I don't understand why a Magic the Gathering site is the big exchange still, and yet people keep creating wallet providers (which is kind of cookie cutter and inessential), vs. an exchange (which is inherently centralized, very technical vs. UI/UX centric, security sensitive, technically interesting, and a natural monopoly). There's some value in being a wallet provider with great funding/redemption options, but that's a hard business which touches a lot of regulation and legacy banking.
I think the big opportunities in BTC are: hardware/trusted wallets, trusted cloud-hosted wallets, an exchange provider, and most interestingly, derivative issues (currencies, instruments, contracts) with BTC as the underlying. Not "yet another web wallet provider".
A wallet provider is essentially retail. An exchange is where wallet providers should be going to offload risk, ideally with the exchange itself taking zero risk; let market makers do it. The only thing the exchange needs to do is publish prices and handle execution/settlement (which is trickier due to the lack of a "bitcoin-USD", "bitcoin-JPY", etc., but can be approximated by retaining USD, JPY, etc. balances on account.
I don't understand why a Magic the Gathering site is the big exchange still...
I think you answer your own question:
...an exchange (which is inherently... a natural monopoly)
MtGox would have to stumble very, very hard to create an opening for another exchange, which would have high start-up costs (because of those interesting security and technical challenges). If you were sufficiently deep-pocketed and bullish on Bitcoin, sure, but most are chasing lower-hanging fruit without an incumbent leader in a natural monopoly role.
I'd agree that wallet provision is a weak opportunity, except perhaps as part one of some deeper strategy.
I think some are attempting to take on MtGox obliquely: Ripple/OpenCoin via its network's distributed books and TradeHill via its recently-restarted professional investor services.
The security and technical challenges aren't as high as most people seem to think and are pretty familiar to people who work on the technical side of trading in the financial world. I would imagine though that most of the people with the knowhow are already in jobs lucrative enough that theres little incentive to write a BTC exchange.
Or at least that's how my calculations go - while I've got the technical and financial background to make me tempted to write a derivatives platform for BTC, I already make a decent salary and my perceived risk vs profit calculation doesn't work out to a number that would make it worth my while. Unless I get bored enough to do it anyway!
Exactly! Your unwillingness to solve those challenges on the cheap, against an entrenched and well-funded leader, is what creates the "high start-up costs".
I don't think they'd be quite as hard to displace as people assume either. I've not spent very long looking at MtGox but I'm sure that all the usual tricks that real-world exchanges use to boost usage would work against MtGox as well - offering tighter spreads, lower transaction fees, encouraging market makers with incentives such as refunded fees as long as they're covering the market for a certain portion of the month, etc.
I'd fight for a position which has a natural monopoly even if there's an incumbent in the space if the incumbent isn't particularly strong. If BTC becomes 100x bigger, MtGox's current position doesn't matter much. If BTC (or other cryptocurrency in general) doesn't get 100x bigger, it doesn't matter and both MtGox and a new competitor will fail/be irrelevant.
I suppose it all hinges on how 'particularly strong' you think the incumbent is. I think MtGox is quite strong: they've survived a number of trials-by-fire, they've grown with Bitcoin, they're the most-linked place in 'how to buy' guides, they're the default source of 'the price'. People who view 'the oldest' as 'the safest' (a popular and not bad folk heuristic) will always lean toward MtGox.
The transition to CoinLab management is a risk factor, but is likely invisible to most people. If it goes off without a hitch, the new links with silicon valley capital will mean any well-funded assault would be answered with a well-funded defense.
> MtGox would have to stumble very, very hard to create an opening for another exchange
That's not true. Largest BTC2PLN exchange bitomat.pl lost it's wallet about two years ago. Mtgox bought them with their customers, covered for the mishap and started trading in PLN with very convenient PLN money transfers. In the meantime another exchange was created bitchange.pl but after bitcoin price crash it was closed. It was reborn with same software as pln.bitcurex.pl and now has larger volume of BTC2PLN trade than mtgox. It doesn't take fee on trades though.
Of course they're possible... but they'll be fighting for scraps compared to the market leader with the deepest book and longest history.
