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No, they aren't, because the price of BTC is growing exponentially without necessarily having dollar deposits grow at the same time. Here's a worked example. I

No, they aren't, because the price of BTC is growing exponentially without necessarily having dollar deposits grow at the same time. Here's a worked example. In a closed system: Day 1: $1 buys 1000 Marmotcoin Day 2: $1000 buys 1 Marmotcoin Day 3: 1000 Marmotcoin attempts to sell for $1,000,000 That's what the initial phases of a liquidity shock will look like. I can almost guarantee you that retail operations all have bank liquidity facilities to deal with sudden upswings in withdrawal demand, otherwise they have to commit house money to cover it.

panarky 9y ago
Your article assumes that to sell on Day 3, the exchange has to borrow $1,000,000 from a bank. That's now how an exchange works. For the price to be 1,000,000 USD for 1,000 BTC, there must exist buyers with 1,000,000 USD and sellers with 1,000 BTC with orders to trade at that price. There's no "house money" since exchanges aren't casinos where the players bet against the house. Buyers and sellers are transacting with each other, matching buy orders with sell orders. The exchange doesn't have to borrow the USD from a bank, the buyers bring the USD to the trade. There is no "liquidity shock" unless the exchange steals or loses the buyers' USD. And that's a different argument.
- pjbyrne 9y ago
  You're still missing the point. If the exchange is providing a fiat on/offramp, then it will have to manage the possibility that the amount of USD deposits is massively exceeded by the amount of Bitcoin deposits which may one day call on the USD deposits to be redeemed. For example. If I bought $1000 for 1 BTC from Coinbase on January 1st 2017 and try to exit that position on Jan 1 2018, once I sell that $10,000 bitcoin to Coinbase I'll be withdrawing $9000 more than I put in. Coinbase has to get the $9000 from somewhere, whether that be from other deposits which are more recent than mine, or from its own trading operations. If you have a large number of people trying to withdraw a large number of dollars at the same time, your offramp could run out of dollars or, in the alternative, be required to (a) draw down a facility with a bank or (b) sell assets. In an environment where the asset price is falling rapidly it may not be able to avail itself of either option. As occurred in 2008, with dire consequences.
  - coryl 9y ago
    I have a share of AAPL stock. I wish to sell it. I place the sell order with my brokerage, and I get fiat USD deposited into my account. This is exactly how Bitcoin is exchanged. Where exactly lies the fundamental liquidity problem for my brokerage/exchange?
  - gruez 9y ago
    >Coinbase has to get the $9000 from somewhere yeah, from the person that just bought BTC for $10,000.
    - dwaltrip 9y ago
      Seriously, three comments in a row and he is still repeating the same fundamental misunderstanding. It's not a complicated concept, I don't get the confusion.
  - kpdxxx 9y ago
    No, _you're_ missing the point.
  - mrb 9y ago
    Exchanges don't provide fiat on/offramp. Exchange users do, by making deposits. Every dollar that a user withdraws from an exchange is a dollar that was (already!) deposited by another user.
    - panarky 9y ago
      Exactly. Here's a revised "worked example". Day 1: Alice buys 1,000 Bitcoin from Bob for 1 USD on a street corner Day 2: Market price on the street corner is 1 Bitcoin for 1,000 USD Day 3: Alice sells 1,000 Bitcoin to Charlie for 1,000,000 USD on a street corner The street corner doesn't have to borrow 1,000,000 USD from a bank. Charlie brings the USD to the trade.
      - pjbyrne 9y ago
        You just proved my point. For this to keep working you need Charlie to show up with $1,000,000 new dollars. In a panic, you need to flip this scenario on its head. Charlie is not going to show up and Diana, who got into Bitcoin in 2009 and hasn't done anything since, decides to take her profits on 1,000 BTC. So this system has $1,001 to meet $2,000,000 in deposit demand, assuming neither Alice nor Bob has withdrawn their USD and some Bitcoin hodlers pile in. Particularly popular liquidity pools eg BitPesa or Coinbase may then be put under pressure to either cease operations, draw down liquidity facilities to buy BTC, or start selling their own assets in order meet demand of BTC holders who want to get out. Those are not good choices.
dahdum 9y ago
That's not a worked example, it's ignoring everything they just explained.
mrb 9y ago
Bids on an exchange's order book are definitely backed by dollars. I don't know why you insist they aren't. You use strange language. Maybe the scenario you mean to describe is not about lack of deposits or lack of float, but is a classic panic sale (ie. order books not deep enough to absorb all asks). Yes, this could happen with Bitcoin, or basically any financial instrument: stocks, forex, etc. As someone who has been trading bitcoins since 2010, I will retort that market depths have definitely been growing over time. I don't have precise data to show you, but for example GDAX's BTC/USD order book accounts for 1/20th of the worldwide BTC trading volume. Right now selling 3600 BTC on GDAX would net $30M and dip the price -20%. Assuming the same depth at other exchanges, this means traders could globally sell 72000 BTC at the same instant for $600 million and dip the price by only 20%. That's a pretty decent market depth. If market depth grew proportionally to Bitcoin's price, it would mean that 7 years ago when Bitcoin was trading at $0.25 (1/36000th its current price: http://bitcoin.zorinaq.com/price/ http://bitcoin.zorinaq.com/price/) then a sale of $16k worth of Bitcoins would have dipped the price by 20%. I don't know if we can find archives of MtGox's trading data from 2010, but I roughly remember selling blocks of 1000 BTC at a time on Mtgox for $0.70-1.00/BTC in February 2011 and each of my sale would dip the price by a few percents. So my (vague) recollection seems to indicate I'm probably right that market depth increased proportionally to Bitcoin's price. Therefore Bitcoin would have been at an equal risk of a panic sale at any point in the last 7 years. And the fact there has never been a long-term panic sale is a testament to Bitcoin's resilience. The markets are deeper and are more resistant than you think.

