Bitcoin's Liquidity: A Third Look

Back in November 2011, I wrote about Bitcoin's liquidity, and how it had improved from six weeks prior. Let's take a look at how we're doing, six months since:

On October 16th, a $50,000 purchase would have moved the price from $3.40 to $3.92, a 15.3% increase. A sale of $50,000 worth of Bitcoins would have taken the price down to $3.03, or a 10.9% drop.

On November 27th, a $50,000 purchase of Bitcoins on Mt.Gox would have moved the price from $2.46 to $2.60, a 5.7% increase. A sale of $50,000 worth of Bitcoins would have taken the price down to $2.30, or a 6.5% drop.

So, how is it looking now?

The market is looking considerably more stable. Today, a $50,000 purchase would only move the price from $5.11 to $5.16, a 1% increase, and a sale of $50,000 would drop the price to $5.06, also a 1% move.

In the last seven months, the Bitcoin market has clearly matured significantly, making it increasingly stable and usable as a currency; something many merchants have been waiting for before deciding to accept Bitcoin. Hopefully this will translate into wider acceptance and growth of the economy.

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Is Bitcoin's Liquidity Improving?

Today, a $50,000 purchase of Bitcoins on Mt.Gox would move the price from $2.46 to $2.60, a 5.7% increase. A sale of $50,000 worth of Bitcoins would take the price down to $2.30, or a 6.5% drop.

On October 16th, a $50,000 purchase would have moved the price from $3.40 to $3.92, a 15.3% increase. A sale of $50,000 worth of Bitcoins would have taken the price down to $3.03, or a 10.9% drop.

Unfortunately this is all the data I have, but it definitely seems, from the type of trading action we've been seeing, that it's taking a lot more capital to move Bitcoin's price in either direction. Are we starting to see the realization of the second Wagner Criterion?

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One of Three "Wagner Criteria" Met

If you remember my interview with Bruce Wagner, back in August, you'll recall that he outlined three hurdles that Bitcoin had to overcome before mass adoption could take place. While there has been much controversy surrounding Bruce Wagner, his reasoning was sound:

"I've been saying that the three major hurdles for Bitcoin are security, liquidity, and currency risk, and all three problems will be solved in three months, maximum. Once these hurdles are dealt with, Bitcoin will roll out as fast as Facebook has."

With StrongCoin, Wagner Criterion number one, "security," has now been met, though at a cost of one percent on outgoing transactions.

Bruce incorrectly used the term "liquidity" to mean the ease with which you could purchase Bitcoins (I've made the same mistake, myself). Regardless, it is still quite difficult to acquire Bitcoins. Inroads have been made on facilitating Bitcoin purchases, with services like BitInstant, but it's a symptom of the archaic financial system we live with that it may never become "easy" to purchase Bitcoins, especially in the United States. That being said, with improvements like Mt.Gox's arrangement with Chase Bank, it gets easier every day.

Currency risk to merchants has been mostly solved, with bit-pay, but again, at a price.

Each day we get closer to meeting all three Wagner Criteria. The three-month time frame might have been a little optimistic, but it is definitely safer, easier, and less risky to transact with Bitcoins, today, than it was when I spoke with Bruce.

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Forbes Flops Part II

How does a magazine like Forbes allow such poorly researched articles to be published to their website?

From Tim Worstall:

"Bitcoin isn’t secure as the thefts have shown, it’s not liquid, as the various price crashes have shown when one single large order goes through an exchange, it’s not widely accepted so it’s not all that good as a medium of exchange and as we’re now finding out, it’s not a good store of value either."

For most of you, I'm going to be preaching to the choir, but for the sake of the Bitcoin novice who might take Tim at his word, let's break down this paragraph:

"Bitcoin isn’t secure as the thefts have shown..."

That is analogous to saying, "the dollar isn't secure, as the bank thefts have shown." I'm not going to bother elaborating any further on that one.

"...It’s not liquid, as the various price crashes have shown when one single large order goes through an exchange..."

Bitcoin is the most liquid currency that has ever existed. Any quantity of Bitcoin can be moved instantly around the world, by anyone. You can't do that with cash, you can't even do that with digital representations of cash. You definitely can't do that with gold or silver. Your proof is a non-sequitur.

"...it’s not widely accepted so it’s not all that good as a medium of exchange..."

In 2004 you could have said, "Facebook is not widely used so it's not all that good as a social network." You would have been right... at the time. Was October 18th, 2011 the deadline for Bitcoin? Was that written down somewhere?

"...it’s not a good store of value either."

Neither was Apple stock... in March of 2000.

Regardless, this is not your parents' currency, and doesn't necessarily have to possess the properties of a traditional currency in order to succeed. Bitcoin doesn't have to store value to exist as a medium of exchange. Any ability to do so is merely icing on the cake.

Tim Worstall, your proof of "The End of Bitcoin" is only proof of your lack of foresight and inability to appreciate the most important development that the Internet has seen since email. I'd like to see a follow-up to your article this time next year, but I have a feeling you're not going to want to write about the taste of crow. I hear it's good with mint-sauce.

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