Liquidity

[Hawk72]

I'm interested to know how people are liquidating the more significant BTC positions.  Say someone wants to get out of 10,000 BTC (between 330,000 and 490,000 USD at current market prices - and that's just today!). Clearly the OTC market works ok, but if I do anything like that at mt Gox, for example, there are tight restrictions on ho much USD I can withdraw. I'd be uneasy leaving any significant balances of anything on mt Gox, and I consider them the most reputable.

So question being how are people getting back into fiat on the larger trades?

If anything, I believe this lack of liquidity back into fiat is a factor maintaining the BTC prices (people just can't get out fast enough without being exposed to counterparty/exchange risk of them holding your fiat).

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[deadweasel]

I'm interested to know how people are liquidating the more significant BTC positions.  Say someone wants to get out of 10,000 BTC (between 330,000 and 490,000 USD at current market prices - and that's just today!). Clearly the OTC market works ok, but if I do anything like that at mt Gox, for example, there are tight restrictions on ho much USD I can withdraw. I'd be uneasy leaving any significant balances of anything on mt Gox, and I consider them the most reputable.

So question being how are people getting back into fiat on the larger trades?

If anything, I believe this lack of liquidity back into fiat is a factor maintaining the BTC prices (people just can't get out fast enough without being exposed to counterparty/exchange risk of them holding your fiat).

There is much uncertainty about how to handle this situation.  Currently, large positions are liquidating no more than a few hundred BTC at a time, several times a day, multiple exchanges, keeping under limits and scrutiny.  At the same time they will use a penny bot to keep the price level more stable (by buying .01btc at a certain price). 

The smartest ones are holding their BTC.  Believing a day will come where the economy and easy of use of BTC will allow easy liquidation.  Most of those same people are hoping they won't need to (fiat parity, you can buy anything with BTC).

There isn't a good single solution to liquidating large amounts.  So we wait.

[Heathrow]

The fact that there is no market liquidity in BitCoins means that the prices are somewhat artificial.  This creates problems for speculators, investors or folks considering other means of entry.  We can't get a good sense of the "real" market value of BitCoins, since we can't tell whether or not folks want to get rid of their BitCoins.

[Stephen Gornick]

people just can't get out fast enough without being exposed to counterparty/exchange risk of them holding your fiat.

Executing the transaction (at an agreed upon price) and actually getting the settlement (proceeds delivered to you, you deliver the coins) are two separate components.  

The convenience of using an exchange like Mt. Gox is that these two essentially can occur at the same time.  I sell and then on-demand I can withdraw (as a bank wire or whatever).

If you can trust your trading counterparty(ies) then you have a much easier time finding buyers.  Most bulk sellers will allow a rate to be locked in but only if payment (e.g., bank wire) clears within a specific (and short) period of time, but even then they require a premium to be paid.

Another approach is to sell a futures contract on ICBIT.se.  For instance, at this moment the spot market rate at Mt. Gox is 44 but the April 15th 2013 futures contract on ICBIT.se can be sold at 47.  So that would be an agreement to take a selling price of 47 today but you'ld need to wait for settlement on April 15th.  Well, technically you are paid (or charged) variation margin daily with the contract settlement on April 15th.  But the point is that you can use futures contracts to lock in a price.

The problem with that approach is that there aren't 10,000 BTC of liquidity there.  But they are growing and someday that type of transaction could work.

Also, along the same lines you could write CALL contracts on MPOE (at MPEX) at a certain strike price (or buy PUT contracts).   There they do apparently offer liquidity for that size of transaction.  That comes at a cost however as the bid/ask spread is relatively very wide.

Other methods the provide liquidity are coming.   CoinSetter and Kraken are two such services that are expected to be launching soon.

[Hawk72]

people just can't get out fast enough without being exposed to counterparty/exchange risk of them holding your fiat.

The convenience of using an exchange like Mt. Gox is that these two essentially can occur at the same time.  I sell and then on demand I can withdraw (as a bank wire or whatever).

It was actually Mt Gox that I was talking about.  They allow withdrawals of 10,000 USD/day, and 50,000 USD/month.

I'm saying the guy who wants to get out of 10,000 BTC today, if he sells everything on Mt Gox in one trade (call it 450,000 USD), even if he withdraws the maximum he can every month, he'd have a significant balance on Mt Gox for 9 months.

Its not the trading liquidity I was referring to, but the actual liquidity into fiat cash.

Think about the guy who wants to put 450,000 down to buy a house and he has 10,000 BTC laying around.  The market into cash just aint liquid enough right now.

