Tag Archives: cryptocurrency

China’s Central Bank Crypto Currency Is “Ready”, After 5 Years Development

A senior official at China’s central bank announced at the China Finance 40 Group meeting today that the country will soon roll out its central bank digital currency (CBDC.)

Mu Changchun, Deputy Chief in the Payment and Settlement Division of the People’s Bank of China (PBOC,) stated that the CBDC prototype exists and the PBOC’s Digital Money Research Group has already fully adopted the blockchain architecture for the currency. China’s CBDC will not rely entirely on a pure blockchain architecture, as this would not allow the currency to achieve the throughput required for retail usage.

According to Changchun, the currency has been in the research and development phase since 2014. At the meeting on Saturday, he said, “People’s Bank digital currency can now be said to be ready.”

The CBDC will employ a two-tier operational structure, per Changchun:

 The People’s Bank of China is the upper level and the commercial banks are the second level. This dual delivery system is suitable for our national conditions. It can use existing resources to mobilize the enthusiasm of commercial banks and smoothly improve the acceptance of digital currency.

 

A two-tier system is preferable due to China’s complex economy, vast territory and large population. “From the perspective of improving accessibility and increasing public willingness to use, a two-tier operational framework should be adopted to deal with this difficulty,” Changchun said. He also welcomed the resources, talent and innovation capabilities of commercial businesses who will partner with the PBOC to roll out the currency. Finally, this system will help avoid concentration of risk and financial disintermediation.

At the same meeting, China UnionPay Chairman Shaofu Jun said that the goals of China’s CBDC would be difficult to achieve. While a CBDC could solve issues related to cross-border transactions, long lag times and legacy inefficiencies, the lack of clear operational processes and a detailed regulatory framework across countries will be challenging to overcome.

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IRS Says It’s Sending Demand Letters to US Cryptocurrency Owners

The U.S. Internal Revenue Service (IRS) announced Friday that it has begun sending letters to taxpayers who own cryptocurrency, advising them to pay any back taxes they may owe or to file amended tax returns regarding their holdings.

In a news bulletin, the agency said that it began mailing what it called “educational letters” last week. According to the statement, there are three variations of the letter that were sent.

The IRS further said that it will have sent such letters to “more than 10,000 taxpayers” by the end of this month,” adding that “the names of these taxpayers were obtained through various ongoing IRS compliance efforts.”

“Taxpayers should take these letters very seriously by reviewing their tax filings and when appropriate, amend past returns and pay back taxes, interest and penalties,” IRS Commissioner Chuck Rettig said in a statement. “The IRS is expanding our efforts involving virtual currency, including increased use of data analytics. We are focused on enforcing the law and helping taxpayers fully understand and meet their obligations.”

In May, it was reported that the IRS is beginning to work on new guidance regarding cryptocurrencies, its first such effort since 2014. A number of organizations and industry advocates have called on the agency in past years to update its guidance following its decision to treat cryptocurrencies as a form of intangible property for tax purposes.

On Thursday, a user of the r/bitcoin subreddit described receiving such a letter. Lawyer Tyson Cross, writing for Forbes, also detailed how a number of his crypto-focused clients have received this kind of letter from the IRS.

Source: by Stan Higgins | Coindesk

IRS Ready To Make Tech Giants Release User Crypto Activity

The United States’ Internal Revenue Service (IRS) is allegedly considering requiring tech giants to report on crypto activity by users, according to a presentation reportedly from an IRS presentation and provided by a Twitter user on July 9.

According to the documents shared, the IRS hopes to use Grand Jury subpoenas on firms such as Apple, Google and Microsoft to check taxpayers’ download history for crypto-related applications.

Known as Crypto Tax Girl, Laura Walter, certified public accountant and crypto tax specialist, tweeted the presentation, which was allegedly for agents in the IRS’s Criminal Investigation division.

Citing the document, Walter concluded that the tax authority is conducting exhaustive research into detection of criminal tax evasion cases involving crypto. As such, the IRS is considering carrying out interviews, open-source and social media searches, as well as electronic surveillance, the expert noted.

Specifically, the 181-page document reads:

“Grand Jury Subpoena should be considered for Apple, Google, and Microsoft for the Subject’s complete application download history. Each application’s function should be explored to determine whether or not the application can transmit, or otherwise allow, transactions in bitcoin.”

