MtGox makes more money the higher the price of bitcoin - conflict of interests?

[monsterer]

Hi guys,

So, MtGox's fee schedule means they make more money per transaction the higher the price of bitcoin.

Doesn't this mean there is a glaring conflict of interests? The biggest and longest running bitcoin exchange *wants* the price to increase and have complete control over the market. Hmmm.

Thoughts?

Cheers, Paul.

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[1715582766]

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[muyuu]

They actually make more money the higher the volume in the market.

[DeathAndTaxes]

Which is greater?
1% * 200,000 * $120
1% * 400,000 * $60

[muyuu]

Which is greater?
1% * 200,000 * $120
1% * 400,000 * $60

When I say they make more depending on the volume, I mean in terms of the same currency.

The more volume in BTC, the more BTC they make. The more volume in $, the more $ they make. Both linearly and ceteris paribus.

Right now volume and volatility are strongly correlated. Volume in BTC and $/BTC not so much.

[monsterer]

Fun fact:

Right now (at $118 / coin) you will have to wait for the price to move $1.428 to *break even* for a round-trip trade.

When the price of bitcoin reaches $1000 / coin, you would have to wait for price to move *$12* just to break-even.

Doesn't seem like that fee schedule can last because traders will just go elsewhere. If there is an elsewhere, of course!

Cheers, Paul.

[DeathAndTaxes]

Which is greater?
1% * 200,000 * $120
1% * 400,000 * $60

When I say they make more depending on the volume, I mean in terms of the same currency.

The more volume in BTC, the more BTC they make. The more volume in $, the more $ they make. Both linearly and ceteris paribus.

Right now volume and volatility are strongly correlated. Volume in BTC and $/BTC not so much.

I was asking the OP.  I believe his argument is flawed.  I agree with you in that IF there is a conflict of interest it is that panic/volatility/chaos leads to higher volume = more trading fees.

[monsterer]

I was asking the OP.  I believe his argument is flawed.  I agree with you in that IF there is a conflict of interest it is that panic/volatility/chaos leads to higher volume = more trading fees.

Ok, lets do some maths:

fees 0.6%:

1btc sold at $1000 = 0.006 * 1000 = $6 fee

1btc sold at $100 = 0.006 * 100 = $0.6 fee

Therefore, at higher dollar value of bitcoin, MtGox makes more per transaction and hence there is a conflict of interests?



Cheers, Paul.

[joesmoe2012]

They should adjust their fees now that they have grown larger, volume has increase, and the price has gone up so much.

[epetroel]

They should adjust their fees now that they have grown larger, volume has increase, and the price has gone up so much.

Exactly.  Given the same volume in USD, Gox will make more money at a higher bitcoin price simply because its much harder now to get a low commission rate.

[edd]

I was asking the OP.  I believe his argument is flawed.  I agree with you in that IF there is a conflict of interest it is that panic/volatility/chaos leads to higher volume = more trading fees.

Ok, lets do some maths:

fees 0.6%:

1btc sold at $1000 = 0.006 * 1000 = $6 fee

1btc sold at $100 = 0.006 * 100 = $0.6 fee

Therefore, at higher dollar value of bitcoin, MtGox makes more per transaction and hence there is a conflict of interests?



Cheers, Paul.

First off, the more you trade, the lower your fees.

Secondly, 1 BTC = 1 BTC. I believe Mt. Gox has said at some point that they do not sell their BTC for USD. If I have time, I'll try to find the quote.

Thirdly, as others have mentioned, you are ignoring the volume (the size and number of transactions). It does Mt. Gox no good to make more per transaction if there are fewer of them and/or they are for smaller amounts.

[monsterer]

First off, the more you trade, the lower your fees.

Secondly, 1 BTC = 1 BTC. I believe Mt. Gox has said at some point that they do not sell their BTC for USD. If I have time, I'll try to find the quote.

Thirdly, as others have mentioned, you are ignoring the volume (the size and number of transactions). It does Mt. Gox no good to make more per transaction if there are fewer of them and/or they are for smaller amounts.

The lowest possible transaction fee at MtGox is 0.2% (after all volume traded discounts). It still has exactly the same behaviour as 0.6%, just lower offset. Still got the same issue:

fees 0.2%:

1btc sold at $1000 = 0.002 * 1000 = $2 fee

1btc sold at $100 = 0.002 * 100 = $0.2 fee


And I'm really not sure what you mean when you say MtGox do not sell BTCs; that is their primary function!

