Bitcoin has quietly reached a major milestone in its quest to reach the masses: Segregated Witness, or SegWit, the software upgrade designed to speed up Bitcoin transactions, is gaining traction. The number of transactions using the technology doubled to more than 30 percent in just the past three days, according to the SegWit.Party website, which tracks the data.
One aspect of cryptocurrencies seems to be misleading thousands of investors every day: their impressive U$ dollar market capitalization. We noticed that this metric is used heavily by investors, but there’s an elephant in the room: the numbers you see are fake.
First of all, we need to discuss how these market capitalizations are calculated, and once we do that, you’ll immediately see why crypto market caps can’t be real.
After an ICO, airdrop or a fork, new coins appear literally out of nowhere. Some are tokens that live in smart contracts in the Ethereum blockchain, others are coins that have their own blockchain, mainnets and specialized wallets. Whatever the generation process is, an X number of new coins now exist somewhere.
The first thing you need to do after a coin is created, is work hard to get it listed in one of the big crypto exchanges. Normally there’s going to be a community that believes in the new coins and have invested in the ICO (or some other generation process). This community can be rallied to vote for the new coin to be included at Binance, Bittrex and so forth.
Once accepted on a large exchange, the coin is then listed as a trading pair. Some examples are Ethereum/Bitcoin, ADA/Bitcoin and so on (note that there won’t usually be a U$/NEWCOIN pair). This new trading pair now shows up just like a traditional stock market trading system, with bids, asks and a system that matches the highest bids against the lowest asks and performs a best possible trade for investors.
But unlike traditional stock markets, instead of trading U$ for stocks, you trade one crypto for another. So instead of having trading volumes measured in U$, you’ve got volume measured in pairs of cryptos.
As you can see, there is no direct conversion to and from U$. The only cryptocurrencies referenced to the U$, Euro or any other major currencies, are the ones being directly bought or sold in those local fiat currencies. And that means 99,9% Bitcoin.
So why is it all fake?
In an exclusive interview with Binary District, Michael Perklin, an expert in digital forensic examination and head of information security architecture at ShapeShift, discussed the lack of privacy in bitcoin, security issues in storing sensitive user information, and the rapid growth of the cryptocurrency market in general.
In the interview, Perklin described bitcoin as one of the most traceable currencies on the planet, due to its lack of privacy solutions and measures.
The implementation of strict Know Your Customer (KYC) and Anti-Money Laundering (AML) systems by nearly every regulated bitcoin trading platform in the market, makes it easy for government officials and law enforcement agencies to trace the identities behind bitcoin wallets and transactions.
“By storing PII on your servers, your company accepts the risk of safeguarding it for each of your customers, and if your systems are breached you not only lose your data but that of your customers as well.”
Although media coverage depicting bitcoin as anonymous criminal money has drastically decreased since 2016, Perklin emphasized that the mainstream media continues to misrepresent bitcoin as a private currency.
“Bitcoin is one of the most traceable currencies on the planet, and contrary to media misreporting over the last few years, Bitcoin is not anonymous and offers very little privacy protection to its users”, Perklin explained. “If a user values privacy above all else, face-to-face meetings where they exchange value, products, services in private will ensure digital footprints are not left behind.”
Lecture by Yves Mersch, Member of the Executive Board of the ECB, Official Monetary and Financial Institutions Forum, London, 8 February 2018
European folklore warns of the will-o’-the-wisp, a malignant creature that dwelt in marshes. It would appear as a light in the distance, which a traveller would mistake for houses. As they reached the place where they thought the light was, it would move further ahead, drawing them deeper into the marsh to their untimely death and a watery grave. In some areas, will-o’-the-wisps were said to mark buried treasure. Investigation of the phenomenon found it was related to dissipating bubbles of marsh gas.
With the draining of marshes to make way for agricultural land, will-o’-the-wisps are rarely sighted nowadays. But there remain plenty of distant flashing lights to distract travellers with promises of riches. As with the previous incarnation, these flashing lights often turn out to be just like bubbles of marsh gas – insubstantial and foul-smelling, but also flammable and sometimes able to burn things around them.
The most recent beguiling wisps are named variously “cryptocurrencies” – to denote the use of cryptographic methods and technology – or “virtual currencies” (VCs) – to denote their lack of legal recognition. There are, at present, more than 1,500 VCs in circulation, with dozens of new schemes being launched monthly, including initial coin offerings (ICOs). Most have failed to attract users, in particular in the major currency areas. The total value outstanding has fluctuated sharply, largely from speculative activity.
