Coinbase just migrated $5 billion worth of its users’ cryptocurrency to a new storage system. The move aims to improve the security of user funds on the platform.
What is most concerning, however, is the sheer volume of cryptocurrency being held on Coinbase. The $5 billion migration reportedly included 5% of all bitcoin in circulation, 8% of ethereum, and 25% of all circulating litecoin.
Earlier this month, Coinbase moved 5% of all BTC, 8% of all ETH, and 25% of all LTC in circulation to our next-gen secure cold storage. Here’s how we did it. https://t.co/8TJ6S97BnW
Centralization – a huge chunk of litecoin is stored in one place and controlled by one company.
Threat of hacks – if the Coinbase custody platform were to be hacked, the attackers could theoretically steal, and therefore control, a quarter of litecoin supply.
Ownership – it means that a huge proportion of litecoin owners don’t actually own their litecoin. Coinbase holds the private keys instead.
Admittedly, Coinbase does have strong security credentials (95% of its funds are held in cold storage and the remaining 5% is insured). The exchange is also fully regulated which should protect it against fraud and reduce the likelihood of hacks.
However, leaving your coins on an exchange platform remains a high-risk strategy. Not to mention you are trusting a third-party to look after your cryptocurrency. If you don’t have the private key yourself, you don’t technically own it.
Proof of Work is the algorithm that powers various blockchains, like Bitcoin, Ethereum, Litecoin, and Monero.
Miners solve complex mathematical puzzles using computer power to produce a “block” of transactions.
When a block is produced, the miner is rewarded with the native cryptocurrency: bitcoin, ether, or litecoin, for example.
Proof of work ensures that blocks are produced at a stable rate and are accurately verified.
Cryptocurrencies work on the principle of a blockchain, where blocks containing transactions are added to the chain to make transactions happen.
The issue is, the speed and validity of blocks must be kept in check. Proof of Work solves this issue, let’s check out how.
Blocks on the blockchain are quite powerful as they confirm the transaction of money between addresses. They also distribute new currency by issuing rewards to the block creator.
For these reasons, there are two important rules for block production.
Blocks need to be verified some way, so that we know what order transactions happened, among other things.
We need to control the speed at which blocks are added. If the speed is not controlled, block rewards are added to the network quickly and the worth of the currency plummets.
Bitcoin, for example, has a target block time of ten minutes. If blocks are created too fast, too much bitcoin will be given out to miners, thus flooding the market. Something has to keep that block time regulated.
Enter Proof Of Work
Proof of work solves both of our issues. It’s based on the idea that we include some data in the block that is hard to calculate, but easy to verify.
Hash algorithms are perfect for our verification problem but don’t fix the issue of timing on their own.
Hashes are designed to be fast to compute, very fast in fact. The time it took to calculate the above two hashes was less than one-hundredth of a second.
But we need to regulate the time, so blocks aren’t produced too quickly.
We have a simple solution to this: network difficulty.
Simply put, you can change how long it takes to create a block by making it harder to solve the cryptographic puzzle.
Usually, that means including a constraint that the hash must be below a specific number. And that that number is calculated at specific intervals.
Now miners have to hash their blocks many times, with each one taking up some time and lots of computer power. In order for the block creator to change the hash of their block, an additional bit of information is added to the block called thenonce.
A nonce is simply a number that can be modified as the block creator sees fit to change the output hash.
Each time a hash is calculated and does not meet the requirements of the network at that time, the nonce is incremented or otherwise changed and the hash re-calculated.
Often a miner will try a very large number of different nonces before they find one that will be accepted by the network. The total time all miners take to find a block should be somewhere around the block time (ten minutes for Bitcoin).
And if not, the difficulty is adjusted to keep the timing in line.
Not all Proof of Work Algorithms are the Same…
The hashing algorithm a cryptocurrency uses directly affects how difficulty will work, and what hardware you can run the mining software on.
To use Bitcoin as an example again; Bitcoin uses the algorithm SHA-256, which is an industry standard hashing algorithm used in many places.
If you’ve saved a password on a website, odds are it was hashed with Secure Hash Algorithm (SHA)-256 before it was stored. Using industry standard hashing algorithms means they are proven secure and worked on by massive communities.
However, using industry-standard algorithms is both a blessing and a curse.
A blessing because most hardware will be able to run your software. But a curse (depending on how you look at it) due to one word: ASICs.
ASIC (Application Specific Integrated Circuits) are mining hardware that gives your network a massive amount of mining power. That increases centralization due to price and power demands. The more ASICs you own or control, the more of the network you command.
Some other cryptocurrencies, like Monero, use their own hashing algorithm specifically designed for use in proof of work systems. These have the advantage that developers have complete control over what hardware the algorithm works on best.
Downsides to Proof of Work
There are a few downsides to Proof of Work when compared to other solutions.