The existence of an exchange operating without fees, at a domain (pln.bitcurex.pl) I can't currently resolve, based on software that once lost the operators' wallet, doesn't seem like a MtGox-killer to me.
Bitomat lost its wallet and got bought by mtgox.Bitchange just closed an got reborn with same software as bicurex after a while. And it has more volume in PLN than mtgox. Probably due to the lack of trade fees (there are only small fees on withdrawals). It's also faster to get your money out of bitcurex than mtgox.
IIRC, the founder of Mtgox, the Bitcoin exchange, is not the same person as the founder of the "Magic the Gathering Online Exchange." The domain was transferred.
from http://www.theverge.com/2013/4/1/4154500/mt-gox-barons-of-bi...
"Karpeles bought the site in 2011 from its founder, Jed McCaleb, also known for developing the infamous video-sharing site eDonkey. McCaleb originally started Mt. Gox as an exchange for Magic: The Gathering playing cards, which explains its odd name, but his growing interest in Bitcoin soon surpassed his affinity for Magic. Seeing the need for a central exchange where users could match buy and sell orders, he converted Mt. Gox to a Bitcoin exchange in 2010."
I'd be concerned about the legal angle of running an exchange. Can you just create one or are they regulated? I know it would be different for each region, but at what point does it change from being a web app to something of significant interest a country's financial regulators?
As has been said, a wallet is easy and could be run with minimal effort as a side project. I think you'd need a lot more than technical knowledge to be able to manage an exchange.
I could do a fully US licensed one (via CFTC, not SEC) for $500k in legal compliance and ~$2-3mm in dev/ops costs. Costs would be about 25% of that overseas (again, fully licensed by local regulators; at minimum a "no action" private letter ruling that you're not a banking institution (since you don't make loans/take deposits), but just a financial service provider like a traditional currency exchange, but much more ideally a fully recognized financial market with participants).
I really don't understand how MtGox's trading engine "lag" gets up to hundreds of seconds. How is matching up buy/sell orders at all a computationally difficult problem? The volume is tiny compared to normal stock exchanges.
Comments
MtGox seems like the weakest link in Bitcoin.
I don't understand why a Magic the Gathering site is the big exchange still, and yet people keep creating wallet providers (which is kind of cookie cutter and inessential), vs. an exchange (which is inherently centralized, very technical vs. UI/UX centric, security sensitive, technically interesting, and a natural monopoly). There's some value in being a wallet provider with great funding/redemption options, but that's a hard business which touches a lot of regulation and legacy banking.
I think the big opportunities in BTC are: hardware/trusted wallets, trusted cloud-hosted wallets, an exchange provider, and most interestingly, derivative issues (currencies, instruments, contracts) with BTC as the underlying. Not "yet another web wallet provider".
A wallet provider is essentially retail. An exchange is where wallet providers should be going to offload risk, ideally with the exchange itself taking zero risk; let market makers do it. The only thing the exchange needs to do is publish prices and handle execution/settlement (which is trickier due to the lack of a "bitcoin-USD", "bitcoin-JPY", etc., but can be approximated by retaining USD, JPY, etc. balances on account.
I don't understand why a Magic the Gathering site is the big exchange still...
I think you answer your own question:
...an exchange (which is inherently... a natural monopoly)
MtGox would have to stumble very, very hard to create an opening for another exchange, which would have high start-up costs (because of those interesting security and technical challenges). If you were sufficiently deep-pocketed and bullish on Bitcoin, sure, but most are chasing lower-hanging fruit without an incumbent leader in a natural monopoly role.
I'd agree that wallet provision is a weak opportunity, except perhaps as part one of some deeper strategy.
I think some are attempting to take on MtGox obliquely: Ripple/OpenCoin via its network's distributed books and TradeHill via its recently-restarted professional investor services.
The security and technical challenges aren't as high as most people seem to think and are pretty familiar to people who work on the technical side of trading in the financial world. I would imagine though that most of the people with the knowhow are already in jobs lucrative enough that theres little incentive to write a BTC exchange.
Or at least that's how my calculations go - while I've got the technical and financial background to make me tempted to write a derivatives platform for BTC, I already make a decent salary and my perceived risk vs profit calculation doesn't work out to a number that would make it worth my while. Unless I get bored enough to do it anyway!
