The Great Tuesday Night Bitcoin Flash Crash And Goldman’s ‘Robot Money’ Thesis

I often get asked by younger traders what it was like to trade in the DotCom bubble. When I tell them stories about the madness that prevailed at the time, they shake their heads in disbelief about how stupid my generation could have been.

Well, my millennial readers, I will let you in on a little secret. You guys are in the midst of blowing your very own bubble.

That’s from the latest note by former derivatives trader Kevin Muir and it comes not a moment too soon.

On Tuesday, the market was inundated with a series of increasingly ridiculous headlines from the crypto universe. Just a day after the LongFin saga hit peak absurdity, the SEC stepped in to suspend trading in shares of Crypto Company, an enterprise born from a reverse merger with a bra maker.

can't. make. it. up.

— Lisa Abramowicz (@lisaabramowicz1) December 19, 2017

No, Lisa, you really can’t.

You can’t make the following up either:

https://twitter.com/QTRResearch/status/943246885770399744

And that was hardly the end of it. For instance, Gemini had a problem on Tuesday when, at around 11:30 a.m. EST, the exchange said “deposits and withdrawals are temporarily unavailable due to an extreme delay in block mining on the Bitcoin Network.” That was fixed about 30 minutes later.

Additionally, the CBOE asked the SEC for permission to list and trade shares of a pair of Bitcoin ETFs, testing the regulator’s patience for this crazy bullshit on a day when, as noted above, that same SEC was effectively forced to suspended trading in a company that earlier this month disclosed a private placement involving the sale of shares to accredited investors at a 97% discount to where the stock was trading.

Just to give you an idea of how comically off the rails this has gone, have a look at this chart which shows you the YTD performance of stocks that have managed to identify themselves with this mania:

Well on Tuesday afternoon, Bitcoin took what at the time seemed like a notable tumble just after the close on Wall Street. We suspected that might just be the start of it and sure enough, two and a half hours later Bitcoin flash crashed to $14,000.

That brief dip represented a decline of some 30% from the highs hit over the weekend ahead of the CME futures launch.

No worries, I'm sure the regulators will investigate what happened here in bitcoin. Oh wait, there are no regulators. pic.twitter.com/a6OovqvexW

— Joe Saluzzi (@JoeSaluzzi) December 20, 2017

Ok, so remember on Monday evening when we documented a couple of possible explanations for the rally in bitcoin cash? Yeah well at the exact same time as the crash you see pictured in the chart above, bitcoin cash exploded to the upside:

It’s up more than 80% in two days.

Not to put too fine a point on it, but this gets more insane literally by the minute. And thanks to the hours cryptocurrency traders keep, it literally never stops. It’s around-the-clock insanity.

We’re absolutely sure there will be some new development in this overnight, but for now, allow us to leave you with the latest from Goldman who postulates that Bitcoin is perhaps best suited as a currency for (and by) “robots”…

Via Goldman

Bitcoin: Preferred cryptocurrency? Crypto-commodity? Robots’ money?

Advocates of Bitcoin have argued that, owing to its limited supply (independent of the intervention of political policy makers), Bitcoin will be inflation-free. As such, Bitcoin could represent a preferred method to politically-vulnerable fiat currencies. However, important regulatory and security issues continue to surround Bitcoin, notably at the point where Bitcoin and mainstream payment systems meet. Moreover, speculative / hoarding behaviour rather than transactions motives appear to dominate demand for Bitcoin, likely undermining the stability of its value and thereby complicating its use for transactions.

Moreover, it could be argued that bitcoins belong to the universe of commodities rather than that of currencies. Given its potential shortcomings as a long-term store of value (e.g., the introduction of a new, technologically more advanced, cryptocurrency would in principle drive the net present value of bitcoins down to zero), bitcoins — understood as a ‘cryptocommodity’ — could be viewed as an inferior replacement for gold, rather than its perfect digital substitute.

Yet, the (much) lower costs of storage and transportation associated with bitcoins relative to other physical commodities mean that there is no absolute dominance of the latter over the former. Given the imperfect substitutability between gold and bitcoins, our commodity research team believes that bitcoin is unlikely to have taken demand from gold.

From a more normative standpoint, rather than a substitute to fiat currencies (which is rather unlikely to happen insofar as national tax systems, which aim at financing public goods, create a natural demand for national currencies) or gold, one may also view cryptocurrencies as a money sui generis, designed for new types of activities. Two groups may be particularly willing to engage in Bitcoin transactions:

• Those undertaking transactions that they wish to hide from the authorities;
• Machines may increasingly need to exchange each other’s computing power in order to solve an increasing set of (complex) problems. A market price for computing power emerges from this. In this instance, assuming transactions between machines (e.g., one based in NY, the other in Paris) do not need to be taxed, it is not clear why fiat currencies would represent a more appropriate medium of exchange for machines than say cryptocurrencies.