What Could Kill the Bitcoin Boom

If you bought a Bitcoin in early 2017, when one cost less than $900, you could have a profit of more than 1,200 percent now. But you almost certainly didn’t do that. Perhaps you dipped in a toe in November or December, as the price hit headline-grabbing records—$10,000, then $15,000, then higher. If you were very unlucky and bought at the peak of about $20,000 on Dec. 17, you’d have lost more than 40 percent of your money as of Jan. 16, when the price was $11,200. More than $2,000 of that decline came in about 24 hours, after South Korean Finance Minister Kim Dong-yeon indicated the country may crack down on cryptocurrency trading to discourage speculation. It’s not every asset that can feel like it’s in a bubble and a crash at the same time.

But based on no other valuation metric than what it cost a year ago, the price of Bitcoin is still dizzyingly high. For the many doubters who can’t believe things have come this far—and for Bitcoin owners who can see how much they might lose—the big question is what it would take to knock the price back further.

In past episodes, “Bitcoin and digital currencies have been incredibly resilient to bad news,” says Meltem Demirors, director of development at Digital Currency Group, which invests in Bitcoin and related technologies. Cryptocurrency exchanges such as Mt. Gox, Bitfinex, and BTC-e have been hacked over the years, with hundreds of millions of dollars’ worth of Bitcoin stolen. China in September moved to shut down exchange trading of the cryptocurrency. None of these permanently stopped Bitcoin’s rise up the price charts, especially after it drew the attention of hedge fund traders and futures markets.

One doomsday scenario would be a successful hack of the blockchain. That’s the underlying technology that records and verifies every transaction, using exact copies of a database spread on computers all over the world. Those host computers, called miners, are rewarded with new Bitcoin for doing the work of verifying transactions. An attacker might be able to alter the blockchain’s history by marshaling more than half the computing power on the network. But that would be monumentally difficult; someone with the technology to do it could instead “opt into the game” and get paid to mine Bitcoin, says Tyler Winklevoss, co-founder of the Gemini digital asset exchange and one of the largest Bitcoin holders.

The likelier risks are far more pedestrian. The first is that while plenty of investors and speculators have piled into Bitcoin, it’s a difficult currency to use in the real world. The network is slow and expensive for small transactions. And who wants to spend $4 in Bitcoin for a coffee if next week that could be worth $8? “My big concern as a company is that digital currency doesn’t find its quote-unquote killer use cases, where people are saying, ‘Wow, we now have tens of millions of daily active users that are using it for payments,’ ” says Adam White, who runs GDAX, the exchange for institutional investors run by Coinbase. “That’s one of the largest existential threats to the company.”

BitPay's Singh Calls Bitcoin Selloff an Overreaction

There’s been a very public civil war among Bitcoin developers: One group favors changes to the network, the other doesn’t. “It’s got to have the developer community come together and figure out how to scale it properly and continuously,” says Sheri Kaiserman, a managing director at Wedbush Securities and an early Wall Street believer in Bitcoin’s potential. Meanwhile, Bitcoin faces competition from other digital currencies, from Bitcoin Cash to Litecoin to Ether, which have also seen big gains and wild swings.

You could spend weeks learning about the nuances of the various cryptocurrencies. But the main risk to Bitcoin is actually the easiest to understand. “The biggest factor in what’s driving the price up is potentially what will drive it down—a reversal of animal spirits,” says Adam Ludwin, chief executive officer of blockchain startup Chain. “There is essentially a belief this will continue to go up. If people believe it will continue to go down, that’s self-reinforcing.”

To explain that psychology, Ludwin invokes John Maynard Keynes. The economist likened investing to a newspaper contest where readers were asked to pick the picture of the person the majority of other people would find most attractive. To win, a reader would have to discard his own judgment and bet purely on a guess of what the average person would find beautiful. Or, maddeningly, even on what the other players would think the average player would like. Cryptocurrency in general is “really one of the most beautiful distillations of the Keynesian beauty contest that’s ever existed,” says Ludwin. All investments have some of this speculative element, but unlike, say, a stock, Bitcoin isn’t a claim on future earnings to which investors can hitch a valuation. To bet on Bitcoin is to believe simply that others will want it.

One read on the psychology of the Bitcoin boom is that it’s part of a broad bull market in all kinds of assets. Despite anxieties about politics, North Korea, and rising equity valuations, investors seem to be in a mood to embrace risk and are fearful of missing out on big gains. Or perhaps Bitcoin is the shadow side of that optimism: Many are drawn to cryptocurrency because they see it as a palliative to the system that came crashing down in 2008, and their belief in Bitcoin has been hard to shake. Market psychology is difficult to pin down—the one thing that’s reliable about it is its volatility.

