Tag: Bitcoin

Bitcoin’s Bumpy Ride

Having reach a high against the US$ of more than $2,800, Bitcoin has now fallen substantially.

The virtual currency reacted to the news that India may be inclined to recognise Bitcoin as a currency, but then fell significantly.  There are reasons why bitcoin could thrive in a country like India.

This article from Business Insider explains:

At 1.32 billion, India’s population may have already taken over China’s – making it the most populous country in the world. According to a study by PricewaterhouseCoopers’, at least a whopping 233 million Indians still don’t have bank accounts.

Although due to demonetization (a government’s move that got rid of 86% currency notes in circulation) and under Prime Minister’s Jan-dhan Yojna (an initiative to open bank accounts for every Indian household), a lot of people have managed to get their bank accounts, but that number is far from 200 million mark.

Ironically, India has one of the largest remittance markets in the world with a total value of close to $70 billion. On every transaction, an average user pays up to 15% in bank charges and conversion fees.

Bitcoin provides a solution to India’s underlying problems. The digital currency can be used to move money inexpensively across borders within a matter of minutes without ever having a bank account. It’s important to note that lately bitcoin adoption is taking over its network capacity, leading to delay in transactions and very high fees (more on this later).

How does it work?

Every transaction on the bitcoin network is recorded on a public ledger called blockchain . Each blockchain has three parts; its identifying address (of approximately 34 characters), the history of who has bought and sold it (the ledger) and the private key header log – where a sophisticated digital signature is captured to confirm every transaction for that particular Bitcoin file.

All the trades that happen on the bitcoin network are publicly disclosed, with each participant’s digital signature attached to the Bitcoin blockchain as a confirmation. These trades can be found at blockchain.info .

What this means is that bitcoin transactions are not completely anonymous. People can see history of your bitcoin wallet, which is great for transparency and security. It also helps deter people from using bitcoins for illegal purposes.

With each new ledger update, some new bitcoins are minted. The number of bitcoins created in each update are halved every 4 years. This will go on till 2140 when this number will round down to zero. At that time no more bitcoins will be added into circulation and the total number of bitcoins will have reached a maximum of 21 million.

The block size controversy

The debate on whether or not to increase the block size has been going on for a few years now. It is clear that the bitcoin network is a bit clogged up at this point and something definitely needs to be done to scale the network in order reduce the transaction fees and time.

At present bitcoin network can achieve 7 transactions per second. To put this in context, Visa says its payment system processes 2,000 transactions per second on average and can handle up to 56,000 transactions per second if needed.

Every transaction on the blockchain is verified by miners who use computing power to solve increasingly complex mathematical equations, which comes in “blocks” and are mined about every 10 minutes. Since these blocks are capped at 1MB, they can record just seven transactions per second, at most.

The average time it takes for a bitcoin transaction to be verified is around 50 minutes, but some transactions can even take days. If you add a small fee to your transaction, it bumps that transaction up in the queue, meaning that those who didn’t pay such a fee may have to wait more.

This has led bitcoin supporters to split into two groups; Bitcoin core (aka the developers) and Bitcoin Unlimited (aka the miners). They both have different scaling proposals, BIP 148 and Segwit2x respectively.

On August 1, 2017 the fate of bitcoin will be decided. Bitcoin core is going to go ahead with its user-activated soft fork (UASF) that would seek to push SegWit (Segregated Witness) live without explicitly asking miners for their support in order to make the blocks more efficient without increasing their size.

Meanwhile, SegWit2x, plans to pair SegWit with a 2 MB block-size increase, boosting transaction capacity further by tweaking the bitcoin’s underlying rules.

If everything goes according to plan, users will be able to start running SegWit2x on 21st July. Similarly, BIP 148 will be triggered on 1st August. There are fears that this collision could possibly split bitcoin into two with entirely different networks.