As Walter emphasized, the presentation envisions that IRS agents ensure that taxpayers are not notified about the obtained information regarding their use of cryptocurrencies to prevent detrimental to the investigation. 

Cointelegraph notes that the IRS has not confirmed the authenticity of the presentation’s origin.

According to the documents provided, the IRS is hoping to serve subpoenas to check data from accounts in banks and Paypal for connection with crypto transactions. Additionally, the tax authority is considering reviewing social media giants such as Facebook and Twitter to find and record publicly available cryptocurrency addresses.

Concluding the thread, Crypto Tax Girl wrote:

“There is a ton of other information in there about crypto in general, tracing transactions via the blockchain, limitations of the blockchain, etc. but what you need to know is that the IRS is working HARD to identify criminal tax cases involving cryptocurrency.”

As previously reported, the IRS currently considers cryptocurrencies property. In late 2018, an advisory committee of the IRS expressed its intent to provide additional guidelines for the taxation of crypto transactions.

Recently, Cointelegraph reported on Singapore’s plan to exempt cryptocurrencies that are intended to function as a medium of exchange from Goods and Services Tax (GST).

Source: by Helen Partz | CoinTelegraph

Modern Cryptocurrency Portfolio Theory

Summary

Modern Portfolio Theory doesn’t work with cryptocurrencies.

In a cryptocurrency portfolio, it’s all about managing risk.

As the cryptocurrency space matures, more high-level allocation models will become relevant.

This idea was first discussed with members of my private investing community, Crypto Blue Chips. To get an exclusive ‘first look’ at my best ideas, start your free trial today >>

Why Modern Portfolio Theory doesn’t work with cryptos

Aside from the obvious (that cryptocurrencies are not companies, they’re just software and the network of people involved), MPT asks the portfolio manager to make some basic assumptions.

  1. We are able to estimate the likely return of an asset (to compare it to the likely risk and determine the efficient frontier)
  2. We look for assets that are not highly correlated to reduce risk

Both of these are a big problem for cryptocurrencies, because the probable return is somewhere between zero and 100x, and nearly every cryptocurrency in the top 20 is highly correlated with bitcoin (at least for now).

https://static.seekingalpha.com/uploads/2018/7/22/49499619-15323029000211542_origin.pngImage Source: Sifrdata

Cryptocurrency projects by sector

What about building a cryptocurrency portfolio based on sector?

I’d like to tell you that it’s possible to just look at the different categories of cryptocurrency projects out there, and just build a sector weighted portfolio like you might do with traditional equities. If that were possible, you might want to use a chart like this to narrow down your choices.

https://static.seekingalpha.com/uploads/2018/7/22/49499619-15323015832143135_origin.jpgImage Source: Twitter

Or, perhaps one like this.

https://static.seekingalpha.com/uploads/2018/7/22/49499619-15323126278860574_origin.jpgImage Source: Reddit

But unfortunately, we can’t have nice things. Recall that 80% of ICOs in the last year are dead already or were simply scams in the first place (the real figure is probably over 90% now).

So, what can we do? We could just skip cryptocurrency all together, or we could take a different approach.

Building a cryptocurrency portfolio is about disciplined, rational reduction

When investing in cryptocurrencies, I suggest that you start off assuming everything is a scam and working backwards from there. Out of the 1900 or so cryptocurrencies listed on CMC, we might be able to argue for a handful as being legit projects that:

  • solve a real problem
  • aren’t a scam
  • didn’t start last week
  • have had their security model stress tested in the wild
  • have people working on them still
  • have an active community

In order to build your own cryptocurrency portfolio, I’m going to give you a list of questions to ask. This list is not exhaustive, but it’s a good place to start.

Can I replace the word “blockchain” with database?

This one comes from Andreas Antonopoulos. If the problem the project is trying to solve would work just as well without a blockchain, then we have a problem. Blockchains are slow, expensive data structures that when used properly can operate in a hostile environment with nobody at the helm.

If performance and control are important, a blockchain is probably not the correct tool for the job.

Is the code open source?

One of the main reasons that bitcoin has been successful is that the code is open source. This allows the community to share ideas and work together to solve problems that they find interesting and even exciting. Projects that hide their code away should be viewed with suspicion as many bugs could be lingering behind the walled gardens. Remember, closed systems maximize control while open systems maximize innovation at the edge.

