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Hong Kong-based Bitcoin exchange Bitfinex customers lose 120K BTC


Bitcoin reporting continues to be as vague as the average persons understanding of Blockchain. Nonetheless this loss will be closely followed. The last big loss was 2 years~ ago at MtGox in Japan, and that resulted in the exchange being shut down.

Following MtGox closing in bankruptcy, here are the reasons according to Wired:

But on the inside, according to some who were there, Mt. Gox was a messy combination of poor management, neglect, and raw inexperience.

So Coindesk are doing no-one any favours by attempting to deflect the Bitfinex loss with a mid article shift to a discussion about Bitcoin mining activity and that effect on Bitcoin prices. Interesting but not the point.

The issue is security of the Blockchain and why this new loss occurred, apparently related to social media, but with no details. Maybe this loss is something to do with phishing or someone using the same password across multiple sites. Whatever the cause it is important to elaborate very quickly if confidence in Blockchain activities is to be established. This quote hidden in the Coindesk article is critical.

Market observer and trader Jacob Eliosoff provided similar input, telling CoinDesk that the event had sparked a new wave of uncertainty.

“The big question will be how much was stolen and whether Bitfinex will make customers whole,” he said.

No-one loses money with online investing with their bank and there is a reason for that. Blockchain has many advantages, but confidence will always come back to the institution involved, and not the encryption methodology; this is entirely due to the human component, which is an unfortunate reality.

Written by Colin Henderson

August 3, 2016 at 00:35

Posted in Uncategorized

Bitcoin – what is the use case DEC_TECH


The lecture by Andreas Antonopoulos was highly entertaining with anticipated shots at banks.  In the audience of 400+ there were 6~ bankers so we were an easy target.

Apparently banks are busy developing strategies he surmises for use of the blockchain without the currency, or with normal currency.  He poo pooed that idea noting that the bitcoins and the blockchain were inseparable.

Having said all that and thoroughly enjoyed his talk I am still no wiser for the use case, let alone the business case for Bitcoin.  Some facts mentioned tonight are well known:

  • bitcoin is unsupervised with no centralized authority
  • Fintrac have indicated that standard KYC and AML checks are required on Bitcoin service providers
  • Volatility;  no real answer.  Reality of large surges in demand.
  • Standards:  there is no similar standard to PCI/DSS
  • Block chain is a ledger 
  • Bitcoin is 100% confidential although this is at odds with the stance taken by Fintrac and that remains to be sorted out

Interestingly of the 400~ people there tonight, the majority had wallets, and have made purchases.  

Antonopoulos joked about the naysayers who were obviously not in the room who see the internet as a bad place and Bitcoin as a method of complete confidentiality in purchases of dubious nature and where confidentialiity was essential.  This is one element of use case that may have relevance for some or more than we care to think about judging by the chuckles, but again there is a conflict with Fintrac and how they can manage their proposed rules.

Antonopoulos wrapped up projecting that countries can never use Bitcoin or blockchain, including his home country of Greece. His reasons for making that statement were primarily economic noting the outcome would be no different than with the Euro.  hmmm

Further he predicted an explosion in exchanges and wordwide prevalence.  He does not once however indicate the use case for Bitcoin.

So I am still left with the position taken earlier that Bitcoin is an investment first and foremost, with an unfortunate undercurrent of payment utility with dubious intent.  

There was one mention tonight early on from  Jeff (Kryptokit) who noted they are deconstructing the math part from banks. I don’t pretend to understand that passing comment, however there could be something there.  I have long speculated that Banks business model is being deconstructed piece by piece as other companies, specialists, take on those roles and do it better and more effectively.  Examples are Paypal, Lending Club, and Ripple. Perhaps there is a similar role for Bitcoin, but its not clear yet.

I shall however continue to test my assumptions and think more about this.  The sheer magnitude of tonights turnout certainly suggests strong interest amongst the tech community.

Written by Colin Henderson

March 17, 2015 at 20:43

Posted in Uncategorized

Bitcoin night at DEC_TECH | Toronto


DEC_TECH is hosting a meetup on Bitcoin tonight at MaRS in Toronto.