In a nutshell, this is how it will go: if the users’ fork has below 50% of hashing power, then there will be two branches; a user’s fork and a miner’s fork. If at some point users’ fork gains more hashing power and has longer chain than the miners’ fork, this is where UASF as a soft fork comes into play. The miners’ fork is then completely wiped out – replacing all the blocks on the miners’ fork with users’ fork.

If majority of miners go with Bitcoin Unlimited and decide to mine blocks bigger than one megabyte, while some users stick to the current bitcoin protocol, the network and blockchain can split in two – resulting in two different types of bitcoin tokens: “BTC”, which follows the current protocol and “BTU”, which follows the new protocol.

Pro tip : Whichever way this goes, if you hold bitcoin, make sure you control your private keys and avoid any transactions shortly after the split.

India’s take on bitcoin

On November 8, prime minister of India announced demonetization of Rs. 500 and Rs. 1000 rupee notes (86% of country’s currency notes in circulation). This move was not only to curb black money problems in the country, but also to push people to go digital and use online wallets instead of cash.

After demonetization India saw a rise in bitcoin demand like never before. For the first time premium on Indian exchanges crossed $300, leading to many arbitrage opportunities.

Hundreds of articles started pouring in claiming that the bitcoin price rally was fueled by demonetization, but Sandeep Goenka, founder of Zebpay, India’s largest bitcoin exchange, had later argued that there was no such link. He said, “This is because India has a negligible share in the bitcoin industry. For the international bitcoin community, demonetisation was yawn , a non-event”.

According to him the price rally that India saw was because of global bitcoin price touching an all time high, but people in India mistakenly related that to demonetization.

What about the premiums though? Why did they skyrocket?

Sandeep said, “Yes, in India the prices were at a premium above international prices but this is common. It happens all the time when the US$ price increases due to low liquidity in Indian markets. The premium on prices had increased sharply even in mid-June, which was the previous major bitcoin price rally.”

The Indian government is in the midst of deciding whether or not to regulate bitcoin. In the past, there have been multiple warning from the government and central bank asking people to stay cautious of virtual currencies, emphasizing they are not regulated by the RBI (Reserve Bank of India).

With the explosive growth that bitcoin has seen since the beginning of 2017, government seems to be reconsidering their stance on bitcoin. Earlier this year, India’s Ministry of Finance (FinMin) established an interdisciplinary committee to study the legal framework surrounding virtual currencies.

Recently FinMin also sought public opinion on virtual currencies after stating that ‘the circulation of Virtual Currencies which are also known as Digital/CryptoCurrencies has been a cause of concern’.

Local reports from India hint at government is already in the process of preparing norms for the regulation of virtual currencies. All signs point toward the government legalizing and taxing bitcoin and other virtual currencies. A ban on cryptocurrencies like bitcoin is highly unlikely and would be counter-productive to government’s own “go cashless” agenda.

While on one hand government is looking to regulate bitcoin, on the other it is actively keeping a close eye on businesses dealing with bitcoin and cracking down on illegal bitcoin activities .

Conclusion

In India bitcoin is far from mainstream. The daily volumes of local bitcoin exchanges are negligible as compared to exchanges in China and the US.

That being said, after demonetization, interest in bitcoin has definitely gone up. More people want to know about bitcoin. Young generation in particular is getting attracted towards the cryptocurrency.

Bitcoin has the potential to thrive in developing countries, but not if transaction fees are higher than the living wages. The whole point of having bitcoin in the first place is to transfer money quickly from one address to another with bare minimum fees.

If bitcoin manages to scale, keeping its core principles intact, there is nothing that can stop it from prospering in the developing world and beyond.

 

Bitcoin faces another test as users battle over how its trading platform should be used

From Business Insider.

The price of Bitcoin remains on a rollercoaster as investors and developers continue to battle over its future.

The cryptocurrency crept above $US3,000 a little more than a week ago, before crashing to almost $US2,000. Since the start of this week it’s been on a steady climb back towards $US3,000. This chart shows the recent fluctuations:

But a report in the Wall Street Journal (WSJ) suggests that tensions still remain in Bitcoin community. While its price climbs, the eventual path that Bitcoin follows is still subject to a significant degree of uncertainty.

