
Things cryptocurrency enthusiasts probably won't tell you - pfraze
http://www.ofnumbers.com/2017/09/21/eight-things-cryptocurrency-enthusiasts-probably-wont-tell-you/
======
Animats
Well, we're about to find out if the Bitcoin exchanges in China have all the
assets they should. The PBOC told them to stop trading, turn over copies of
their records to the PBOC, and refund the balances of their customers. We
should know within days which exchanges were stealing customer assets.

The exchange executives were told not to try to leave China.

(Remember Big Vern? Paul Vernon, CEO of Cryptsy. Took the money and fled to
Liaoning, China. Started a Bitcoin exchange in China. Wanted in the US. Might
be a good time to push through diplomatic channels for the government of China
to find and return him. The PBOC investigators may have found him by now.)

~~~
dreit1
People actually knowledgable in the crypto community would have told you
literally years ago that the Chinese exchanges were shit. ChangPeng Zhao who
now runs binance out of Hong Kong, made a reddit post (now deleted) stating
exactly what was going on. The issue of exchanges "investing" client funds was
known two years ago, and most people stayed away from these exchanges.

~~~
smcl
The exchanges investing client money does not surprise me at all. I worked in
UK finance for 6 years or so where you have mandatory "CASS" training to warn
you what is and is not OK to do with client money. I remember when I first
started I was like "well _obviously_ you keep client money and assets separate
from the corporate accounts..." and _EVERY_ year in the "refresher course" our
Compliance dept gave they had new cases of banks fucking this up and getting
insane fines for it [0].

If these supposedly respectable banks managed to repeatedly do this (this is
after the financial crisis btw) then it's anyone's guess what goes on in the
Wild West that is Bitcoin exchanges. That said, the stupidity and lack of
common sense in UK financial industry continues blows my mind.

[0] - [https://www.moneymarketing.co.uk/why-the-fca-rewrote-the-
rul...](https://www.moneymarketing.co.uk/why-the-fca-rewrote-the-rules-the-
biggest-fines-for-client-money-breaches/)

~~~
blusterXY
Yes, we will see what the situation is in terms of exchange liquidity. With
that said, the reports were of exchanges investing customer-deposited RMB
funds, not selling customer-deposited crypto for fiat and then investing that
fiat for profit.

~~~
smcl
Well investing the client deposits is pretty much exactly the situation I
described. Probably could be seen as less directly scammy or intentional than
selling their assets and investing it in <pick-a-product>, but certainly still
a pretty standard client money breach

------
earlz
I think that the cryptocurrency/blockchain space is the next big thing in the
world on-par with the internet. But it still has a long way to go. In the late
90s you could say "X on the internet" and get tons of investment. Now it's the
same but with "X on the blockchain". We are going through growing pains now,
and there definitely needs to be some regulation introduced to curb the many
scams. My personal hope though is that the regulators work, not to try to stop
this industry, but rather to shape it. I mean, why do I need to make $1M/year
in order to prove to the US government that I'm worthy of investing into a
startup. This is why ICOs are such a big thing right now for westerners, it
circumvents that (and internationally, it allows people that would have
otherwise not had any route to do such a thing). But there definitely needs to
be some regulation behind that, because it's ridiculously easy to make a sleek
marketing page that says "buy now and the price will go up later"... and
people will buy into it.

Also, this quote:

> using cryptocurrency networks are cheaper to send money overseas than
> Western Union. No, it probably is not

Uhh, maybe not in some narrow cases (especially as pointed out in the source,
for people that need to use cash agents or are unbankable), but for many
people I know including myself, it is significantly cheaper to use bitcoin
rather than Western Union (source: I receive my salary in bitcoin based on
spot price tied to USD)

(disclaimer: co-founder of a blockchain project)

~~~
OJFord
> I receive my salary in bitcoin based on spot price tied to USD

Why would you want that? Why not just receive USD, and buy BTC each month if
you like the price?

~~~
dreit1
exchange fees, and a general dedication to cryptocurrency

~~~
joosters
So the exchange fees magically vanished?