    BOTTOM LINE – Despite its meteoric rise in the past few years, Bitcoin remains a wildly volatile investment, dropping more than $2,000 in a day when bad news hits.

    Read more: www.bloomberg.com

    Bitcoin Plunges After Plans for Split Called Off

    Bitcoin continued its retreat from a record high after traders weighed in on the cancellation of a technology upgrade that threatened to disrupt the biggest cryptocurrency.

    Investors who were expecting the extra coins stemming from a split of the chain may be taking profits, while others who are disappointed the update was scrapped earlier this week may be switching to alternative coins, according to Charlie Lee, founder of litecoin, the fifth-largest cryptocurrency by market value.

    While bitcoin soared to a record $7,882 within minutes of news that it would avoid another split on Wednesday, the gains have evaporated. Bitcoin is now trading more than $1,000 below where it was after a faction of the community scrapped plans for a so-called hard fork. Bitcoin was down 8 percent to $6,575 at 2:19 p.m. in New York.

    Some speculators are disappointed they won’t get the additional coins that would have been created by a hard fork. While bitcoin splits are potentially disruptive, they’ve so far amounted to free money for holders of the cryptocurrency. Bitcoin Cash, the result of a hard fork in August, has climbed to about $900 from as low as $565 on the day the split was canceled, while bitcoin has slipped almost 10 percent after touching a record right after the news.
    The main architects behind a change to its underlying software, known as SegWit2x, canceled their controversial plans Wednesday, saying they wanted to avoid deepening divides in the developer community.

    Bitcoin developers, users and miners — those running computers that crunch the complex math required to verify transactions — have been trying to agree on ways to make transactions faster, as the network’s growing popularity has led to congestion. After an initial upgrade in August known as SegWit, short for Segregated Witness, a group in the bitcoin community was calling for SegWit2x. The second upgrade hadn’t gained as much support and was only a week away from confronting bitcoin with one of its hardest tests ever.

    Bitcoin had climbed from about $6,00O since CME Group Inc., the world’s largest exchange owner, said on Oct. 31 that it wants to offer bitcoin futures by the end of the year, only a month after dismissing such a plan. Cboe Global Markets Inc. said in August that it wants to sell futures. Both need approval from the U.S. Commodity Futures Trading Commission.

    Skeptics of the digital currency ranging from billionaire Warren Buffett to JPMorgan Chase & Co. Chief Executive Officer Jamie Dimon have warned that the unregulated asset is a speculative bubble in danger of bursting after its almost sevenfold increase this year.

      Read more: www.bloomberg.com

      Heres What the World’s Central Banks Really Think About Bitcoin

      Eight years since the birth of bitcoin, central banks around the world are increasingly recognizing the potential upsides and downsides of digital currencies.

      The guardians of the global economy have two sets of issues to address. First is what to do, if anything, about emergence and growth of the private cryptocurrencies that are grabbing more and more attention — with bitcoin now surging toward $10,000. The second question is whether to issue official versions.

      Following is an overview of how the world’s largest central banks (and some smaller ones) are approaching the subject:

      U.S.: Privacy Worry

      The Federal Reserve’s investigation into cryptocurrencies is in its early days, and it hasn’t been overtly enthusiastic about the idea of a central-bank issued answer to bitcoin. Jerome Powell, a board member and the chairman nominee, said earlier this year that technical issues remain with the technology and "governance and risk management will be critical." Powell said there are "meaningful" challenges to a central bank cryptocurrency, that privacy issues could be a problem, and private-sector alternatives may do the job.

      Euro Area: Tulip-Like

      The European Central Bank has repeatedly warned about the dangers of investing in digital currencies. Vice President Vitor Constancio said in September that bitcoin isn’t a currency, but a “tulip” — alluding to the 17th-century bubble in the Netherlands. Colleague Benoit Coeure has warned bitcoin’s unstable value and links to tax evasion and crime create major risks. President Mario Draghi said this month the impact of digital currencies on the euro-area economy was limited and they posed no threat to central banks’ monopoly on money. 

      China: Conditions ‘Ripe’

      China has made it clear: the central bank has full control over cryptocurrencies. With a research team set up in 2014 to develop digital fiat money, the People’s Bank of China believes "conditions are ripe" for it to embrace the technology. But it has cracked down on private digital issuers, banning exchange trading of bitcoin and others. While there’s no formal start date for introducing digital currencies, authorities say going digital could help improve payment efficiency and allow more accurate control of currencies.

