Bitcoin Sheds 36.5% In A Month

Bitcoin’s price has plummeted a further 8% today to a global average of $306 USD according to the BraveNewCoin Price Index. This price decline follows another month of downward trending, having shed 36.5% in the last 30 days. Several theories have been circulating on the internet. Sites like reddit.com have a wide range of opinions, the ‘bitcoin is a bubble!’ crowd are out in full swing blaming the "New Paradigm" price spike in Dec 2013.

A more technical analysis from a month ago shows bitcoin’s price still well within a predicted range:

Other theories for the continuing drop in bitcoin price include; merchant adoption, where 95% of merchants liquidate bitcoins after receiving payment; the US Dollar rising more than 7.1% in the last quarter, fortune.com article here; and market manipulation.

Bitcoin has so far survived the closure of silk road, The ‘China Bans Bitcoin’ news, the sweat out of the US with Ben Lawsky’s proposed draconian NY Bitcoin License, possible 51% attack threats, various scams and bitcoin heists, along with the massive MtGox catastrophe right at the beginning of 2014. Bitcoin is still up 200% from 12 months ago and the growth in wallets and transaction volume continue to grow exponentially. Despite all this we will keep seeing ‘is bitcoin dead?’ until bitcoin is as popular as Paypal or Visa.

One area of interest little spoken about in depth is the Chinese Exchanges. Most price-indexes won’t even include these exchanges in their trading volumes. Here’s a few metrics to put things in perspective:

The bitcoin/ Chinese Yuan trading pair (BTC/CNY) made up 78.81% of global bitcoin trading volume in the last 24 hours, with the bitcoin/ US Dollar pair (BTC/USD) making up less than 20%. The global trading volume of BTC/CNY has been over 70% for months with highs up to 89% on some days.

The BNC Price Index (BPI) deliberated whether or not to include the Chinese exchanges into their global price index due to the fact that several of these exchanges have 0% trading fees, and were suspected of running bots on their own exchanges (possibly front-running their own customers’ orders). Their huge volumes have been the linchpin of debate over their validity and legitimacy. The conclusion was that these exchanges made up the majority of the market and therefore had to be included to represent a true global Bitcoin price average.

One notable reason, out of many, that may explain why these exchanges became so huge, is that most private sales (like sellers of localbitcoins.com) use OKcoin or Houbi as their means to liquidate or procure their OTC (over the counter) coins. They then transact with locals in dozens of countries. You may be sitting in Panama, and procure some BTC from a localbitcoins seller – who, chances are, will have a Houbi or OKcoin account. This is where your bitcoins will ultimately come from. More specifically, in countries where there is a lack of Bitcoin exchanges, customers use their local currency (such as USD for this example) to purchase Bitcoins from private sellers. The seller uses CNY sitting in 1 of the big 5 Chinese exchanges, to procure your BTC at the time of trade. This contributes to trading volume on Chinese exchanges, but never shows as USD volume as the local trade was peer to peer.

Other notable reasons are the suite of trading tools offered by OKCoin (the largest Chinese exchange). They provide a peer to peer funding option that enables leveraged trading (upto 3x). Combine this with 0% fees, the liquidity provided by being the worlds largest exchange, the artificial stability of the Chinese Yuan, and its easy to see why they’ve become so dominant.

Ultimately this drives a lot of BTC volume into CNY. To the tune of 75% or more of global trading. Centralization of bitcoin’s market liquidity raises the same questions as the centralization of Bitcoins mining power. Concentration of power ,or centralization, is what Bitcoin was created to overcome. So how consolidated are the Chinese Exchanges and what can be done to diversify?

Firstly, here is a snapshot of how the trading volume in CNY breaks down between the 5 big Chinese exchanges:

OkCoin made up 34.28% of the BTC/CNY trading volume in the last 24 hours. Meaning 1 exchange clears around 30% of global trading on a daily basis.

Earlier today a reddit user, trixisowned, published a post titled "OHCC Exchange Partnership and the fractional exchanges that support it. Your exchange may be counterfeiting cryptocurrency!" The post claims that BTC China, OkCoin & Houbi have a mutual trust and ‘freely join their reserves’ via their OHCC partnership to participate in fractional reserve banking. Ie – ‘allowing more bitcoin to be traded then they have in cold-storage’.

While an interesting theory, and one that has been in the back of many people’s minds since the MtGox failure. The operators of these large exchanges would be shooting themselves in the foot by ultimately undermining Bitcoin’s strength. Or at least we would hope they have come to this conclusion themselves. Point being, trust in exchanges is never going to be a loving bond. So the question remains, what can be done to ensure centralization doesn’t threaten bitcoins network strength?

Recently 2 of the big 5 Chinese exchanges have produced positive audit results, with BTC China showing 100% in reserves and OKcoin with 104%. This is one repercussion of the MtGox failure we can all be thankful for. The industry screamed out for transparency and regulation. Bitcoin is possibly the 1st industry in existence where a large number of participants actually want some form of regulation so they can get on with planning their business.

While internet rumours are always going to be with us, the topic of centralized anything in a decentralized system such as bitcoin will raise the most concern. Considering Bitcoin’s track record of innovating its way out of a problem, we can hope to see a more decentralized future where the threat of a ‘whale’ is drastically reduced with existing and coming decentralized services such as MataLair, BitStock,Coinsigner and Bitsquare as well as 2.0 platforms such as ripple offering a clean gateway for a decentralized exchange.

For the near future expect more price swings and rumors. Be wary of centralization. Ultimately, bitcoin’s gold is in it’s blockchain technology and its obvious disruption potential for massive markets such as remittance, micro-transactions and its ability to decentralize registration and asset ownership systems.

Here’s tom with the weather.