~~~
Tepix
You can transfer money to Coinbase for free with a SEPA transfer. Transfer
from Coinbase to GDAX for free. Buy crypto currency without fees by placing
maker orders on GDAX. Then transfer the crypto coins into your own wallet
without a fee.

~~~
mrep
Wow, that sounds insanely complex not to mention risky due to all the hacks
cryptocurrencies have suffered.

I'll take my safe and free direct deposit. I actually had a case where a bank
teller gave me the wrong state's routing number because she thought my account
should be based in the one she lived and not the one that was set up. My
entire month's pay went to the wrong account and I freaked out when i figured
out what happened. I went to a chase bank and explained the problem, they
found the money in the other account and were able to send it into mine.

Screw up the bitcoin address in any one of those transactions and your money
is permanently gone.

------
TheLilHipster
Most cryptos are definitely pump and dump ponzis designed to eat your money,
there is definitely a technocracy-like barrier for entry if you want to join
the crypto bandwagon. Focus your time and energy on BTC, ETH and an anonymous
coin like XMR. Any other offering should be met with skepticism.

~~~
AgentME
>Focus your time and energy on BTC, ETH and an anonymous coin like XMR. Any
other offering should be met with skepticism.

To elaborate/explain on this point for those less familiar: those three
cryptocurrencies actually are based on real technical innovation, and have
developer communities producing more technical innovation. There are many
other cryptocurrencies that have zero technical innovation (or completely
nonsense innovation) and are merely clones of previous cryptocurrencies with
some identifiers tweaked, made purely so investors can pump and dump.

The article in part 5 ("The decline of Maximalism") seems to be criticizing
the idea that people would prefer some cryptocurrencies to others, which is
completely ridiculous. There are real differences / issues with many.

~~~
omarchowdhury
Technical innovation is not the only type of innovation happening in the
crypto space. There are tokens being developed whose innovations are
financial, social, political, and economic. Don't assume technical innovation
is the end all be all, Ethereum's technical innovation allows for the other
types of innovation to occur, for example.

To strengthen my argument, you wouldn't expect every startup on the Internet
to develop their own Apache server, HTTP protocol, and all the other technical
innovations that allow for their business to exist, would you?

~~~
AgentME
I don't exactly disagree; I think there are some ICOs that are promising. (And
I'm happy that many are being built on top of a pre-existing blockchain like
Ethereum's rather than pretending they're secure without a large group of
miners securing their blockchain.)

Maybe I should drop the word "technical": There are many projects out there
with no real innovation whatsoever that were created only to facilitate pump-
and-dumps rather than to enable some kind of innovation.

~~~
pitcharoad
The innovations are technical _yet_ in the sense of _theoretical_ mostly. Save
the backlash, I'm just voicing the most critical opinion.

------
mrb
« _Bitfinex has provided no details about how it was hacked, who hacked it, or
to where those funds were drained to._ »

Actually, Zane Tackett, Director of Community & Product Development at
Bitfinex, has provided information, including the complete list of Bitcoin
addresses where the stolen funds went: [http://blog.zorinaq.com/bitfinex-
hack-2016/](http://blog.zorinaq.com/bitfinex-hack-2016/)

------
aryehof
Sadly I believe the _ideals_ of cryptocurrency/blockchain technologies have
been currently hijacked by those solely driven by a profit motive and greed.
Altruism in the pursuit of a _better way_ is for dummies I guess.

I think that Satoshi's main thoughts at the moment would be bemusement about
how the cryptocurrency mania seen today so well illustrates human behavior.

~~~
swfsql
I think he hopped this would happen, actually in a non-judging standpoint.

I won't judge, but just state it's different from yourself: who apparently
thinks egoism or profit-seeking is bad or undesired.

------
goatsi
I'm not sure what the author wants bitcoin to be. They are correct in pointing
out the various scams that litter bitcoin, but they also seem to want to shut
out crime (silkroad et al) with better analysis tools and centralization.
Without the various scams pumping the price criminals are the only ones who
would be using bitcoin, as they are locked out of the much simpler & easier to
use alternatives that any normal person will use.

~~~
StavrosK
> they also seem to want to shut out crime (silkroad et al)

Is there much _actual_ crime being facilitated by Bitcoin? I mean apart from
the "things that are illegal now but they're going to be legal in a few years
because one country started a misguided effort that everyone else blindly
followed" crime.