      Japan: Study Mode

      Bank of Japan Governor Haruhiko Kuroda said in an October speech that the BOJ has no imminent plan to issue digital currencies, though it’s important to deepen knowledge about them. “Issuing CBDC (central bank digital currency) to the general public is as if a central bank extends the access to its accounts to anyone,” Kuroda said. “As such, discussion about CBDC revisits fundamental issues of central banking.”

      Germany: ‘Speculative Plaything’

      In a country where lot of citizens still prefer to pay in cash, the Bundesbank has been particularly wary of the emergence of bitcoin and other virtual currencies. Board member Carl-Ludwig Thiele said in September bitcoin was “more of a speculative plaything than a form of payment.” A shift of deposits into blockchain would disrupt banks’ business models and could upend monetary policy, Thiele said. At the same time, the Bundesbank has been actively studying the application of the technology in payment systems.

      U.K.: Potential ‘Revolution’

      Bank of England Governor Mark Carney has cited cryptocurrencies as part of a potential “revolution” in finance. The central bank started a financial technology accelerator last year, a Silicon Valley practice to incubate young companies. Carney says technology based on blockchain, the distributed accounting database, shows “great promise” in enabling central banks to strengthen their defenses against cyber attack and overhaul the way payments are made between institutions and consumers. He has nevertheless cautioned the BOE is still a long way from from creating a digital version of sterling.

      France: ‘Great Caution’

      Bank of France Governor Francois Villeroy de Galhau said in June that French officials "advise great caution with respect to bitcoin because there is no public institution behind it to provide confidence. In history all examples of private currencies ended badly. Bitcoin even has a dark side — there were this data attacks." He said "those who use Bitcoin today do so at their own risk."

      India: Not Allowed

      India’s central bank is opposed to cryptocurrencies given that they can be a channel for money laundering and terrorist financing. Nevertheless, the Reserve Bank of India has a group studying whether digital currencies backed by global central banks can be used as legal tender. Currently, the use of cryptocurrencies is a violation of foreign-exchange rules.

      Brazil: Support Innovation

      The Banco Central do Brasil sees “no immediate risk for the Brazilian financial system" but remains alert to the developments of the usage of those currencies, it said in a statement this month. The bank pledged “to support financial innovation, including new technologies that make the financial system safer and more efficient.”

      Canada: Asset-Like

      The Bank of Canada’s senior deputy governor, Carolyn Wilkins, who is leading research on cryptocurrencies, said in an interview this month that cryptocurrencies aren’t true forms of money. “This is really an asset, or a security, and so it should be treated that way,” Wilkins said. As others, she viewed distributed ledger technology as promising for making the financial system more efficient.

      South Korea: Crime Watch

      The Bank of Korea’s focus has been protecting consumers and preventing cryptocurrencies from being used as a tool of crime. Deputy Governor Shin Ho-soon said this month that more research and monitoring was needed.

      Russia: ‘Pyramid Schemes’

      Russia’s central bank has expressed concerns about potential risks from digital currencies, with Governor Elvira Nabiullina saying “we don’t legalize pyramid schemes” and “we are totally opposed to private money, no matter if it is in physical or virtual form.” For the moment, the Bank of Russia prefers to delay a decision on regulating the financial instruments unless President Vladimir Putin pushes for action sooner. The central bank will work with prosecutors to block websites that allow retail investors access to bitcoin exchanges, according to Sergey Shvetsov, a deputy governor.

      Australia: Monitoring Closely

      The Reserve Bank is closely monitoring the rise of digital currencies and recognizes the technology underpinning bitcoin has the "potential for widespread use in the financial sector and many other parts of the economy," head of payments policy Tony Richards said last month.

      Turkey: Important Element

      Digital currencies may contribute to financial stability if designed well, Turkish Central Bank Governor Murat Cetinkaya said in Istanbul earlier this month. Digital currencies pose new risks to central banks, including their control of money supply and price stability, and the transmission of monetary policy, Cetinkaya said. Even so, the Turkish central banker said that digital currencies may be an important element for a cashless economy, and the technologies used can help speed up and make payment systems more efficient.

      Netherlands: Most Daring

      The Dutch have been among the most daring when it comes to experimenting with digital currencies. Two years ago the central bank created its own cryptocurrency called DNBcoin — for internal circulation only — to better understand how it works. Presenting the results last year, Ron Berndsen, who was in charge of the project, said blockchain may be “naturally applicable” in the settlement of complex financial transactions.

      Scandinavia: Exploring Options

      Like the Dutch, some Nordic authorities have been at the forefront of exploring the idea of digital cash. Sweden’s Riksbank, the world’s oldest central bank, is probing options including a digital register-based e-krona, with balances in central-database accounts or with values stored in an app or on a card. The bank says the introduction of an e-krona poses "no major obstacles" to monetary policy.

