Bitcoin's market microstructure -- what's behind all this insane movement?

[scalper]

I am new here. Been trading bitcoin for a month now. I am young but I have studied markets seriously for about 4 years now. Not just technical analysis but also financial history and a little known subject known as market microstructure -- which is basically the study of "how" trade occurs in any market. I have never seen a market trade quite like bitcoin and probably never will again. It makes silver's runup 3 years ago look like child's play.

You can attribute bitcoin's crazy runup to news, value, or mania, and every answer has validity to it but I have another answer that's just in front of everyone's eyes. It's an extremely illiquid and thus extremely volatile market. It's that simple. My theory is that it's a unique combination of bitcoin's low float, the ineptitude of the primary exchange mtgox, and a young market (only 3 years old) that lacks sophisticated liquidity provision (i figure most of the supply probably belongs to the major miners, whom have more expertise in technology than being efficient market makers). Along with that, it is also difficult to move a lot of cash around to all the major exchanges, and to short sell, creating barriers to entry for bigger money players who could add a little liquidity. There are one hour bars that represent 50% and 100% moves... in BOTH DIRECTIONS! When I watch it trade on clarkmoody, it just strikes me as so inefficient. Like the people who are making the biggest decisions probably never traded their entire lives. They send market orders down for 20 straight points, and then the other direction for 15 points within the next 5 minutes! Who trades like that? Or maybe something else can explain that phenomenon? Another crazy anomaly to me was the lack of volume increase while the price kept soaring... usually bubbles require increased participation until there is nobody left to buy, or total short seller capitulation (which isnt possible in this market). Almost every parabolic chart has increased volume towards the peak.

The only market that I have ever seen comparable to bitcoins in terms of how fast it can rise and how easily it can fall, are OTCBB bulletin board stocks. Pump and dumps, basically (though not all of them, see FNMA, FMCC both which recently had a parabolic rise and fall but are real companies). Not saying bitcoin is a pump job, but there are some apt comparisons. For one, the OTCBB is highly illiquid. They are not like their NASDAQ/NYSE counterparts where you just click a button and get out of a position within milliseconds. 95% of the time you can out reasonably well, but when there is a panic (or a squeeze), your fill is at the mercy of the market.... kinda similar to getting out of bitcoin near its highs with all the lag on mtgox and all the bids disappearing.

I am not a bull or bear, just someone who wants to make money. I really do think this is the frontier of trading right now. If anyone else shares the same line of thought with me, as opposed to say, being obsessed about where bitcoin will be in 3 years (which frankly, I don't care about), send me a PM.

[Ls777]

What if you think this is the frontier of trading right now AND you are obsessed over bitcoins potential in 3 years

[SlipperySlope]

Another crazy anomaly to me was the lack of volume increase while the price kept soaring... usually bubbles require increased participation until there is nobody left to buy, or total short seller capitulation (which isnt possible in this market). Almost every parabolic chart has increased volume towards the peak.

I watched the trades in the hours before the peak. It appeared there were a relative lack of bids - so sellers had to take what was there and prices dropped fast on little volume. Then gox lag prevented any new market orders for crucial hours during April 10. That too, restricted volume.

[scalper]

What if you think this is the frontier of trading right now AND you are obsessed over bitcoins potential in 3 years

In my experience, I don't find a lot of people who can simultaneously be "married" to a position (if you're dreaming about 4-5 digits in 3 years, to me, that's being married to the bitcoin long position) and yet still maintain the agility/flexibility needed to be a good trader. It'll always cloud their judgment.

On a personal note, I like the bitcoin technology/concept a lot. I trade to make cash though.

[RyNinDaCleM]

Welcome to Bitcoin, your post is spot on! 

What I find in this market, is most participants won't buy into the "wall". The wall must be bought by the big boys, then in a panic driven frenzy, everyone gets in on low depth and low volume as they chase the price up to the next resistance. In this market, it seems it's not about minimizing slippage, it's about maximizing the price movement with the least amount of Fiat.

[Bit_Happy]

What's behind all this insane movement?
Insane levels of greed and fear is the short answer.

Normal markets don't have people all over the internet talking about how much money they made (i.e The thread where someone bought in at $5 and now they have a new $30,000 vehicle), and/or how certain they are that prices are going much higher.
Then add people borrowing money to "invest", and you are set up for huge price moves.

[scalper]

Greed and fear is in every market. I don't think bitcoin traders or investors are inherently more "greedy/fearful" than those who trade stocks or oil.

I think the market structure itself makes people more reactive than they should be. It's an unnatural level of volatility for humans to deal with. There is so little "work to be done", so to speak, to create pain. Whether it be pain of loss or pain of missing out the next move.

[scalper]

Normal markets don't have people all over the internet talking about how much money they made (i.e The thread where someone bought in at $5 and now they have a new $30,000 vehicle), and/or how certain they are that prices are going much higher.

have you ever visited yahoo finance forums for any speculative stock, like a $5 biotech or a random otcbb stock?

there are plenty of people like that.

and who knows who's really telling the truth most of the time.

[fitty]

Oh it's pumping and dumping no doubt. They use large dumps to nudge the market in either direction.