Cheers, Paul.

[Terk]

Ok, lets do some maths:

fees 0.6%:

1btc sold at $1000 = 0.006 * 1000 = $6 fee

1btc sold at $100 = 0.006 * 100 = $0.6 fee

Therefore, at higher dollar value of bitcoin, MtGox makes more per transaction and hence there is a conflict of interests?

Why are you comparing USD fees at different USD volumes? You should compare the same currency.

$1000 spent on 1 BTC at $1000: fee is 0.006 * $1000 = $6.00
$1000 spent on 10 BTC at $100: fee is 0.006 * $1000 = $6.00

Or the other way around:

1 BTC sold at $1000 for $1000: fee is 0.006 * $1000 = $6.00
10 BTC sold at $100 for $1000: fee is 0.006 * $1000 = $6.00

Your calculation would be good only if you assume that people want to buy the same amount of BTC regardless the price, which obviously isn't true. If you have $100 to invest in bitcoins, then at the price $100 you'll buy 1 BTC and pay $0.60 fee. But if the price is $1000, you simply buy 0.1 BTC for your $100 and pay... $0.60 fee. You won't buy 10 BTC for $1000 (as you had in your example), because you have only $100 (and if you had $1000, then you would buy 10 BTC at the price $100, not 1 BTC).

No matter the BTC price, MtGox earns the same amount of USD from your $100 traded.

[monsterer]

Your calculation would be good only if you assume that people want to buy the same amount of BTC regardless the price, which obviously isn't true.

Isn't it?

Ok, well - lets look at MtGox volume restrictions. The smallest possible volume traded with MtGox is 0.01 btc. So the uninitiated trader might want to start learning how to trade btc profitably by starting out with the smallest possible volume to reduce losses incurred while learning the trade.

At $100/btc, this cautious trader has sells 0.01 btc and incurs a 0.01*100*0.006 = $0.006 fee.
At $1000/btc, a different but equally cautious trader sells the minimum volume and incurs a 0.01*1000*0.006 = $0.6 fee.

Hardly fair, is it?

The right way to approach per-trade fees, IMO is for MtGox to push the spread apart by a fixed price - this is how trading Forex works.

Cheers, Paul.

[Terk]

You forget that someone has to be on the other side of the transaction as you assume that your trader will be able to sell any amount of BTC regardless the price.

If your trader sells 0.01 BTC at $1000, that is for $10, then there has to be someone willing to spend $10 on BTC. If your trader sells 0.01 BTC at $100, then there has to be someone willing to spend $1 on BTC.

If on the other side there only is a “cautious trader” willing to spend $1, and there isn't be anyone else, that 0.01 BTC couldn't be sold at $100 as it requires $10 from buyer, which simply isn't there.

So in your example: when $10 is traded, MtGox earns $0.06 fee; when $1 is traded, MtGox earns $0.006 fee. Their fee income is dependent solely on USD trading volume.

[Terk]

Also, please make a simple thought exercise.

Average price in the last 24 hours was $118.52 and MtGox had 63,172.45 BTC = 7,487,305.55 USD trading volume during these 24 hours (http://www.bitcoincharts.com/markets/).

If the price was $1185.20. Do you think they would have trading volume 63,172.45 BTC = 74,873,055.50 USD? Do you think that 67.3 millions of USD would magically appear as an addition to yesterday's 7.49 million USD?

Let me help you with the answer. No, the $67M would not magically appear. MtGox would have trading volume 6,317.245 BTC = 7,487,305.55 USD, plus/minus 10%, and would earn more or less the same USD in fees.

Their fees are dependent solely on trading volume, and trading volume is dependent solely on currency supply. There's finite supply of USD as well as finite supply of BTC. 10x price jump won't cause magically 10x increase of USD volume.

[monsterer]

You forget that someone has to be on the other side of the transaction as you assume that your trader will be able to sell any amount of BTC regardless the price.

If your trader sells 0.01 BTC at $1000, that is for $10, then there has to be someone willing to spend $10 on BTC. If your trader sells 0.01 BTC at $100, then there has to be someone willing to spend $1 on BTC.

If on the other side there only is a “cautious trader” willing to spend $1, and there isn't be anyone else, that 0.01 BTC couldn't be sold at $100 as it requires $10 from buyer, which simply isn't there.

So in your example: when $10 is traded, MtGox earns $0.06 fee; when $1 is traded, MtGox earns $0.006 fee. Their fee income is dependent solely on USD trading volume.