~~~
goatsi
Ransomware seemly pretty solidly illegal. It existed before bitcoin (mainly
using ucash/paysafe/greendot codes) but bitcoin is what enabled it to scale.

------
verroq
What about blantant market manipulation?

[https://hackernoon.com/meet-spoofy-how-a-single-entity-
domin...](https://hackernoon.com/meet-spoofy-how-a-single-entity-dominates-
the-price-of-bitcoin-39c711d28eb4)

~~~
drcode
Well, there is undeniably spoofing and wash trading in these markets, I see
both happen all the time- I'm not sure though why they are considered a bad
thing: They obfuscate the order books, making it easier for other
buyers/sellers to make trades without broadcasting their overall position to
other traders.

I'd love to hear a good argument why these things are a "bad thing" besides
just the argument that "it's wrong to lie". I don't really have a strong
opinion either way and could probably be swayed- Any takers?

~~~
physguy1123
Disclaimer - this is using equities markets as the example.

Spoofing is bad for a lot of reasons. It's bad for retail investors who
buy(sell) into a position when it's been spoofed high(low) believing the order
book is real. It's bad for market makers who must widen their spread and/or
add less liquidity since information in the order book isn't real. It's bad
when a spoofed price wrongly activates a bunch of stop orders. It's bad when
somebody exits a position wrongly believing that a different party has an
informational advantage over them. It's just blatant market manipulation that
benefits only the spoofers.

If a company released false earnings reports or somebody released fake
information about a company to change the price, people would be up in arms,
you would never hear anybody making your argument. I don't see how
manipulating an order book is that different. The book is a fundamental part
of how companies are valued since it's how people speculate on future value,
act on informational advantages, hedge, and it's how that information itself
is disseminated).

Maybe the bitcoin markets are different enough from equities that the effects
of spoofing aren't that bad (already super volatile, no outside information
other than price speculation, no latency arbitrage). But I would need to see
some really strong arguments to that effect to convince me of that.

------
darawk
Most of the author's points are silly. I was a customer of Bitfinex, and I
lost a significant sum of money in the hack, but they paid me back. I couldn't
be happier with their handling of it. I'm upset that their poor security
practices led them to get hacked in the first place, but once it happened,
their handling was pretty ideal. I don't know anyone who was a customer of
theirs and doesn't approve of how they handled it, and I know several others
that were impacted by the hack.

~~~
calcifer
So you think the author's very intricately written, detailed arguments are
"silly" and all you can offer in retort is an anecdote about how you weren't
effected by the Bitfinex hack (which was a _tiny_ part of the author's
argument).

~~~
darawk
I started writing a detailed rebuttal and debunking of the author's points,
but then I noticed others had done it already, so I didn't waste my time.
Suffice it to say that many of the things he says simply aren't true, and for
the rest, his reasoning is poor. For details, you can read other posts in this
comment thread.

------
pmorici
As someone who has followed the crypto-currency scene for the past several
years I don't disagree with a lot of the broad points presented about fraud
being a problem but he is presenting some flat out false information to
support his thesis.

To take one example, his claim that historically Coinbase has kept traction
stats close to the vest is completely false. He says that the only accurate
user numbers come from a filing in the IRS lawsuit. The IRS lawsuit was
initially filed in November 2016 and has been ongoing. Coinbase has published
user stats on their about page[0] since November of 2014 two full years before
the IRS took Coinbase to court, you can go look in the wayback archive. So the
claim that the lawsuit provides the only glimpse at the number of Coinbase
users is categorically false.

[0] [https://www.coinbase.com/about](https://www.coinbase.com/about)

------
STRML
Phenomenally detailed article and interesting subject matter. Thanks for
sharing. Of particular concern to the community should be the issuance and
solvency of Tether. An audit is long overdue.