      In an environment of decreasing use of cash, Norway’s Norges Bank is looking at  possibilities such as individual accounts at the central bank or plastic cards or an app to use for payments, it said in a May report. Denmark has backtracked somewhat from initial enthusiasm, with Deputy Governor Per Callesen last month cautioning against central banks offering digital currencies directly to consumers. One argument is that such direct access to central bank liquidity could contribute to runs on commercial banks in times of crisis.

      New Zealand: Considering Future

      The Reserve Bank of New Zealand, once a pioneer on the global stage with its early introduction of an inflation target, said Wednesday it’s considering its future plans for currency issuance, and how digital units may fit into those strategies. “Work is currently underway to assess the future demand for New Zealand fiat currency and to consider whether it would be feasible for the reserve bank to replace the physical currency that currently circulates with a digital alternative,” the RBNZ said in what it termed an analytical note.

      Morocco: Violating Law

      Representing one of the more stringent reactions, the country has deemed that all transactions involving virtual currencies as violating exchange regulations and punishable by law. Cryptocurrencies amount to a hidden payment system, not backed by any institution and involving significant risks for their users, authorities said in a statement this month.

      Bank for International Settlements: Can’t Ignore

      The central bank for central banks has said that policy makers can’t ignore the growth of cryptocurrencies and will likely have to consider whether it makes sense for them to issue their own digital currencies at some point. “Bitcoin has gone from being an obscure curiosity to a household name,” the BIS said in September. One option is a currency available to the public, with only the central bank able to issue units that would be directly convertible to cash and reserves. There might be a greater risk of bank runs, however, and commercial lenders might face a shortage of deposits. Privacy could also be a concern.

        Read more: www.bloomberg.com

        Youd Be Crazy to Actually Spend Bitcoin

        A little more than four years ago, Coupa Café, a caramel-macchiato joint in Palo Alto, began accepting bitcoin. This was shortly before the first big bitcoin rush briefly pushed the cryptocurrency’s price from about $100 to more than $1,000. At the time, two or three Coupa customers a week would pay their bills with bitcoin, says co-owner Camelia Coupal. Today, the number is … still two or three people a week. “It’s a really minimal part of our sales,” she says. “It’s really just a quirky thing for our customers.”

        That’s the story of bitcoin this past year: The cryptocurrency has made fortunes for speculators, but—for that reason and others—it hasn’t been much use as a medium of exchange. Except in countries such as Venezuela, where inflation makes the local money even more volatile than bitcoin prices, its use by online merchants is virtually zero and shrinking, according to Morgan Stanley. When businesses like Coupal’s started accepting bitcoin, advocates predicted it would eventually replace money. Those voices have grown quiet. “The value of bitcoin is really predicated on its being a useful means of transactions,” says Jacob Leshno, an assistant professor at Columbia Business School. “If you take that away, all you are left with is a bubble asset.”

        In 2017 bitcoin’s value rose from about $1,000 to as much as $19,000, often with swings of thousands of dollars a day. (As of publication, it’s trading at about $15,000.) Governments including China’s and Japan’s tightened the rules governing cryptocurrency businesses, and China has shut down its exchanges. Bitcoin’s popularity has also made its network much slower and sent transaction fees spiraling. In late December, sellers had to choose between waiting hours and sometimes days for their transactions to go through or paying an average $55 fee to jump the line. (In mid-2016 such fees topped out at about 15¢.) That’s made bitcoin impractical for everyday transactions, such as $3 cups of coffee.

        The eight-year-old bitcoin network is “really janky,” says John Quinn, co-founder of Storj Labs Inc., whose dozen employees worked 12-hour days for two months last spring to switch their data-storage startup from bitcoin to the rival cryptocurrency ethereum. Two-year-old ethereum has its own problems, including rising transaction fees, but it’s become the first choice for most startups seeking to use so-called smart contracts or raise money through initial coin offerings, which generated about $4 billion in 2017. While ethereum has added lots of features and uses, bitcoin looks almost the same as it always has, says Lucas Nuzzi, a senior analyst at Digital Asset Research.

        Bitcoin’s limitations are becoming bigger issues as banks and other financial institutions build out their own similar networks. “Cost, we expect that to be sub-1¢,” says Richard Brown, chief technology officer for industry consortium R3, which is helping companies build such networks. Completing a transaction, he says, “takes the speed of light, seconds at most.”

        Some bitcoin developers are trying to tweak the network software to speed transactions, but disagreements about the approach have led some groups to split off and create their own smaller networks. “Startups need to be aware that they are building a house on moving ground,” says Michael Dunworth, chief executive officer of Wyre Inc., a cross-border payment service using the bitcoin network.