The global value of all VCs is currently around a fifth of the value of all euro banknotes in circulation and around 3% of the narrow monetary aggregate M1. Of course, these figures are probably already out of date, such is the volatility of the market. Having a million dollars’ worth of Bitcoin today would have required the simple investment of three million dollars in mid-December. Because holders can hide their identity and location, it is impossible to accurately analyse VC circulation in the euro area. But euro-related activity on exchanges represents a small share of global activity, and is concentrated on a small number of users.
While VCs remained an esoteric interest, it seemed sufficient for authorities to mostly observe and issue warnings here and there. But it is the dose that makes the poison. Now that VCs may grow to be economically significant, we need to reduce the risk of negative impacts on the economy.
In my remarks today, I wish to explain what it takes for something to be considered “money” – and how VCs measure up. I will then set out what I believe are some of the key regulatory questions that need addressing, and actions that need to be taken to mitigate the potential blowback from VCs to the rest of the financial system.
A strange thing happened on the way to the decentralized digital currency revolution: a cop – a regulator – seems to have salvaged bitcoin’s giant crash. Less than 24 hours after a 65 percent drop in bitcoin’s price, hysteria from all corners, no less than one man, the Commodities Futures Trading Commission (CFTC) chair, J. Christopher Giancarlo, brought the couch-fainting, pearl-clutching community hope.
Bitcoin Hero, J. Christopher Giancarlo
No one in the ecosystem was excited that two of bitcoin’s main regulators, the Securities and Exchange Commission (SEC) and CFTC chairs were headed up to the United States Senate for a hearing in front of the Committee on Banking, Housing, and Urban Affairs. At issue was the future of regulation, and as luck would have it crypto had taken a giant dump and the US stock market dropped as well a day before. Politicians love to throw themselves between a crisis, and it being an election year, a perfect storm for headlines such as “crackdown” seemed to be brewing.
A brief history of the stablecoin
Those of you who have been following this blog for awhile may recall my deep and enduring disdain for the “stablecoin” concept, that is, the idea that it is possible for “crypto-economic” magic and game theory to ensure that a cryptocurrency can be reliably pegged to the value of some real asset without requiring a bankruptcy-remote contractual mechanism to ensure convertibility of the crypto-asset into the real deal (something mainstream finance already does extremely efficiently).
I type d that tyitle twice because I knew it was wrong the first time. Still wrong. w/e. GF’s out at a lesbian bar, BTC crashing WHY AM I HOLDING? I’LL TELL YOU WHY. It’s because I’m a bad trader and I KNOW I’M A BAD TRADER. Yeah you good traders can spot the highs and the lows pit pat piffy wing wong wang just like that and make a millino bucks sure no problem bro. Likewise the weak hands are like OH NO IT’S GOING DOWN I’M GONNA SELL he he he and then they’re like OH GOD MY ASSHOLE when the SMART traders who KNOW WHAT THE FUCK THEY’RE DOING buy back in but you know what? I’m not part of that group. When the traders buy back in I’m already part of the market capital so GUESS WHO YOU’RE CHEATING day traders NOT ME~! Those taunt threads saying “OHH YOU SHOULD HAVE SOLD” YEAH NO SHIT. NO SHIT I SHOULD HAVE SOLD. I SHOULD HAVE SOLD MOMENTS BEFORE EVERY SELL AND BOUGHT MOMENTS BEFORE EVERY BUY BUT YOU KNOW WHAT NOT EVERYBODY IS AS COOL AS YOU. You only sell in a bear market if you are a good day trader or an illusioned noob. The people inbetween hold. In a zero-sum game such as this, traders can only take your money if you sell.
so i’ve had some whiskey
actually on the bottle it’s spelled whisky
(but only if it’s payable in BTC)
There are similarities between this week’s crypto and markets routs. Bitcoin has been a plaything for risk-hungry traders and punters rather than a widely held investment or real-world currency. It’s been shunned by banks and banned by governments.
Yet it’s still possible that its slide on Monday made the broader market selloff worse, as investors sold assets to compensate for crypto-losses. Marginal as this may be, and you can’t be certain of correlation with something as unstable as digital currencies, it’s a link that’s at least worth exploring.
The past 24 hours have shown a surprising resemblance between Bitcoin’s behavior and the world’s more established financial markets. A chart of Bitcoin’s price plotted against S&P 500 E-Mini futures shows how both moved in similar formation when the selloff reached a trough and a mini-rebound began.
The corrections are similar, with both back to levels last seen in November. A regression analysis of the past two years shows a correlation of 0.7 between Bitcoin’s price and the S&P 500 Index, where 0 is the weakest correlation and 1 the strongest. Over a year, the correlation is 0.8.
This is pretty unexpected, considering that Bitcoin is essentially just a piece of code.