After remarkably low volume and volatility throughout much of August, yesterday saw one of the largest bitcoin exchange rate movements in weeks. A number of factors may have contributed, including the recent news that Germany recognized bitcoin as private money, but more interesting may be the market signals observable from the movements.
Mt Gox counterparty risk quantified
Despite their declining volume relative to the total market, Gox still handles the majority of USD/BTC trading with more than double the share of Bitstamp, their next closest competitor. As we pointed out last month, fiat withdrawal hiatuses at Mt. Gox have led to significant price disparities across exchanges. With USD clients still awaiting withdrawals since the hiatus began two months ago on June 20, many traders have looked to buy BTC on Mt. Gox so it can be withdrawn and moved elsewhere.
As the price subsequently rose on Mt. Gox relative to other exchanges, it created a quantifiable counterparty risk premium. Said differently, the price differential between exchanges shows the extra compensation required by an investor to accept USD on Gox vs USD elsewhere. Like any other financial market, riskier investments command higher return. Since the differential has grown significantly in the past weeks, it’s clear the market perceives an increasing risk of not receiving their USD from Gox in a timely manner, or perhaps ever.
Mt Gox as a leading indicator
Perhaps most interesting is that Gox has also been the clear first mover on price over the past few days, with major exchange rate movements in USD occurring on Gox well before Bitstamp, often by hours. For example, consider the market peaks hit on August 19: Gox reached a peak of $123.74 at 07:55, Bitstamp reached a peak of $105.16 at 11:17 – more than three hours later. The same trend has been true in both directions recently, with Bitstamp lagging Gox on downward trends as well. Following the peaks described, both exchanges retraced much of those gains before beginning their ascent upwards from $116 and $101 – though they did so with Gox leading the turnaround by more than an hour.
Noticed the same thing about the bitstamp delay. Seemed almost too obvious until it kept happening. Question about the counterparty risk premium: does that mean the market thinks Mt. Gox has a 14% chance of closing down?
Included in that 14% differential there are also other factors, such as account funding costs that differ somewhat with each person. Even with an isolated figure for the rate differential attributable to counterparty, it does not directly translate to implied probability of default.