Unbound Tech: People Exposed in BitMEX Crypto Exchange Email Leak “Remain at High Risk for Exploitation”

“Software-defined cryptography firm” Unbound Tech says that parties exposed in last week’s email debacle at BitMEX, and the exchange itself, “remain at high risk for exploitation through a variety of approaches.”

Last Friday, news broke that BitMEX, a cryptocurrency exchange popular for allowing 100x leveraged trades of cryptocurrency on its platform, had exposed the email addresses of “many” customers.

The error occurred when the company sent out a mass “general user update email” but failed to “blind CC” the email addresses of recipients.

The exact number of affected parties remains unconfirmed, but an individual or individuals behind an anonymous account on Twitter claimed Friday to be in possession of 400 000 BitMEX customer emails exposed in the breach.

Another party on Twitter claimed to have found over 200 passwords that matched the compromised emails on a database of stolen information. That individual said he or she would be emailing affected BitMEX customers to warn them of their exposure.

Unbound Tech says, “at least 23,000” individuals had their emails exposed in the breach, “leaving these individuals vulnerable to potential hackers looking to utilize their personal information and/or gain access to their digital assets.”

Oz Mishli, a cybersecurity specialist and VP Product at Unbound who helps crypto exchanges “improve their security posture” has offered some insights on the implications of the BitMEX breach on the exchange’s users.

“Email is where a lot of attack vectors begin,” he says, “from simple phishing to (a) complex drive by exploits downloading malware, so access to a list with a significant number of email addresses of users in a specific exchange is a high quality target for fraudsters.”

Because parties exposed in the BitMEX email debacle are likely to be traders or holders of cryptocurrencies, their funds may now be targeted by hackers, Mishli says:

“(Hackers) now have (an) effective way to precisely reach significant amounts of the exchange customers with highly targeted attacks.”

BitMEX did catch on to the leak in short order and says it has taken precautions to prevent customers from being put further at risk. But fallout from the attack will be descending for some time, says Mishli:

“(W)hile it seems that the direct implications of the leak are limited and the issue was identified and stopped by BitMEX, the indirect implications are still ongoing: there’s a high likelihood that the leaked data will be used to carry out targeted attacks on BitMEX’s affected customers, as mentioned above. In fact, in it’s blog BitMEX states that it actually happened, and its support team is working very hard to prevent subsequent compromises following this leak.”

Mishli sees, “two main attack vectors,” enabled by the leak.

The first is, “fraudsters attempting to access victims’ accounts, mainly by using compromised password (databases) from past breaches (and relying on password reuse by the victim across different services).”

The second is, “fraudsters initiating a targeted attack like (a) phishing campaign or malware campaign targeting BitMEX specifically.”

Mishli says the attack on customers, “is likely to come first as it is a lower level attack that is easier to pull off by less sophisticated attackers.” Mishli says it appears that BitMEX is already repelling these.

An attack on BitMEX, on the other hand, “is likely to come later as it requires more thorough preparation and stronger skills, however enables much more significant gain as it could deploy sophisticated attacks at scale to many leaked users (e.g. capable of bypassing 2FA).”

BitMEX Crypto Exchange May Have Exposed 400K Customer Email Addresses

There is a lot of anger on “crypto Twitter” today following news that BitMEX, a cryptocurrency exchange known for allowing 100x leveraged cryptocurrency trades on its platform, has exposed the email addresses of “many” of its customers.

The error occurred when the company sent out a mass “general user update email” but failed to “blind CC” the email addresses of numerous recipients.

BitMEX says in a blog post (November 1st) that the incident resulted from a “software error”:

“Earlier today, some of our users received an email which contained the email addresses of other users in the ‘to’ field. We apologise for the concern this communication may have caused. This was the result of a software error which has now been addressed.”

BitMEX says no other user data was exposed in the breach:

“BitMEX takes the privacy and security of our users very seriously. Rest assured that in this instance, beyond email addresses, no other personal data or account information have been disclosed and no further emails have been sent. The error which has caused this has been identified and fixed, ensuring our usual high standards of privacy are upheld.”

The company also promises to implement “additional features” to assure the problem is not repeated.

BitMEX offers, “immediate guidance…to assure the safety of your account,” including adding the proper BitMEX support email addresses to one’s email contact list; refraining from indulging any apparent requests from BitMEX to transfer funds (“BitMEX will never ask you to transfer funds. The only way to fund your BitMEX account is to send bitcoin to your unique BitMEX deposit address…begin(ning) with ‘3BMEX’ or ‘3BitMEX'”); and the use of strong passwords and two-factor authentication.

