Bitcoin Whales, The Mt. Gox Collapse: Good riddance!
Currencies / Bitcoin Jun 06, 2014 - 11:50 AM GMTBy: Mark_Blair
Bitcoin (and Friends) Enter a New Phase (and Other Information):
These articles are from deep within the crypto-geek scene. We hope to establish prowess.
We see right now that a major shift is underway:
'The Pyramid':
the height of the pyramid is price. The base of the pyramid is public knowledge (now well beyond Silk Road and Mt. Gox); technological developments (like BTC ATM's); and adopton by corporations, etc. (M.I.T. just gave $100 to every student).
I am sure readers will understand the analogy: the wider the base, the higher the pyramid may be without toppling over.
In the last quarter of 2013, when Bitcoin spiked so hard, the base of the pyramid was much narrower. The spike was driven by trading.
Note on 'whales': whales are those with enough Bitcoin (or any other coin) to significantly skew the market. Whales come into existence in a range of ways.
One is 'difficulty.' When a coin is launched, the 'mining difficulty' is often very low. Those who are LITERALLY waiting to mine at the second the starting gun is fired can rapidly accrue large packets of coin. More on this below.
The point is that Bitcoin has significant whales, so Bitcoin markets are subject to manipulation. Volatility should decrease significantly as cryptos 'mature,' but the whales will remain a problem -- or a boon, if you just want to day-trade.
The 'discovery' of Bitcoin (and a few altcoins) in China in late 2013 (and other factors) resulted in a pyramid that was too tall and too narrow.
2014 as The Year of Sortin' It All Out:
crypto geeks understood last December that 2014 would be a strange and volatile year in which a range of positives would go head to head with a range of negatives -- principally Government hostility of various degrees (and this comes in 'active' and 'passive' forms. More on this below).
There was also a string of exchange collapses, though only Mt. Gox made the mainstream press. (More below)
At this point, seven months later, The China Thing is very largely factored in, and most other governments have released enough information to let the crypto sphere roughly calculate the 'balance of forces.'
Thus, the considerable spike in Bitcoin price in recent weeks has a novel dynamic. Yes, the whales will always be with us; but this is the very first time that the base of the pyramid has been this broad, which doesn't tell us how high Bitcoin's price will go; but it indicates that gains are far far more likely to be sustained.
'Active' and 'Passive' Government Hostility
Active hostility is exactly what it sounds like -- the Chinese Government publicly stating what Bitcoiners must and must not do; the Indian Government detaining the operators of Bitcoin exchanges.
'Passive' hostility -- Australia is a classical example -- is a lack of regulation in an environment of over-regulation. When asked about their positions on Bitcoin, Australian banks either lie or stonewall (or both. I am tempted to name names.). Government authorities are ignorant. This creates uncertainty for business people thinking to adopt cryptos, and business hates uncertainty. Thus Government inaction has the effect of greatly slowing adoption.
The Mt. Gox Collapse:
good riddance!! It is a pleasure to have the chance here to clarify this issue:
Bitcoin and Friends are functional systems in and of themselves. Their roots were 'peer to peer,' which means people met in person to trade Bitcoin. Automated exchanges are actually an anomaly: integral at present to the DYNAMIC of cryptos, but not at all a part of the security structures of the coins (and this is crucial to understanding how cryptos will thrive under Government duress. The 'chassis' of a cryptographic currency -- sans exchanges, ATM's and the Bitcoin Foundation -- is not only fully functional, it was designed expressly thus.
In short, Bitcoin is way smarter than Governments. It is the most potential libertarian political instrument since the anarcho-syndicalist trade-union movement of the 1800's; and it will truly thrive, after some delay, if Governments try to stamp it out. Watch China, and ask me about Dark Coin).
Many crypto geeks were amazed that anyone ever did trade on Mt. Gox, which was trailing smoke from one engine for nearly a year before it went down (and evidenced also a thing that will astound readers here: the possiblity of not ever getting your coin out of Mt. Gox drove the price of 'Gox Bitcoin' up. Go figure!!).
More on The Collapse of Other Exchanges
Check the charts from early February, 2014. The Gox collapse was a major incident -- it was the world's largest exchange at the time -- but in following weeks a number of characters with electronic jemmy-bars got into a number of other exchanges, and that prolonged BTC's price-weakening.