Can I rent enough hash power to 51% this network right now?

Many cryptocurrencies are secured by proof of work. However, not all coins are created equal. Mining secures a PoW coin, but it can also be its downfall. For example, Ethereum (ETH-USD) shares a mining algorithm with Ethereum Classic (ETC-USD). However, Ethereum has attracted 20x more hash power than Ethereum Classic, which means that if you go to Nicehash, you can rent enough hash power to just take over Ethereum Classic for about $16,330 per hour. The reason for this is that the Ethash algorithm can be run on just about any GPU, so by using a marketplace for renting hash power, anyone that wants to can literally take over a the cryptocurrency of their choice if they pay the price.

However, not all coins can be hijacked in this way. Some coins like Bitcoin (BTC-USD) are so huge that only 1% of the necessary hardware could be rented for such an attack. Any coin that shares the SHA-256 algorithm is orders of magnitude easier to attack than bitcoin because bitcoin is the most profitable to mine, so that’s the network that the miners point their hardware at.

Bitcoin Cash (BCH-USD), for example, can be attacked with 1/14th the hardware that you would need to attack bitcoin, making it much less secure from a 51% attack standpoint.

See chart below.

https://static.seekingalpha.com/uploads/2018/7/22/49499619-15323042289304018_origin.pngImage Source: Crypto51

Does the coin have a fancy new security model or data structure?

If it does, it might just be the next big thing. But, more likely the security model has major flaws that have yet to be discovered. Bitcoin’s blockchain and proof of work has been operating in the wild since 2009, and it has been attacked constantly.

https://static.seekingalpha.com/uploads/2018/7/22/49499619-1532304896481929_origin.pngImage Source: Twitter

Smaller cryptocurrencies have the disadvantage of not being in the spotlight, so their networks’ bandwidth and security are tested at only a fraction of the pressure placed on larger networks like Bitcoin and Ethereum.

This doesn’t mean that we should stop trying to innovate, we just need to understand that the risk/reward ratio for these new concepts should be seen as orders of magnitude higher than that of Bitcoin and Ethereum because of the fact that they just haven’t been around long enough, they haven’t grown large enough to really be put to the test.

Some examples of this are the tangle, block lattice, and delegated proof of stake. They might be great ideas, they might even be the future, but betting on them now is a different animal than investing in Bitcoin.

Can this cryptocurrency be properly secured (preferably in a hardware wallet) in cold storage?

As I wrote about in my blog, part of the joy of investing in cryptocurrencies is understanding how to take custody of the assets. While there are many ways to secure cryptocurrency, my preference is to use a hardware wallet and store the coins offline (cold storage).

There are some really cool projects I’d like to invest in, but I just don’t want to deal with the mess of having to run full nodes of each project on my local machine, or worrying about if my paper wallet is safe.

A hardware wallet like Trezor or Ledger Nano S can store many of the top cryptocurrencies is a highly secure manner. As a fiduciary, I owe it to my investors to use the best security possible, so I rarely invest in cryptocurrencies that cannot be stored in a hardware wallet.

Is anyone using this cryptocurrency, and are there any software engineers working on the project still?

These seem like basic questions that you wouldn’t have to worry about if you were investing in a traditional company. I mean, nobody asks “I wonder if any software engineers at Amazon are writing code this month?” before buying Amazon (AMZN). But, with cryptocurrency things are a bit different.

Some projects I would like to invest in fail at this step. Either the number of transactions does not seem to be growing, or the development team seems to have wandered off.

Two projects I would be investing in if they were actively maintained are Dogecoin (DOGE-USD) and Litecoin (LTC-USD). See the development activity below.

https://static.seekingalpha.com/uploads/2018/7/22/49499619-15323067888755922_origin.pnghttps://static.seekingalpha.com/uploads/2018/7/22/49499619-1532306813947775_origin.png

With no active development team, these projects simply can’t survive.

Does the team behind this project inspire confidence, and can they be identified?

In order to reduce the odds that the cryptocurrency project that you’re thinking about investing in is a scam, it’s worthwhile to take a look at the founders. If you can’t find a way to identify them, and their past work, then what kind of recourse do you have if they just take the funds and vanish?