Guest speaker is Andreas Antonopoulos who is apparently well known in Bitcoin-land.  Looking forward to this.  More to come.

Written by Colin Henderson

March 17, 2015 at 17:26

Posted in Uncategorized

IRS determines Bitcoin is property not currency


This is a fascinating ruling on the Bitcoin argument as a currency.  The US IRS has noted that Bitcoins are not fungible, which is one of the features of cash.  Each Bitcoin is unique which also implies unique tax treatment.  Whereas cash can be together in bills or in an account and it doesn’t matter which one is spent first.

This doesn’t stop it being used as a payment medium, but it is not the same as cash.

Bitcoin Tax Ruling Credit Slips

The IRS ruled that Bitcoin and other virtual currencies are property, not currency.  This means that they are subject to capital gains taxation.  And that means that Bitcoins are not fungible.  The price at which a particular Bitcoin was acquired (and this is traceable) determines the capital gains on that particular Bitcoin when spent.  If I spend Bitcoin A, which I bought at $10, but is now worth $400, I’ve got a very different tax treatment than if I spend Bitcoin B, which I bought at $390.

Written by Colin Henderson

March 31, 2014 at 08:34

Posted in Uncategorized

All about Bitcoin | report from Jonathan Shieber from Goldman Sachs rightly separates the technology from the currency


A smart report on Bitcoin from Jonathan Shieber at Goldman Sachs.  A well researched report that involves interviews with some very smart people, and comes to what I believe is the correct conclusion.  Smart technology with promise, but never a currency.  Worth the read for those with rose coloured bitcoin glasses.

All about Bitcoin:

So what is it? The short answer is that Bitcoin with a capital “B” is a peer-to-peer network that allows for the proof and transfer of ownership without the need for a trusted third party. The unit of that network is bitcoin with a little “b”. But agreement on the topic seems to end there;indeed, there is a deep divide between true Bitcoin believers and serious skeptics. We look at the range of wildly diverging views. So where does that leave us?  With the conclusion that bitcoin likely can’t work as a currency, but some sense that the ledger-based technology that underlies it could hold promise.

Posner makes the point I did earlier that intrinsic payment support costs have not been absorbed by the Bitcoin implementation.

Posner points out that enhancing the convenience and, importantly, security of using bitcoin will most likely raise the cost of its use.

Written by Colin Henderson

March 13, 2014 at 23:44

Posted in Uncategorized

The under appreciated problem is looming for Bitcoin


It appears the disappearance of Bitcoin exchange, Mt Gox, is not a problem, at least to those who did not keep their Bitcoins there.

Fate of Mt Gox questioned after Bitcoin trading suspended

One of the protesters, London-based developer Kolin Burges, said on Tuesday that his faith in Bitcoin as an alternative payment system had not been shaken.

“If Gox is finally disappearing, it is bad news for everyone with their money in there, but good news for the rest of the industry.”

I would have to disagree and say this is a huge problem for Bitcoin.  As I have said before its a smart software market but there is no reason to trust nor rely on Bitcoin as a medium of exchange or as a currency.  it is a speculative investment run by unregulated and frankly unknown people.

Its great that Kolin Burges makes the quote above, but when $40 million [Edit:  I missed a zero –  that should have read $400 million] worth of Bitcoins disappear and 20% of the value is wiped of the market, this is a Bitcoin equivalent of Greece, except at least Greece is still around to make amends.

A few weeks ago Mt Gox announced the freeze on withdrawals.  At the time it was blamed on a software bug, but it now appears it is plain old theft by one of the owners.

I maintain that at best Bitcoin is a speculative commodity market. No amount of software smarts can make up for country based trust in a currency.  I refer to my review of Alex Paynes piece and his quote:

Silicon Valley has a seemingly endless capacity to mistake social and political problems for technological ones, and Bitcoin is just the latest example of this selective blindness

Written by Colin Henderson

February 25, 2014 at 13:48

Posted in Uncategorized

Bitcoin merchant costs–no evidence to suggest they would be cheaper


There is a growing misrepresentation about how Bircoin will change payments.  I have gone into this earlier.  But today we have a new issue.  Transaction cost.

