Does a Flash Crash for the Honey Badger of Money Mark a Good Time to Get In?

02/13/2014 3:00 pm EST

Focus: TRADING

Rob Booker

Author, Man Vs. Market: Lessons from Trading on the Road

Your host Rob Booker is joined by special guest Rob Wilson to talk about a newsworthy event: Mt. Gox, a bitcoin/currency exchange, announced that it was halting all transactions on its exchange, which sent the price of bitcoin dropping…While Rob Booker expresses sympathy for anyone caught in the crossfire of this flash crash, he reassures that bitcoin will survive this—and the question is—does this provide a good time to buy bitcoin? Both Robs say yes! So, Rob Booker is going to jump on the wagon and start buying some bitcoin and put his first $1,000 into bitcoin, stage himself into something, and build a position.

 
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Rob Booker: Recently I’ve been talking to Rob Wilson and we’ve been talking about Bitcoin. Now on the podcast, you’ve heard me talk a little bit about bitcoin recently. I’ve gone through something of a transformation in my opinion where I thought that it was probably kind of shady, and then I thought it was a little bit shaky, and now I think actually today’s events, which you’ll find out about in just a moment, have possibly made bitcoin, given us a buying opportunity which is really odd. We don’t really talk about trades specifically on the podcast but today in the news, Mt. Gox, a major exchanger of bitcoins into dollars and into Australian dollars into yen and whatever else, announced that they were halting all transactions on their exchange which sent the price of bitcoin dropping precipitously and I caught up with Rob Wilson on the phone to see what his opinion on the matter is and to find out if now is the time to buy some bitcoin. Mr. Wilson,

Rob Wilson: Hello.

Rob Booker: So what’s up with Mt. Gox, is that what you say? How do you say that?

Rob Wilson: Yeah, Mt. Gox, yeah.

Rob Booker: What’s up with them?

Rob Wilson: Oh listen, they’ve had problems since last April.

Rob Booker: Yeah.

Rob Wilson: Processing US dollars out of their account and that goes back to basically a lawsuit that a US payment company brought against them. They effectively shut down their account with Mt. Gox and Mr. Gox was, there’s an investigation still going on about money transmission and the failure to comply with New York client and anti-minority laws

Rob Booker: Right.

Rob Wilson: So that was the start of it and then from that point really, US dollar owners were struggling to get their money off Mt. Gox and then it became impossible to get your money off Mt. Gox because they couldn’t transfer payments back into dollars easily. They didn’t have a payment process really on the dollar end.

Rob Booker: Right.

Rob Wilson: So that was all through the summer so through the summer and the autumn, Mt. Gox was carrying anything up to generally 10% but more often than not a 20% premium with other exchanges because people with dollars would buy a bitcoin on the Mt. Gox exchange just to get their money out.

Rob Booker: Right.

Rob Wilson: And then that reached a climax last week when people could get bitcoin out either.

Rob Booker: Oh boy.

Rob Wilson: And so they have no means of exiting at all, and throughout the autumn, they could get out a premium by buying bitcoins more expensively than you could buy them anywhere else but that was preferable but what they have done today is the exchange, their exchange was effective for the shut for all transactions in and out from, I think it was last Thursday, and everyone was waiting on a statement from them this evening and when that statement was made, instead of admitting fault or being transparent with the community about their plans to fix it, they blamed a well-known and very old minor error in the if you like in the bitcoin protocol as a way to sort of obfuscate their liability and that immediately caused a huge setoff, which is in the process of being recovered at the moment but

NEXT PAGE: Trapped in Bitcoin World

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Rob Booker: Okay, so let’s, let me back it up here. Let’s just like break it down into like bite size pieces here so for the purposes of the podcast, okay so we’re talking to Rob Wilson. Rob Wilson is our great friend, longtime listener, first time caller, not really. Wilson’s joining us from Australia and for the last few minutes before we came on here, we’ve been talking about recent changes in bitcoin and I’ve had this conversation going on with Wilson for actually quite some time and I’ve been waiting, Rob, I’ve been waiting for an opportunity to buy bitcoin at a significant discount so other people’s panic and other people’s fear sort of becomes my opportunity today as one of the largest what do you call it a dealer or a, what would call Mt. Gox?

