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Bitwise Calls Out to SEC: 95% of Bitcoin Trade Volume Is Fake, Real Market Is Or

The size of the legitimate BTC trade volume is just as large as the bitcoin futures market, Bitwise tells the SEC.

At the 1997 edition of the annual Worldwide Developers Conference — an event put together by iPhone-maker Apple Inc. to communicate directly with its community of developers and users — a participant asked founder and then-CEO Steve Jobs the following question:

“What do we do about the press? Wall Street Journal reporters get up in the morning, sell Apple short and then go write stories about us. And, it’s clear that it’s perception versus reality. They don’t know s— about operating systems. They don’t know anything about tools. They don’t know what’s going on in the future. They don’t know that we’re building icebergs, and building from the bottom up.”

The bitcoin (BTC) market is in a somewhat similar position. The mainstream media has published quite a handful of negative headlines. A considerable population of traditional finance folks, who can’t wrap their heads around the need and use of bitcoin, are happy to point at inconsistencies in the market to back their “I told you so” declarations about how they believe bitcoin is a farce.

Jobs replied by comparing the way the press treats new developments to how people tend to treat a child whom they saw as an infant, disregarding the fact that the child might have matured considerably since then.

In the case of bitcoin, the lag time is not only true for the press, but also for regulators and traditional finance professionals. Additionally, it appears that the crypto community is accepting and following the notion — perhaps unintentionally — by educating the public about how bitcoin and the crypto space at large are evolving. There have been scads of reports with the aim of doing just that. The latest is from Bitwise Asset Management, an American crypto asset fund manager.

Bitwise has recently prepared a 104-page white paper. In it, the fund manager argued that the bitcoin market still has inconsistencies regarding trading data, but the legitimate part of the market has a “remarkable efficiency.”

The report builds on a presentation Bitwise had made to the United States Security Exchange Commission (SEC) in March of 2018 to back up its cryptocurrency exchange-traded fund (ETF) application filing.

Here’s are the most important points, with some perspective, from the report.

Approximately 95% of reported BTC trading volume is fake

As part of the research, Bitwise analyzed trading data of some 83 exchanges. Researchers said they looked at the trade size histograms, volume spike alignment and spread patterns of these exchanges. They concluded that there are only 10 exchanges with 100% real trading volumes, and these 10 exchanges collectively account for 5% of the reported trading volume.

Bitwise classifies the 10 exchanges as real volume exchanges or reference exchanges. The 10 exchanges include Binance, Bitfinex, bitFlyer, Bitstamp, Bittrex, Coinbase Pro, Gemini, itBit, Kraken and Poloniex. Among the 73 exchanges that Bitwise condemned as displaying fake volumes are OKEx, HitBTC and Huobi.

As expected, there were questions raised about the reliability of the Bitwise study considering that these popular exchanges aren’t regarded as real volume exchanges. Bitwise pointed out that the trading data of the three exchanges doesn’t follow that of Bitwise’s real volume exchanges. It also referenced existing research that found similar patterns with the three exchanges to support its findings.

Fake Transaction Volumes Estimated by Different Researchers

Using the data above, the average daily volume of these three exchanges would have increased the volume of legitimate trading in the Bitwise study from $554 million to $622 million. But the researchers said that it wouldn’t have materially changed their conclusion.

HitBTC published a blog post in response to Bitwise’s report in which it says it that it has a different customer profile compared to other exchanges, particularly those that the report branded as legitimate. That’s because the exchange supports algorithmic trading, whose pattern is likely to noticeably differ from human trading. HitBTC wrote:

“Different exchanges have different customer profile. HitBTC is among the first crypto exchanges to offer low-latency institutional grade (FIX) trading API. This is why the client profile of HitBTC differs from that of unmentioned but implied ‘reference exchanges’.”

Low-latency trading simply means strategies that respond to market events in milliseconds, and algorithmic trading is one of those strategies. 

Bitwise did recognize the use of algorithms in crypto trading by pointing out that the average price deviation of 0.12% across its real volume exchanges is within the arbitrage band, adding that the trend “suggests that institutional-quality arbitrageurs and algorithmic programs are in place that monitor the system and identify and capitalize on any pricing discrepancies to constantly keep the prices closely together.”

OKEx, on the other hand, admitted that some traders engage in wash trading on its platform to quickly build their trading volume so they could enjoy a lower fee structure.

The remaining 5% makes up for a highly regulated and efficient market

With six of the 10 legitimate volume exchanges in the report based in the U.S., Bitwise argues that the crypto space is more regulated than presumed. Of the 10 exchanges, only Binance isn’t a money services business (MSB), while only the four non-U.S.-based exchanges don’t possess a BitLicense, which is issued by the New York State Department of Financial Services. This level of oversight only breads transparency.

The crypto market is maturing thanks to developments since December 2017

The year 2017, marked the time when bitcoin attracted the most attention from the mainstream world, thanks to the wild bull run that saw the crypto go from just under $1,000 per BTC to nearly $20,000 by the end of the year. But, the following 12 months saw the price drop to as low as nearly $3,000 during a period that is widely regarded as the crypto winter.

Bitwise research suggests that the bitcoin market has significantly matured over the period. First of all, pointing to a downward trend in the average deviation of bitcoin’s price on its 10 reference exchanges from the consolidated price in the broader market, research claims that the quality of the bitcoin spot market has improved.