[H@ml3t]

It was actually Mt Gox that I was talking about.  They allow withdrawals of 10,000 USD/day, and 50,000 USD/month.

I'm saying the guy who wants to get out of 10,000 BTC today, if he sells everything on Mt Gox in one trade (call it 450,000 USD), even if he withdraws the maximum he can every month, he'd have a significant balance on Mt Gox for 9 months.

Its not the trading liquidity I was referring to, but the actual liquidity into fiat cash.

Think about the guy who wants to put 450,000 down to buy a house and he has 10,000 BTC laying around.  The market into cash just aint liquid enough right now.

First of all if someone could do such a trade and could provide aml he would be able to make a special agreement to bypass the withdrawal limits for sure.

But such a trade is simply not possible if you look at the market dept: http://bitcoincharts.com/markets/mtgoxUSD.html You can't sell 10k btc in a single trade with the aim of cashing it out at current market prices. There are simply not enough buyers at this rate so you had to go down in price etc. Furthermore it would probably cause massive disruptions in general, e.g. some sort of a crash. In either way you would never be able to get 450k USD for your coins and thererefore the payout limits are not bothering.

In the future with a much higher market dept the withdrawal limits will be higher or nonexistent of course.

[Hawk72]

Thanks Hamlet. 

I'm comfortable with the market liquidity but the intent of my post was to consider the liquidity into fiat.

Lets break liquidity here into two components:

1) Market Liquidity.  Indeed like every market there is a particular market depth.  Bitcoin is still fairly illiquid, but I am very comfortable that you can trade a significant block.  10,000 BTC out of the roughly total 10,000,000 outstanding equates to an order of 0.1% of the total issuance.  Unloading 0.1% of a many equities would also stand to trounce the market.  Lets keep market liquidity aside.  For arguments sake, take the current market on Mt Gox - with current market prices at 44, I can right now unload 10,000 BTC and have an approx weighted exit price of 41 (I would drive the price down to about 39 in doing that).  We can argue getting a better price by executing WAP orders over an hour, a day, a week, etc, but at current market depth I'd stand to have around 410,000 USD sitting at Mt Gox.

2) Liquidity into fiat.  Right now on Mt Gox, it would take me 8 months to get the entire 410,000 USD out of Mt Gox and into my brick and mortar USD deposit account.

#1 is just an issue with market depth - no different than any other market.

#2 I believe is somewhat unique to bitcoin.  In the world of US equities, I can sell 410,000 USD of AAPL stock and write a check on the whole thing within 3 days.

Surely this is a problem for the larger holders of BTC that want to cash some out and get into a new house, for example.  I am interested to understand how people have dealt with this.  I have to believe such users have relied on the OTC market.  Did the larger sellers use the OTC website and then travel across the nation dumping BTC?

The other point that I found interesting is that this illiquidity into fiat could be a barrier to exiting BTC, hence keeping prices inflated.  I'd be very interested to know of another market that has a similar restriction on getting back into fiat, and if that market shares any of the dynamics that we witness with BTC.

[H@ml3t]

Regarding #2 I still think that a special deal with Mt. Gox is possible. In praxis, although I doubt that anyone already did try to exchange 10.000 in a short period, people would propably use different exchanges, different accounts and realworld exchange on the same day.

[Stephen Gornick]

Surely this is a problem for the larger holders of BTC that want to cash some out and get into a new house, for example.  I am interested to understand how people have dealt with this.

Well, the market matures.

A year ago it was the same question except instead of asking how difficult a $400,000 cash-out would be, it was studying how difficult a $100,000 cash-out would be.

Today, that $100,000 cash-out is no longer a problem.  Some months from now, that $400,000 cash-out will possibly not be a problem (thanks to maybe CoinLab, or other liquidity / bulk seller options.)

So you are asking what solution today exists to a problem that almost nobody currently has.  And by the time more people have that need, there will be more solutions available certainly.

In the meantime, someone today doing this would have to wait four days for each of the $100K per-day withdrawals from Mt. Gox to go through.  It's not the end of the world, I wouldn't think.

[Stephen Gornick]

Regarding #2 I still think that a special deal with Mt. Gox is possible.

Mt. Gox offers the ability to have your account be "Trusted Status (Level 3)",

Fiat: Daily withdrawal limit (24hrs): 100,000 USD (or equivalent)
Fiat: Monthly withdrawal limit: 500,000 USD (or equivalent)
Bitcoin: Daily Bitcoin withdrawal limit (24hrs): 20,000 BTC
Bitcoin: Monthly Bitcoin withdrawal limit: none

 - https://support.mtgox.com/entries/20919111-AML-Account-Statuses