Insights from a professional Bitcoin trader: Technology, power or bubble?

If you are an investor seeking the highest return (risk), trading Bitcoin is undoubtedly your first choice.

It only took one month for the price to rise from $1,400 to $2,800, with fluctuations reaching 30% in one day. There are amazing arbitrage opportunities in different exchanges.

Who is trading these crazy cryptocurrencies? An investor named Kevin Muir has revealed the tip of the iceberg. In an article titled, My Great Bitcoin Bungle, he reveals the hidden side of Bitcoin traders.

Before talking about trading Bitcoin, let’s first listen to this story:

Once upon a time there was a man who worked at Fisherman’s Wharf, and his daily job was to trade fish.

The price of fish fluctuates dramatically every day, and the market changes quickly and crazily. There are large amounts of selling and buying every day, and you can make huge profits or huge losses every day.

There was huge speculation in the fish market, and the price went up completely out of touch with the fundamentals. Eventually, the market crashed, and the traders realized they had too much fish. Now, the traders were so hungry that they opened the fish they had traded and took a bite. Suddenly they shouted, "Hey! These fish are rotten."

The man finally realized: "These are not fish to be eaten, they are just fish to be traded ."

Back to my Bitcoin story, I first came into contact with Bitcoin in early 2012 , when a programmer born in the 2000s told me that he had found something very cool and wanted me to invest in it.

He said: “I just saw this post on reddit, there is a virtual currency called Bitcoin.

A lot of programmers are making it really exciting. It’s basically a decentralized unit of currency. Transactions are done peer to peer, with no banks or governments acting as middlemen.”

“But who will control it?”

The kid said, “No one, that’s the beauty of technology. ”

"If no one controls it, how do you know when a transaction takes place? What if it gets hacked?"

“A network of computers builds a distributed ledger of transactions that uses a cryptography-based system to ensure consensus among all transaction participants.”

"I don't understand. It's a ledger that exists in the air and no one controls it. Why would we use this currency?"

“Yeah,” the Millennials said. “This is so beautiful. No one can control it, no one can manipulate it, it’s like a liberal’s wet dream. We should buy some. ”

"Are you kidding?"

"I'm serious. For $10,000, who knows if it will work. But the technology is incredible. It has the power to change the world."

At the time, Bitcoin was around $4 . But I still thought it was overpriced. Looking back on my investing experience over the years, there are many things I regret, but that missed opportunity is particularly memorable.

A year later, this programmer born in the 2000s called me again and said:

“Remember that cryptocurrency I mentioned last year? Well, it’s gone up. In fact, it’s gone up a lot. It’s going to $30 now and it’s getting some real fans. I really think this technology is catching up. We should see the quote.”

But my response is: "This is a bubble. People will eventually realize that they just bought a few bytes in the cloud, and the trend will end before you realize it."

Shortly after this conversation, Bitcoin quickly rose to $80.

OK, I admit now that I couldn't be more stupid...

I finally asked this programmer born in the 2000s again, and he taught me how to set up a wallet, buy bitcoins, etc.

At the same time, we started mining again. At first, we just used the idle computers in the office. But this friend born in the 2000s had to buy a professional computer. We purchased computers from Butterfly Labs, a professional mining company.

The infrastructure investment is expensive, but if we can mine Bitcoin, the rewards will quickly make up for all the costs, and within a few weeks, the mining profits will completely offset the investment costs.

The price of Bitcoin is still rising at a rate of $100, $110, $120, $140, $160, and $200.

A major turning point came at the end of 2013. After a series of analytical articles by Bitcoin analyst Raoul Pal were published, Wall Street elites took notice of this field.

In the past, Bitcoin rarely rose by more than $10 overnight, but after Wall Street joined in, a $50 or even $100 increase was just a blink of an eye.

The story of Bitcoin is even more exciting now. We are not just miners, but are actually turning to arbitrage .

Even if you could mine all the Bitcoins, you would eventually have to sell them to make a profit. In finance, you give your stock certificates to a broker, they execute the trade when it’s time to trade, and you collect the money. It’s that simple.

Government regulations ensure that everything is done smoothly. Brokers are regulated and everything is guaranteed.

But Bitcoin exchanges are like the Wild West. Your money is like sitting in a brand new bank in Montana in the early 1800s. Yes, your Bitcoins are completely legal, but those banks could go bankrupt at any time, and your recourse is limited.

The programmer born in the 2000s and I discovered that there are always arbitrage opportunities in the world of Bitcoin. At that time, we found that a Japanese exchange called Mt Gox continued to purchase Bitcoin at a higher price than other exchanges. (Mt. Gox went offline in February 2014 due to hackers stealing Bitcoin and suspended online transactions. It also filed for bankruptcy protection soon after.)

So we tested arbitrage. We initially transferred small positions of Bitcoin and requested payment after trading. We timed how long it took us from request to payment. The longer the delay was for an exchange, the less likely we were to trade with it.

We eventually found out which exchanges were trustworthy and created an automatic arbitrage between the two exchanges. Don’t forget that in the stock market, brokers cannot lock the market (i.e., provide quotes on exchange B on exchange A). But in the Bitcoin world, not only is there no such restriction, but direct arbitrage is also possible (i.e., buy on exchange A and immediately sell on exchange B).

At one point, we were mining and arbitrage trading Bitcoin at the same time. During this time, Bitcoin went from $150 to $1,200. We bought so many computers that the entire office overheated, and we were forced to move our mining operations to an unheated underground garage in Canada.

The world of Bitcoin is very different now. It is more professional and it is no longer just a currency for buying things on Silk Road. Some people believe that Bitcoin is the most powerful competitor to replace legal tender in the future.

But I still stick to my original point of view, I still think Bitcoin is a bubble.

From a technical point of view, Bitcoin is not the strongest cryptocurrency. Now new digital currencies represented by Ethereum are emerging, and there may be stronger technologies to replace existing cryptocurrencies in the future.

In addition, the Bitcoin network is far from reliable and remains outside the mainstream financial trading market. In fact, people buy Bitcoin not for its efficiency, but for its anonymity and decentralization.

Finally, virtual currencies are bound to pose a threat to the government's legal tender. Technology determines that virtual currencies such as Bitcoin, which exist in the Internet cloud world, are difficult to regulate. And desperate governments will do desperate things. I will not tie my assets to a currency that poses a threat to the government. Especially when this currency is essentially based on a computer Internet that is regulated by the government.