panarky 9y ago

Your article assumes that to sell on Day 3, the exchange has to borrow $1,000,000 from a bank. That's now how an exchange works. For the price to be 1,000,000 USD for 1,000 BTC, there must exist buyers with 1,000,000 USD and sellers with 1,000 BTC with orders to trade at that price. There's no "house money" since exchanges aren't casinos where the players bet against the house. Buyers and sellers are transacting with each other, matching buy orders with sell orders. The exchange doesn't have to borrow the USD from a bank, the buyers bring the USD to the trade. There is no "liquidity shock" unless the exchange steals or loses the buyers' USD. And that's a different argument.

pjbyrne 9y ago
You're still missing the point. If the exchange is providing a fiat on/offramp, then it will have to manage the possibility that the amount of USD deposits is massively exceeded by the amount of Bitcoin deposits which may one day call on the USD deposits to be redeemed. For example. If I bought $1000 for 1 BTC from Coinbase on January 1st 2017 and try to exit that position on Jan 1 2018, once I sell that $10,000 bitcoin to Coinbase I'll be withdrawing $9000 more than I put in. Coinbase has to get the $9000 from somewhere, whether that be from other deposits which are more recent than mine, or from its own trading operations. If you have a large number of people trying to withdraw a large number of dollars at the same time, your offramp could run out of dollars or, in the alternative, be required to (a) draw down a facility with a bank or (b) sell assets. In an environment where the asset price is falling rapidly it may not be able to avail itself of either option. As occurred in 2008, with dire consequences.
- coryl 9y ago
  I have a share of AAPL stock. I wish to sell it. I place the sell order with my brokerage, and I get fiat USD deposited into my account. This is exactly how Bitcoin is exchanged. Where exactly lies the fundamental liquidity problem for my brokerage/exchange?
- gruez 9y ago
  >Coinbase has to get the $9000 from somewhere yeah, from the person that just bought BTC for $10,000.
  - dwaltrip 9y ago
    Seriously, three comments in a row and he is still repeating the same fundamental misunderstanding. It's not a complicated concept, I don't get the confusion.
- kpdxxx 9y ago
  No, _you're_ missing the point.
- mrb 9y ago
  Exchanges don't provide fiat on/offramp. Exchange users do, by making deposits. Every dollar that a user withdraws from an exchange is a dollar that was (already!) deposited by another user.
  - panarky 9y ago
    Exactly. Here's a revised "worked example". Day 1: Alice buys 1,000 Bitcoin from Bob for 1 USD on a street corner Day 2: Market price on the street corner is 1 Bitcoin for 1,000 USD Day 3: Alice sells 1,000 Bitcoin to Charlie for 1,000,000 USD on a street corner The street corner doesn't have to borrow 1,000,000 USD from a bank. Charlie brings the USD to the trade.
    - pjbyrne 9y ago
      You just proved my point. For this to keep working you need Charlie to show up with $1,000,000 new dollars. In a panic, you need to flip this scenario on its head. Charlie is not going to show up and Diana, who got into Bitcoin in 2009 and hasn't done anything since, decides to take her profits on 1,000 BTC. So this system has $1,001 to meet $2,000,000 in deposit demand, assuming neither Alice nor Bob has withdrawn their USD and some Bitcoin hodlers pile in. Particularly popular liquidity pools eg BitPesa or Coinbase may then be put under pressure to either cease operations, draw down liquidity facilities to buy BTC, or start selling their own assets in order meet demand of BTC holders who want to get out. Those are not good choices.

dahdum 9y ago

That's not a worked example, it's ignoring everything they just explained.

mrb 9y ago

Bids on an exchange's order book are definitely backed by dollars. I don't know why you insist they aren't. You use strange language. Maybe the scenario you mean to describe is not about lack of deposits or lack of float, but is a classic panic sale (ie. order books not deep enough to absorb all asks). Yes, this could happen with Bitcoin, or basically any financial instrument: stocks, forex, etc. As someone who has been trading bitcoins since 2010, I will retort that market depths have definitely been growing over time. I don't have precise data to show you, but for example GDAX's BTC/USD order book accounts for 1/20th of the worldwide BTC trading volume. Right now selling 3600 BTC on GDAX would net $30M and dip the price -20%. Assuming the same depth at other exchanges, this means traders could globally sell 72000 BTC at the same instant for $600 million and dip the price by only 20%. That's a pretty decent market depth. If market depth grew proportionally to Bitcoin's price, it would mean that 7 years ago when Bitcoin was trading at $0.25 (1/36000th its current price: http://bitcoin.zorinaq.com/price/ http://bitcoin.zorinaq.com/price/) then a sale of $16k worth of Bitcoins would have dipped the price by 20%. I don't know if we can find archives of MtGox's trading data from 2010, but I roughly remember selling blocks of 1000 BTC at a time on Mtgox for $0.70-1.00/BTC in February 2011 and each of my sale would dip the price by a few percents. So my (vague) recollection seems to indicate I'm probably right that market depth increased proportionally to Bitcoin's price. Therefore Bitcoin would have been at an equal risk of a panic sale at any point in the last 7 years. And the fact there has never been a long-term panic sale is a testament to Bitcoin's resilience. The markets are deeper and are more resistant than you think.