Exactly! Your unwillingness to solve those challenges on the cheap, against an entrenched and well-funded leader, is what creates the "high start-up costs".
I don't think they'd be quite as hard to displace as people assume either. I've not spent very long looking at MtGox but I'm sure that all the usual tricks that real-world exchanges use to boost usage would work against MtGox as well - offering tighter spreads, lower transaction fees, encouraging market makers with incentives such as refunded fees as long as they're covering the market for a certain portion of the month, etc.
I'd fight for a position which has a natural monopoly even if there's an incumbent in the space if the incumbent isn't particularly strong. If BTC becomes 100x bigger, MtGox's current position doesn't matter much. If BTC (or other cryptocurrency in general) doesn't get 100x bigger, it doesn't matter and both MtGox and a new competitor will fail/be irrelevant.
I suppose it all hinges on how 'particularly strong' you think the incumbent is. I think MtGox is quite strong: they've survived a number of trials-by-fire, they've grown with Bitcoin, they're the most-linked place in 'how to buy' guides, they're the default source of 'the price'. People who view 'the oldest' as 'the safest' (a popular and not bad folk heuristic) will always lean toward MtGox.
The transition to CoinLab management is a risk factor, but is likely invisible to most people. If it goes off without a hitch, the new links with silicon valley capital will mean any well-funded assault would be answered with a well-funded defense.
> MtGox would have to stumble very, very hard to create an opening for another exchange
That's not true. Largest BTC2PLN exchange bitomat.pl lost it's wallet about two years ago. Mtgox bought them with their customers, covered for the mishap and started trading in PLN with very convenient PLN money transfers. In the meantime another exchange was created bitchange.pl but after bitcoin price crash it was closed. It was reborn with same software as pln.bitcurex.pl and now has larger volume of BTC2PLN trade than mtgox. It doesn't take fee on trades though.
So multiple exchanges are possible.
Of course they're possible... but they'll be fighting for scraps compared to the market leader with the deepest book and longest history.
The existence of an exchange operating without fees, at a domain (pln.bitcurex.pl) I can't currently resolve, based on software that once lost the operators' wallet, doesn't seem like a MtGox-killer to me.
Bitomat lost its wallet and got bought by mtgox.Bitchange just closed an got reborn with same software as bicurex after a while. And it has more volume in PLN than mtgox. Probably due to the lack of trade fees (there are only small fees on withdrawals). It's also faster to get your money out of bitcurex than mtgox.
IIRC, the founder of Mtgox, the Bitcoin exchange, is not the same person as the founder of the "Magic the Gathering Online Exchange." The domain was transferred.
from http://www.theverge.com/2013/4/1/4154500/mt-gox-barons-of-bi... "Karpeles bought the site in 2011 from its founder, Jed McCaleb, also known for developing the infamous video-sharing site eDonkey. McCaleb originally started Mt. Gox as an exchange for Magic: The Gathering playing cards, which explains its odd name, but his growing interest in Bitcoin soon surpassed his affinity for Magic. Seeing the need for a central exchange where users could match buy and sell orders, he converted Mt. Gox to a Bitcoin exchange in 2010."
MtGox is supposed to be replaced by CoinLab (which will still be called MtGox but will apparently be a completely different backend) any day now.
I'd be concerned about the legal angle of running an exchange. Can you just create one or are they regulated? I know it would be different for each region, but at what point does it change from being a web app to something of significant interest a country's financial regulators?
As has been said, a wallet is easy and could be run with minimal effort as a side project. I think you'd need a lot more than technical knowledge to be able to manage an exchange.
I could do a fully US licensed one (via CFTC, not SEC) for $500k in legal compliance and ~$2-3mm in dev/ops costs. Costs would be about 25% of that overseas (again, fully licensed by local regulators; at minimum a "no action" private letter ruling that you're not a banking institution (since you don't make loans/take deposits), but just a financial service provider like a traditional currency exchange, but much more ideally a fully recognized financial market with participants).
(IANAL of course, and IANAS7)
I really don't understand how MtGox's trading engine "lag" gets up to hundreds of seconds. How is matching up buy/sell orders at all a computationally difficult problem? The volume is tiny compared to normal stock exchanges.