Bitcoin Flash Crash… Really? I Mean Really?


Paypal, Visa, Amex, and Matercard are all third party payment mechanisms. But what are Bitcoins? Listen to Bloomberg’s Cris Valerio describe them in this video: Virtual Currency Bitcoin Rises in Usage and Value. And Tracy Alloway of FT Alphaville describes them in this blog, complete with George Clooney tie-in.


Bitcoins are an attempt to cut out those middlemen, and they are the world’s first virtual currency. They are the brainchild of high speed computing wizards and geeks who use powerful computers to solve complex math problems. Their value depends on no central bank. They are worth exactly what folks trade it for online, and are dependent solely on that confidence online. They are also untraceable. Bitcoins trade just like stocks, and if you can believe it, on many different “exchanges”, like MTGox for example.


Have you heard enough about Bitcoins? Are you getting a feeling of Déjà vu? You should! It’s been a wild couple of months for Bitcoin traders. Between April and June, the currency rose from a dollar to more than $30, fell back to $10, and rose again to $20. It was at $17 at the beginning of this weekend before a string of bad news pushed it down again. Get this. Bitcoins flash-crashed, due to compromised accounts, hackers, and malfeasance.


Everything about this product runs parallel with the “evolution” of HFT in our capital markets. You have heard us opine that the HFT traders couldn’t care less about the companies they are trading. They don’t even know the names of the securities or their industries. They HFT “market makers” might just as well be flipping Citigroup, Bank of America, Ford, currencies, bonds, CDS swaps, baseball cards, or bitcoins. And for the magical benefits the HFT robots bless us with, they come with a price. Risk. Risk of volatility. Risk of crashes. Risk of fraud.


So jump right into the Bitcoin craze; we are sure you can trade them soon through the online broker of your choice. You are protected. The Regs are on it. I think.