ChristianKl comments on A proposed inefficiency in the Bitcoin markets - Less Wrong

3 Post author: Liron 27 December 2013 03:48AM

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Comment author: John_Maxwell_IV 27 December 2013 07:34:31AM *  8 points [-]

The book Fortune's Formula describes a simple investing scheme invented by Claude Shannon, referred to as "Shannon's Demon", that's specifically designed to make money in markets described by log random walks. I found a blog post describing the scheme here. (Some previous discussion.) I'd expect this kind of volatility harvesting scheme to work better for Bitcoins than for other assets because Bitcoins are more volatile.

However, I'm not convinced that the market for Bitcoins is efficient... for example, there are going to be 84 million Litecoins to Bitcoins' 21 million, but typical investors don't know that, so 4 Litecoins for $100 feels like more of a steal than 1 Bitcoin for $100 (even Silicon Valley software engineers commonly forget to account for this basic division operation). There was talk on /r/bitcoin about how once the price got to the $1000 range, people seemed reluctant to invest since it seemed so expensive and how things should be reframed as "mBTC". And I'd expect that quant firms are reluctant to trade bitcoins due to factors like institutional regulation and it not being serious-seeming enough for themselves or their investors.

Comment author: ChristianKl 27 December 2013 03:28:07PM 4 points [-]

However, I'm not convinced that the market for Bitcoins is efficient... for example, there are going to be 84 million Litecoins to Bitcoins' 21 million, but typical investors don't know that, so 4 Litecoins for $100 feels like more of a steal than 1 Bitcoin for $100

There no reason at all to believe that the total value of Litecoins should have an easy relationship to Bitcoins. Bitcoin has much more infrastructure for real world usage behind it.

Comment author: John_Maxwell_IV 27 December 2013 11:49:22PM 3 points [-]

I agree, I'm just arguing that typical investors are not valuing either currency rationally and "failure to account for the denominator" is an argument in favor of this position.