The rift centres around what Bitcoin is for and how it should be used. In one camp, users want Bitcoin to remain as a finite commodity similar to gold.

Opponents want the speed and size of Bitcoin transactions to be rapidly sped up. In effect, they want Bitcoin to function to a similar fashion to a highly liquid currency like the US dollar.

The cryptocurrency was established with a limited supply of 21 million Bitcoins, of which around 14 million have been mined. That shortage of supply could go some way to explaining the dramatic increase in prices this year.

The blockchain network that Bitcoin trades on provides a historical record of all Bitcoin transactions. All users can see the blockchain activity, but the system provides a high degree of protection for people’s individual identity.

The Wall Street Journal provided a brief summary of how the activity on the blockchain currently works. Bitcoin transactions are packaged into blocks by companies that specialise in processing the trades.

However, the size of those transactions is currently capped. That means a processing speed of approximately just seven transactions per second, compared to a large network like Visa which can process hundreds of thousands in the same time frame.

With Bitcoin’s popularity exploding, the reduced capacity has led to delays and higher transaction fees.

Not surprisingly, some market participants want to increase the volume of transactions. But they’re facing resistance from those who want to maintain the status quo.

That resistance stems partly from a desire to protect their investment, but they also want to maintain the original Bitcoin platform without the intrusion of big business.

Previous attempts at compromise have failed, and the possibility of a split in the currency is back on the table.

The dispute has led a growing number of users to sell out of Bitcoin and purchase Ethereum instead. Prices for Ethereum (the world’s second biggest cryptocurrency) have also skyrocketed this year.

Ethereum, which experienced a flash crash overnight, was worth $US190 at the end of May and now trades at around $US300, after starting the year at a price of $US8.15.

According to the WSJ, all parties are open to boosting transaction capacity for Bitcoin but there are strong disagreements about how to actually go about it.

Businesses would prefer to raise the transaction limit for all Bitcoins, whereas their opponents (led by developers) want to set up a secondary network with faster processing speeds.

The net effect is that the outlook for Bitcoin remains increasingly cloudy as the market continues to develop and mature.

Price hikes in Ether and Bitcoin aren’t the signs of a bubble

From The Conversation.

When there is a rapid growth in any of the crypto-currencies and assets such as Bitcoin, Ether, Zcash and others, many will call it out as a bubble. Indeed, on a relatively short time scale it clearly looks like a bubble.

The entire crypto-currency market capitalisation currently stands at around US$100 billion; it was US$60 billion one month ago. But Bitcoin was worth 1/100 of a US cent in June of 2009, 7 cents in June 2010, and US$7 in June of 2012.

Recently all eyes were on Ether. Over a 90 day period, Ether appreciated twice as quickly as Bitcoin did in late 2013, when Bitcoin crashed to around 35% of it’s highest value. Aside from the 2013 crash, Bitcoin has experienced smaller crashes many times since, but is now worth double its 2013 high.

In the longer term, these are fluctuations around a strong growth trend. Crashes will cause some to abandon the field. But signals of longer term growth in these crypto-currencies and assets point to a possible emergence of a new type of market, through the building of a new economic infrastructure.

Ether is the token of the Ethereumblockchain, a platform that runs “smart contracts” through a distributed online ledger that records transactions. It’s second only to the crypto-currency Bitcoin in price. Some believe it will one day overtake Bitcoin (a process dubbed “The Flippening”).

Price hikes not the sign of a bubble

Fundamental aspects of the technology that underpins crypto-currencies and assets are causing people to re-imagine, and then enact, new ways of creating and exchanging value online.

The key difference between Bitcoin and Ethereum is that you can use Bitcoin for payments, but you can use Ether to automate any number of processes using smart contracts.