The Aggregate Average Deviation of Bitcoin's Price from Consolidated Price

According to the chart, the price of bitcoin on the 10 exchanges deviated by as much as 0.25% to 0.4% between January and March 2018. The trend, however, levels out as of April 2018. Bitwise suggests that this trend shows the growing competitiveness of bitcoin arbitraging.

Also, the introduction of bitcoin futures in December 2017 has attracted bigger traditional market players to the crypto space and has so far made the market more organized, according to Bitwise. The cryptocurrency space has seen the entrance of one of the world’s largest asset managers, Fidelity Investments, which has built a custodianship solution.

Algorithmic market makers including Jane Street, which traded more than $8 trillion across all financial products in 2018, also started offering bitcoin trading in 2018. Other large algorithmic market makers that have entered the space include Susquehanna International Group, FlowTraders and Jump Trading LCC.

These developments, according to Bitwise, have allowed the bitcoin market to sizeably grow in efficiency. The paper points at trends on how deviations in price are being rapidly wiped off the market as proof that institutional-grade tools are being deployed.

Nail-biting moments in anticipation of Bitwise ETF ruling

Bitwise is currently awaiting a decision to be made on its ETF filing with the SEC. With this report, the crypto asset manager aims to alleviate the SEC’s fears and show the commission that the market has matured to a level where it can sustain an ETF product.

When the SEC rejected an ETF application by the Winklevoss brothers last year, it expressed concerns that regulated derivatives markets such as the bitcoin futures market are small relative to the spot market. In turn, this would make it difficult to see through the unregulated, and possibly fraudulent, nature of the bitcoin market.

By showing that the spot market is significantly smaller than often reported, Bitwise pointed out that the size of the bitcoin futures market is almost as large as the bitcoin spot market. Through this, the fund manager hopes to persuade the SEC to finally ease up on its concerns regarding cryptocurrencies.

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Mt Gox's Bitcoin Creditors Can Now File for Rehabilitation Claims

Creditors of the long-defunct bitcoin exchange Mt Gox can now begin submitting proof of their claims in a newly-approved rehabilitation process.

Nobuaki Kobayashi, the trustee of Mt. Gox, announced in a note on Thursday that an online claim filing system is now up and running for creditors, whether or not they filed proofs for claims in the previous bankruptcy proceeding.

As previously reported by CoinDesk, Mt. Gox creditors won a big victory in June after a Tokyo district court moved the exchange from bankruptcy to a civil rehabilitation process. Most importantly, this opens the door to creditors receiving actual bitcoin compared to a cash payout equal to the value of their holdings when Gox went bust in early 2014.

Kobayashi said that creditors have until Oct. 22 to file proofs.

“The planned deadline for the Rehabilitation Trustee to submit a statement of approval or rejection to the court is January 24, 2019, but, at the current point in time, a definite date has not been determined,” the trustee said in a separate Q&A document.

However, users who lost online login access to Mt. Gox may have to submit information in an offline method by sending proofs to an address in Tokyo designated by the Mt. Gox trustee.

Mt. Gox, once the largest bitcoin exchange by trading volume, declared bankruptcy in 2014 after more than 744,000 BTC was stolen. Creditors subsequently began a years-long process in a bid to retrieve their funds.

As bitcoin’s price soared to nearly $20,000 late last year, several creditors filed a petition to the bankruptcy court in Tokyo, seeking to move the case into civil rehabilitation.

Currently, lawyers representing several Mt. Gox creditors who filed the petition are also drafting a proposed refund policy, arguing that Mt. Gox should repay creditors with the same cryptocurrencies they deposited with the exchange instead of cash.

And such assets should be sent to “exchanges in which many creditors have accounts or can open accounts easily,” as previously reported by CoinDesk.

Bitcoin image via Shutterstock

The leader in blockchain news, CoinDesk is a media outlet that strives for the highest journalistic standards and abides by a strict set of editorial policies. CoinDesk is an independent operating subsidiary of Digital Currency Group, which invests in cryptocurrencies and blockchain startups.

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Bancor Urges Industry Players to Collaborate After $23.5 Million Hack

On July 9, the decentralized crypto platform Bancor was compromised. The hackers managed to drain over $23 million worth of crypto, part of which has allegedly already been converted into fiat via the instant exchange service Changelly. While the Bancor team is collaborating with other industry players to track the stolen funds, the recent security breach shows how decentralized platforms deal with security breaches, even though some community members have started to question whether Bancor can be considered a decentralized service at all.

What is Bancor?

Bancor was launched in June 2017 after one of the most successful Initial Coin Offerings (ICOs) in history: It gathered around $153 million in Ethereum (ETH) in just three hours during the crowdfunding stage backed by renown investor Tim Draper, among others. Named after a supranational currency conceptualized by economists John Maynard Keynes and E. F. Schumacher aimed to be used for international trade after World War II, the Tel Aviv-based Bancor is a decentralized cryptocurrency platform that essentially allows users to launch their own tokens.

In more detail, the Bancor protocol enables users to issue so-called “smart tokens,” which can hold one or more tokens in reserve and convert them into other tokens with no counterparty. Bancor integrates its own self-titled token (BNT), which can be traded for any of the other tokens supported by the network, and vice versa.