First, Proof of Work requires a lot of computing power. And, the more mining power on the network, the higher the difficulty. Meaning that you very quickly run into a situation where those with the cash to buy hardware do. And when you have a lot of hardware, you tend to store all their hardware in one place, leading to centralization.
At worst, this could lead to a 51% attack, whereby one actor, or group of actors, control more than half of the network. If that happens, they could theoretically “double spend” the cryptocurrency on the network.
And second, that computing power needs a lot of electricity to run, and at the high end, miners go looking for the cheapest power possible. This means that miners start to congregate in cities or countries where the power is cheap, again leading to centralization.
The world’s first fully-regulated crypto ETP (exchange-traded product) will launch in Switzerland this week, allowing people to trade a basket of cryptocurrencies including bitcoin, ethereum, XRP, bitcoin cash, and litecoin.
It’s important to point out that, contrary to some misleading news reports, this is not the much-hyped bitcoin ETF (exchange-traded fund).
The cryptoverse is eagerly awaiting the approval of a bitcoin ETF, with many calling it the future catalyst for a bitcoin price surge. But how is this Swiss crypto ETP different? And what exactly do you need to know?
What is a Crypto ETP?
An ETP is an acronym for “exchange-traded product.”
In simple terms, an ETP tracks the price of an underlying asset (or a basket of assets), like gold, stocks, and now cryptocurrencies.
The beauty of ETPs is that they are simple and cheap. With this new ETP, investors don’t need to buy cryptocurrencies directly or figure out how to store them. They simply buy the ETP from their broker and instantly get exposure to a basket of five cryptocurrencies.
The ETP is traded on the Swiss stock exchange and can be bought through a traditional stockbroker.
In essence, they’re more accessible to institutional investors which may lead to more money flowing into the crypto market.
Sounds a Lot like an ETF…
It is. The difference is that “ETP” is an umbrella term for different types of exchange-traded products. Those products include ETFs.
ETFs are the most popular type of ETP, but there are others, including exchange-traded notes (ETN) and exchange-traded vehicles (ETFV).
The Amun Crypto ETP will begin trading this week on the Six exchange. It will track a basket of five cryptocurrencies, weighted heavily to bitcoin and XRP. The exact makeup of the ETP is listed below:
Bitcoin Cash: 5.2%
It’s interesting to note that XRP receives a significantly higher weighting compared to ethereum. Although XRP overtook ethereum as the second-largest cryptocurrency last week, the heavier weighting may be an indication of Amun’s expectations for the future.
Note: the weighting will be rebalanced automatically on a monthly basis.
Amun notes that it aims to provide a diverse holding of crypto assets. However, it removes any assets that are tied to a fiat currency, like tether, and any currencies with anonymity features (such as zcash and monero).
The Amun Crypto ETP also avoid any coins without sufficient liquidity and those that don’t trade on reputable exchanges.
“The Amun ETP will give institutional investors that are restricted to investing only in securities or do not want to set up custody for digital assets exposure to cryptocurrencies. It will also provide access for retail investors that currently have no access to crypto exchanges due to local regulatory impediments.”
The ETP carries a management fee of 2.5% annually.
Jane Street and Flow Traders will back the fund and have agreed to pour money into the ETP to give it liquidity. They are known as “market makers.”
In true cryptocurrency style, the ETP will trade under the ticker $hodl. It’s a nod to the popular crypto meme “hodl,” a misspelling of “hold” which was adopted by crypto enthusiasts as a term for holding bitcoin even through the biggest price drops.
It launches on the Swiss SIX exchange, the fourth-largest stock exchange in the world. Based in Zurich, it has a market capitalization of $1.6 trillion.
At the time, SIX CEO said: “For us, it is abundantly clear that much of what is going on in the digital space is here to stay and will define the future of our industry.”
Set to launch in 2019, the exchange will facilitate trading, settlement and storage custody services.
How Is This Different to the Anticipated Bitcoin Etf?
First, there’s the makeup of the ETF itself. The Amun Crypto ETP tracks a basket of cryptocurrencies, rather than purely bitcoin.
Secondly, there’s the scale and impact of the ETP. While the Swiss ETP is an important first step, launching an ETF in the US is a much bigger beast.
The size of the exchange is the first point of difference. The Swiss exchange has a market capitalization of $1.6 trillion, compared to the New York Stock Exchange’s $21.3 trillion and the Nasdaq’s $7.8 trillion.
Simply put, launching a bitcoin ETF on one of the major US exchanges would have a much larger impact.
Then there’s the regulatory process. Switzerland, as explained, is much more open to the crypto industry in general. Approval in Switzerland is less of a groundbreaking move. Whereas the approval of a bitcoin ETF in the US would break down the door for countless other cryptocurrency products and investment vehicles.
