We have seen plenty of drama lately in the Bitcoin arena. Technological questions aside, it is time to re-evaluate the involvement in a market with looming roller coaster dynamics.
Originally, our motivation to favor cryptocurrency over other asset classes as a subject to automated trading, resulted from these four considerations:
- Bitcoin exchanges like Bitstamp or Gemini are easily accessible from a software developers point of view. They have modern, well maintained and well documented APIs, and you don’t need to work for a financial services institution to receive access.
- The trading hours are 24×7, so the trading bot does not run idle 2/3 of the time, which seems like a waste of resources.
- Cryptocurrencies are cool. I don’t blame you if you beg to differ, with Bitcoin going more and more mainstream nowadays. But back in 2014 there was no dispute about it being the coolest thing since the UNIVAC 9000 series.
- Little regulation. Don’t get me wrong: Regulation is a very very very good thing. After the 2010 flash crash, regulators in all major markets started to look very closely on automated trading, and put sensible restrictions in place. Since then we have seen a few more flash crashes, but non of them was nearly as severe as the 2010 incident. And this was certainly not due to a more responsible behavior of the market participants. So regulation is a good thing. But that said, if automated trading is what you want to do, it complicates your life. In German law, Bitcoin is neither a currency nor a security, so it is mostly unregulated, which made our project a little easier.
The last point was originally an advantage, but it seems to turn into a hassle now, because as it stands today, the market seems to go crazy. This is a problem, because it becomes inherently unpredictable.
It might not be obvious, but with a deep neural network the predictive performance, at the end of the day, still depends on the ability to find statistical relationships, however hidden and convoluted they might be. In a market with constantly changing influencing factors, these interrelations are hard to find, even under normal conditions. Add craziness as another complexity layer and your neural network’s only output will be white noise. At least with mine, this is the case.
So what can we do?
I hear many people talking about tulips lately. They refer, of cause, to the Tulip mania in the early 17th century. They point out parallels of today’s Bitcoin exchange rate to the historic tulip prices, to point out that Bitcoin is a case of an irrationally inflated bubble that is doomed to burst.
Indeed there seems to be a good portion of irrationality. In the past, whenever we saw a hike in the Bitcoin price, it came with an obvious explanation: The disappropriation of Russian bank customers in Cyprus; the Indian demonetarization policy; gambling in China. The last event in this series was the cancelled hard fork in November. Although the problem addressed by the proposed fork has not been solved yet by any means, since then the price has more then tripled. I don’t believe, that many of the buyers have a firm grasp of blockchain hard forks. It just does not justify the latest price hike.
Use this finding as input for a little ducktesting, and you will likely come to the conclusion that we are, in fact, dealing with a bad case of a speculative bubble.
So is this the time to abandon Bitcoin and blockchain technology and move on the the next cool thing? Or walk back to something more conservative?
Let’s come back to the tulips: What happened after the bubble has burst? Take a walk through almost any neighborhood in almost any western community, and you see, that, while the tulip bubble is gone, the tulips are still there. They can be found in most private and public gardens. They cover a significant share of the land surface of the Netherlands and represent a small but notable share of the Dutch economy.
To me, this looks like a blueprint for the further way of Bitcoin. The current craze has the beautiful side effect, that for the first time people with no immediate need and no interest in the technology, create Bitcoin wallets and acquire cryptocurrency. No matter if the price stabilizes at the current level or it crashes and then stabilizes at a much lower level: The wallets will still be there and people will still own Bitcoin and know a lot more about it then a few months ago.
No matter how this ends: When it’s over, Bitcoin will likely be ubiquitous in more and more areas, like tulips are today. We might finally enter a phase where Bitcoin will be used the intended way: as a currency.
As a conclusion: This is not the time to leave the field of Bitcoin. If anything it is a good time to enter the area of cryptocurrencies and blockchain technology, because no matter if the current market is a bubble or just very healthy growth: It will contribute to a much broader use of the technology in the next few years.