Crypto and the Bandits

Crypto and the Bandits

The Legend of Crypto

The elusive but legendary visionary Satoshi Nakamoto created the “un-hackable” crypto by the name of Bitcoin and “tamper-proof” Blockchain, the underlying technology developed and designed for immutability as well as peer-to-peer consensus.

After a prolonged and “under-the-radar” runway from obscurity to mainstream and by 2017 eclipsing all major currencies in fame and popularity by reaching dizzying heights, many entrepreneurs, visionaries and opportunists have duplicated the uniqueness of Bitcoin - un-hackable, decentralised, borderless. However, the cryptocurrency crown still remains firmly on the head of the first crypto pioneer King Nakamoto with his Bitcoin crusade having recently reached a commanding 54% of global market cap.

Security by design - one reason why Bitcoin has survived is because it leaves hackers nothing to hack. The public ledger contains no identifying information about the system’s users. Even more important, no one owns or controls that ledger. There’s no single Master Version.

Source: The Truth Machine: The Blockchain and the Future of Everything - authors Paul Vigna and Michael J. Casey - 2018

The heir to the throne of King Nakamoto is none other than the young genius by the name of Vitalik Buterin, Canadian-born Russian and the creator of Ethereum, Ether and smart contracts at the tender age of only 19.

Ethereum is currently the leading blockchain platform used by 3.310 ICOs, representing 80,38% of the entire ICO market. At a very distant second place is “Waves” (used by a mere 105 ICOs), followed by “Stellar” (40 ICOs), “NEO” (28 ICOs), “NEM” (18 ICOs) and “EOS” (16 ICOs) which currently is the top ICO in the world, having raised a mind-boggling $4.2 billion

(source: ICObench report #21 - 17 Aug 2018).

There are many crypto and blockchain contenders vying for supremacy, however the dominant lead by Bitcoin and Ethereum is at present insurmountable and unachievable for the foreseeable future.

The Cyber Bandits

In 2013, Tokyo based Mt. Gox CEO Max Karpelès is on the top of the world.

Crypto Bandit.jpg

His company is at the time by far the biggest Bitcoin exchange in the world, handling an incredible 70% of all Bitcoin transactions globally, giving Mt. Gox an enviable and dominant market share. Things were going good for Karpelès, he was even planning to open a Bitcoin cafe.

The Mt. Gox 2011 Hack: A Sign of Things to Come

On June 19, 2011, something strange happened. All of the sudden and without any warning or indication, the value of Bitcoin on Mt. Gox fell all the way down to one cent !

A hacker managed to attack into the Mt. Gox auditor’s computer system and then transferred a very large amount of Bitcoin to his own account and subsequently used the Mt. Gox exchange itself to sell the stolen Bitcoins.

By flooding the market with a massive amount of Bitcoin, it created a huge strain on the exchange’s system and the Bitcoin price dropped dramatically, only to rebound shortly afterwards but the damage was already done.

Even that Mt. Gox recovered from this hack, nothing could save the exchange from the catastrophe that was bound to happen.

In 2014, Mt. Gox suffers from another attack (due to serious technological mismanagement), but this time it’s an astronomical $473 Million robbery which at the time was around 7% of the world’s total supply of Bitcoins.

In the aftermath of the Mt. Gox heist - and the timing could not have been worse as Bitcoin was gradually going mainstream - the value of Bitcoin fell drastically and many investors lost fortunes. Mt. Gox filed for bankruptcy protection in the US on March 9th, 2014

The Mt. Gox heist was the first time Bitcoin got stolen from an exchange and almost lead to the demise Bitcoin. Even that the hack is associated with Bitcoin, the crypto itself did not get hacked, but only the exchange and many more after that.

Some of the hackers’ heists are quite spectacular in terms of the amount of cryptos stolen and the audacity of the crypto bandits themselves. Hackers sometimes manage to steal the private keys of account holders through a weak technical loophole allowing for a fairly simple DDoS (Distributed Denial of Service) attack such as the one suffered by the “Bitfinex” exchange on June 5th 2018 from which it bounced back almost immediately, other hackers brazenly attacked exchanges by exploiting the weaknesses of crypto exchange platforms and their customer‘s custodian wallets. 

Crypto Exchange Cyber Security

Since the boom of Bitcoin and the hype of all things crypto, almost 200 exchanges have popped up all over the world to offer crypto trading of coins and tokens.

The velocity at which crypto is conquering the world has been like lighting, but the thunder that has hit many crypto exchanges by surprise is pretty much similar to “robbery in broad daylight”.

Blockchain security firm CipherTrace recently reported that $731 million worth of cryptocurrencies were stolen from crypto exchanges during the first half of 2018.