        Because only 21 million bitcoins will ever be issued, there’s a case to be made that the currency is simply evolving from a transaction network to digital gold. Longtime advocates say different. “At the end of the day, it is bitcoin’s use in commerce that drives its price and further adoption,” says Roger Ver, the advocate known as Bitcoin Jesus, who spent bitcoin last year to cover his startup’s 60-person payroll and book hotels on Expedia. (He’s become a vocal champion for “bitcoin cash,” a cryptocurrency that’s facing an internal insider-trading investigation after having splintered from bitcoin last summer.)

        Amid the current fervor, Ver is the exception. “No one is spending bitcoin,” says Iqbal Gandham, managing director at EToro Ltd., a cryptocurrency exchange. “It could be the most expensive piece of pizza you ever bought.”

          BOTTOM LINE – There’s little sense in using bitcoin for its intended purpose as a medium of exchange when its value can fluctuate by thousands of dollars in a given trading day.

          Read more: www.bloomberg.com

          How to Make Money Off Bitcoin Without Actually Owning It

          It’s the equity investor’s conundrum: how to get access to the skyrocketing returns of bitcoin and blockchain without actually owning the tokens.

          To Thomas Lee, a major bitcoin bull who heads research for Fundstrat Global Advisors, a dozen stocks should do the trick.

          “We believe investors should have exposure to blockchain, particularly given bitcoin has essentially zero correlation to equities, bonds and commodities —- hence, as a portfolio strategy, bitcoin is a good diversification tool,” Lee wrote in a note to clients Friday. “But this is impractical for many equity managers, given the parameters of their mandate or because of practical issues (custody of tokens, etc.).”

          Investors recently have sought ways to participate in the eye-popping bitcoin rally without having to purchase the cryptocurrency on the unregulated exchanges that have proven susceptible to hacks. Absent from Lee’s list are bitcoin futures, regulated derivative products that will debut on Cboe Global Markets Sunday and CME Group Dec. 18.

          Lee has long been one of Wall Street’s biggest advocates of the cryptocurrency. Two weeks ago he doubled his price target on bitcoin to $11,500 by the middle of 2018. It went for $15,552 as of 10:31 a.m. in New York on Friday, according to Bloomberg composite pricing.

          He suggests equity managers look to these ideas to leverage blockchain in their portfolios:

          • Bitcoin Investment Trust (GBTC)
          • MGT Capital Investments Inc. (MGTI)
          • HIVE Blockchain Technologies Ltd. (HIVE)
          • U.S. Global Investors Inc. (GROW)
          • DigitalX Ltd. (DCC)
          • NVIDIA Corp. (NVDA)
          • Advanced Micro Devices Inc. (AMD)
          • CME Group Inc. (CME)
          • Cboe Global Markets Inc. (CBOE)
          • Overstock.com Inc. (OSTK)
          • Goldman Sachs Group Inc. (GS)
          • Square Inc. (SQ)

          The looming availability of futures weighed on these equity proxies this week, as speculators may be shifting away from stocks of companies that have benefited as bitcoin’s price rose more than 15-fold this year. Both HIVE Blockchain Technologies and U.S. Global Investors are down near 10 percent this week. Nvidia and Advanced Micro Devices have also suffered losses in the five days ending Dec. 8.

          As for the totality of Lee’s picks, an equal weighted basket of these stocks is up 136 percent this year, according to the note. But as impressive as that may seem, he points out that it still lags bitcoin’s 1,685 rise in 2017.

            Read more: www.bloomberg.com

            Crypto-Linked Stocks Sink With Bitcoin on South Korean Warning

            The rout in bitcoin is also taking down stocks with ties to cryptocurrencies.

            Pareteum Corp. dropped 26 percent as of 1:13 p.m. in New York, while Digital Power Corp. and LongFin Corp. each slipped more than 6 percent after South Korea’s government said it wanted to clamp down on speculation, potentially by shutting down some exchanges. The warning sent bitcoin below $14,000, leaving it down 29 percent from last week’s record.

            Overstock.com Inc., On Track Innovations Ltd., and Riot Blockchain Inc. also traded lower Thursday, in relatively light volume during a holiday-shortened week.

            The crypto space has been on a wild ride this month, with the digital token bitcoin soaring to record highs before a dramatic selloff last week. The assets rebounded earlier this week, before resuming their slide lower in a test for investor enthusiasm in the asset class.

            Such volatility isn’t new for bitcoin or its proxies. The digital coin has seen many peaks and valleys over the course of its history. This year, it’s climbed 1,300 percent and once reached more than $19,500. Related assets have largely moved in tandem with the cryptocurrency. Shares of Riot Blockchain and Digital Power, while taking a hit today, are still up 611 percent and 475 percent this year, respectively.