Ok, lets stop peering into our crystal balls because that seems to be confusing matters.

Let's look back into the past:

When btc traded at $10, minimum volume cost 0.01*10*0.006 = $0.0006 in fees
Then btc moved to $100, minimum volume cost 0.01*100*0.006 = $0.006 in fees

In both instances we know there were traders willing to pick up the other side of the trade because that already happened. And in fact, trading volume has *increased massively* from the time of $10/btc to $100/btc.

The simple fact that I'm trying to get across here is that a round-trip trade will cost more and more in fees the higher the price of btc.  This is not sustainable, as should be completely obvious.

And as for your thought exercise, ask yourself this: are MtGox making more money now at the current price or when the price was $10/btc?

Cheers, Paul.

[Terk]

When btc traded at $10, minimum volume cost 0.01*10*0.006 = $0.0006 in fees
Then btc moved to $100, minimum volume cost 0.01*100*0.006 = $0.006 in fees

Their total income depends not on minimum volume but actual volume. Minimum volume for a single order is insignificant.

And as for your thought exercise, ask yourself this: are MtGox making more money now at the current price or when the price was $10/btc?

I'm sorry but you don't understand the market at all. Let me give you one last example. I am taking historical data.

1) 2012-08-17.
Average daily price 13.26 USD.
Daily volume 221,033.9 BTC = 2,930,580.33 USD.
Their fee income is 17,583.48 USD

2) 2013-05-09.
Average daily price 111.66 USD.
Daily volume 26,894.46 = 3,003,068.41 USD.
Their fee income is 18,018.41 USD

3) 2013-05-02
Average daily price 106.49 USD.
Daily volume 234,129.17 = 24,932,099.53 USD.
Their fee income is 149,592.59 USD

Despite day 2 price is 8.4x higher than in day 1, they earned almost exactly the same income, because trading volume was similar.

Despite day 3 price is only 5% different from day 2, they earned 8.3x more income, because trading volume was much higher.

It's not the price what matters for their income, it's solely the USD volume that is traded.

[dree12]

I understand the rationale of many forum posters here contending that volume does not go up as price goes up. However, whatever experimental evidence we have does not seem to support this assertion.



Here is an image of volume in BTC. One would expect that as price increases, BTC volume decreases. However, BTC volume does not seem noticeably affected by the price. Therefore, USD volume would seem to increase as price increases.

[MikeMark]

Rising volume with rising price is an indication of increasing adoption. That's a good thing. For earlier adopters, rising price is a good thing. So is rising volume with rising price.

If you are concerned that there is a conflict of interest, start a competing exchange and change the way the fee schedule works. Be a more important part of the market! Maybe you'll look at things differently. 

[BCB]

It's called profit motive you idiot.  If you don't trust them don't use them.  

You should try one of these fabulous exchanges:

bitcoinica.com
mybitcoin.com
bitmarket.eu
bitfloor.com
bitcoin-central.com
tradehill.com
cryptoxchange.com
bitcoin-central.com
intersango.com
bitcoin-24.com
bitcoinopx.com
paytunia.com
btctree.com
www.bitme.com
ziggap.com
bitomat.com

[Terk]

Weekly chart is more clear to read:



Compare the two blue periods. The second one has slightly lower volume, but the price is three times bigger.
Compare the two orange periods. The second one has similar or slightly lower volume, but the price is many times bigger.

What does it mean? That price and volume aren't that much related.

I understand the rationale of many forum posters here contending that volume does not go up as price goes up. However, whatever experimental evidence we have does not seem to support this assertion.

It's actually the other way around. The recent price raise was because of increased demand, which created bigger volume - as there were many new people wanted to buy-in, the price raised. But price and volume aren't related that much. If more people wanted to sell than buy, the price would go down despite having big volume.

Let me give you an example.

If there are 10 people that want to buy 1 BTC each and 50 people that want to sell 1 BTC each, the price will go down as sellers will compete for the buyers. If there are 5 people that want to buy 1 BTC each and 1 person who want to sell 1 BTC, the price will go up, as buyers will compete for the seller. You can have increasing prices at low volumes and decreasing prices at high volumes. Or the opposite. Price is the result of the ratio [how many people want to buy] / [how many want to sell]. Volume is just [how many people want to buy and sell]. With people wanting to buy 10,000 BTC and other people wanting to sell 10,000 BTC, the price will most likely won't change. With people wanting to buy 10 BTC and other people wanting to sell 1 BTC, the price will most likely go up.