There's no fundamentals. The biggest "fundamental" is

1) the price is going up - that's good! there must be a reason!
2) the price is going down - that's bad! there must be a reason!

So when market movements are pretty much the only "fundamental" data people are using, it's really easy to manipulate the market. If you ask people why they sold, most will say "the price was going down". If you ask people why they bought, most will say "the price was going up".

Not to mention it's a pretend exchange. We can't even be sure the data is real. There's no regulation. MtGox could be making up huge chunks of the trading data people are using. So you can't even look at the charts and assume what you are looking at is accurate or real. Pretend exchange, pretend currency, with a lot of pretend traders.

[AlgoSwan]

Last month of BTC parabolic rise and chrash simply indicates some large insider behind all these moves and made a nice profit from it. Who lost? Of course uneducated one with sheep mentality who frequently watch CNN and other major channels for financial news and theory. Last 30 days of BTC charts has no meaning to keen BTC miners. Just remove this data from the charts.

Anything changed?
Nothing!

Will miners stop mine BTC?
No.

Will miners seek most efficient ASICs and GPUs for their rig?
Yes.

Will alternative cryptocurrencies dead?
Majority of them will be dead. Only innovators will survive.

Will we see solar-powered GPU mining rigs available before 2015?
If not solar-powered, more energy efficient rigs will be available within a year or so.

[Bit_Happy]

Greed and fear is in every market. I don't think bitcoin traders or investors are inherently more "greedy/fearful" than those who trade stocks or oil....

Ok, perhaps the greed level is similar, but the fear is stronger here.
How many people take insane risks to invest in crude oil, the big new thing that is unlike any other?

[johnblaze]

They send market orders down for 20 straight points, and then the other direction for 15 points within the next 5 minutes! Who trades like that?

people who demand liquidity trade like that. go read Mr Harris again

on an illiquid market, thats how price moves. plus, your perception is off simply because BTC trades for so many decimals. you see 20 bids get hit but in reality they might all be 0.00001 difference which is irrelevant

[scalper]

They send market orders down for 20 straight points, and then the other direction for 15 points within the next 5 minutes! Who trades like that?

people who demand liquidity trade like that. go read Mr Harris again

on an illiquid market, thats how price moves. plus, your perception is off simply because BTC trades for so many decimals. you see 20 bids get hit but in reality they might all be 0.00001 difference which is irrelevant

yeah, because it's so efficient to demand liquidity til the point where the price impact is 5-10% in a few minutes right? what other market actually does that, do tell?

my perception is not off. i am not talking about the number of levels, i am talking about POINTS, as in DOLLARS.... i have seen the stock rip 10+ points on all offer prints and drop 10+ points on all bid prints in 1 minute.

thanks for the stating the obvious anyway, not sure what point you were trying to make that i didnt already kind of make in my original post.

[GeoRW]

there were times with bigger liquidity and very stable prices. Recent price rise due to coming of big players to market disturbed this, lots of market makers that provided liquidity at previous price levels vanished or cashed out and looking at recent busts of some of the exchanges (btc24, bitfloor) it is not very encouraging to keep money there. So, looks like no stability in foreseeable future.

[rothschild_666]

I wonder what Nassim Taleb thinks?

OP's post is spot on, there's no real liquidity.  Also I have questions about how well the exchanges are matching orders and staying solvent.

[superduh]

mtgox is still highly illiquid market.
if you looked at the volume graphs before the crash it was basically nothing
since the crash there has been more coins traded than the whole month leading up to the crash.
there has been more traded on the 16th than i think a week leading up to the crash
market was not ready. too much slippage too much guessing. too much trying to take advantage of opportunities.
ddos/lags didn't help either
yes- you are correct there is a lot of wrong things with the market at the moment. mtgox is trying to be completely hands off and perhaps if they were more like a professional company they could try to keep things stable one way or another

[Ichthyo]

If conventional banking industry has managed anything, than it's to limit access to serious trading activities to an exclusive club of people, all sharing a highly in-tuned mentality. These people used to think to have a tight grip on what an "effective market" is, when a market is "sane" and how it should behave "orderly".

Change any of the border conditions and -- surprise -- the market behaves "strange"

[adamstgBit]

you're doing it wrong, you have to trade in such a way to increase your bitcoin stach not your fiat stach. trust me, bitcoin is ultimate inflation hedge, it will increase in value as people find it useful and it will keep up with real inflation rates... if hyperinflation happens tomorrow, how long do you think it will take the market to adjust? -12hour, thats right, Negative 12hours!  bitcoin baby ya!

[thezerg]

I am not a bull or bear, just someone who wants to make money. I really do think this is the frontier of trading right now. If anyone else shares the same line of thought with me, as opposed to say, being obsessed about where bitcoin will be in 3 years (which frankly, I don't care about), send me a PM.

You are what's behind it.  You have no belief in the underlying value of the security/commodity.  You just want to trade it to "make" money.  That behavior tends to magnify trends...

[johnblaze]

yeah, because it's so efficient to demand liquidity til the point where the price impact is 5-10% in a few minutes right? what other market actually does that, do tell?

any market where liquidity is scarce. price is impacted greatly in low liquidity environments. do you even know what liquidity means?

if you don't understand these basics, you are an idiot. go back to reading Harris like i said