Thus, the smart token contract is its own market maker. As a result, it automatically provides price discovery and liquidity to other coins. In other words, Bancor is an outlet for selling any digital tokens it lists, even if there is no available buyer for them. It is a decentralized system, and, therefore, does not require KYC procedures and — unlike centralized crypto-trading platforms that recently attracted the harsh criticism of ETH creator Vitalik Buterin, who went as far as to wish them to “burn in hell forever” — does not store all user funds in one place, which potentially might attract hackers.

How did it get hacked?

Nevertheless, on July 9, it became subject to a heist, during which the hackers managed to steal roughly $23.5 million worth of crypto — 3,200,000 BNT (worth $10 million), 24,984 ETH (worth approximately $12.5 million) and 229,356,645 NPXS (worth roughly $1 million). The Bancor team confirmed the theft on its Twitter and swiftly froze the stolen BNT tokens, as such an ability was built into the Bancor protocol “to be used in an extreme situation to recover from a security breach,” limiting the total damage to approximately $13.5 million.

As to what caused the attack to be so successful, Bancor team reported the morning of July 9 that “a wallet used to upgrade some smart contracts was compromised.” All operations were halted, and the platform went offline — Bancor representatives assured Cointelegraph that the service will be up within 24 hours, around 10 hours ago. The platform has also reassured that “no user wallets have been compromised in the attack.”

The heist provoked some community members to question if the platform can be seen as decentralized at all. For instance, Charlie Lee, the creator of Litecoin, wrote on his Twitter:

“A Bancor wallet got hacked and that wallet has the ability to steal coins out of their own smart contracts. An exchange is not decentralized if it can lose customer funds OR if it can freeze customer funds. Bancor can do BOTH. It’s a false sense of decentralization.”

Community collaboration as the key to dealing with hacks

Now, Bancor hopes to track the stolen funds, part of which have been exchanged via the instant conversion service Changelly, as CEO Konstantin Gladych told Cointelegraph in an elaborating statement:

“Afterward, the tokens were frozen by the Bancor Foundation in our contract. Now we are helping track the stolen funds.”

Moreover, Bancor’s head of communications, Nate Hindman, informed Cointelegraph that the service is coordinating with a number of industry players to come up with tools and technology that would help the industry cooperate more effectively when hacks occur:

“These mechanisms include a real-time blacklist that tracks offending addresses and stolen assets, as well as an emergency fund that compensates projects when thefts occur. There is plenty more to do here and we look forward to working with our peers across the industry to make everyone stronger and smarter as we move forward together. Collaboration is not just a concept, it’s a practice — and we are grateful for the support and assistance.”

When asked whether it is possible to completely prevent these kinds of security breaches, Hindman argued that hacker attacks are becoming more sophisticated — along with the industry, however. Hindman also stressed that crypto platforms can outmaneuver hackers through collaborative effort:

“Together we stand in our efforts to create better tools that prevent thieves from committing crimes and utilizing stolen funds, and better processes for analyzing situations and informing users and relevant parties when they occur.”

Meanwhile, the BNT token is down 15 percent, trading for $2.43, according to

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South Korea’s Regulatory Evolution: Important Steps for Crypto Exchanges, ICOs and Blockchain

South Korea’s relationship with the cryptocurrency industry has ebbed and flowed over the years. There has been a blanket ban on ICOs, set in September 2017, as well as strong rumours in January — that were eventually dismissed — that cryptocurrencies in their entirety would be banned.

However, things have warmed up in the Asian country with talk emerging that South Korea is now looking to lead the way in the fourth industrial revolution. South Korea’s government seems to have realized how much potential there is in the blockchain and cryptocurrency space — catching up with its citizens, who contribute a large portion of the global cryptocurrency trading market; it was reported that South Korea processed over 14 percent of global Bitcoin trades in July of last year.

The change in attitude from the government, however, has come with heavy regulations and rules in the use of cryptocurrencies.

Some notably harsh regulations that they have put upon the crypto space in the past include:

However, they have also acted positively by:

Latest developments — classification of crypto exchanges

The latest move from South Korea has seen them essentially reclassify cryptocurrency exchanges as legal entities. The new draft, which adds a lot of legitimacy to the blockchain space in the country, now classifies exchanges as “crypto asset exchange and brokerage.”

This is an important redefinition because it “recognizes crypto exchanges as regulated financial institutions,” as opposed to their previous classification as “communication vendors.”

Of course, looking at cryptocurrency exchanges as legal entities sounds extremely positive for the space in the country, as they are now viewed by the government as legitimate legal entities that are afforded many protections and assurance. But, they are also becoming subject to many more legal rules and regulations.

This would appear to be a positive step for the everyday customer of exchanges, as they have had to suffer with a number of issues that come with an ecosystem that has been plagued with problems — including hacks and fraud allegations. But, looking at the way in which the government has moved through the blockchain space, it is unsurprising that they have made this latest regulation in regards to exchanges.

Andrew Lim, the president of South Korea Blockchain, a blockchain marketing and PR company, told Cointelegraph that it was more a case of when, not if.

“Classifying all things blockchain was to be expected, especially when it comes to the exchanges and the critical need for regulations. It wasn’t too long ago when you could open a cryptocurrency exchange with a “mail order distributor” license in Korea. There were hardly any regulations in place and the platforms they built the exchanges on were unbelievably insecure.”

A necessary change

A look back at how things were before in Korea also sheds a lot of insight into why things are heading the direction they are now with the latest regulations.

