Coinbase and the Power of Bitcoin Exchanges

Many fondly remember their first Bitcoin transaction. It likely took place on Coinbase, one of the first exchanges to serve the Western marketplace. Bitcoin became tradeable on Coinbase when the price of a coin was in the single digits and daily volume couldn’t match the population of a small country town. Since then, this exchange has helped Bitcoin gain traction and made it more accessible to consumers the world over. There’s no doubt that Bitcoin fans today have a soft spot for the exchange, and those who began trading early probably have Coinbase to thank for their riches.

The company wields its influence over the market quietly, but this power in the cryptocurrency world is undeniable. As a certain wise uncle once said, with great power comes great responsibility, and Coinbase currently sits in a precarious position. Some questionable behavior in the past is raising eyebrows inside the community and out, yet few seem to grasp just how thin a line the exchange walks.

Exchanging the Game

Bitcoin was originally a closed ecosystem, with those who mined it the only ones to receive the cryptocurrency as a reward. This is the unique “proof of work” algorithm that keeps the ecosystem running to this day, reimbursing miners with Bitcoin for verifying and processing transactions on the network. However, exchanges allowed trading between Bitcoin that had already been mined, and fiat money like Dollars, Pounds and Yen. In some ways, this was good: It put Bitcoin into the hands of those who didn’t want to, or couldn’t, mine it, but it also opened a whole new can of worms.

Exchanges are vital to the Bitcoin economy because they remain the primary way of obtaining value from one’s Bitcoins, since merchant acceptance of Bitcoin is still quite low. Though eCommerce is relatively eager to adopt cryptocurrency as a payment solution, like in the case of Alibaba or Overstock, brick and mortar is still slow on the uptake. Unfortunately, many people still patronize physical stores and shops where cash or credit cards are infinitely easier to use.

Naturally, a place to turn your Bitcoin into cash becomes an extremely in-demand service. Though it gives people an easy way to grasp the value of their Bitcoin, it also opens the market for speculation. Coinbase and other early exchanges created a relationship between fiat currencies and Bitcoin and changed the name of the game forever. No longer was it about creating a new banking system, or an easier way to trade. It was about hitting the “moon,” “hodling” and making the coin’s price its only measure of success.

The Power of Exchanges

Because exchanges are an avenue to Bitcoin trading, they also have a lot of influence on the price of Bitcoin itself. Many understand that when an exchange adds an altcoin for Bitcoin pair trading, the price of that coin is likely to rise significantly due to a new source of volume. Early buyers of altcoins like NEO have petitioned the world’s exchanges to accept NEO as a tradeable coin, and it’s largely working. In turn for listing popular coins, the exchanges profit from fees (if they even impose them) and the spread.

They can also take advantage of high volume in more sinister ways. Throughout the years, many have noticed that during times when the price of Bitcoin is falling rapidly, Coinbase goes offline. Though the company says it’s because of an influx of new customers, unmanageable trade volume, insufficient server capacity and the like, many suspect Coinbase of front-running.

During these times, an exchange could theoretically fill their own buy and sell orders before clients’ and make a great deal of money. In fact, US watchdog organization the Commodities and Futures Trading Commission is currently investigating Coinbase’s GDAX exchange for potential margin trading violations following Ethereum’s flash crash this summer.

Any exchange that has so much influence and goes mostly unchecked is troubling. The US has mostly let cryptocurrency flourish in the country, but should a rogue politician get scared and encourage restrictive measures like those imposed in China and South Korea, Coinbase might have something more to worry about. Should it ever be ordered offline like some others, it will surely cause a sizeable crash in the price of Bitcoin.

On the Bright Side

Coinbase might have to get its story straight for when regulators come knocking and wish to poke around more thoroughly. However, it will also have a lot of good on its record. It’s currently insured by the FDIC and is largely compliant with all the guidelines established thus far in its home country, Coinbase is based in San Francisco. As more time passes, and more governments, central banks, and financial institutions realize the good that cryptocurrency and Blockchain can do, they may take a less harsh stance on those already operating within their borders. For Coinbase and their customers, this is welcome news.

Money on Mougayar? Business Blockchain Author Launches Crypto Fund

Author and investor William Mougayar has launched a blockchain-based cryptocurrency index fund.

Announced yesterday, Mougayar is one of 12 managers to open up a fund on iconomi, a blockchain-based digital asset management platform. According to Mougayar, however, his fund will distinguish itself by allowing investors to benefit from something he is uniquely able to provide – his expertise.

"I'm able to balance and rebalance the basket in a favorable way. And that insulates the average user from some of the blind spots that they may be facing," he said.

On this point, Mougayar offers no shortage of credentials, having authored a book "The Business Blockchain," published by Wiley last year, as well as launching a popular conference focused on the emerging digital asset economy last May.

Mougayar told CoinDesk:

"The value proposition is that I am part of this market. I talk to these companies. I know their CEOs. I know their founders. I know the real story."

Notably, for more novice investors, the fund will seek to invest in the broader cryptocurrency asset class, beyond better-known options such as bitcoin.