            For related news and information:
            XBT Curncy GP for bitcoin
            VCCY for a cryptocurrency monitor

            For more on cryptocurrencies, check out the podcast:

              Read more: www.bloomberg.com

              Diary of an African Cryptocurrency Miner

              Eugene Mutai’s Nairobi apartment is filled with the sound of money: That would be the hum of a phalanx of fans cooling the computers he’s programmed to mine cryptocurrencies around the clock.

              The 28-year-old has given up a chunk of his living quarters to the enterprise. What’s more, he invests every spare cent in initial-coin offerings: fundraising tools some startups are using to crowdsource capital. He’s a proud citizen of a strange and controversial new world — and a rather rare breed, with just a high-school education and no formal training as a coder. That’s one thing he holds up as proof that cryptofinance isn’t the scam that a diversity of critics, from Jamie Dimon of JPMorgan Chase & Co. to Saudi Arabian Prince Alwaleed bin Talal, have suggested it is.

              “The entire ecosystem could be the biggest wealth-distribution system ever,” Mutai said as his 2-year old daughter, Xena, named after the warrior princess, played with a tablet, swiping from app to app. In the world of internet-based currencies traded without interference from banks or regulators, “big players can’t deny anyone from participating in the financial system.”

              Cables and electronics components that make up one of Mutai’s mining machines.
              Photographer: Luis Tato/Bloomberg

              For Mutai, the appeal is simple: It levels the playing field in global markets that don’t give people like him many breaks.

              An opposing view is that what this young man is doing is wrong or stupid, sucking up massive amounts of electricity to create a software-fabricated asset that’s traded anonymously in a lottery criminals find irresistible.

              So Mutai is either in the middle of a fraud, or a revolution. Whichever, the market has exploded — growing to $190 billion from just $17 billion at the start of the year. Hundreds of new digital tokens have sprung up as entrepreneurs started projects based on blockchain, the public bookkeeping technology that supports digital currencies, raising millions and even hundreds of millions of dollars in minutes. The value of bitcoin, the biggest of them all, has increased six-fold. And it’s about to go mainstream, with CME Group Inc. in Chicago planning to introduce bitcoin-futures trading contracts by the end of the year.

              Eugene Mutai and his daughter Xena.
              Photographer: Luis Tato/Bloomberg

              Cryptocurrencies are especially attractive in economies where there are restrictions on taking cash abroad, or people don’t have bank accounts, or the local currency is being trampled by inflation. That’s the case in Zimbabwe, for example, which is facing a liquidity crisis as inflation spirals: Bitcoin in the local Golix exchange has soared to more than $10,000, a 75 percent premium on global prices, as locals rush to it to protect savings.

              In six of the largest African nations for which there is trading data in the online exchange Local Bitcoins, the average premium to the Bloomberg bitcoin index is 7 percent; the gap in major bitcoin trading hubs such as China, South Korea, Germany and the U.K. doesn’t surpass 3 percent. Mutai said he sees cryptocurrencies as safe because “local political issues don’t affect them” — something of note in Kenya, where after two elections within three months there’s still a stalemate over who is the rightful leader.

              A bitcoin web trading screen.
              Photographer: Luis Tato/Bloomberg

              Just last year, Mutai hadn’t heard of bitcoin, which hardly makes him unusual. Neither does the fact that a decade ago he didn’t have access to a computer. He was interested in technology, though, and borrowed a friend’s Nokia Symbian S40, one of the first non-smartphones that could download apps. In between odd jobs in farming, herding sheep and ferrying people on his motorcycle, he taught himself the basics of HTML and CSS coding languages.

              He was living at the time in his mother’s home village — they moved there from the city for his last year of high school, after his twin brother died and his mom lost her job — and was barely earning enough to survive. So he decided to move in with his uncle in Nairobi, who happened to have a desktop computer and a WiFi connection. “It was do or die,” he said.

              Mutai spent four months glued to the computer, worrying his uncle, who at one point took the machine away. After mastering the mysteries of code, he landed a job as a programmer. He also became a consultant for the technology incubator iHub and for the Nairobi County government. By 2016, he was named Kenya’s top-ranked software developer by Git Awards, which bases its rankings on data from GitHub, a site where coders store and share their work.

              Mutai arranges a rack of cryptocurrency mining machines at his home in Nairobi, Kenya.
              Photographer: Luis Tato/Bloomberg

              Now Mutai works for Andela, which trains developers and engineers throughout Africa and connects them with companies including Microsoft Corp. His current contract is with Restaurant Brands International Inc., building an ordering app for Tim Hortons. He’s in the Kenyan middle class, a feat for a guy without a college degree.