How bitcoin makes transactions cheaper

bitcoin, I would have paid much much less than the c. 2.5% it cost me to process your credit card

Relevance to Bankwatch:

The argument made in this article is that Bitcoin merchant costs are different by not requiring a third party to validate the transaction.  This argument is made because Bitcoin is open because “It allows you to securely and anonymously transfer money to anyone, anywhere in the world”. 

Lets think that through and compare to the credit card example used. 

Payor sends money to recipient.  Recipient needs to trust payor.  How does recipient trust payor?  The post assumes that recipient is somehow magically and freely hooked into the bitcoin network.  Not so. 

Lets extrapolate to an ecommerce world where every e-commerce vendor accepts bitcoin.  This suggests two scenarios:

  1. vendors hire devs to create bitcoin integration which requires up front cost and ongoing maintenance
  2. vendors seek third party integrators, i.e. acquirer networks

History suggests option two is most likely.  Either way both options are not free.  The assumption that bitcoin is much cheaper is just that at this stage .. an assumption. 

I have complete faith in the various ecosystems to ensure a fair price is paid for something as intrinsically complex as bitcoin.  There is no evidence to suggest that price would be cheaper.

Written by Colin Henderson

January 22, 2014 at 00:24

Posted in Uncategorized

Mintchip vs Bitcoin – the perfect test of Central Bank vs P2P money


We now have a brilliant comparison in front of us between a government backed electronic currency and an internet peer to peer based one.  May the best man win.

Royal Canadian Mint demos digital currency – Mintchip

The Mint hopes that eventually Canadians will use a ‘chip’ to load value onto a device such as a smartphone, PC, tablet, or store it in the cloud, and then buy physical goods in the real world or digital content online.

IMG_0810

Bitcoin is an innovative payment network and a new kind of money

Bitcoin uses peer-to-peer technology to operate with no central authority or banks; managing transactions and the issuing of bitcoins is carried out collectively by the network. Bitcoin is open-source; its design is public, nobody owns or controls Bitcoin and everyone can take part. Through many of its unique properties, Bitcoin allows exciting uses that could not be covered by any previous payment system.

image

Relevance to Bankwatch:

I attended the release of MintChip in 2012 in Toronto, and while it was very loosely defined, despite that, I have greater confidence in it than the tightly defined Bitcoin.  Time will tell.  I have a lot of (ugly) experience with P2P.  The premise of wisdom of crowds for example is flawed. Bitcoin by its nature involves a degree of democratic vote as to things like relative power of miners.  I am immediately suspicious that my money is evaluated by other than commercial need;  that’s something I understand.

I do not see money evolving in P2P at all.  Money is fundamental and basic.  Utmost confidence is essential.

I’d love to hear views on the pros and cons here.  Weigh in please!

Written by Colin Henderson

January 14, 2014 at 00:42

Posted in Uncategorized

“Bitcoin, Magical Thinking, and Political Ideology” | Alex Payne


I recently posted my views on Bitcoin determining that it is some kind of asset class that is gradually becoming regulated as such.

Today courtesy of 7 Stories to Read this Weekend I came across this article. It is well written sometimes humorous and very deep. Worth the read.

Bitcoin, Magical Thinking, and Political Ideology  | Alex Payne

Most charitably, Bitcoin is regarded as a flawed but nonetheless worthwhile experiment, one that has unfortunately attracted outsized attention and investment before correcting any number of glaring security issues.

To those less kind, Bitcoin has become synonymous with everything wrong with Silicon Valley: a marriage of dubious technology and questionableeconomics wrapped up in a crypto-libertarian political agenda that smacks of nerds-do-it-better paternalism. With its influx of finance mercenaries, the Bitcoin community is a grim illustration of greed running roughshod over meaningful progress.

Far from a “breakthrough”, Bitcoin is viewed by many technologists as an intellectual sinkhole. A person’s sincere interest in Bitcoin is evidence that they are disconnected from the financial problems most people face whilelacking a fundamental understanding of the role and function of central banking. The only thing “profound” about Bitcoin is its community’s near-total obliviousness to reality.

And social commentary on the valley view of the world.