Lim goes on to explain just how rouge things were before the government began stepping in to try and secure the exchanges in South Korea:

“Recently, I sent out a warning to investors about leaving their crypto assets in exchanges and a few hours later, Bithumb was hacked! I still remember a seminar at a law office involved in policy making, and the speaker saying that the exchanges were not liable if hacked or their data was breached.”

“It was absolutely insane that people were leaving hundreds of millions of KRW (South Korean won, which is equal to hundreds of thousands of dollars – nrd) in these exchanges. It truly was the wild, wild east — ripe for hackings and fraud. Classifying them as legal entities and having them under stricter supervision was inevitable, and it couldn’t have come any sooner.”

South Korea’s move to legitimizing cryptocurrencies

Moves such as legalizing remittance in Bitcoin and allowing fintech companies to process up to $20,000 worth of South Korean won in Bitcoin for users were unprecedented at the time and seen as quite forward thinking.

But the trade-off for this was that the regulators had a way in when it came to getting the exchanges to play by the rules. By allowing remittance, the exchanges in South Korea were now tied to the Financial Services Commission (FSC). They required capital of at least $436,000 to be retained, plus data processing facilities for Know Your Customer (KYC) and Anti-Money Laundering (AML) in order to get the watchdog’s approval.

With the government now getting itself entrenched in the cryptocurrency market of South Korea, it learned along the way which aspects required a hardline approach and which needed support for the innovation to grow.

A blanket ban, in the same style as China, was imposed on ICOs in order to try to stop the scams that were becoming obviously prevalent in this space. It also focused in on the anonymous nature of digital currencies by banning anonymous trading.

These big hits on the cryptocurrency market in South Korea had many wondering if there was not a full and total ban on cryptocurrencies in the works. In fact, the rumors got so big that 200,000 people petitioned against it in January. This led to the Blue House — the location of the head of government in the country — having to come out and dismiss the rumours.

Building the fourth industrial revolution

It has become clear that the South Korean attitude toward cryptocurrencies in terms of their government has changed substantially. It is not simply that they have gone from hating it to loving it, it’s that they have decided to get their hands dirty and mold it into a workable space in the country that can help them be at the forefront of the fourth industrial revolution.

The change in attitude is most obvious when one looks at how they have reversed the ICO ban recently, with Hong Eui-rak of the ruling party of Korea saying of the legislation that put ICOs back on the market in early May:

“The primary goal of the legislation is helping remove uncertainties facing blockchain-related businesses.”

The South Korean special committee tasked with moving forward the fourth industrial revolution also gave some insight into what the goal is with the cryptocurrency regulation on May 29.

“We need to form a task force including private experts in order to improve transparency of cryptocurrency trading and establish a healthy trade order. We will also establish a legal basis for cryptocurrency trading, including permission of ICOs, through the National Assembly Standing Committee.”

Furthermore, there have been additional signs that point towards this change in attitude.

Exchanges in the headlights

Now, the latest legal draft from the government involving the blockchain space is focusing on new categories for blockchain and, especially, cryptocurrency exchanges, putting them up next as the sector that needs to be dealt with.

On face value, exchanges are now recognized as legal entities, and this is major because it is an admission from the government that they recognizing the ecosystem as a legitimate one. 

But this move is a double-edged sword for exchanges, who have already jumped through a number of hoops in the government’s progression toward regulating blockchain and cryptocurrencies.

The Head of Operations Korea at EOS Asia, John Yoon, noted to Cointelegraph that the primary focus of this reclassification seems to be aimed at exchanges and the transactions that they produce:

“[The new classifications] will come out maybe at the end of the month or early August, from what I hear. Cryptocurrency exchanges and transactions will be the key issues, as most Koreans are having issues on Bithumb and Upbit, when it comes to exchanging and depositing/withdrawing.”

Yoon goes on to explain that this move from the government is clearly positive for everyday users of the exchanges — because of the difficulties already felt when depositing and withdrawing — but also points out that the exchanges will be heavily monitored now.

“[The exchanges] will be constantly monitored for their level of security and to make sure everything is on the up and up. For customers, it will be great, as it will open up more opportunities to invest in crypto.”

The Korean ministries have been working since the end of last month to produce the final draft of a new blockchain industry classification scheme, which is expected by the end of July. It is, of course, expected that the protection and recognition that comes with these new classifications will be beneficial for exchanges in the long run, but they will also be held to harsher rules and regulations.

Japanese comparison?

The South Korean move could be compared to the way in which Japan is looking to sort out its issues with exchanges — especially in the light of two major hacks in Tokyo, that of Coincheck on January 26, 2018 and Mt.Gox on February 7, 2014 — with their Financial Services Authority (FSA)  investigating exchanges and issuing business improvement orders.

Japan is looking for its exchanges to perform to the desired standard of the government and regulators, much like the Korean government. However, in Japan, there was a backlash from these harsh regulations — as some exchanges decided to go out of business, while the heads of Bitflyer and Bitbank quit the Japan Virtual Currency Exchange Association (JVCEA) after also receiving these orders.

However, Yoon does not think the backlash will effect the Korean exchanges as much, he actually expects this regulation to stimulate the growth of more exchanges.

“I don’t think any [exchanges] will fight against it. Actually, there might be more created. Once regulations are up, I expect to see the number of exchanges double — or even triple — by the end of the year.”

Better for business

It is not only the people in charge of exchanges and the customers who have been waiting for direct regulation. Yoon also explains that many businesses that operate with or around cryptocurrencies have been somewhat in limbo, not sure which direction the South Korean government would go with their regulations. But now, they have a defined outline.

