Bitcoin or Bust? Rigged Price May Crater

by Fintan Dunne, BreakForNews.com - 25th Sept, 2013 @ 7:00pmET

Sometimes, it takes a Pirate to catch a Shark.

The founder of Sweden's first Pirate Party, Rick Falkvinge, has just shown how trading 'sharks' are nosing around the Bitcoin market, repeatedly manipulating it, and picking off unwitting victims.

For example, he's found trading patterns where huge streams of bitcoin trading transactions for exactly one bitcoin, are spaced exactly five seconds apart. He's also shown streams of buy orders placed only 0.0001 bitcoin apart in price. There are coordinated transactions, where one of a team of price-manipulators is selling to another, to create the illusion of real market dynamics.

It's covert. Even on Wall St. - it's highly illegal. And it's rampant in Bitcoin trading.

Falkvinge had even found the same sucker-bait trading cycle repeating five times in sequence over recent weeks. The tactics drove the bitcoin price higher, even as it gamed other market players to enrich the shark team along the way:

As if this was not concerning enough, Falkvinge also questions how the current bitcoin price has drifted far higher than the underlying market of tangible bitcoin goods and services.

I will paraphrase/summarize his argument:

From a pool of  about 11.7 million bitcoin in circulation, a vast 3.5 million bitcoin are gambled every year on SatoshiDice and PrimeDice - the top two bitcoin gambling websites. Gambling is not representative of a currency's money supply value - but drugs and legit products and services are.

Silk Road has a reported 22 million USD in annual sales, and the BitPay clearinghouse has an annual bitcoin-economy turnover of about 60 million USD equivalent. So, let’s divide that $82 million by US money velocity, which is 1.67 on average. This gives us a total bitcoin tangible money supply value of around $50 million USD. 

Oops. Bitcoin's current money supply valuation is $142 x 11.7Million bitcoin = $1.66 Billion USD. 

So, the current value of one bitcoin, as backed by the products and services of a transactional currency, is roughly $4 - as against a current bitcoin price of $142. Oops, again.

Some of those figures are somewhat apples compared to oranges, but they do indicate the potential overvaluation problem. Imagine a market event triggering an exit scare where every $140 notional worth of bitcoin is scrambling to buy something, anything tangible out of a $4 goods and services pool.

These valuation and rigging concerns are taking place against the backdrop of a bitcoin price which has doubled since July's fade from the April 'Cyprus Crisis' high - but on thinning trading volume and with negative money flow:

April's Cyprus effect lifted the bitcoin price from sub-$20 to the region of $130 and left a heightened public interest which still registers on Google Trends. 

But the price never fell as far as it rose - and has now climbed back to the euphoric levels of May and June on modest volume and negative trending flow. Therin lies the vulnerability, heightened by the sniff of rigging in the air.

It's a long way down to that underlying $4 bitcoin pool of goods and services. 

Tread carefully. Eyes wide open.

Fintan Dunne - 25th Sept, 2013