Is there a whitepaper, and does it make sense?

You can learn a lot about a cryptocurrency project from the whitepaper. In fact, I think it’s a great place to start. Also, you might want to check that the entire thing wasn’t copied and pasted, because that’s a thing that happens all the time.

What is the token’s issuance model?

Bitcoin has a fixed issuance model that will result in 21 million tokens being created by the year 2140, but many other coins have no set maximum supply. Also, some of these ICOs have large portions of the tokens set aside for their foundation and early stage investors (and they probably bought it at a discounted rate before the rest of us even heard about the project).

Tokens that restrict the supply tend to be worth more as long as they can attract actual usage. It’s important to understand how new tokens are issued if you are trying to predict what they might be worth in the future if the project achieves the goals it set out for itself.

What the future of portfolio management might look like

I think that as the cryptocurrency market matures we will start being able to apply the more traditional valuation models. I think that when traditional assets start being tokenized, then it won’t be uncommon to have crypto assets in a traditional portfolio much in the same way that we have derivatives, ETFs, mutual funds and equities all in the same E-Trade (ETFC) account now.

Imagine having a basket of foreign currencies with some bitcoin thrown in, or a basket of utility companies that includes blockchain-based power tokens representing claims of future energy production.

I think that crypto assets will just become a tool, a technological means to an end in the future. Tokenizing existing assets and the discovery of new assets to tokenize may well define the digital revolution as we move into a world where the Internet of Things becomes a vivid reality.

Conclusion

It would be nice to apply modern portfolio theory to a cryptocurrency portfolio. However, the cryptocurrency market simply isn’t mature enough yet for this to be a reality. Today, the best we can do is look for signs of extraordinary risk and steer clear. This means taking a more skeptical approach and investing only in cryptocurrencies that might qualify as “Crypto Blue Chips.”

If you like this article, you will love Crypto Blue Chips, where this idea was discussed first. Besides posting articles early, there’s research in Crypto Blue Chips you can’t get anywhere else, like the BVIPE, the Bitcoin Value Indicator Professional Edition, posted with updates every week. Also, you can follow along as I build a portfolio of cryptocurrencies that we’ll be holding for the next 1-3 years. Get in on the ground floor with Crypto Blue Chips.

Source: by Hans Hauge | Seeking alpha

 

Bitcoin Whale Blows Up, Leading To Forced Liquidation, “Bail-Ins”

We may have found the reason for Bitcoin’s persistent weakness over the past week.

After hitting a price above $8,000 thanks to recent Blackrock ETF speculation, the cryptocurrency has dropped 10% in the past week, dropping as low as $7,300 today, leaving traders stumped what was causing this latest selloff in the absence of market-moving news.

It turns out the reason may have been a good, old-fashioned margin call forced liquidation, because as Bloomberg reports a massive wrong-way bet left an unidentified bitcoin futures trader unable to cover losses, resulting in a margin call that has “bailed-in” counter parties forced to chip in and cover the shortfall, while threatening to crush confidence in yet another major cryptocurrency venues.

According to a statement posted by Hong Kong’s OKEx crypto exchange on Friday, a long position in Bitcoin futures that crossed on Monday, July 30, had a notional value of about $416 million. After Bitcoin prices dropped sharply in subsequent days, OKEx moved to liquidate the position on Tuesday, “but the exchange was unable to cover the trader’s shortfall as Bitcoin’s price slumped.”

The exchange, which identified the problem trader only by an anonymous ID number 2051247, said the position was initiated at 2 a.m. Hong Kong time on July 31.

https://www.zerohedge.com/sites/default/files/inline-images/bitcoin%20futs%20trade.jpg?itok=7FefGVJS

“Our risk management team immediately contacted the client, requesting the client several times to partially close the positions to reduce the overall market risks,” OKEx said. “However, the client refused to cooperate, which lead to our decision of freezing the client’s account to prevent further positions increasing. Shortly after this preemptive action, unfortunately, the BTC price tumbled, causing the liquidation of the account.”

The exchange was forced to inject 2,500 Bitcoins, roughly $18 million at current prices, into an insurance fund to help minimize the impact on clients. And since OKEx has a “socialized clawback” policy for such instances, it also forced other futures traders with unrealized gains this week to give up about 18 percent of their profits.

