Bitcoin Exposed: Today's Complete Guide to Tomorrow's Currency (8 page)

The big shut down though, occurred on April 3, 2013 and April 11, 2013. There was no technical difficulty. Instead, Mtgox decided to cool the market instead of allowing it to trade free.

Bitcoin has had several code problems in which there were unverifiable Bitcoins within the network. The first and worst incident occurred shortly after Bitcoin came into existence. In August 2010 over 184 million BTC were generated in a transaction and sent to a few addresses in the network. They were soon spotted as false Bitcoins (BTC), the flaw in the code that created the false BTC was corrected, and within hours the network was back up.

On March 13, 2013 there was a split in the block chain as a result of a large number of blocks created that did not match with previous ones because of a difference in software and the size of the blocks created. This resulted in two sets of block chains depending on the version of the software 0.7 or 0.8 being run. The developers working with Bitcoin.org resolved this split by agreeing to use the 0.7 version and all the transactions checked against that block chain. Even after a 23% drop in Bitcoin value due to this split, Bitcoin bounced back.

The lesson though, is that Bitcoin can have problems with the core code. We all know our computers are not fool proof. Such is the issue with Bitcoin.

Prominent Attacks, Scammers, And Bottlenecks

The cryptographic code for Bitcoin is virtually impossible to crack. That brings all the focus for hackers to use more basic brute force methods of shutting down exchanges and getting Bitcoins.

A DDoS is a Distributed-Denial-of-Service attack that sends huge numbers of bot data visitors that overload servers. When an exchange gets hit, inevitably the value of Bitcoins tumbles. This alone would provide enough profit to motivate hackers to crash exchanges for cleaning up the now devalued BTC's. When the exchange gets back up and running, the value of BTC's climb and the hackers have their pay day- possibly. It is also possible that the hackers simply want to crash the service.

InstaWallet was crashed by a similar attack and never recovered.

Other possible attacks:

Government regulations attempt to restrict access to exchanges, label it an investment, or that it is trying to be a currency that threatens the government monopoly. All these fall under Financial Crimes Enforcement Network (FinCEN):

This black boot agency putting a damper on our monetary freedom is saying:

Users of Bitcoins do not fall under FinCEN rules, but any exchange or wallet services do! They are known as MSB's or money services businesses. This means that any service that transfers, exchanges, stores, or interacts with Bitcoins on a per fee basis, could eventually be the target of the U.S. treasury, FBI, IRS, and any other agency that chooses to participate.

This represents the greatest threat against Bitcoin. Our mystery developers behind Bitcoin saw this attack coming. Their answer was to distribute the ability to exchange Bitcoin. They built in a “black market.” What they really built in - was freedom for free people to transact without anyone else knowing about it, taxing it, or being able to stop it.

There is no way short of taking down the Internet and/or power grid for the government to fully stop Bitcoin. That won't necessarily stop them from trying, however.

Profiting With Bitcoins

“
Civilization and profit go hand in hand.”

Calvin Coolidge

Successfully trading in any market requires serious study, a keen ability for pattern recognition, and deep knowledge of historical trends and evaluation systems. This section covers the basics of trading only.

Surprisingly, applying basic trading principles often produces the largest profits. More sophisticated trading techniques, sometimes called scalping systems, require more effort and yield small profits, if any at all.

We will proceed from the simple mechanics of buying and selling Bitcoins, to decision criteria for when to buy or sell (the essence of trading), all the way through Bitcoin trading robots or trading services.

Trading Bitcoins

We can buy or sell Bitcoins with anyone who is willing to transact with us. For instance, we could buy Bitcoins locally with localBitcoin.com

Here is a sample screen:

Notice a few interesting and critical developments in this market:

1. Online prices are more consistent, as we would expect.

2. Local prices are both over and under the online price.

3. There is as much as a 24% difference between the lowest and highest prices approximately. Ignore the wild $256.20/BTC. Everyone else will.