“There are many banks here that are in a wait-and-see mode. A lot of Korean companies are going to Singapore and other [places] to do their ICOs, so the Korean government is acting fast to incorporate these regulations.

Companies that have blockchain businesses in South Korea seem happy to see regulation coming in, as it spells a better future for the space.

“This is another step in the journey of legitimizing the asset class by providing regulatory framework for facilitating value exchange of digital assets, in one of the most leading geographies in the space,” Agada Nameri, General Manager of iCapital, told Cointelegraph.

Additionally, Uriel Peled, co-founder at Orbs, suggested to Cointelegraph: “Korea has the potential to become the ‘blockchain nation.’ If these government initiatives go hand-in-hand with training blockchain engineers, Korea is in a unique position to become the global leader in blockchain.”

Regulation opening the doors

There looks to be a battle every time regulators step into a new space — as is being seen in Japan and now in South Korea, with these new classifications changing things for exchanges. As crypto businesses begin to come under more scrutiny, they are faced with the decision to either better themselves or simply leave the space.

But on a fundamental level, it can only be seen as a good thing. The cryptocurrency space descended into a ‘wild west’ situation because there was no control, and now that the controls have stepped in, those who want to remain in the space have to up their game and produce a reputable service.

All the while, the act of regulating and making legal exchanges is simply legitimizing the blockchain and cryptocurrency space more, laying a foundation for a healthier environment down the line.

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Are Cryptocurrency Exchanges Hurting the Industry?

Cryptocurrency Exchanges–Crypto-based trading platforms have found their way into headlines with increasing frequency throughout the past several weeks.

It began with The Daily Mail reporting on Ben Delo, co-founder of cryptocurrency exchange BitMex, as Britain’s youngest self-made billionaire and the United Kingdom’s first “bitcoin billionaire.”

Binance, the world’s top crypto trading portal by daily volume, grabbed headlines in an interview with Bloomberg, when founder Changpeng Zhao claimed 2018 revenue had already eclipsed 300 million USD, and the exchange was on pace to turn a profit of 500 million to 1 billion USD. With all of the money flowing out of the market capitalization of cryptocurrency during this bear market, the eyebrow raising gains of crypto exchanges has caused more than one investor and industry leader to take note of the money to be made.

Vitalik Buterin, founder of second overall cryptocurrency by market cap Ethereum, threw down the gauntlet two days ago in an interview with TechCrunch, when he stated in no uncertain terms that the state of crypto-based exchanges had caught his ire,

“I definitely personally hope centralized exchanges burn in hell as much as possible.”

In particular, Buterin finds fault with the 10 – 15 million USD fee imposed on cryptocurrency projects looking to be listed on popular exchanges. For example, a new coin that wishes to be listed on Binance’s top-ranked platform must first shell out an enormous amount of money to have that accessibility–development funds that are supposed to be used in improving the coin’s technology, not increasing it’s exchange availability. Alas, the pay-to-play model imposed by most exchanges has created centralized gatekeepers akin to those found in the traditional world of fiat.

While the alternative would be sole decentralized exchanges, where buyers and sellers engage in an open market of direct trading with no intermediaries, the landscape is still in its infancy. Many in the community have taken up Buterin’s rallying call, expressing their anger with the state of cryptocurrency and its heavy emphasis on the power of exchanges.

So, have cryptocurrency exchanges started to do more harm for the industry than good?

It depends on how you view the purpose of cryptocurrency.

A significant number of investors in cryptocurrency are solely that–traders looking to capitalize and make money through an emerging market. For this class of crypto user, exchanges offer the sole purpose and portal to accomplishing their goal, and provide significant advantages over the traditional market: miniscule fees (compared to stock brokers), 24/7 trading and a wide variety of assets to speculate on.

Particularly with the media emphasis on crypto and Bitcoin-based price movement, with CNBC regularly publishing the daily volatility of crypto to its largely removed audience, enthusiasts of the technology have to accept that a large market share is comprised of traders with no interest in learning about the underlying asset. Profit, or at least the promise of profit, is the primary motivator for this group, and they will continue to champion exchanges as the arbiter of their speculation.

But therein lies the problem most community members find with the present state of crypto-based exchanges: the emphasis is entirely on price as opposed to the advancement of technology.

In addition, the process of adoption for cryptocurrency becomes bastardized through the myopic lens of centralized exchanges. Communities, particularly for smaller projects and up-and-coming coins, rally around being listed on new exchanges as a way to gain exposure, rather than focusing on the real adoption of user driven problem solving and real-world use cases. The result is empty scaffolding that leads to the uncertain landscape of the current industry. Coins are pumped to billion dollar valuations through speculation alone, all driven through the back and forth actions of investors on exchanges. Yes, this plows capital into currencies, increasing the development budget of projects in addition to drawing more media attention.

But it also creates the appearance of the “bubble” that has become vogue to bandy about by entrenched Wall Street players. It is hard not to draw comparisons between cryptocurrency, in its present form, and the bubble that started the new millenium. Decentralized exchanges may not dampen the speculative driven growth, and they certainly do not provide the user-friendly approach of current exchanges, but it does give the process of cryptocurrency use more legitimacy. Trading crypto for crypto, through direct market tunnels as opposed to intermediaries, symbolizes what decentralized money is capable of and how it can differentiate from fiat.

