Can you corner the Bitcoin market?

What is cornering?

First thing first, cornering a market is in short trying to game the system and push up the price of an asset so as to profit from the price distortion. This is done by having monopolistic power in the market place, whether or not you are a monopoly. The important thing is to be the biggest player on the field.

Wikipedia defines it as “getting sufficient control of an asset to allow the price to be manipulated, or, to have the greatest market share in a particular industry without having a monopoly.”

What is Bitcoin?

Bitcoin is a virtual currency, digital currency and/or crypto-currency that was created by a mystery guy as a means of payment or possible store of value that is free from control of governments and therefore avoid the perceived flaws of the current financial system and use of fiat currencies. This may or may not be the case, and unless we can speak to the original creator, the real purpose that this technology is supposed to serve is open to interpretations.

New bitcoins are created or mined using specialized software and hardware built for this sole purpose. The difficulty and therefore the duration of mining the next coin increases exponentially with the total amount capped at 21 million. There are many other virtual currencies popping up but bitcoin still dominates in terms of acceptability and usage.

Whether bitcoin is considered an asset or a currency is open for debate and we are not doing it here. Points to note are that the price of it in USD or any countries currency varies wildly and there is a fixed amount of it, at least for now. Currently, about 12 to 13 million had being mined out of a possible 21 million. The value of a bitcoin is still defined by fiat currencies.

At the time of writing, the price of bitcoin has been hit hard by the collapse of Mt. Gox and the recent announcement from IRAS that defines bitcoin as an asset and subjected to tax. The 30 day price range is USD 436 to USD 710 and about 12.6 million coins were mined so far as informed by the bitcoincharts website.

Can it be cornered?

I will start by estimating the amount of financial resources needed to pull this off.

Assuming the price is fixed at USD 500, the total value of the coins in circulation will be about USD 6 Billion. So Bill Gates can spare less than 5% of his net worth and owns half of all the bitcoins out there.

However, in the course of buying up the Bitcoin, he will need to pay a higher and higher price as the supply on the market dwindles. Let’s assume a price sensitivity of 20% per million Bitcoin supply reduction.

By the time he intends to buy the 6th million of Bitcoins, price would have probably hit USD 1,245, and that was assuming a linear increment in prices. An exponential increase would be more likely.

His attempt to get 6 million bitcoins or half of all bitcoins in circulation now will most likely cost about 4.9 to 6.5 billion USD.

bitcoin corner cost

On the other hand, if the prices are so sensitive to buying pressure, then it might make sense to cash out earlier. A peculiar difference from other valuable commodities like gold or diamond is that, while they are scare, there isn’t a hard figure to the total amount present. Bitcoin on the other hand has a fixed amount at 21 million. Would price be compelled to move at the same velocity both up and down?

Problems with executing an effective corner of bitcoin

Another factor that might affect the success of such a scheme is the impact of such an event on the confidence of the new currency itself. The extreme price gyrations might force weak hands to exit the market altogether. There will also be very few means of controlling or negating such an event as compared to other market cornering episodes in history.

Past cornering attempts often involved lots of leverage which will force the perpetrator to liquidate due to cash flow or liquidity problems, like what happened to the Hunt brothers and their silver corner. Bitcoin’s decentralized nature also meant that there is little the state can do to counter the effects. For example, by announcing a market freeze, forced liquidation of positions or other regulatory tools available to the state in other financial or asset markets.

This in fact can also act as an argument as to why the bitcoin market cannot be cornered. Up until now, putting illegal trades aside, most business owners who accept bitcoins as payment have the freedom to accept any other fiat currencies in circulation as payment. It would be unlikely for customers to pay for a cup of coffee in bitcoin if they can buy it at USD 5 instead of using bitcoins worth USD 7 for example. In short, people can simply not buy more bitcoins to use as a payment tool until the price has fallen to an acceptable level.

So can it be cornered or what?

It can of course be done by anyone or any parties who are willing to commit vast amounts of capital but the probability of success is actually lower and profit potential subdued simply because as a payment tool, there are plenty of substitutes out there (fiat currencies) or as a store of value (gold, diamonds, and other rare goods). Bitcoin is basically a commodity that has no ‘natural users’ or consumers of it to make it a must have item in contrast to copper for example, which has a real world usage of it.

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