While many use cases for Ethereum are still at the proof-of-concept stage, it is now attracting the attention of major banks, businesses and governments, all interested in the potential of the technology to provide greater efficiency and transparency in transactions. That normalisation has collapsed the implicit risk premium attached to this technology.

Venture capitalist Albert Wenger describes the current activity in crypto-currencies and assets as “fat protocol investing”. To explain what this is, take the example of the underlying internet and web protocols (TCPI/IP and HTTP), used to build and run websites. These are not able to store value – therefore they are “thin protocols” in Wenger’s terminology. So instead, people invest in companies that make software (applications) and hardware that rely on these protocols.

Companies such as Google and Facebook made a fortune by collecting and storing data generated by users through their online interactions. Meanwhile, users, and the developers who created internet and web protocol, received nothing in return. Blockchain is a “fat protocol” because it can be monetised, including incentives for developers but also for users. For example, the creator of JavaScript and co-founder of Mozilla Brendan Eich, recently released an Ethereum-based web browser through which users can be paid for the attention they give to advertisements.

What is making crypto-assets and currencies appear bubbly is the way in which many of these new platforms and applications have raised money through what are called initial coin offerings. An initial coin offering (a word play on ‘initial public offering’) is a mechanism by which developers sell the tokens associated with their platform to the public. Depending on the structure of the offering, buyers can usually then trade the tokens, creating secondary markets. As the founder of Ethereum, Vitalik Buterin, has noted, no-one has figured out the right model for these offerings.

This could be due to the immaturity of the Ethereum platform and ecosystem (which started development in 2013 and went live only in 2015). What we’re observing here is a new economic infrastructure being built and coming online. In tweets on Tuesday, Buterin distanced himself from initial coin offerings, stating he would no longer agree to be an advisor.

So while the current speculation in crypto-assets should make us pause, this is not speculative like tulips, or gold mining stocks. It is speculative like building a new city, in that infrastructure needs to be developed first before you get to see who moves there.

A further point to note is that investment bubbles are actually useful and important mechanisms for building new technologies because of the way they concentrate speculative resources on a new technology to facilitate exploration.

There is an enormous effort proceeding to building new crypto businesses and infrastructure on the Ethereum platform. If this platform does indeed begin to carry large parts of the global economy as predicted by Deloitte, a business consultancy, then it’s still massively undervalued.

These comments should not be construed as offering personal financial advice.

Authors: Jason Potts, Professor of Economics, RMIT University; Ellie Rennie, Principal Research Fellow, RMIT University

Bitcoin Reaches For The Stars

The digital currency Bitcoin has now breached the US$2,100 mark thanks to continuing strong demand from Japan and China. Japan accounted for nearly 55 percent of trade volumes recently, where Bitcoin is now recognised as legal currency.

But to highlight the volatility, after hitting a fresh record-high of US$2,230 in US trade, it tumbled over 10% to as low as US$2,001 before rebounding yet again. Now it is up again at US$2,143 having added over 5% in just the past couple of hours.

The longer term trend is clear.

Bitcoin had already lifted to USD$1,900 last week when reports of possible political scandal in the U.S. and Brazil drove traders to safe commodities so Gold futures rose more than 2 percent. But some are now suggesting that Bitcoin may soon be seen as a competitor for gold in a flight to safety.

In addition, Bitcoin traded on the Hong Kong-based Bitfinex will soon be easily converted to U.S. dollars and this has the potential to narrow spreads and lift volumes further.

Some are also suggesting that the US Securities & Exchange Commission (SEC) may reverse its earlier decision to block the creation of a Bitcoin Exchange Traded Fund (ETF) is also impacting the market.

Remarkable to think that this highly volatile digital currency may be seen in the same category as gold!

Bitcoin Now Legal Tender In Japan

From Yahoo Finance.

Bitcoin has traded up to $1,147 a coin after Japan announced on Friday that bitcoin would be accepted as a legal payment method beginning on April 1, 2017.