Last year, crypto exchanges recorded around $266 million in losses from security breaches and heists. The first half of 2018 recorded triple the amount stolen from crypto exchanges in 2017, triggering investors in the cryptocurrency space to develop concerns regarding the standard of security measures implemented by crypto trading platforms.

Source: CCN article - 4 July 2018

That’s an incredible triple of the total amount stolen in all of 2017 within the first 6 months of 2018.

The biggest heist so far in 2018 was the massive “Coincheck” hack in Japan where $500 million was stolen, followed by the $40 million hack of “Coinrail” in South Korea. The common problem was that both exchanges stored unusually large amounts of crypto assets in online “hot wallets” that can be accessed via the internet as opposed to “cold wallets” which are stored off-line. Additionally, both exchanges failed to utilise multi-signature technology to secure and safeguard customer funds.

Coincheck CEO Koichiro Wada said in an interview with Bloomberg: 

“We were aware we didn’t have enough people working on internal checks, management and system risk. We strived to expand using headhunters and agencies, but ended up in this situation.”

Source: CCN article - 4 July 2018

As a direct result and consequence of the these heists, both Japan and South Korea have started to implement strict regulatory compliance as well as establishing the necessary standards for the entire crypto exchange industry. South Korea has gone one step further and decided to regulate cryptocurrency exchanges like banks, granting local financial authorities the right to oversee and monitor crypto exchanges as well crypto trading.

With stricter regulations in place, both Japan and South Korea expect the occurrence and magnitude of cyber security breaches to go gradually down in the course of time in conjunction with the steady development of cyber security technology.

Crypto Trading on Blockchain

“Blockchain is a very strange thing - simultaneously the most overhyped, least understood and most disruptive technology

of our time”

Source: Future Crunch on Media by Angus Hervey - 11 Oct 2017 

At the present time, and for the foreseeable future, financial trading will continue to use the ultra-fast network of the current global financial systems and infrastructure.

The speed at which financial transactions are effected today has not yet been achieved on blockchain, however there are many innovative contenders, notably Malta-based “Crypto Circle X” which is working on a proprietary technological algorithm that is capable of high performance trading of over 10 million transactions per second.

This mind-boggling high performance of financial transactions at “light speed” will revolutionise crypto trading on blockchain and shake up the financial industry from the bottom to the top. In addition to lightning fast speed, Crypto Circle X will offer a safe & secure crypto wallet/custody service and trading for professionals as well as for novice traders which is ground-breaking as almost all exchanges have their focus on the professionals of cryptocurrency trading. In the process - and due to a distorted focus - most trading platforms have inadvertently disregarded the new generation of young (but inexperienced traders) that also want a “piece of the action” and make a fortune by trading on the volatile swings of Bitcoin and other crypto currencies.

One of they key characteristics of blockchain, that is beneficial to crypto trading and investing, is the immutability of data and the provenance of assets. There is a track record of transactions registered on blockchain and therefore digital assets can be traced to their original sources and owners.

Another challenging aspect of crypto trading is handling volatility and utilising effective risk management. Even for experienced traders, deciding on the risk/rewards ratios of cryptos is very difficult and sometimes entirely unpredictable as cryptos are traded on the pure market dynamics of supply and demand (without any Central Bank interference or control). Additionally, the criteria and technical fundamentals for trading are difficult to establish when a financial instrument has volatile swings and spikes in the range from anywhere between $1.000 to $20.000 within one single year in 2017. There are have been no recent comparable financial instruments which such magnitude in swings and trading range.

In an attempt to reduce the risk factor of trading cryptos, there has been a big push forward by crypto exchanges and platforms as well as crypto traders to establish “Bitcoin ETFs” as well as other blockchain-based crypto funds.

Only recently, the SEC started a review to decide whether or not nine Bitcoin ETFs should be registered and allowed to be listed on exchanges, however after a prolonged decision-making process, it decided not to grant permission and thus denied SEC authorisation which was a big setback for the whole crypto trading industry. Now their decision is being reviewed and the entire crypto world is holding their breath awaiting for a positive review and reversal of the SEC’s decision on the first nine pioneering Bitcoin ETFs.

Bitcoin ETFs Are a ‘Terrible Idea”, Says Bitcoin Advocate

Andreas Antonopoulos

“I’m going to burst your bubble. I know a lot of people want to see Bitcoin ETFs because ‘lambos’ and ‘to the moon’ and all that. I think it’s a terrible idea. I still think it’s going to happen, but I think it’s a terrible idea. I’m actually against Bitcoin ETFs.”