              But his opportunity for real wealth, Mutai figures, is in cryptocurrencies, which he can exchange for dollars or hold as an investment. His mining rig runs six 1080 Ti graphics cards. Maintenance is pretty low, as he wrote on his Facebook page: “It sits in my living room doing its thing all day every day with little or no supervision.”

              At the moment, the rig churns out mainly digital coins called Zcash and LBRY Credits. Mutai said he’d like to increase production by plugging in two more graphics cards, but that will have to wait until he can upgrade the power supply to his apartment. As it is, his monthly electric bill is about $200, steep for a residence in Nairobi.

              His initial-coin offerings investing takes more personal energy. “I do a lot of research,” Mutai said. “I feel like a small VC.”

              Is he treading dangerous waters? Possibly, but he’s up for the gamble. “They say no-risk, no-return, and I’m willing to take the risk.”

                Read more: www.bloomberg.com

                Why Arbitrage Traders Are Salivating Over Bitcoin Futures

                The proverbial free lunch is just sitting there in the hours-old bitcoin futures market. So why isn’t it being gobbled up?

                Cboe Global Markets Inc.’s new contracts were priced as much as 13 percent higher than bitcoin itself since trading began Sunday night, according to data compiled by Bloomberg.

                That should have arbitrage traders salivating, especially among market makers starving after their — already successful and hugely profitable — efforts to make other similar assets trade in lockstep. Pity the poor S&P 500 arb living off spreads well below 1 percent, or merger arbs in the U.S., where the median gap is just north of 1 percent, according to data compiled by Bloomberg.

                “Arbitrage will close that gap, but it will be days and weeks,” Cboe Chief Executive Officer Ed Tilly said on Bloomberg Television Monday, less than a day after launching the product.

                Arbs make money when two strongly related assets converge in price, selling the one they consider pricey, buying the other, profiting off the difference.

                Their job is a little complicated with these futures. Bitcoin’s wild volatility makes it harder to predict where the most-active contract, which expires in January, will settle, Tilly added. Only a few thousand contracts have traded so far, perhaps not enough to exert much influence on the cryptocurrency. And some investors might be willing to pay a premium for futures on a regulated market instead of going to the trouble of creating accounts at bitcoin exchanges, which have been repeatedly hacked with millions of dollars worth of tokens stolen.

                “People feel a lot more comfortable in the futures on the Cboe than on an unregulated exchange,” said Kevin Kelly, managing partner of Benchmark Investments, which analyzes futures markets to develop indexes. 

                Then there’s the fact that when the Cboe contracts expire, buyers get cash, not bitcoin itself. When a derivative is cash-settled, that tends to weaken links to an underlying asset.

                “If you’re doing a cash-settled future, it’s just a bet,” said Aaron Brown, a former managing director at quant hedge fund AQR Capital Management who invests in the cryptocurrency and writes for Bloomberg Prophets. “If that’s not related to any underlying physical transaction, the only people who want to do it are gamblers.” The wide arb spread is “a big issue. It’s an illiquidity, it has to go away.” 

                Soon, Cboe won’t be the sole regulated exchange offering bitcoin futures. Rival CME Group Inc. will launch its own contracts on Dec. 18. And Nasdaq Inc. is planning to bring a competing product to market next year, Bloomberg News recently reported

                The price gap between bitcoin and bitcoin futures won’t last forever, said Dave Weisberger, CEO of CoinRoutes, a cryptocurrency data and order routing company.

                “The futures will ping-pong between premium and discount,” he said. “I suspect at some point, potentially triggered by a negative event, it will flip. Markets go up and down, and bitcoin has been no different. It’s just been fast.”

                  Read more: www.bloomberg.com

                  A $50 Million Hack Just Showed That the DAO Was All Too Human

                  Sometime in the wee hours Friday, a thief made off with $50 million of virtual currency.

                  The victims are investors in a strange fund called the DAO, or Decentralized Autonomous Organization, who poured more than $150 million of a bitcoin-style currency called Ether into the project.

                  Code was supposed to eliminate the need to trust humans. But humans, it turns out, are tough to take out of the equation.

                  The people who created the DAO saw it as a decentralized investment fund. Instead of leaving decisions to a few partners, anyone who invested would havea say in which companies to fund. The more you contributed, the more weight your vote carried. And the distributed structure meant no one could run off with the money.

                  That was the plan, anyway.

                  The DAO is built on Ethereum, a system designed for building decentralized applications. Its creators hoped to prove you can build a more democratic financial institution, one without centralized control or human fallibility. Instead, the DAO led to a heist that raises philosophical questions about the viability of such systems. Code was supposed to eliminate the need to trust humans. But humans, it turns out, are tough to take out of the equation.

