Monday, June 27, 2011

Setting professional Bitcoin traders straight

It's bothered me how a lot of the people posting criticisms of Bitcoin manage to get their facts wrong. But apparently, even people with a giant financial incentive to get them right ... still get them wrong.

At this point, I think it's only fair to post disclosures: I hold a portfolio that is long Bitcoin.

Anyway, I saw an (unintentionally) funny post on the blog at the Financial Times's Alphaville.

According to the post, a trader found out about Bitcoin and, based on technical analysis (chart-reading), he judged that Bitcoin was in a bubble and wanted to short. Okay, fair enough, we have someone entering the marketplace and tendering his judgment through the price system. So, you would think he would do his diligence and have some clue about what he was trading before trying to make a big bet on it, right?

Well ... I'll just quote him:

I've done some research, read through the concept [of Bitcoin] and quickly got to the point where I felt that the only reasonable position would be to short such a bull market. [...]

... so I tried to contact Adam at Bitcoin.org to ask if they intended to implement a possibility to short the BTC. Due to the overload in mails they must have had, I never got an answer on my inquiry.

See the rookie mistake there? (If you don't, that's okay. After all, you weren't about to bet $50,000 on your incomplete understanding.) Bitcoin is a open source project that uses protocol that implements a currency. That's all it does: make sure that the ability to use Bitcoins, per its own published protocols, works. The people at Bitcoin.org -- the development team and volunteers updating the wiki -- don't run exchanges (like Mt. Gox) where you can convert bitcoins into dollars. Those are independently run by people who use Bitcoin.

In short, MT. GOX IS NOT THE SAME AS BITCOIN!

So, this trader just did the equivalent of "trying to contact" the U.S. Mint to "ask if they intended to implement a possibility to short the US dollar", and then speculating that they must have been unable to answer his inquiry "due to the overload in mails they must have had" in this oh-so-heated market.

No, bright guy, they probably just didn't have time to talk to someone who didn't even understand the difference between a Bitcoin exchange (like Mt. Gox) and the Bitcoin project. Just like, I suppose, the U.S. Mint doesn't respond to inquiries misdirected people who ask them when they can short the dollar. (Note: it's not shorting the US dollar that's necessary misdirected, but asking the U.S. Mint about it.)

The blogger, Tracy Alloway, didn't seem to do any better. He added:

We like the currency trader’s rather more nuanced take ...

Nuanced? Yikes. I just hope traders -- and financial journalists -- have a better understanding of their normal playground than they do about Bitcoin.

18 comments:

Beryl Ostting said...

I notice a lot of BitCoin fans make a huge deal out of how people mistake MtGox for the protocol. It's true, it's a mistake. But it would be more interesting to investigate the reasons why this trader felt BitCoin is such a self-evident short.
Perhaps he did some back-of-the-napkin math about the number of bitcoins outstanding vs. the daily trade volume and was able to conclude there is a large chance of a crash.
He might be able to feel that intuitively from parallel situations in his career, having seen it occur in the past with much-hyped stocks with a small free float.
For instance.
And then he makes a rookie mistake conflating the protocol for the exchange, and *that's* the only thing the coinheads can hear.

Silas Barta said...

It's not just that he conflated the two, but that he didn't do enough research to have even a passing familiarity with something that he was ready to bet on.

Anonymous said...

There is an Adam who works at Mt. Gox and is vocal on the forums. I'd bet that's who he tried to contact and just misspoke or was misquoted in the interview.

digital signatures said...

Actually, Bitcoin values have proved remarkably resilient –the exchange rate back at around US $17.30 per coin, according to Monday trade data from Mt.Gox. As blogger and MIT grad Star Simpson notes.

Beryl Ostting said...

@Digital Signatures: Yes, remarkably resilient. Does "MIT grad Star Simpson" have any more insightful remarks with the benefit of hindsight?

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