Centralized fund managers having millions of votes in the Bitcoin ecosystem allowing for manipulation in price action, scaling debates, and forks is the main concern for the Antonopoulos who foresees disagreements over forks between major ETFs leading to splits forming currencies akin to “corporate Bitcoin.”

Source: CCN article - 4 July 2018 

The New Global Wall Street

The former ruling Kings and their global Empires of Wall Street have lost significant power and influence over the past decade. Due to the global economic crash and ensuing financial crisis of 2008, venerable institutions such as Merrill Lynch have fallen from grace (which subsequently was acquired by Bank of America), with Lehman Brothers and Bear Stearns simply going into bankruptcy with the loss of thousands of jobs across the world. The knock-on effects were even more dramatic with major banks in many countries around the world applying for government help and bailout and subsequent job losses in the hundred thousands in the financial industry with ancillary industries (vendors/suppliers/etc.) suffering from job losses as well.

Ten years down the line the global economy has rebounded and most banks, brokerages and financial institutions that received government bailout have almost all fully recovered.

The financial markets are experiencing the longest bull run ever recorded and the valuations of tech companies have reached astronomical heights with Apple recently surpassing the $1 trillion market cap value and soon to follow Amazon, Alibaba and Alphabet (Google).

However, in the meantime, the rules of the game have changed and many new players have entered the space to claim their stake to fortune and fame.

World-famous crypto exchange newcomers such as Binance, Bitmain, Bittrex, Kraken, HitBTC and Coinbase have taken the bulk of crypto market trading for their account and upended a decades-long financial market dominance by Wall Street.

The prestigious legacy financial institutions Goldman Sachs, JP Morgan and Bank of America/Merrill Lynch have had a rude awakening and are desperately trying to reinvent and include themselves in the lucrative business of crypto trading and related services such as custody and escrow.

Some of the new and reputable crypto exchanges have seen explosive growth with massive daily sign ups of up to 50.000 users and incredible profits in the hundreds of millions per quarter. South Korea’s biggest cryptocurrency exchange “UPbit” has already achieved a huge profit margin of over $100 million in the third quarter of 2018, even after a decline in trading volume and a bear market for cryptos. Cryptocurrency exchange leader and behemoth ”Binance” expects an incredible $1 billion net profit for 2018.

These are figures that most legacy investment banks and exchanges can only dream of. And this is mainly due to the high operating costs that have creeped in over the years, to keep and maintain positions of market dominance by only hiring the best graduates for investment banking and keeping the legacy infrastructure of global financial industry up and running.

As a result of rapidly advancing technology of crypto and blockchain, exchanges are open for business at all times as cryptos can be traded 24/7 around the globe without the necessity of an intermediary, the former legacy financial institutions and brokerages which controlled the financial markets up and until now. This crucial development and paradigm shift to financial inclusion of the mass market consumers is greatly beneficial and has significantly expanded the customer base to include retail investors and the masses of unwitting risk-takers and opportunists.

Along with mainstream adoption of Bitcoin and other major cryptocurrencies as well as technological advancement of Blockchain protocol, the global dominance of finance enjoyed by Wall Street has been thoroughly disrupted and the financial industry now has a new conqueror that goes by the name of Crypto. And for this reason, the upcoming tsunami of change in the financial world will be disruptive as well as revolutionary on all fronts.

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  • Chris Stewart

    The general sentiment around the cryptocurrency market has been negative for most of 2018.

  • James Crellin

    Cryptocurrencies are volatile assets with more ups and downs still coming.

  • Luke Murphy

    Exchanges are not utilising the top-notch technology to protect consumers and hackers are taking full advantage of this issue.

  • Jenna Camille

    The current downturn is motivated by one such perceived risk: the law enforcement action on exchanges and their effort to put a stop to price manipulation.

  • Alex Prince

    Cryptos should not need market manipulation to sustain their value.

  • Rick Frazier

    The pace of institutional investor participation in the crypto space has been taking longer than expected....

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Eleftherios Jerry Floros

FinTech Expert

Eleftherios Jerry Floros is a FinTech Expert at Rethink Your Digital Future and founder of Elysian Impact Investing, a money super-app and impact investment platform powered by artificial intelligence, blockchain technology and data science. He is also an investor, entrepreneur, thought-leader, speaker and author with a 37 year diversified background in FinTech, finance, engineering, maritime and shipping. His main areas of interest are FinTech, impact investing, sustainable finance, entrepreneurship and digital disruption which is profoundly impacting the global economy as well as our personal lives. Mr Floros undertook studies at the University of Oxford, Wharton Business School of the University of Pennsylvania and the London Academy of Trading.

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