As mentioned, our CEO, Arthur Hayes, wrote on Chinese exchanges running their
customers' deposits in local bonds & stocks back in 2015 [1]. It's worth a
read. We at BitMEX have brought a full-time writer into our employ just to
bring more of these stories to the fore and help create the facts-first,
inquisitive atmosphere crypto desperately needs. [2]

1\. [https://blog.bitmex.com/crypto-trader-digest-
nov-30/#shadow-...](https://blog.bitmex.com/crypto-trader-digest-
nov-30/#shadow-banks)

2\. [https://research.bitmex.com](https://research.bitmex.com)

------
wallacoloo
Great article (less the typos, but I feel that's understandable for something
so lengthy in which the author did clearly put forth lots of effort to do his
research).

I'm in the camp of people interested in cryptocurrencies due to their
libertarian qualities and largely motivated by what I perceive to be repeated
irresponsible behavior by governments in how they administer their currency
(most recently notable in the years surrounding 2008 - just before Bitcoin was
activated). In fact, I find it curious that the article did note even allude
to the setting in which Bitcoin was born, as its roots go very much against
regulation by governments.

The whole idea behind blockchains is distributed consensus. One of the
greatest values behind bitcoin is its lack of centralization and a sort of
distributed governance surrounding it (more so with some other
cryptocurrencies, but bitcoin does have primitive mechanisms for users to vote
towards such things as protocol evolution). It has some other advantages that
government-operated currencies could make use of, such as being difficult to
forge, but the real innovations are centered around the user not needing to
trust third parties (govt included) to behave in the user's interest. If you
embrace regulations to the extent that they exist in traditional currencies -
if transactions/addresses are ever forced to be blacklisted (and thereby
reversible), or funds made to be seizable by design, for example - then what
_value_ do cryptocurrencies provide that couldn't be replicated by a non-
cryptographic/centrally operated digital currency, and why then _wouldn't_
they be superseded by something easier to use/control?

It seems to me that the lack of regulation is a large part of the value behind
bitcoin. So when the article quotes:

> The cryptocurrency world is basically rediscovering a vast framework of
> securities and consumer protection laws that already exist; and now they
> know why they exist.

I'm skeptical. If consumers want regulation, they'd use the established
currencies. Bitcoin exists to be unregulated.

\----

On a less political note, this article was _full_ of useful information and
thoughts, so thanks to the author. I popped out of the cryptocurrency world in
2013 and fell back into it two months ago, and it's disappointingly difficult
to find articles like this that actually have some depth to them. There's too
much get-rich-quick hype and not enough interest in understanding the social
or technical developments associated with cryptocurrencies most places I
visit.

------
jondubois
All these articles make it sound like anyone can launch a successful ICO and
make millions on the spot but it's not true at all. Doing a successful ICO is
very difficult and requires deep connections within the industry... It's
probably only marginally easier than raising funding from a VC.

------
jackfoxy
> The cryptocurrency world is basically rediscovering a vast framework of
> securities and consumer protection laws that already exist; and now they
> know why they exist.

Can this framework be re-invented, perhaps on the blockchain, to be more
efficient (less friction), more comprehensible, and machine checkable?

------
kwelstr
In my opinion, the regulators should focus on exchanges applying KYC and make
the exchanges function the same a stock exchanges. If I buy a stock in the US
through a brokerage house, they have my info and every year they send me a
1099 with my profit/loss for the year that I give my accountant to add to my
income tax report.

Once the exchanges are regulated like that it would be very difficult to
launder money or avoid paying taxes on profits.

~~~
trakout
There is a focus on building decentralized exchanges at the moment.

Regulation will become more difficult when these become mainstream.

~~~
jamiek88
If bitcoin wants to be part of the global financial system avoiding regulation
is not the way.

That just basically supports the OP.