Toward that end, the fund will include allocations of 15 cryptocurrencies that will change based on Mougayar's outlook on the cryptocurrency space. Currently, Mougayar will hold the largest allocation, at 20 percent of the total index, in ether, and 10 percent in bitcoin.

Three lesser-known cryptocurrencies – steem, nexium and cofoundit – will each represent 10 percent of the index's holdings. The remaining 10 cryptocurrencies, which include melon, augur and basic attention token, will each represent 4 percent of the holdings.

"Having a basket of cryptocurrencies, managed by someone who knows what they are doing, in a way removes some of the risks for the average consumer," Mougayar said.

Fund costs and structure

But while new crypto index funds are launching almost daily, Mougayar's fund seems to be courting a new class of retail investor – those with more experience in cryptocurrency than in traditional markets.

Mougayar's index charges a relatively low total fee of 5 percent, which is in stark contrast to the very high "two-and-twenty" fee structure fiat-based hedge funds sometimes charge.

Managers of those funds will typically argue that their research work, and sometimes active trading, drive up costs – and that their returns justify their fees, though that assertion is a highly controversial one. Mougayar told CoinDesk that he charges a premium over the 2 percent sometimes charged by low-fee passive funds because he believes active management can provide investors with substantial additional value creation.

Also, unlike other cryptocurrency hedge funds, Mougayar's does not require a minimum investment, something that should appeal to smaller retail investors.

"It's like you're on an exchange. You can buy 0.1 bitcoin. There is no minimum," he said.

Diving deeper, Mougayar's partnership with Iconomi divides two responsibilities typically consolidated in a single firm in other lower-fee tracking funds.

In order to invest in Mougayar's fund, users must first load their account by depositing bitcoin or ether on the Iconomi platform. While Mougayar selects the initial portfolio allocations and re-weights regularly, the investor's user account will reside on the Iconomi blockchain platform.

An additional advantage of partnering with Iconomi, Mougayar argued, is that investors do not need to manage the custody of their own key pairs.

GAW Miners CEO Held Liable for $9.8 Million Judgment in SEC Case

A US federal judge has signed off on a final judgment against Homero Josh Garza, the CEO of the now-defunct cryptocurrency mining firm GAW Miners.

The judgment, entered on October 4, comes less than two years after the Securities and Exchange Commission (SEC) first filed suit against Garza, GAW Miners and ZenMiner, a related firm. Garza was accused and chargedwith violating securities laws through the offering of so-called "Hashlets," or "virtual miners" which were sold to customers through an internal exchange.

Today's judgment follows a guilty plea from Garza, given in July, in a related criminal case pursued by the U.S. Justice Department. Garza plead guilty to a single wire fraud charge and faces sentencing early next year.

In the SEC's civil case, Garza has been held liable for $9,182,000, an amount that the court order said will be "deemed satisfied by the order of restitution that will be entered against him when he is sentenced in the related criminal case." It comes after the agency won a default judgment against GAW Miners and ZenMiner for $11 million in disgorged profits and civil penalties.

GAW Miners, prior to its collapse, previously offered hosted mining services. It later moved into the cloud mining business, through which customers can purchase hash power generated by hardware owned by the miner. But in the case of GAW, the firm didn't actually possess as much hash power as it sold – prompting a harsh rebuke from federal prosecutors in their original complaint from December 2015.

"Though cloaked in technological sophistication and jargon, defendants' fraud was simple at its core – defendants sold what they did not own, and misrepresented the nature of what they were selling," they wrote at the time.

Council Staffers Fired for Bitcoin Mining in Crimea

Two IT workers employed by an authority in Crimea were fired late last month after they were reportedly caught mining bitcoins at work.

RIA Novosti reports that the two unnamed individuals were employees of the Council of Ministers of Crimea, part of the disputed territory's executive branch. The news service indicates the workers installed mining software on computers owned by the council, though the report didn't state how long the operation had been in place.

Through mining – the energy-intensive process by which new transactions are added to a blockchain – the two were said to have raised only a small amount of bitcoin before being discovered.

Whether the council is pursuing charges against the individuals remains uncertain at this time.

The incident is the latest instance in which an employee used official resources to mine bitcoin – only to get caught and terminated for doing so.

In January, an IT employee for the Federal Reserve board of directors was fined $5,000 and put on probation after using a server to mine bitcoins. Later in July, a New York City employee was disciplined after being caught using a government computer to mine bitcoins.

Losing Steam? Dash Price Rallies Over $300 But Upside in Doubt

With a rally in bitcoin pushing up the wider cryptocurrency asset class, dash is back above $300.

At press time, the dash-US dollar (DASH/USD) exchange rate is down over the last week (as expected) falling to $285 on October 3; its lowest level since September 17. The cryptocurrency is now trading at $306; down 1.6 percent in the last 24 hours as per CoinMarketCap.

Yet, the sell-off seen over the last week serves to highlight a peculiarity of the cryptocurrency – that is proving somewhat disconnected with the broader market. For example, while bitcoin remained strongly bid over the weekend, dash suffered losses.