Rob Wilson: They are an exchange.

Rob Booker: They’re an exchange so they have experienced technical difficulties. The television screen has gone dark with the rainbow-colored stripes and they’re not contacting their customers and they have essentially said in a statement as you are aware, the Mt. Gox team, which is responsible on any given day for as much as 30% of transactions in bitcoin, the Mt. Gox team has been working hard to address an issue by the way the bitcoin withdrawals are processed. By bitcoin withdrawal, we are referring to transactions from a Mt. Gox bitcoin wallet to an external bitcoin address so essentially hey, we can’t transfer any bitcoins anywhere. That’s what they said. Then they said bitcoin transactions to any Mt. Gox bitcoin address and currency withdrawals into dollars, yen, euro, etc., are not affected by this issue. The problem we have identified is not limited to Mt. Gox and affects all transactions where bitcoins are being sent to a third party. We believe that the changes required for addressing this issue will be positive over the long term. As a result, we took the necessary action of suspending bitcoin withdrawals until this technical issue has been resolved. What caused the bitcoin to drop significantly today on this news though Wilson is that customers are having problems transferring bitcoins back into dollars and getting them out, is that correct?

Rob Wilson: Yeah, I mean Mt. Gox problems go back to the point where the US tightened up their money laundering and New York client laws as they affect bitcoins so as soon as the US government started taking bitcoins seriously, Mt. Gox found themselves without, if you like, a merchant service provider to allow US dollar depositors to get their dollars back out of the exchange.

Rob Booker: Right.

Rob Wilson: And so it’s been hard for a long time for particularly US treasurers to recover currency from the exchange in US dollars and so as a result of that, for a long time there’s been a lot of anguish and bad press surrounding Mt. Gox, but until very recently, customers or clients with money of US dollars on Mt. Gox exchange could always buy a bitcoin and obviously once the bitcoins were in their possession, they could move them off the exchange and put them in their own wallet and it was, life could carry on; however, they were paying between a 10% and 20% premium over any other exchange to do that, which clearly they didn’t make anyone very happy. 

Rob Booker: Yeah, right, exactly.

Rob Wilson: Things tightened up again quite recently when last week Mt. Gox suspended Century, suspended all bitcoin transactions off the exchange, as well, so now no one could get their dollars out and they couldn’t get their bitcoin out either and clearly that was a terrible situation from everybody’s perspective. They promised the market a statement today which would be I guess it would be at the open, just before the open eastern time just as you turn the European forenoon and the entire bitcoin community was anticipating some form of coming clean, some sort of action plan. I don’t think anyone was expecting them to essentially try to throw the entire bitcoin protocol under the bus which is what they did.

NEXT PAGE: Can You Trade Bitcoins?

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Rob Booker: Yeah, they’ve essentially said unless the protocol changes, we can’t continue to do this.

Rob Wilson: Right, so no one was expecting that and that caused something of a flash crash. There have since been bitcoin core developers on the wire saying hang on a moment Mt. Gox. We’ve known about the problem that you’re alluding to for two years. It’s not a major problem by in any way, shape, or form and had you coded correctly, it wouldn’t be an issue for you now. 

Rob Booker: Bitcoin has a flash crash like every 45 days so what is the, as far as I’m concerned, I don’t have any money at Mt. Gox and for anybody that does, I certainly feel the pain. I mean that’s a terrible thing, and of course, nobody wants to go through that where their broker or exchange provider is holding onto their money and not processing transactions and whatever else, but does this represent, like in the bigger picture here Wilson, let’s get a pass. This is a growing pain in this industry. This has happened in every industry or every financial industry where a product was new and the first brokers to that product were bucket chops or terrible human beings and bitcoin is going to survive this. Does this represent a place to buy bitcoin?