This is key information for day trading scenarios. We could conceivably buy Bitcoins for $122.96 in lots up to $1000. Then we could sell them all day long for $140.81. 

Our profit works out to about 8 x $17 = $136 (We will neglect gas costs, and buying fractional amounts of Bitcoins)

We could also simply buy Bitcoins online and then sell them locally for a small mark-up. This seems to be the simple trading system of choice for the $153 and $147 sellers.

All we need to do is follow the early steps described in the section How to Use Bitcoins. Briefly, we buy Bitcoins using our Dwolla, Coinbase, Blockchain, or other wallet with a custom produced address from a Bitcoin exchange. We can choose MtGox, Bitcoin-24, Bitcoin7, or others.

Then we sign-up for LocalBitcoin. Post our price on their “Sell Bitcoins” section, and we are in the Bitcoin trading business. While this “arbitrage” method of trading can deliver a reasonable profit, there are bigger profits available for more aggressive profit seekers.

Our best opportunity for trading with Bitcoins involves online only trading. We will buy BTC with our national currency through a trading exchange, and then sell BTC for either our own national currency, or another national currency.

Switching currencies may not be allowed on certain exchanges or in certain countries. Switching currencies between the buy side and sell side of our trade can also add significant complication to our trade. A better move is to stick with one national currency unless we are experienced with FOREX trading already.

Here is what a BTC Buy Order with MtGox looks like for a new account that has not been funded yet:

We can enter any amount under “Amount of BTC to BUY” that we have funded. For this new account, that is $0.00. It could be initially as high as $4000 for most new accounts. Some exchanges have no limits, and some have staged limits over time.

The “Price per coin in USD” is set automatically here at 127 and change. It will move up or down as we wait to execute the order. This is extremely important to consider. Speed, timing, and execution all affect the price we pay.

After we enter the Amount of BTC to Buy, hit the BUY button, there will be a lag sometimes, but often the order gets executed immediately.

Presto! We are a Bitcoin trader!

Now, for the nuts and bolts of selling Bitcoins, much is the same in terms of fields, with a key difference. When we sell Bitcoins, the exchange takes a slice of the transaction in the form of a reduced selling price. Other exchanges operate differently.

The difference between the BTC Buy price and the BTC Sell price is called the “spread.” It is also sometimes known as the Bid/Ask spread. Bid for what buyers are willing to pay, and Ask for what sellers are willing to sell at.

For this case the BUY/SELL is about $0.40 USD. Not a large spread, amounting to less than 0.5% of the trade.

The good news here is that trading Bitcoins is not administratively expensive. The In/Out costs or round trip are less than 1% of the trade, and often free. Some stock, options, and commodities traders can see In/Out costs between bid/ask, commissions, and exchange fees of closer to 3% or higher.

Trading on other Bitcoin exchanges operates in a similar fashion to MtGox.

This is all manual entry trading, not automated or computerized trading. Manual trading can deliver fantastic returns so long as we time our trades and our directions correctly. That is the focus of the next section - answering the question of up or down and when.

General Trading Principles For Bitcoin

Trading technicians focus on three general trends:

First, and most importantly, is the
macro
or
long-term
trend. This is also referred to as a
secular
trend.

Second, is the medium or primary term trend. Third, is the micro, secondary, or short-term trend.

These terms refer to different time periods for different markets, but roughly speaking they break down as follows:

Macro/Secular is for greater than 5 years and usually less than 25 years. Gold and silver were in a secular or macro bull market from 1970's into 1980.

Primary/Medium term trends run for a year or more, but not generally longer than 4 years. The U.S. general stock market as shown by the S&P500 has been in a secondary bull market for several years.

Micro/Secondary trends run less than a year and often refer to moves lasting a few weeks or months. The recent dip in the U.S. stock market is probably a micro bear or down trending market. When it reverses and goes higher, it will confirm that this was a secondary down trend and not a switch to a secular bear market.

All of this seems simple until we have to make the up or down decision. We need only get one decision correct for making a great trade. So, what is the secular or macro trend for Bitcoins relative to our national currency?