Cryptocurrency exchanges provide the most simplistic solution for giving people, particularly newcomers to the industry, accessibility to their cryptocurrency of choice. But so long as exchanges partake in centralized efforts, they signal to the community of cryptocurrency that their existence is to profit from the industry–whatever the cost may be. Exchanges, like all companies, have a right to pursue profits. But cryptocurrency communities should keep in mind that clamoring for exchange driven growth is prioritizing market cap today in lieu of real adoption.


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What Do We Know About the CFTC Price Manipulation Probe

On June 8, it was reported that the U.S. Commodity Futures Trading Commission (CFTC) demanded extensive trading data from several cryptocurrency exchanges in order to investigate whether there has been price manipulation in the crypto market.

Earlier, on May 24, Bloomberg reported that a criminal probe into Bitcoin (BTC) and Ethereum (ETH) price manipulation by crypto traders had been opened by the U.S. Department of Justice (DOJ) in conjunction with the Commodity Futures Trading Commission (CFTC). That information was indirectly confirmed in the recent Wall Street Journal report, although it was made clear that the DOJ was studying potential price manipulation in a separate case. In May, some mainstream players, including former Wall Street executive and billionaire investor Michael Novogratz, and Cameron of Winklevoss twins, president of the Gemini exchange, greeted the probe.

What provoked the CFTC investigation?

According to the Wall Street Journal, the probe followed the launch of BTC futures by CME Group, a major derivatives marketplace, in December 2017. CME generates its BTC futures prices based on data from four major crypto exchanges: Bitstamp, Coinbase, itBit and Kraken, where manipulative trading could potentially have altered the value of BTC futures.

After the settlement of the first contract in January, CME asked the four exchanges to provide trading data. However, several of the exchanges refused to cooperate, saying that the request was intrusive. The crypto exchanges only handed over their data once CME shortened the time window of its request from one day to a few hours, according to the Wall Street Journal’s sources. It was also reported that CME originally sought the information through a third-party — a London-based company that calculates the Bitcoin price to use for its futures contracts. The sources added that the crypto exchanges did not want to hand over data to the undisclosed British firm, which also runs its own trading platform.

CME is regulated by the CFTC, a federal agency dealing with futures and options markets in the U.S. The CFTC views Bitcoin as a commodity and is therefore subject to its direct supervision.

Thus, regulators from the CFTC were allegedly upset that CME does not have agreements which obligate crypto exchanges to share price data that is related to futures contracts. According to the Wall Street Journal’s sources, the quarrel between CME and the crypto exchanges led the CFTC to open an investigation.

Nevertheless, CME spokeswoman Laurie Bischel said that their London-based index provider has a disclosure agreement with all four exchanges:

“All participating exchanges are required to share information, including cooperation with inquiries and investigations.”

Kraken Chief Executive Jesse Powell told the Wall Street Journal that the “newly declared oversight” of how BTC prices form futures prices “has the spot exchanges [Eds: spot markets are non-futures exchanges] questioning the value and cost of their index participation,” while other exchanges declined to comment or didn’t respond at the time.

The Wall Street Journal article also mentions that the CFTC is coordinating their investigation with the U.S. Department of Justice (DOJ). As mentioned above, last month the DOJ opened a similar — but separate — investigation into BTC and ETH price manipulation.

But how can one manipulate BTC price?

The Wall Street Journal’s article mentions ‘spoofing’ as one of the examples of illegal trading schemes that are investigated by CFTC. The May report regarding the separate criminal probe launched by DOJ also listed ‘wash trading’ in a similar context.  

Spoofing is a process when a trader (or a group of traders) creates an order for a substantial amount of BTC (or any coin, commodity, etc.) to form the illusion of exchange optimism or pessimism — depending on their goals — and then cancels it, i.e. when someone puts an order to sell 2000 BTC, it might cause some panic among traders, rushing them to sell their stock before the price drops, effectively dropping that price as a result. That’s what an entity named Spoofy would do on Bitfinex, according to a detailed blog on Hackernoon.

Similarly, an article in the Journal of Monetary Economics published by a group of academics in early January, suggests that the price of Bitcoin was artificially bloated in 2013 by a single player operating on the largest exchange at the time, Mt. Gox (which then infamously shut down) and trader Sylvain Ribes published a Medium post in March, arguing that about $3 billion of all crypto-assets’ volume is trumped up.

Wash trading, in turn, is when a trader simultaneously sells and buys the same amount of BTC, essentially trading with himself. First, an investor will place a sell order, then place a buy order to buy from himself, or vice versa. Both activities, spoofing and wash trading, are illegal in the mainstream financial world, but it is worth noting that crypto markets are largely unregulated.

In theory, there are more ways to manipulate the price of BTC: the FICC Markets Standards Board (FMSB), the UK industry body overseeing standards in fixed income, currency and commodity trading, lists about 24 of them besides spoofing and wash trading. 

Market and community reaction

On June 10, the day after the Wall Street Journal report, crypto markets saw a sharp drop, as all of the top-100 cryptocurrencies by market capitalization were in the red over 24 hours, while total market capitalization was down by about $20 billion over the same period.

John McAfee, founder of McAfee Antivirus Software and crypto enthusiast who recently announced his bid to run for U.S. president in 2020 as a way to serve the crypto community, urged the community to not panic about the price drop:

“It is an overreaction to the news that Bitstamp, Coinbase, itBit and Kraken are being investigated for price manipulation. This will delay the bull market by no more than 30 days. Don’t buy into the fear. Buy the coins.”