Rob Wilson: So I conduct my analysis through Bitstamp and I was, in fact in my most recent post on bitscan.com, I was saying that look, I’m not expecting to see higher support until we get to about $550 because you see a confluence of horizontal and rising support at round that level and funny thing, whilst Bitstamp traded down through $550, she’s now sitting at around $620 which is exactly what you’d expect so what you tend to find with bitcoin because it’s a particularly illiquid market that when it really gets its skates on, it will trade through levels but that isn’t what happens if you like it as soon as the limit orders are reflecting in the price and it holds above them so you can’t trade bitcoin in the same way that you would a more mature financial instrument because it is just too illiquid at the moment. 

Rob Booker: So what do you mean you can’t trade it like you trade another financial instrument? In what way can’t you trade it? 

Rob Wilson: Well, let’s say I mean look, if we were trading eurodollar and the price moved 40 or 50 pips through a stop loss or if you like a key price point that we’d identified, then we’d probably be out of the trade, right, and we come back and yet another time. 

Rob Booker: Well, I don’t think of bitcoin like that, though, Wilson. I think of bitcoin as a long-term investment. I don’t think of bitcoin as a trader’s instrument right now so I mean in that sense, yeah, you’re right. I mean you’re not going to jump in and out of a bitcoin trade, right?

Rob Wilson: Right, exactly, so more reasonably you’re finding points in price where you’re anticipating a reaction in your favor as you and I always used to do right so you’d look for the limit of the existing condition and you identify that point in price is where you want to get in and I identify that point and price as $550. I think we got as low as $500 and then when it went back up to $620 so listen, what we do from here in the short term is difficult to say. This has obviously generated an awful lot of negative press which is going to take a while to unwind so I’m not suggesting that on the back of this news the short-term drop won’t continue. 

Rob Booker: That would be fantastic as far as I’m concerned. Like as an investor thinking in the long term.

Rob Wilson: Correct, so you…

Rob Booker: I was actually on an airplane just the other day and I told somebody listen, I’d love to be a long-term investor in bitcoin but not at these prices. I’m not going buy Google at $1,100 and I’m not going buy bitcoin at $1,020 or whatever. It’s not going to happen. I’m not going to do it, but if it could fall to $400 or $450 or something and the guy said oh yeah, nice try and I’m like dude, it’s an untested market and like who knows what’s going to happen, right Wilson? I mean it could hopefully we could get some traction out of this Mt. Gox story and maybe everybody could give me a chance to get on the ride here. That’s what I would like.

NEXT PAGE: Building a Bitcoin Position

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Rob Wilson: Look, I mean, I think you know more importantly to our earlier point, none of this changes the underlying strength of the protocol and its utility as a means of transferring value from peer to peer. I mean if you’re working, let’s say for example you’re working at Western Union, right, and you know business is about transferring money from a remittance from person A to person B. Now you’re charging upwards of 3%, 5% to do that, it’s taking five business days to get through and you’re infrastructure includes all the security that you need to construct around your network to keep it secure so bitcoin allows people to transfer, as you and I proved the other day, right, you can transfer value from peer to peer without giving all your financial details away. You can do it instantly and you can do it for free because the bitcoin network or the bitcoin protocol is secure at its core. You don’t need to pay for the infrastructure of superimposing a security system around it. So you’re telling me that you’d be happy with your business model at Western Union now, right? I mean, come on.

Rob Booker: Yeah, it doesn’t change, but it also doesn’t change the fact that there’s been widespread mainstream acceptance of this by a core group of people who don’t give a crap about Mt. Gox. They didn’t expect the exchanges to be perfect and they weren’t investing in bitcoin as a hobby. The people are in bitcoin right now are the hardcore of individuals that believe in security and privacy, anonymity. They believe in a lot of things that aren’t going to change today because a shady broker or exchanger that they already knew was kind of shady has even gotten a little bit shadier. Then the question pops up in the minds of podcast listeners Wilson. Where does someone go right now not just in a private transaction which would be hard to track down but where does someone go that says alright, I’m ready, I want to buy $1,000 worth of bitcoin. What other exchange provider is looked upon as having a better reputation?

