancarlo last month? If not, you can read the entire thing here, but he gave an interview to Fortune a couple of days ago and summed up the problem with Bitcoin futures as follows:

The issue is they’re putting bitcoin in the same basket as U.S. Treasuries, stock index futures, and all the really serious products.

My fear is in the unlikely event [a bitcoin-related liquidity crisis] happens at smaller clearinghouses, we’ll have something like Lehman Brothers – or worse.

So that’s the risk. And Cboe kicks things off in three days.

Just got the notice for the new BBG ticker for Bitcoin futures. This feels surreal.

— Luke Kawa (@LJKawa) December 7, 2017