Price, volume. Not related. The only thing connecting the two, is that when volume significantly raises, the price usually changes a lot. But it can change up or down. MtGox doesn't care that much if the price is high or low. They care for the volume. They're as much happy with people creating volume by panic selling as with people creating volume by horny buying.

[Hfleer]

0.6% is a bit too high, would like to see something like 0.1% plus a small fixed fee(or better) sometime in the future.

[monsterer]

Ok, I accept that it is possible for the market to automatically adjust to rising fees by lowering traded volume - if there were no limit on the minimum volume, this would be easier.

As it stands now, the minimum volume limit will get more and more restrictive.

Right now, the minimum sell fee you can expect to pay is roughly $0.006.

At $1000 it will be $0.06.

To be honest, a percentage fee is horrible no matter what value is has (apart from 0) because it's unintuitive and it causes the spread to widen the higher the price of bitcoin.

I'm sorry but you don't understand the market at all. Let me give you one last example. I am taking historical data.

1) 2012-08-17.
Average daily price 13.26 USD.
Daily volume 221,033.9 BTC = 2,930,580.33 USD.
Their fee income is 17,583.48 USD

2) 2013-05-09.
Average daily price 111.66 USD.
Daily volume 26,894.46 = 3,003,068.41 USD.
Their fee income is 18,018.41 USD

3) 2013-05-02
Average daily price 106.49 USD.
Daily volume 234,129.17 = 24,932,099.53 USD.
Their fee income is 149,592.59 USD

Ok, help me out here because it seems like 1) and 3) are the perfect illustration of my point about rising prices? 1 and 3 have similar volume only the price has changed and look at the fees.

Cheers, Paul.

[Terk]

Ok, help me out here because it seems like 1) and 3) are the perfect illustration of my point about rising prices? 1 and 3 have similar volume only the price has changed and look at the fees.

3) has 8.5x bigger volume than 1) - 24,932,099.53 USD vs 2,930,580.33 USD - and that's why there are more fees.

You have 9.1x price increase between 1) and 2) - from 13.26 USD to 111.66 USD. Where is your fee increase? Please tell me.

[monsterer]

3) has 8.5x bigger volume than 1) - 24,932,099.53 USD vs 2,930,580.33 USD - and that's why there are more fees.

You have 9.1x price increase between 1) and 2) - from 13.26 USD to 111.66 USD. Where is your fee increase? Please tell me.

Volume in 1 is 221,033.9 BTC
Volume in 3 is 234,129.17 BTC

The volume looks similar to me. Only price has changed between these two examples?

[Zaih]

It's all proportional I think you'll find..

As price goes up, people will be buying less Bitcoins on average. If the volume stays the same after this, that means their is more market action. I guess that's a direct link to Bitcoin going up though...

I think your thinking of it in the completely wrong manner however.

[Terk]

I am obviously talking about USD volume. You can't compare BTC volume and USD fees. If you want to talk BTC volume, then calculate BTC fees and they're roughly the same in 1) and 3).

Also, volume on bitcoin exchanges still depends more on USD supply than on BTC supply, so it's another reason why it's the USD volume that matters.

If you tell me, that it's the same volume when people traded $24.9M and when they traded $2.9M, then you are probably trolling me.

[romerun]

percentage fee discourages high frequency trading. I bet if they make a reasonable fix fee structure, they will get much much higher volume, since at least 70% of trade volume in global markets these days is responsible by frequency bots.

Oh I forgot that Gox cannot handle volume, but new exchanges with good trading engine shouldn't follow Gox fee structure.

[monsterer]

I am obviously talking about USD volume. You can't compare BTC volume and USD fees. If you want to talk BTC volume, then calculate BTC fees and they're roughly the same in 1) and 3).

How are you separating that in your numbers? Your figures for USD volume must only be sell-volume then, not a combination? Can you give me a link to your information source?

[Terk]

How are you separating that in your numbers? Your figures for USD volume must only be sell-volume then, not a combination?

Not separating and not sell-volume only. Total transaction volume. BTC volume is equivalent to USD volume and it's total transaction volume. It's just the USD volume that matters when we're comparing USD fee figures (and also because this market at this point is driven mostly by USD supply).

Can you give me a link to your information source?

As I wrote before, I take data from http://www.bitcoincharts.com/charts/mtgoxUSD (you can pick date range that you like and then there's “load raw data” link under the chart).