Rob Wilson: Well, I think if I lived in the US, I’d be making a beeline for Coinbase because you could transfer your cash from your US bank account straight in and I don’t think they charge a commission and that’s a very easy way of doing business, but that isn’t the only way. There are also a network of local bitcoin traders and you can just go to localBitcoin.com, you can find the nearest guy to you and you can conduct a transaction in person or online

Rob Booker: And that’s LocalBitcoins?

Rob Wilson: LocalBitcoins.com, yeah, or you can do something or sell something which owes you bitcoin and to give you an example, Bitscan has a, if you like a classifieds marketplace where you can sell anything that you don’t want any more whether it be a service or a product and take bitcoin for it. Indeed you can write for Bitscan and earn bitcoin so there are, anything you can offer and to another human being, you can take bitcoin for it. It’s a currency, frankly, in a real sense, just like anything else so it isn’t necessary to if you’re a distant client or you don’t have the funds to go anywhere other than look within and offer something to your fellow man frankly. 

Rob Booker: Yeah, that’s awesome. Well, I mean, this is, I’ve been waiting for this Wilson so today’s news, although it’s depressing and of course we don’t want anybody to lose any money and all those things, I think it’s pretty much the greatest day in my trading life in about I don’t know six months because I’m going to start buying bitcoin like I’m, this is it for me. I don’t know how much farther it could fall or will fall but I’ve been waiting for it to test those lows and if it can drop a little bit further, it would even be better and I could stage myself into something and build a position which you were able to do years ago at prices that we probably won’t ever see again so I just want to catch up with you really.

NEXT PAGE: Where to Find More Information

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Rob Wilson: Well, that was slightly crazy but that was right, that was in the beginning of sort of last year but you know even then it looked, you know what it’s like. A market always looks too expensive, right. I mean I don’t personally think that I think we’re a bargain price right now. If you trace, if you plot bitcoin on a logarithmic scale right and you draw a support line across all of the lows, you’ll see that the mean rates of advance, the mean rate of capitalization is roughly 10 times annually okay? Now bitcoin is obviously trading way above that rising floor of a moment and indeed bitcoin could fall to as low as sort of $150 a bitcoin and still not what would I say, it still wouldn’t violate that growth trend. Now if you carry that growth trend on, I’ll leave you to do the math but basically you’re looking at about $12,000 a bitcoin by November this year and you’re looking at about what just over $100,000 a bitcoin for the year after right, and by the time you get to sort of November, 2016, in fact. If you work it out but the bottom line is that sounds incredible, but from a fundamental perspective, that should only represent a total capitalization of 1% of the total global cash transaction market. 

Rob Booker: Right.

Rob Wilson: And that seems a lot more doable to me. Now I’m not saying that we’ll get there in three years and things like today’s instance don’t help his feel of adoption. I think that that, if this carries on for the next few weeks, it certainly hasn’t been a brilliant start of the year for bitcoin but I saw a blog earlier this evening. If you ask any Fortune 500 CEO whether he would be happy to take a 20% drop in the valuation of his company as a result of a country market, a major country market shutting down for him, which would be Russia just recently for bitcoin, the loss of one of his companies main sales channels which would be Mt. Gox and the incarceration of one of his company’s most prominent directors of the board, that would be Charlie Shrem for bitcoin, if you all those things were to happen to him in the space of two weeks, and it only cost him 20% of this company’s valuation, he’d bite your hand off. They call bitcoin the honey badger of money and they’re not wrong, you know, and he’s incredibly resilient. It just gets pelted by the establishment at every turn and it just soldiers on and the reason for that is that it has such inherent properties, pro-trade properties, pro-privacy properties that people value and the macro financial situation is so in disastrous that it’s a perfect storm of possibility for bitcoin and it just marches on and I’ve got no doubt that it will continue to march on through this and we’ll look back in six months’ time and think what was that blip? I remember last year for example Rob when bitcoin rose to $266 and we all thought “holy Moses” but it only stayed there for about 24 hours and before we knew it, we were back down to about $100 and then $70. I wondered if we’d ever see those sort of levels again and so I looked at my bitcoin holding. If you look back at those levels now, it literally looks like a speed bump. I mean it’s just amazing.