However, as is always the long-term case for an open-source project like cryptos, highly-effective solutions are found. Mechanisms for public-auditing exchanges came into being, and exchanges have passed/are passing into a new era. Ask me about Mintpal.
More on Whales and Suchlike:
to begin, readers, understand that we are wading here into an acrimonious bog. There is almost no subject in the crypto sphere as contentious as this one. These are my definitions, presented simply:
one: some coins have no 'pre-mine' at all (and if that is the case, you will always find that stated in the Basic Stats. Ask me.). This means that the developers ('devs') do it hard from the start. I know guys in South Korea who are -- even with a fund of pre-mined 'devs'-fund' coin -- struggling to pay their power bill. (Go, Dokdo Coin!!) For analysts, there is no argument that having no pre-mine is a good sign.
Two: 'insta-mine': insta-mine (this is the 'difficulty' that I mentioned above) is the pre-mine you're having when you're not having a pre-mine. The technicals of a coin can be thus that at the moment of firing the starting gun startling amounts of coin can be ripped out in minutes. 'Increase in difficulty' then kicks in, so later-comers can't repeat the feat. The currency is hobbled for life.
Three: 'IPO's': wonderfully problematic! People send in amounts of Bitcoin before a coin is launched, and large packets of coin are 'pre-sold' to them. Insta-whales!!
Four: 'hidden launch': a cousin of insta-mine. A window of only an hour or so is necessary between the first actual mining of a currency's coins, and the public release of the key data, for a whale-creating holding of coin to be obtained.
Five: 'Foundations': cryptos are libertarian. Open source. Protocol by consensus. Thus a 'Foundation' -- a centralised body -- that holds a massive body of coin (even ALL the coin . . . ) is a basis for a permanent shouting-match between supporters and subtractors. The supporters argue that a sufficiency of safeguards are in place to prevent shenanigans. The detractors claim, with good reason, that the nature of cryptos makes it just too easy to subvert such safeguards. Ask me about Nxt and Ripple, two 'foundation' coins that are top of the charts.
Lastly: the arithmetic of whales:
the mining of many cryptos will not be completed for decades. It is thus not easy for some to understand why such a fuss occurs over just six or eight percent of a currency being in the hands of just a few people. It goes like this:
the last coin of Seeminglyinnocent Coin, the millionth, will be mined in the year 2050. There's a 2% pre-mine for development, and a 2% IPO. Suppose that 50,000 coins are mined in the first month.
Now let's assume that one of the devs controlling the devs'-fund wallet is the trading-partner of an IPO who is actually TWO IPO's -- IPO coin can go to an anonymous wallet linked to an anonymous email address.
Thus the arithmetic is: 1% is 10,000 coins. So if 10,000 coins are snuck out of the dev wallet to . . . some other wallets, and just 4,000 coins from the IPO block are added to that 10,000, that's somewhere around 20% of the total of coins on the market, sufficient to seriously skew trading.
The beauty of this model is that if you 'short hard' (so many realities of crypto-trading are understood by stock-exchange traders!!), you can regularly pick up large packets of coin even as ten of thousands of newly-mined coins come into play, thus keeping your numerical advantage permanently intact.
In closing: Bitcoin is the Now Future. It will be an historical phenomenon. It bolts into the Internet like a motor bolts into the engine bay. Meanwhile, though, 'Cryptocurrencies 2.0' are already in use on 'test nets.'
I guess that within 18 months Bitcoin's hold on total crypto market cap may well be down to less than 70%. If Bitcoin is by then around $15 Billion, then the altcoin market -- with its tradable market volatility -- will be as large as Bitcoin's was when interest in Bitcoin really spiked in mid-2013.
Think about a portfolio. Here are several over which I wouldn't quibble:
One: Bitcoin (70%); Dark Coin (20%); a stake in the Etherium Project, one way or another (10%)
Two: Bitcoin (80%); Nxt (15%); Ripple (5%)
Three: Bitcoin (60%); Nxt (20%); Etherium Project (10%) -- and buy a packet of CGB, and hang out with the 'consultancy community' there.
Mark Blair has thirty years experience as a libertarian political theorist and activist. His retirement hobby has become the commercial development of cryptos.
He hangs out at https://bitcointalk.org/index.php?topic=245086.2840
Mark Blair, Unicup, Western Australia
© 2014 Copyright Mark Blair - All Rights Reserved
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