Every thread devolves to how to avoid taxes, kyc etc.

~~~
CryptoPunk
The point of cryptocurrency is to restore privacy in financial matters, not
become part of the new centralized financial establishment. The OP doesn't
believe in financial privacy, so there is no way cryptocurrency will ever be
acceptable to him. He believes in mass surveillance of currency transfers,
something which is anathema to a significant segment of the population.

------
ringaroundthetx
> In other words, the ICO rackets have recreated many aspects of the financial
> services industry (underwriters, broker/dealers)

This is all you need to know, end of article.

Of course, the tone of this article is "racket", "boiler room" etc. I call it
price discovery, efficient, economic growth.

The article's only objectiveness is by saying that they don't have
transparency and financial controls that the securities industry does. But
makes no mistake in calling it controversial that one fund or one ICO is
investing their proceeds in other ICOs, news flash this is how all economies
work. But here it is controversial because "shareholders" don't know, except
there are no shareholders, BUT WAIT THEY SHOULD BE SHAREHOLDERS as if these
are equity securities!

It is hard to debate this article because each aspect has to be taken
individually.

But this author consistently describes an aspect of cryptocurrency as
controversial, while inadvertently describing how all capital markets work,
but holding bitcoin at a different non-existent standard.

------
deevolution
I think cryptocurrency has reached or has perhaps just passed the peak of
inflated expectations on the hype cycle chart and is now decending into the
trough of dissolutionment. There are some pretty wild claims out there - it
does seem like lots of the rhetoric out there is that cryptocurrency and
blockchain technology will solve ALL of the problems. But i think blockchain
has a ways to go before we see which problems it is particularly good at
solving. People will learn, overtime as companies fail in their attempt to
apply blockchain to every aspect of life. When a few of these companies to
succeed, which im certain at least one will, we will see the real, unhyped
value of the blockchain. Edit(spelling)

~~~
quantdev
Thinking 'blockchain', which is just a linked-list with hashes, is going to
solve anything is silly. It's even sillier than thinking internal intranets or
TCP/IP would create huge value, when really the Internet, something much more
than internal intranets and TCP/IP, was the innovation.

Bitcoin is an open, borderless distributed network with an economic and social
system built on top of a data structure called a blockchain. The real
innovation has very little to do with the 'blockchain' hype corporations are
pushing.

------
Nokinside
There are also some philosophical issues that add to the hype.

\- BTC or some other cryptocurrency as taking over local currencies in long
term. There is such things as optimal currency region. Global single currency
would not work well.

\- Money as good long term store of value. That's hoarders dream, but it would
be harmful for economy as a whole. It's the idea that you work hour in 2017,
store the value as a money and take that hour out 2027 and it's value has
retained value or increased while the work done in 2017 is less valuable than
work done in 2027 due to productivity increases. This kind of imbalance leads
to deflationary spiral.

~~~
swfsql
work in 2027 is more valuable? so instead of just buying a coffe, you should
pay it NOW and tell the seller you will back in 2027 to get it. They will love
it!

~~~
Nokinside
They would love it. Anyone would love it.

Especially if doing the work includes using technology. Buying your computer,
phone or car now and getting it 10 years from now would be ideal for the
seller.

~~~
swfsql
I got confused by your previous claim. This doesn't "hurt the economy". Yes,
2027 tends to be more productive than 2017, but this requires an increase of
investment, that implies savings.

Holding money allows others to use their money to invest _, so you actually
facilitate productivity to increase.

_ This is "in general", since you allow _more_ good and services to be
available to be consumed by others.

edit: this animation explains this coordination between savers and investors:
[https://www.youtube.com/watch?v=YaxIPPMR3fI](https://www.youtube.com/watch?v=YaxIPPMR3fI)

~~~
Nokinside
>Holding money allows others to use their money to invest,

That's not holding money in this context.

Hoarding money is keeping cash in your house or bitcoin in your purse. The
money is separated from the economy.