One possible explanation for the behavior, however, is that the market is becoming more conscious that dash is seeking to compete with bitcoin as a payment network focused on consumer transactions.

As the bitcoin blockchain has hung tightly to limitations on network storage (see: the scaling debate), other blockchains, dash included, are seeking to compete. At press time, the average dash transaction fee was $0.02, or about $1.50 at current prices.

Larger debates about blockchain mechanics aside, dash could remain well bid above $300, and any signs that this value proposition is strengthening could potentially lead it to act as a viable bitcoin hedge.

However, the price action analysis suggests, the uptick in dash could run out of steam around $320 levels.

4-hour chart

• A bullish break of the falling channel would open doors for a rally to $324 (4-hour 200-MA) and $330 levels.

Daily chart

The chart above shows:

• 5-day moving average and 10-day moving average is sloping downwards. Thus, upticks above $320 could be short-lived.
• The 50-day moving average is still sloping upwards and currently, stands at $323 levels.

View

• In the short-run, a move to $320-330 looks likely. Caution is advised above $320 levels as the 10-day moving average is still sloping downwards.
• Only two consecutive days-end close above the 50-day moving average would open doors for a rally to $373 levels (Sep 27 high).

Cloudflare Suspends Torrent Website for Cryptocurrency Miner 'Malware'

Internet domain provider Cloudflare has begun to crack down on websites running hidden cryptocurrency miners.

The news came to light yesterday, when the operator of torrent site ProxyBunker told TorrentFreak that Cloudflare had moved to remove all its relevant domains due to a miner hiding in the website's code. A portal to other torrent sites, ProxyBunker had been running the "Coinhive" monero miner for four days prior to the suspension.

Justin Paine, head of trust and safety at Cloudflare, reportedly told ProxyBunker that the decision was taken because the miner was operating in secret, with no option for visitors to disable the code, and was thus considered "malware."

Paine was quoted as saying:

"Multiple domains in your account were injecting Coinhive mining code without notifying users. ... We consider this to be malware, and as such the account was suspended, and all domains removed from Cloudflare."

A website miner works by tapping the processing power of visitors' computers to mine cryptocurrencies. This particular process has gained notoriety in recent days, given instances such as torrent site The Pirate Bay's controversial decision to launch a Web-based miner, which was later removed following a public outcry.

Perhaps more notably, well-known companies like TV content provider Showtime have reportedly had mining malware hidden on their websites, stealing processing power from unwitting users.

Further, the number of torrent sites running mining code has reportedly increased.

The trend has been met with mixed responses, but according to TorrentFreak, website miners could serve as a novel financing method for low-profit services, such as torrents. Yesterday, torrent website PassThePopcorn announced it will be introducing an "opt-in" version of the software as a way of funding its service.

Circle Is Building a Master Mobile Payments Network on Ethereum

Blockchain startup Circle has unveiled new software aimed at connecting the world's digital wallets.

Known as 'CENTRE', the project seeks to create a way for digital wallets (like Venmo, Alipay or the startup's own Circle Pay) to communicate with one another. Put more simply, CENTRE as envisioned would let the companies behind those apps to transmit and settle funds between them.

At its heart, the project targets the so-called "walled garden" issue, wherein different platforms – whether they be a social media site like Facebook or a payments app like Venmo – exist largely within their own ecosystems. Circle is aiming to build a bridge between them, betting that it would make for a more inclusive consumer payments environment.

Circle released today a new white paper outlining the specifications and intended use for CENTRE, which notes that the project has grown since being established as an internal method for transacting in both cryptocurrencies and fiat currencies in digital form. Notably, the startup is planning to develop a new implementation of CENTRE on top of the ethereum network, complete with its own ERC-20 token, the CENT.

CENTRE makes further use of the token standard, however, as node operators – whether they be an app operator, a bank or another financial institution – could issue their own ERC-20 tokens tied to a particular fiat currency to send between other parties on the CENTRE network.

Transactions between nodes would be settled through smart contracts, or self-executing pieces of code that trigger when certain conditions are met. That the startup would move in this direction is perhaps unsurprising – last December, Circle revealed its work on "Spark", a smart contract platform it uses to settle transactions.

CENT, according to the paper, is meant to act as a common medium of exchange between apps that originally use entirely incompatible currencies. This means that while nodes aren't required to accept, say, a USD-tied token issued on ethereum by another party on the CENTRE network, they do, by default, have to accept the CENT.

The startup explains:

"The CENTRE Token, in addition to its other uses (such as accessing the service provider protocol), provides a way for wallets which have no fiat tokens in common to transact, as they will be able to use CENTRE Tokens to obtain the needed fiat token in common to transact."

Circle is planning to create a CENTRE Foundation to spearhead development of the initiative, and the establishment of that nonprofit group is expected to happen in the coming months.

Though it's unclear who will make the shift, the startup said that "several key Circle employees" are expected to form the foundation's early leadership team.