As Bloomberg notes, “while clawbacks are not unprecedented at OKEx, the size of this week’s debacle has attracted lots of attention in crypto circles.”

The episode underscores the risks of trading on lightly regulated virtual currency venues, which often allow high levels of leverage and lack the protections investors have come to expect from traditional stock and bond markets. Crypto platforms have been dogged by everything from outages to hacks to market manipulation over the past few years, a period when spectacular swings in Bitcoin and its ilk attracted hordes of new traders from all over the world.

“Everyone is talking about it,” said Jake Smith, a Tokyo-based adviser to Bitcoin.com, in reference to the OKEx trade.

And while everyone also wants to now how much capital was actually at risk, the biggest question is just how much margin there was in the trade. The problem here is that the exchange – ranked No. 2 by traded value – allows clients to leverage their positions by as much as 20 times.

For those who rhetorcially tend to ask “what can possibly go wrong” after every bitcoin slump, well now you know.

What happens next?

OKEx, which requires traders to pass a quiz on its rules before they can begin investing in futures, outlined planned changes to its margin system and liquidation procedures that it said would “vastly minimize the size of forced liquidation positions” and make clawbacks less frequent.

According to Bloomberg, clawbacks are unique to crypto markets and expose the exchanges who use them to reputational risks when clients are forced to absorb losses, said Tiantian Kullander, a former Morgan Stanley trader who co-founded crypto trading firm Amber AI Group.

“It’s a weird mechanism,” Kullander said.

Finally, judging by the bounce in bitcoin, the market appears relieved that it has identified the culprit of the selling, and with no more liquidation overhang left, is once again pushing prices across the crypto space higher.

source: ZeroHedge

The Cryptocurrency Insurance Business Is Booming

What is the next step when you have a speculative asset whose value ( may go to zero or $250,000 ) in the near future? Why start writing insurance policies on it, of course!  That’s the line of logic employed in the world of cryptocurrencies, as the newly formed crypto insurance business is booming.

https://www.zerohedge.com/sites/default/files/inline-images/crypto%20heist%202.jpg?itok=NTGpQkCB

To be sure, there is ample demand and soaring interest in crypto insurance, according to Bloomberg. After all, with fat premiums and no insurer on record to date of ever paying out a claim, why wouldn’t there be?

Furthermore, one can rarely go a few weeks without a headline about a major crypto exchange getting hacked, sometimes with hundreds of millions of dollars being lost in the process. Such was the case with the hacks of Bitfinex and Mt. Gox. Remember this stud?

https://www.zerohedge.com/sites/default/files/inline-images/mark%20karpeles.jpg?itok=YpJF6kchMark Karpeles, Mt. Gox CEO

As a result of this “accident prone” asset class, major players in the insurance and finance industry believe that the future for crypto insurance is bright. As Bloomberg notes, a representative from Allianz said it “could be a big opportunity.” Which is why Allianz is offering the product:

“Insurance for cryptocurrency storage will be a big opportunity,” said Christian Weishuber, a spokesman for Allianz, which began offering individual coverage for digital-coin theft in the past year and is one of the few insurers that agreed to talk about the issue. “Digital assets are becoming more relevant, important and prevalent on the real economy and we are exploring product and coverage options in this area.”

In addition, two other major crypto-insurance shops – Marsh & McLennan and Aon – said business has been booming over the last year.

While the cost is still beyond reach for many fledgling companies, Marsh & McLennan and Aon, the two leading insurance brokers that help companies shop for crypto policies, say business has been brisk this year. For the first time, Marsh formed a team of 10 dedicated to servicing blockchain startups.

Aon, which claims to have over 50 percent of the market for crypto insurance, recently streamlined its standard policy form to speed up the underwriting process. It has also seen some insurers tweak general company policies to include crypto-specific protections.

Whil Marsh and Aon declined to identify their partners, people familiar with the matter say over a dozen underwriters, including Chubb and XL, currently provide coverage to crypto-related businesses. And here is a blast from the past: none other than AIG has also been adding crypto coverage into standard policy forms, and said it’s met with cryptocurrency custodians and trading platforms about coverage, however, the firm “declined to say how much in crypto-related premiums it’s taken in.”