According to Coindesk, Japan legislature passed a law, following months of debate, that brought bitcoin exchanges under anti-money laundering/know-your-customer rules, while also categorizing bitcoin as a kind of prepaid payment instrument.

It’s a debate that began in the wake of the collapse of Mt Gox, the now-defunct bitcoin exchange that shuttered after months of growing complications and, in the end, revelations of insolvency and alleged fraud.

According to Japan’s Financial Services Agency, that law goes into effect on 1st April, putting in place capital requirements for exchanges as well as cybersecurity and operational stipulations. In addition, those exchanges will also be required to conduct employee training programs and submit to annual audits.

Yet there may be more work to come in this area.

For example, Nomura Research Institute’s Yasutake Okano indicated in a May 2016 report that other Japanese laws may need to change to account for the tech, including the Banking Act and Financial Instruments and Exchange Act.

Reports indicate that other groups in Japan are moving to plug some of those gaps as well.

According to a report from Nikkei, the Accounting Standards Board of Japan decided earlier this week to begin developing standards for digital currencies like bitcoin. Its work mirrors other efforts being undertaken elsewhere, including Australia, which began pushing for such standards late last year.

It’s the first bit of good news for bitcoin in quite some time. Recent chatter in the market has centered around developers threatening a “hard fork” that would split the currency in two.

Additionally, the US Securities and Exchange Commission rejected two bitcoin ETFs in March, saying that it did not find the proposals “to be consistent with Section 6(b)(5) of the Exchange Act, which requires, among other things, that the rules of a national securities exchange be designed to prevent fraudulent and manipulative acts and practices and to protect investors and the public interest.”

Bitcoin has gained more than 19% so far in 2017. It has been the top-performing currency every year since 2010, except for 2014.

Bitcoin Surges Above $900 on Geopolitical Risks, Fed Tightening

From Bloomberg.

Bitcoin headed for its biggest weekly jump since June as rising geopolitical risks boosted demand for alternative assets.

The cryptocurrency surged 15 percent this week to $900.40 as of 2:38 p.m. in Hong Kong, taking its gain this year to 107 percent, data compiled by Bloomberg show. The last time it was at such levels was in January 2014, when bitcoin was tumbling from its record price of $1,137 following the implosion of the MtGox exchange and tightening Chinese controls.

 

Bitcoin is extending a rally that’s beaten every major currency, stock index and commodity contract in 2016. Buyers sought alternative assets this week amid the killing of Russia’s envoy to Turkey and a separate attack that left 12 people dead in Berlin. Weakening pressure on the yuan, which intensified this month as the U.S. projected a faster pace of tightening next year following Donald Trump’s election win, is also increasing demand for bitcoin in China, where the majority of trading occurs.

“Terrorist attacks in Europe boosted haven demand in capital markets, and gold has been falling since Trump was elected,” said Le Xiaotian, an analyst at Huobi, a Chinese exchange. “Global instability has to a large extent directed funds to the bitcoin market.”

Bitcoin, which trades in cyberspace and is mined by code-cracking computers, is gaining popularity among some investors as an alternative safe haven because it’s deemed to be less influenced by government regulations and changes to monetary policy. Gold, which tends to trade in tandem with bitcoin when haven demand is strong, has fallen this quarter as U.S. rates rise, narrowing its premium over bitcoin to the least in three years.

“The Fed’s rate hike announcement has probably spooked a lot of emerging-market investors, particularly those in China, who are now flocking to bitcoin as a refuge from weak fiat currency assets,” said Thomas Glucksmann, head of marketing at Gatecoin Ltd. in Hong Kong. “As we’ve passed the $800 bitcoin price, a strong resistance point in the past, and move closer towards the psychological $1000 stratosphere, anything seems possible.”

Don’t blame Bitcoin for the madness of men

From The Conversation.

Virtual currency Bitcoin is much-maligned, partly due to its shady history and its treatment as a trading commodity. However, with the dismantling of Silk Road and the collapse of Mt Gox, Bitcoin is no longer a mere play thing for drug dealers and fantasy gamers.