While the CFTC probe into four major exchanges is considered to be one of the reasons for the price drop, it might have also been related to the mainstream media reports regarding the security breach of South Korean crypto exchange Coinrail. However, this event is unlikely to have significantly impacted the price action on the markets, with Coinmarketcap data showing that Coinrail is the 99th largest crypto exchange, with a rather modest trading volume of about $2.5 million. The community’s reaction on Bloomberg, the Wall Street Journal, Reuters, the Guardian and others claiming that Coinrail’s hack had crashed markets seemed frustrated.

In late May, BTC fell as much as 4.3 percent to $7,267 shortly after Bloomberg broke news about the DOJ and CFTC investigation on May 24 that the media outlet posted as an update a few hours after the original publication, which also prompted some community members to accuse the publication of FUD.

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Crypto Trading, Explained

What is crypto trading?

This type of trading involves exchanging one cryptocurrency for another, buying and selling coins, and exchanging fiat money into crypto.

It bears some similarities to foreign exchange (forex), where fiat currencies from across the globe are traded 24 hours a day.

The number of cryptocurrencies has exploded in recent years – and estimates suggest there are now more than 1,500 in existence.

Many of these coins can only be acquired using a major cryptocurrency such as Bitcoin or Ethereum. Because of this, you’ll likely need to perform trades if you want to contribute to initial coin offerings (ICOs,) or use a blockchain company’s services.

One upside of crypto trading is that you can get involved without mining coins yourself – a process that takes time, energy, technical knowhow and a lot of computing power.

OK! So how do I buy crypto?

You’ll usually go through something known as a crypto exchange.

Crypto exchanges generally fall into two categories: centralized and decentralized.

As well as buying crypto using fiat currency, a centralized exchange is somewhere you can store funds and exchange the likes of Bitcoin for other coins and tokens. Examples include Coinbase, Kraken and Binance. Although there is less risk that your funds will disappear if you forget a password or your private key, it’s important to go with reputable providers who have high security standards. That’s because there have been cases where millions of dollars have disappeared from these exchanges overnight through hacking.

On the other side of the coin, decentralized exchanges (DEX) remove the middleman – meaning trading is automated and peer to peer. They include Waves, Bitsquare, Bitshares, and CounterParty. Unlike their centralized counterparts, there is more of an emphasis on privacy here, allowing you to take further steps to protect your identity. The “trustless environment” on these platforms is driven by smart contracts. Although you retain 100 percent control of your cash through your own personal wallet, losing your private keys could make your funds irretrievable.

So where is the best place to store my crypto, then?

This depends on what your priorities are.

So-called “hot wallets” make accessing your crypto easy – allowing you to transfer funds and complete trades quickly and with ease. Many providers now offer mobile apps so this can be done on the move. Meanwhile, “cold wallets” are stored offline – commonly on USB sticks – with some people even writing down their private keys on paper. The latter can work well if you’re looking to save crypto for a rainy day.

Another thing to think about is what you want to store in your crypto wallet. If you’re interested in trading, the odds are that you’ll own multiple cryptocurrencies at once. Some wallets are only designed to support one coin, while others support dozens.

What should I look for when buying coins?

With hundreds to choose from, each with a different value and purpose, it’s worth doing your research.

Only a few cryptocurrencies – such as Bitcoin and Ethereum – have achieved mainstream levels of popularity. However, even well-established currencies can fall victim to extreme price volatility. It can be difficult to predict how prices will fluctuate with newly minted coins because there is little historical information to analyze. Backing a new currency could prove extremely lucrative, but equally, there’s a chance you’ll make an expensive mistake if you don’t know what you’re doing.

Keeping up to speed with the news on Cointelegraph, seeking independent ratings on ICOs, and gathering as much information as you can on a coin’s background are essential steps before you decide to make an investment. After making a purchase, monitor any changes in price closely – and consider setting higher and upper limits on when you would want to sell your crypto, mitigating losses in the event of a crash and protecting profits after a surge.

Any beginner’s mistakes I should avoid?

Try to avoid putting all your eggs in one basket.

Just like traditional investing, it’s worth having a diverse portfolio and spreading risk. That way, if one cryptocurrency performs disastrously, it won’t have a catastrophic effect on the overall value of your assets.

Another tip is to try and determine why the value of a particular cryptocurrency is rising or falling before you make an investment. Buying a coin that’s in freefall and waiting for its value to increase again may seem astute, but there’s no guarantee that it’ll bounce back. Chasing gains by backing a currency that’s surged can also seem tempting, but there’s always the risk of “pump and dump” schemes where the price crashes afterwards. Know the “why” before you buy.

Finally, always check, double check and triple check while trading – a simple tip that even seasoned crypto holders forget. When setting up buy or sell orders, make sure your numbers add up, as even the smallest of typos can see you lose an eye-watering amount. Also, when dealing with an exchange, make sure you’re sending coins to the correct address.

Is there a way to learn crypto trading?

To improve rapidly, you need guidance and support from a mentor or a community you trust.

Ideally, a rookie trader should start by choosing a reliable exchange and playing with popular coins, such as Bitcoin or Ethereum. However, the learning by doing approach is too slow for those who want to succeed fast. Joining a community of like-minded traders could be one of the best decisions to make: there are plenty of groups on Telegram or regular meetups in the US and other countries.  

