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Bitcoin Series Addendum - Market Structure


  • In my previous Bitcoin series, I left out an important detail.
  • It concerns the market structure, which has become very relevant in the last few days.
  • This article describes the implications for investors and what they can do about it.

I had thought my Bitcoin series, starting with "Bitcoin Series #1 - The Basics," was pretty comprehensive. However, it appears as if I forgot to include something very important. This "something" has actually been showing its extreme effects during the last few days.

What I forgot to include is Bitcoin's market structure. What do I mean by that? Well, overwhelmingly, bitcoin is traded on bitcoin exchanges. There are thousands of these markets, but within those, a few are a lot more relevant than others. For instance, these were the markets with the highest volume in the last 24 hours:

Source: Coinmarketcap.com

So here's the thing: Each of these markets does not communicate with the others. What does this mean? It means that buyers/sellers on each exchange are reliant on bids/asks exclusively from other members trading on the very same exchange.

Now, that doesn't seem all that different from what happens with stocks in countries like the U.S., with all kinds of markets and ECNs, does it? But it really is massively different.

That's because with stocks, a broker can quickly reroute his orders from one exchange to the other. The depositary/custodian of his stockholdings is not the exchange. With bitcoin, it's different. The exchange is also the depositary of one's bitcoin holdings (at least when they're primed to be traded). And to reroute their selling orders from one exchange to the next, investors would have to:

  • Withdraw their bitcoin from one exchange's wallet to their own wallet.
  • Deposit their bitcoin from their wallet into the other exchange's wallet.

With bitcoin, these things take a lot of time (and some expense). Just to get their bitcoin from the first exchange, and beyond any timing overhead for exchange processing, investors (and the exchange) will need confirmation that the transaction has been committed to the Bitcoin blockchain. That takes up

This article was written by

Paulo Santos profile picture
Leader of Idea Generator
Our goal is to beat the S&P500 and to provide consistent positive returns.

Portuguese independent trader and analyst. I have worked for both sell side (brokerage) and buy side (fund management) institutions. I've been investing professionally for around 30 years.

I have a Marketplace service here on Seeking Alpha called Idea Generator that's focused on deep value, real-time actionable ideas based on valuation and catalysts. The Idea Generator portfolio has beaten the S&P 500 by more than 74% since inception (2015).

I can be reached at paulo.santosATthinkfn.com.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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