Holding money normally means keeping it in the bank account or in cash like
instruments. That's fine. Bank loans it to others who use it. You receive
interest for contributing capital.

~~~
swfsql
Right, it's not exactly the same kind of "holding". But in this case also
(burying the money), the economy (a free one) is not hurt.

To get a view of it: what if I have chests full of gold, then before dying I
take tons of them, burn and bury so no one else ever put their hands on it?
Nobody is hurt. Nobody is getting less food than they would, nobody is getting
less anything than they would, because even if I bury the money I have, I
didn't bury any other of the goods and services that are available in the
economy in any time.

Because money is just a resources "coordinator's" power. If I burn mine, I'm
just letting go of that power and letting someone else do it instead.

Sure, saying I had all that money not stealing or anything of the sort implies
ppl I'm involved with (in/directly) are so much better that I "was allowed to
coordinate more"/"received a lot of money". But still, in the end, the economy
is not hurt.

------
nurettin
What they really won't tell you about is; if you sign your account with a weak
password, someone will brute-force it open and transfer your coins. Which is
considerably more interesting and exciting than this article.

~~~
PretzelPirate
This really isn't a problem anymore if you don't store coins on an exchange.
Just get a hardware wallet and you have incredibly good digital security.

------
4010dell
This article should be the README before getting into Crypto world.

First article to point out 21.co. What is their product ??? Read on twitter -
A guy asked MA a question for 100$ on 21.co platform, got "NO" as answer. 100$
for a NO...So a guy spent his hard earned 100$ on a question to a VC. VC made
money, Donated that to charity to show off and gather "philanthropy" point in
his smug circle, got tax savings maybe, his invested firm 21.co made money,
21.co vanity metric of donating to charity increased further.

Poor soul who asked question, got scammed.

~~~
RationPhantoms
But 21.co has a legitimate business model. They should have some sort of 3rd
party metric guaranteeing a quality answer but I definitely like the premise.

------
tstyle
"In the real world, “market cap” is based on a claim on a company’s assets and
future cash flows."

Is that true? I thought even in the real world, market cap simply meant
price_per_share * num_shares_in_circulation.

------
debacle
But why is NO ONE talking about the fact that these vehicles aren't even
pretending to be currencies anymore?

------
DennisP
"Don't trust exchanges" is something _most_ cryptocurrency enthusiasts will
tell you. Make a paper wallet or get a Ledger. If you have a lot of funds, a
safe deposit box is also a good idea.

------
gbacon
(9) The Regression Theorem of Mises

------
memossy
I w

------
patryn20
There is still no legitimate use of bitcoin beyond niche markets and
speculation. Besides maybe a very risky (as in unpredictable value on
delivery) method of money transfer. It is and has always been a criminal and
launderer toy.

I am very excited by progress in Ethereum and see it as a model for a better
way forward. Though I do not trust its maintainers and community to build a
secure and reliable system. There have been far to many preventable losses due
to their amateur efforts.

The future of crypto is exciting. The present currencies are the Diamond Rios
and Creative Nomads of crytocurrency.

Downvote away.

~~~
mahyarm
It's also useful for cheaper & faster cross border remittances for the common
person. For the common person paypal's %3+ currency exchange fees is more
expensive than the equivalent %0.5-%1 in fees you get from a 2 bitcoin
exchanges. And it's far faster since everything moves at the speed of local
deposits & withdraws.

~~~
woogiewonka
Transferwise is pretty friendly and uses real exchange rate + reasonable fees
Usually around 1% or less. With Bitcoin, I can send the same transfer for
0.03% - which puts Transferwise to shame and makes PayPal look like an absurd
joke. Granted there's much more involved with current volatility of bitcoin
but once that gets more stable all of the other options will be a total joke.
People who cant't understand the future of bitcoin as remittence are in for a
rude awakening.

~~~
patryn20
This is based on the assumption that bitcoin will stabilize.

I think bitcoin is a flawed first mover. The winner (and future stable
cryptocurrency) likely hasn't been invented yet.

But I imagine it's mathematic properties will allows for a sustainable
transaction rate (i.e.: thousands per second), short (as in sub 2-3 second)
final confirmation times, and the ability to execute Ethereum like smart
contracts without major security flaws and naive language implementation
choices.

~~~
nikcub
Bitcoin has Lightning with non-Turing complete smart contracts which offer
better security

Ethereum has plasma and raiden with touring complete smart contracts

Pick one and build on it - there is no need to rip out the underlying
blockchain to achieve what you’re outlining - it exists today