                  A Never-Ending ATM

                  DAO developers and Ethereum enthusiasts are trying to figure out how they mightreverse the theft. The good news is that time is on their side. The thief transferred the stolen funds into a clone of the DAO that likely includes code that, as in the original system, delays payouts for a few weeks.

                  Stephan Tual, the COO of Slock.it, the company that built the DAO, says the thiefprobably never expected to be able to spend the ether. Each unit of ether is unique and traceable. If the hacker tries to sell any of the stolen ether in a cryptocurrency market, the system will flag it.

                  “It’s like stealing the Mona Lisa,” he says. “Great, congratulations, but what do you do with it? You can’t sell it, it’s too big to be sold.”

                  The DAO is a piece of software known as a “smart contract”–essentially an agreement that enforces itself via code rather than courts. But like all software, smart contracts do exactly what their makers program them to doand sometimes those programs have unintended consequences.

                  It’s not clear yet exactly how the hack worked, says Andrew Miller, a PhD student at the University of Maryland who studies smart contracts and helped audit Ethereum’s code last year. But he says the attacker probably exploited a programming mistake that’s exceedingly common in smart contracts.

                  Let’s say you have $50 in the bank and you want to withdraw that from an ATM. You insert your card, punch in your PIN number and then request that $50. Before the machine spits out the cash it will check your balance. Once it spits out the cash, it will debit $50 from that balance. Then the machine asks you if you’d like to process another transaction. You tap “yes” and try to take $50 again. But the ATM sees that your balance is now $0 and refuses. It asks you again if you want to process another transaction, so this time you say “no.” Your session ends.

                  Now imagine that the ATM didn’t record your new balance until you ended the session. You could keep requesting $50 again and again until you finally told the machine you didn’t want to process any more transactionsor the machine ran out of money.

                  The DAO hacker was probably able to run a transaction that automatically repeated itself over and over again before the system checked the balance, Miller says. That would allow anyone to pull far more money out of the fund than they put in.

                  The programming language that Ethereum developers use to write smart contracts, Solidity, makes it really easy to make this sort of mistake, says Emin Gun Sirer, a Cornell University computer scientist who co-authored a paper earlier this year pointing out a number of potential pitfalls in the DAO’s design. Others have previously spotted places in the DAO code that would have made such a theft possible. Sirer says the DAO developers have tried to be vigilant about preventing such flaws, but because it’s such an easy mistake to make, it’s not surprising that instances of the bug escaped notice.

                  All Too Human

                  As bad as the bug was, Sirer still thinks that both the DAO and Ethereum are worthwhile experiments. The DAO helped raise awareness of the idea of smart contracts, which Sirer thinks will eventually become extremely important to how the world conducts transactions. The project has also called attention to some of the biggest technical challenges.

                  “This is a rite of passage for the project,” he says.

                  The Ethereum team is now debating how, and whether, to refund the stolen funds. Ethereum works much like Bitcoin does: the system records each transaction in a global ledger that resides on every Ethereum user’s computer. The Ethereum team could release a new version of the software that tweaks this ledger to essentially reverse all of the DAO heist transactions. If enough people installed this version, it would be like the hack never happened. That’s exactly what many people in the community, including Ethereum creator Vitalik Buterin and the Slock.it team would like to see happen.

                  ‘No one wants to see this fail.’

                  “Fourteen percent of all ether is in the DAO,” Tual says. “No one wants to see this fail.”

                  But others think that reversing the transactions could have a damaging effect on people’s perceptions of ether an cryptocurrencies in general.

                  Alex Van de Sande, a user experience designer who has contributed to several Ethereum-related projects, and who put money into the DAO, says he believes other ways exist to retrieve the missing funds. Because the thief transferred the pilfered ether into a clone of the DAO, de Sande points out, it may well have the exact same security vulnerability as the original. Developers could just steal the ether back.

                  The idea behind Ethereum, much like Bitcoin, was to create a computer system that facilitated transactions using the immutable rules of mathematics. The code would eliminate the need to trust anyone. If people can simply reverse transactions they didn’t mean to make, it proves that people, not mathematics are really in charge of the system, de Sande says. If the code did something people didn’t mean it to do, then people will have to live the consequences.

                  The fact that a fork is being discussed at all proves that despite the Ethereum team’s best efforts, machines will always be subject to the messy politics of the human world. But that also might end up saving the project. The heist has divided people and exposed the inevitability of human weakness. But it’s also bringing people together to fix things. Humanity is making that possible, not mathematics.

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