The Securities and Exchange Commission (SEC) faces a deadline of December 29th to rule on the next bitcoin ETF proposal put forth by VanEck. However, there’s a good chance the SEC will push the decision back into 2019.
Commentators expect a bitcoin ETF approval to kickstart a new bitcoin price surge. It would, theoretically, allow institutional investors to flood into the market.
Currently, many Wall Street traders are forbidden to buy or hold cryptocurrencies as part of their client portfolios. Others are worried about the risk involved with buying and storing so much crypto directly.
A bitcoin ETF would give them an easier way to gain exposure to the crypto market, without the risk and complexity of buying it directly.
The Swiss crypto ETP is an impressive and important milestone in crypto adoption. It provides a simple route for institutional investors to wade into the crypto market. However, this is not the catalyst many are waiting for, and it does not make a bitcoin ETF approval in the US any more likely.
As always, Block Explorer will bring you more information as and when the true bitcoin ETF is approved in the US.
So what exactly is going on? Why is the SEC pushing back so hard?
It has nothing to do with bitcoin itself
Throughout its many rejections, the SEC has been quick to point out that it has nothing to do with bitcoin’s functionality:
“[The agency] emphasizes that its disapproval does not rest on an evaluation of whether bitcoin, or blockchain technology more generally, has utility or value as an innovation or an investment.”
Problem 1: market size
Most of the bitcoin ETF proposals (except the VanECK ETF) track the bitcoin futures market, not bitcoin itself. The SEC says that’s a problem because the bitcoin futures market is too small:
“Among other things, the Exchange has offered no record evidence to demonstrate that bitcoin futures markets are ‘markets of significant size.’”
Bitcoin futures were only introduced in December 2017, so the market has not yet grown to the size of other mature markets. (It has only 2.5% the volume of the silver futures market, for example).
Problem 2: manipulation and fraud
Ultimately, this is the SEC’s biggest concern. The ETFs were rejected because they did not meet the Exchange Act requirements, in particular:
“The requirement that a national securities exchange’s rules be designed to prevent fraudulent and manipulative acts and practices.”
Price manipulation remains an underlying issue for the SEC.
Problem 3: bitcoin volume outside the US
Three-quarters of bitcoin trade activity takes place outside the US. That makes it difficult for the SEC to ensure “significant investor protection.”
Problem 4: wild swings on exchanges
Although this wasn’t addressed directly by the SEC, it has been suggested that an ETF is more likely to be accepted if crypto exchanges worked together. Some offer wildly different prices for the same asset while keeping true market data behind closed doors. The SEC is likely to want more transparency before approving an ETF.
Is there any hope for a bitcoin ETF?
The SEC hit a slightly more optimistic tone in the latest round of rejections. It hinted that a bitcoin ETF might provide a safer method for entering the market, compared to buying the asset itself:
“The Commission acknowledges that, compared to trading in unregulated bitcoin spot markets, trading a bitcoin-based ETP on a national securities exchange may provide some additional protection to investors, but the Commission must consider this potential benefit in the broader context of whether the proposal meets each of the applicable requirements of the Exchange Act,”
Bitcoin prices drop in response
After the Winklevoss rejection and the VanEck delay, the price of bitcoin collapsed. It seems today, however, traders are more realistic, having priced in the high likelihood of rejection. Bitcoin is down 3.5%, but it’s a far cry from the steep drops we saw after previous rulings.
Use our news to inform cryptocurrency trading decisions, stay up-to-date on happenings in the industry, and more!
Gemini To Become First BitLicensed Exchange To Offer Trading in Zcash
The New York State Department of Financial Services has authorized Gemini Trust Company to offer trading of Zcash, Litecoin and Bitcoin Cash. Tyler Winklevoss, Chief Executive Officer of Gemini Trust Company, LCC said, “We are proud be the first licensed exchange in the world to offer Zcash trading and custody services and look forward to providing customers with a safe, secure, and regulated place to buy, sell, and store Zcash, an incredible new form of digital cash.”
Crypto Mining Company Coinmint Moving To Revamp 1,300 Acre Alcoa Plot
Once used for aluminum smelting, an Alcoa plant in Upstate New York is going to be converted into one of the world’s largest bitcoin mining centers. CNBC reports Coinmint said Tuesday it “would invest up to $700 million in the upstate New York location, which it expects to be the biggest bitcoin mining center in the world. The project will create an estimated 150 jobs over the next 18 months.”
Cryptocurrency Theft Malware Now An Economy Worth Millions
According to a new research report titled “Cryptocurrency Gold Rush on the Dark Web” by Carbon Black, the market for malware and tools designed for the theft of cryptocurrency is growing swiftly. ZDNet states, “The researchers estimate that over the past six months alone, a total of $1.1 billion has been stolen in cryptocurrency-related thefts, and approximately 12,000 marketplaces in the underbelly of the Internet are fueling this trend.”