Also, resources such as Taklimakan Network, the blockchain investment platform, connect amateur crypto investors and traders with industry experts. The company’s ICO started in April and will finish on August 31.

Unlike numerous intermediaries in the crypto world, the platform’s goal is actually to teach you to make your own investment decisions. Taklimakan Network is encouraging experienced pros to share opinions on crypto markets and blockchain projects, helping crypto newbies to trade from the position of knowledge.  

Co-author: Vicky Lova

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S. Korea’s Largest Exchange UPbit Runs ‘Internal Audit’, Dispels Fraud Allegations

South Korea‘s largest cryptocurrency exchange UPbit said it has conducted an internal audit that disproves suspicions of fraud, local media reported Tuesday, May 15.

UPbit, which saw a sudden visit from financial regulators on Friday, May 11, on suspicion officials had faked balance sheets, has yet to publish the audit data, which it claims demonstrates its coin holdings are real.

Quoting the exchange’s CEO, local news outlet Naver now reports UPbit’s ledgers are “100%” in step with their wallets.

Claims that a “misunderstanding” between government inspectors over multiple wallets caused the suspicions also appear valid, social media commentators added Tuesday.

Friday’s original inspection caused panic on markets and coincided with Mt. Gox trustees apparently selling a further chunk of client liquidation funds, resulting in several days of price drops.

While the matter is not officially settled, responses note, UPbit’s reports about the audit would appear counterproductive if made at a time when no concrete information existed at all.

“We will see how the story unfolds, but I find it highly unlikely that UPbit would spin a narrative of innocence if they were under investigation where proof was easily seen through blockchain transactions,” a Twitter-based Korean cryptocurrency news commentator wrote.

UPbit, owned by a subsidiary of South Korean communications giant Kakao, is the world’s fifth largest crypto exchange by 24-hour trade volume, seeing about $910 mln in trades on the day to press time.

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Norwegian Crypto Exchange Loses Case Against Nordea Bank For Closing Its Account

Norwegian cryptocurrency exchange Bitmynt AS has lost its case against Scandinavian financial services giant Nordea, local news E24 reports May 4. The ruling concludes a case, in which Bitmynt founder Sturle Sunde sued Nordea for closing the exchange’s account.

Sturle Sunde first brought legal action against Nordea in December of last year, when Nordea closed Bitmynt’s account over concerns of inadequate anti-money laundering mechanisms and terrorist financing risks. According to local news, this made Sunde ineligible to register with the Brønnøysund Register Centre to establish limited liability. The ruling of the Oslo District Court reads:

“The Court is, after a global assessment, [in] no doubt that the risk of money laundering and transactions related to criminal offenses is clearly elevated by Bitcoin trade, although Bitcoin trading is now also largely done [under] legitimate conditions.”

The court found “it clear that this risk constitutes an objective reason for the bank to deny customer relationships” under a provision of the Finance Contracts Act. Sunde said he is disappointed in the decision and that the court’s verdict “in practice” bans Bitcoin trading in general in Norway. He maintains that the exchange did not violate any laws, and plans to appeal the decision.

The court was especially critical of Sunde’s safety practices, pointing out that they were mostly manually carried out by Sunde himself. The sentence states, “He believes he knows the customer and has a stomach feeling that makes him recognize suspicious conditions.” The court found that Sunde’s intuition, in combination with customer contact and usage of Wallet Explorer, was insufficient in mitigating risk to a degree to which the bank could accept.

Sunde said that the financial costs of the case are substantial, having already spent NOK 1 mln ($124,000). He said that he is now considering crowdsourcing for funding the appeal. When asked whether the trial has been worth the money, Sunde answered:

“Until now, it has not been, but I hope that it will end.”

In April, a group of Chilean cryptocurrency exchanges sued a group of banks for defacto banning the crypto industry in the country by closing down their accounts. On April 25, crypto exchange Buda won an appeal in Chile’s anti-monopoly court to have their accounts temporarily re-opened at state bank Banco del Estado de Chile and Itau Corpbanca.

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Goldman Sachs Says Bitcoin ‘Is Not A Fraud’, Plans Trading

Goldman Sachs has said Bitcoin “is not a fraud” as it unveiled plans to buy and sell cryptocurrency, the New York Times reported May 2.

In a move which sets the investment banking giant apart from its Wall Street competitors, Goldman will initially offer various contracts with Bitcoin exposure before rumoredly entering the trading arena.

Commenting on the decision, Rana Yared, an executive involved in creating the offerings, said the bank had been “inundated” with client requests.

“It resonates with us when a client says, ‘I want to hold Bitcoin or Bitcoin futures because I think it is an alternate store of value,’” she told the publication.

“…It is not a new risk that we don’t understand. It is just a heightened risk that we need to be extra aware of here.”

She added that Goldman “had concluded Bitcoin is not a fraud,” a poignant statement in an industry where competitor JPMorgan CEO Jamie Dimon’s infamous description of Bitcoin still resonates.

Nonetheless, even Goldman CEO Lloyd Blankfein publicly stated Bitcoin “is not for him” during its all-time price highs in December 2017, and Yared appeared quick to dispel any myths that the bank was a ‘Bitcoin believer.’

“I would not describe myself as a true believer who wakes up thinking Bitcoin will take over the world,” she added.

“For almost every person involved, there has been personal skepticism brought to the table.”