Rob Booker: Alright so Rob, where can traders who want to find out more about bitcoin, where can they go? What kind of app can they download?

Rob Wilson: Well, that’s a perfect segue isn’t it. I mean you can certainly go and find Bitscan.com where we have an easy, you can see like marketplace and you can track or you can find bitcoin businesses near to you and we have the largest directory on the planet, now we’re twice the size of the opposition and you can find any business around you even geographically or by listing so that’s a nice little place to start but frankly Rob, if you type bitcoin into Google, there are 101 sites where you can increase your general knowledge. 

Rob Booker: Alright, well if you missed Commander Wilson’s analysis on the currency market and you want to get something like it though, you go to Bitscan.com. You should check it out, download the app and Wilson this is not the last time we’re going to talk about this because today I’m finishing the setup of my coin base account and I am going to put my first $1000 into bitcoin with great fanfare and much ceremony.

NEXT PAGE: Rob’s Contrarian Bet

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Rob Wilson: Good for you, Rob. Welcome to the community, mate. You won’t regret it.

Rob Booker: And at these rates, it should buy me like one sliver of a bit. I mean this thing is like anything.

Rob Wilson: Just under two. 

Rob Booker: Just under two, I’m going to be proud owner of, I’m going to birth just under two bitcoins. It sounds exciting. Well, have a great evening in Australia. Can’t wait to catch up with you again. 

Rob Wilson: Cheers, Rob. 

Rob Booker: Cheers. So Jason, all of this bitcoin stuff, what do you make of all this now? Does this now just seem like the Iraqi dinar to you?

Jason Pyles: Well, it’s very exciting actually and to hear you guys talk about it, number one I was fascinated. Number two is was intrigued. Number three I was like wow, I’m tempted but that bull was probably way too wild for a guy like me to ride but not a guy like you, Rob. 

Rob Booker: Yeah, maybe so. I like this right now. I like this panic and fear. This is exactly what doesn’t look like a buying opportunity to most people and it could, of course, be a sustained move in the “wrong direction” but I think that’s exactly what we’ve been taught over the years. If we’ve learned anything, it’s that if you like a financial instrument for the long term, then you want there to be some kind of crisis that depresses the price of that financial instrument in the short term and then you’ll get a pop in the price and then every subsequent crisis won’t be able to carry it down as far as the last one did and crises and panics and stuff like that, that’s inevitable and this has probably got a lot of legs on it for a long time to come on the good side and this short-term bad news, when something’s as beloved as bitcoin is amongst its followers, they are pretty resilient individuals. They don’t want to see their team lose so they’ll pick up the pieces pretty quickly to save its legitimacy so we’ll see. I think we’ll see that price rise but maybe only after another drop and Jason, when we come back next time, I’ll have my whole bitcoin account all set up and we can talk about how difficult or easy it was.

Jason Pyles: Well, that’ll be great and you know what else you should do, just so you don’t feel empty handed after purchasing it, you should go buy some of those chocolate gold coins that are wrapped in the gold tinfoil so you can feel like you have something. 

Rob Booker: Okay, that’s, what a great idea and I catch my children eating them and you’re like ah, my bitcoins, my bitcoins. Alright, Jason. For the listeners that want to catch up with Rob Wilson and learn about bitcoin or get some basic support and resistance analysis and some advanced forecasting on it, you can go to Bitscan.com or download the Bitscan app for your iPhone and you’re listening to The Trader’s Podcast.

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