There may be a simple explanation for the enthusiasm to sell insurance: Marsh and Aon said that, so far, they are not aware of any insurance companies that have had to actually pay out on any claims, even as 2018 is supposed to be the “busiest year for hacks on record”. It’s probably safe to say that it won’t be long before claims are paid out. Big ones.

With 2018 on track to be the busiest year for hacks on record, the potential for a reputational black eye is perhaps one reason many insurers have declined to speak publicly about crypto. Lloyd’s of London, the world’s oldest insurance market, published a bulletin this month with guidance on crypto coverage and asked its agents to “proceed with a level of caution that recognizes the risks.”

Meanwhile, demand for insurance will only grow as it gives start-ups an air of credibility when try to raise capital, providing some modest cover for a business that has generally been speculative and regarded as somewhat dangerous.

It’s no small irony that the crypto industry, which originally sprung out of a techno-utopian desire to liberate its users from the traditional financial system, is embracing insurance as a way to go mainstream.

“I see it is a required step,” said Lucas Nuzzi, director of technology research at Digital Asset Research. Coverage can reduce investor concerns and make it easier to work with banks. “It definitely helps legitimize the industry.”

For example, Trustology, a London-based startup focused on crypto custody services, is in talks to obtain coverage that would insure its customer accounts up to 85,000 pounds — the same standard as a U.K. bank account — to help attract more clients. It’s also looking at self-insuring client funds.

And while even major crypto exchanges like Coinbase are starting to buy this type of insurance, in the case of the most popular US crypto exchange, it is only on a “fraction” of their holdings.

Coinbase, one of the most widely used crypto exchanges, buys insurance for a fraction of the digital coins it holds. Funds stored in so-called hot wallets, which may contain up to 2 percent of client assets and are used in active trading, are covered. Coinbase’s disclosures don’t provide details on how much coverage is provided for its remaining coin deposits, which are stored offline as a security measure.

Finally, selling crypto insurance for now remains a goldmine, with insurance companies able to charge a significant premiums, as underwriters can charge a crypto-related company upwards of five times or more than your average business for coverage against loss or theft, according to Bloomberg.

That said, like with any other other financial security boom, where derivatives of derivatives wind up in bloom during the first stage, many are skeptical about how long of a runway the field of crypto insurance will have, especially given the fact that the underlying asset value would will likely be for the determined by regulators in the future – and the decision will likely prove to be extremely volatile, leading to a painful bust for the insurance industry.

Source: ZeroHedge

TechCrunch: Over 1000 Crypto Projects Are Considered ‘Dead’ Now

More than a thousand of crypto projects are “already dead” as of June 30, 2018, according to a recent TechCrunch report. The news outlet has based its claim on data from two websites: Coinopsy and DeadCoins.

Coinopsy provides daily reviews of various cryptocurrencies, including ones that are already “dead.” It defines a “dead” token as exhibiting at least one of the following:

“abandoned, scammed, website dead, no nodes, wallet issues, no social updates, low volume or developers have walked away from the project.”

According to Coinopsy’s list, there are 247 “dead” coins as of press time. These include the notorious Bitconnect that was shut down in January 2018 and is described by the website as “the most successful ponzi-scheme in crypto so far.”

DeadCoins similarly has a 830-item long list of “dead” cryptocurrencies. Among them is the recent Titanium Blockchain Infrastructure Services initial coin offering (ICO) that was shut dow by the U.S. Securities and Exchange Commission (SEC) for fraudulent practices.

According to the SEC’s press release, Titanium has raised $21 million from investors from the U.S. and other countries. In its statement, the SEC warned investors about ICOs as an extremely risky type of investment:

“Having filed multiple cases involving allegedly fraudulent ICOs, we again encourage investors to be especially cautious when considering these as investments.”

As Cointelegraph reported Friday, the volume of ICOs has reached $13.7 billion in 2018 so far, which is already twice as much as the market amounted to in the entire 2017. According to TechCrunch, scam and dead ICOs raised $1 billion in 2017.

On June 21, Nasdaq CEO Adena Friedman warned that ICOs pose “serious risks” for retail investors, claiming that projects that raise money this way have “almost no oversight.”

Earlier in June, crypto evangelist John McAfee said that he will stop promoting ICOs due to alleged threats from the SEC.

Source: ZeroHedge