Silicon Valley has a seemingly endless capacity to mistake social and political problems for technological ones, and Bitcoin is just the latest example of this selective blindness. The underbanked will not be lifted out of poverty by conducting their meager daily business in a cryptocurrency rather than a fiat currency, even if Bitcoin or its ilk manages to reduce marginal transaction costs (at scale and in full regulatory compliance, that is). But then, we should note that Dixon wasn’t talking about lifting anyone out of poverty, just “offer[ing them] low-cost financial services”.

Written by Colin Henderson

December 21, 2013 at 20:33

Posted in Uncategorized

Bitcoin is an asset class, not a currency


I think there is a lot of confused thinking about Bitcoin.  I believe today it is an asset and not a currency.  That view is supported by first Germany, and now Norway.

It is admirable that many get excited about the potential for an ecommerce medium of exchange that is secure but lets dig behind the hype.

First of Ben Bernanke was quoted as suggesting it and other virtual currencies “may hold long term promise”.  Next the BofA report on Bitcoin was taken by many as the herald of the future of eCommerce.

However the hype overtook the content of those reports.  In both cases, Bernanke and BofA were very careful to discuss and frame the potential of future virtual currencies and Bernanke particularly in the context of the need for future regulation.

BofA were very clear with this comment from their report.

Bitcoin: a first assessment | Bank of America Merrill Lynch Report

However, as a unit of account and store of a value, it has considerable shortcomings which we believe will ultimately hinder it from ascending to international currency status.

In other words the hype got ahead of the facts.

image

Here are some things to consider about Bitcoin that are both pro and con relative to thinking of it as a currency:

  • interesting technology: provides a means of managing number of Bitcoin units.  If we parse that out, it is not dissimilar to gold or silver.  A finite market size means that owners are comfortable a flood of new volume will not show up and devalue their holdings. 
  • Tamper proof:  it cannot be forged and users can be sure of its existence
  • History and tracking:  as the BofA report states “the fact that all Bitcoin transactions are publically available and that every Bitcoin has a unique transaction history that cannot be altered may ultimately limit its use in the black market/underworld.”  This is an improvement over Anti Money Laundering tracking with regular currencies.
  • Market behaviour:  Bitcoin is being amassed as an investment by the current majority of users. 
  • Price volatility:  the volatility of price makes it hard to think of it as cash unless you are storing Zimbawean pounds or 1930’s German Marks.
  • Timliness:  Again referring to the BofA report “Fifty minutes is the time needed for enough additional blocks to be added to the chain to protect against double spending.”  This appears to be a technical inhabitant due to the processing and computing load required to maintain the above advantages elative to tracking, and security of your Bitcoins.

Relevance to Bankwatch:

I believe at the end of the day Bitcoin is an interesting asset and not a currency.  it is electronic gold.

The disadvantages of price volatility and timeliness are just too significant.  It reminds me of the situation during the banking crisis where eastern Europeans had mortgages denominated in other countries currencies.  I am not using this analogy to be pro or anti Bitcoin as a currency.  I use it only to make the point that any time you are transacting in something that is not what you receive as salary has deep risks, and could make the cost much different than your family budget allows.  You would not buy groceries using a futures contract in Zinc or Beef on the CME just to make an extreme point.

On timliness, making a purchase has to happen now, not in 50 minutes.

Bitcoin is an asset class. 

There are elements that are interesting, especially the digital tracking that can follow each and every Bitcoin and its history.  The capacity to manage that tracking will give even Werner Vogels (more) grey hair.  Clearly such a concept needs significant cloud computing capacity far beyond anything we have today. 

With experience and thought, there are other ways that might address the shortcomings, but the big sticker is how to address volatility of an asset that is not tied to something as rock solid as a country, and its GDP, tax base, and government rule of law.

The one thing Bitcoin has done is generate a new and different level of thought on the concept of money way beyond the usual stored value cards etc.  There is credence to the idea that and internet based medium could be safer, stronger and better.  What if our home currencies were managed this way for example?

Anyhow, that’s what I think.  How about you?

Written by Colin Henderson

December 17, 2013 at 00:55

Posted in Uncategorized

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