It has real potential as a means to conduct seamless and secure online transactions. Its role as a key player in our fintech future should be assured.

But in order to achieve this status, its price needs to stop fluctuating so wildly. The main cause of the Bitcoin roller-coaster has been speculation. Speculation has consequences.

In 1720, when the South Sea Company collapsed, Sir Isaac Newton famously quipped, “I can calculate the movement of the stars, but not the madness of men”. Newton was referring to the frenzied trade in South Sea Stock that had gripped England and her neighbours. The collapse of the South Sea Company was the first global financial crisis. When the bubble burst, Newton himself lost the equivalent of almost US$5 million.

In the months leading up to the scheme’s demise, Daniel Defoe published a pamphlet warning against too much speculation. What would these learned gentlemen make of our recent interest in Bitcoin? Newton would be fascinated by the ingenuity of our modern technology and Defoe (himself a tradesmen and very interested in finance) would likely be enchanted by the invention of an unregulated nationless currency.

But what would they think of all the speculation? I think neither would approve. In 2013, the price of Bitcoin soared from US$15 in January to over US$1,000 by the end of November. Bitcoin’s increasing value was loosely tied to its emerging legitimacy, but the biggest surge in price was driven by Chinese investors hoarding Bitcoin and stashing it offshore. For the first time, Bitcoin was serving as both a digital currency and as an investment product in its own right. Whether Bitcoin’s performance in 2013 meets the definition of a speculative bubble deserves a closer look.

Irrational exuberance

Bubbles begin by stealth. The price of any commodity will only take off when smart institutional investors notice the product’s potential value and step in. They buy while the price is still low and sell when it has made a gain over a short period of time. The first sell-off is followed by a dip in price, known as a “bear trap”. Once the investment has the media’s attention, public enthusiasm follows. Demand pushes the price up and then the madness sets in: namely, greed, delusion, fear, panic and finally despair.

In Bitcoin’s early years, its price was even-tempered. In July 2010, one Bitcoin cost 9 cents. For the next ten months, it hovered around this mark. Nothing remarkable happened until April 2011, when the price of Bitcoin suddenly climbed steeply, spiked at US$29.60 and then steadily dipped back to US$13.00, which became the new normal. This lasted almost two years. Then on April 9, 2013, the price soared to US$230, followed by a rapid sell-off and another dip in price.

An article in CNN Money published on April 12, 2013 reported that the Bitcoin bubble may have burst. In fact, this was just the bear trap. Frenzied trading ensued and on December 4, 2013, it peaked at US$1,047.25. It has not been back there since. For the past two years, the closing price for Bitcoin has fluctuated between US$250 and US$450.

The events of 2013 have all the hallmarks of a speculative bubble. What is the problem? All this volatility is giving Bitcoin a bad name.

As we know, economic bubbles are driven by greed, delusion and fear. These emotions impair judgement. Greed lures us to believe in schemes and promises that are just too good to be true. In Bitcoin’s brief and turbulent history, fortunes have been made and lost. Some investors have been unlucky, but most were duped. In December last year, 10,000 investors lost US$19 million in a Bitcoin Ponzi scheme. A number of exchanges have also completely imploded. Some have fallen foul of hackers, while others have been shut down by regulators for running sham operations or laundering the ill-gotten gains of a black market.

Notwithstanding all these shocks and crashes, I would argue that we should not be put off Bitcoin. Our negative impressions are borne of the way it has been used so far, but this will change.

The technology that drives Bitcoin enables almost riskless storage and transfer of value and data. In an increasingly digitised world, this is a really useful innovation. Once the regulators step in and (for example) curb the influence of speculative trading in Bitcoin, its role as a legitimate currency will prevail and the madness will stop.

Author: Philippa Ryan, Lecturer in Civil Practice and Commercial Equity, University of Technology Sydney