The breach is very serious for a number of reasons.

First, any nefarious actor who may have received the problem email now has a list of known cryptocurrency traders that he or she can exploit, sell or distribute to hackers on the Dark Net or elsewhere.

Affected parties could start receiving “phishing” emails impersonating BitMEX, other crypto exchanges, wallet services or other entities.

These emails could contain malware-bearing links designed to infect cryptocurrency wallets present on an individual’s computer or simply shut down the entire computer.

Crypto-stealing malware has been known to re-route transfers of cryptocurrencies to software wallets controlled by hackers.

BitMEX advises that affected persons be careful about assuring the authenticity of any apparent communiqués from crypto businesses.

The exposed email addresses could also help hackers execute a SIM-swap attack and take over a BitMEX user’s cellphone in order  use those phone to access financial and other accounts.

A BitMEX hack group has apparently already emerged on Telegram…

Another Twitter user is claiming to have located 229 passwords corresponding to exposed BitMEX user emails.

As well, an individual or individuals behind a Twitter account called, “Bitmexdatabaseleak” claims to now be in possession of more than 400 000 emails of BitMEX customers exposed in the email leak.

The account names several high-profile crypto personages and taunts them about whether or not they paid taxes on their crypto gains:

Report: Former Wall Street Traders Warn of Crypto Lending Bubble

The availability of cheap, cryptocurrency-collateralized loans is growing unsustainably and could induce a crisis, two former Wall Street traders now working in crypto lending have told Bloomberg.

According to the outlet, the crypto-collateralized loan industry is a relatively new one that mostly emerged in the last two years during the post 2017 “crypto doldrums,” but which is already worth $5 billion USD.

Large holders of cryptocurrencies who bought in prior to the crypto crash of early 2018 are now avoiding selling a loss now by lending out their holdings for interest, using the digital assets as collateral for cash, or lending them to crypto short sellers.

Interests rates for these services started at 11% but now sit at around 5% APR.

The sources to Bloomberg warn that red flag features of the crypto lending space include loose lending standards, a profusion of available funds without enough demand and elevated risk-taking.

And though a $5 billion USD bubble bursting is unlikely to reverberate outside of crypto, it could induce sell-offs within, the sources warn.

“What keeps me up at night is not adoption or even regulatory uncertainty. It’s credit risk,” said Jason Urban, a former trader at DRW Holding and Goldman Sachs now running the DrawBridge (Crypto) Lending in Chicago. “The torpedo below the waterline is an MF Global-Lehman Brothers type event.”

Michael Moro described crypto lending at his firm Genesis, which has provided about $2 billion in cryptocurrency-based lending to businesses since March 2018.

There, a borrower will typically post $1.2 million in collateral in order to borrow $1 million in Bitcoins. If the price of Bitcoins go up while the loan is in place, the borrower must pay additional money or may see their holdings liquidated. If prices drop, borrowers may have some of their collateral returned.

Moro told Bloomberg that he wonders whether some borrowers understand the risk, and said he sees, “more competition, and that leads to prices that don’t make sense relative to the risk and collateralization.”

Alex Mashinsky of the crypto lending platform Celsius Network, which also claims to have $2 billion in crypto loans circulating, said strong compliance is in place there and that his loans go mostly to institutions.

Mashinsky rather pointed a finger at crypto exchanges offering highly-leveraged trades to inexperienced investors as the main source of risk that could lead to a crypto price meltdown.

Seychelles-registered crypto exchange BitMEX, for instance, offers up to 100x leveraged trades of Bitcoins and other cryptocurrencies and is known for “rekking” speculators in devastating liquidations.

BitMEX CEO Arthur Hayes has been caught on tape referring to crypto retail investors as “degenerate gamblers” that pushed his business out of obscurity. BitMEX cofounders Hayes, Ben Delo, and Samuel Reed have all allegedly become crypto billionaires.

According to CoinSutra, leveraged trading has also been made available at Binance (20x), Huobi (3x), Kraken (5x) and Poloniex (5x) cryptocurrency trading platforms, among others.

Zac Prince, CEO of crypto-lending platform Block-Fi also told Bloomberg that his firm observes strict standards in lending, and Antoni Trenchev, co-founder of Nexo, said his platform recommends loan-to-collateral ratios of no more than 50%.

Matthew Jobbe Duval, now developing a lending arm for token-issuance platform CoinList concurred with Moro, however, when he said he perceives risks that remind him of previous financial bubbles.

“The feeling of deja-vu is there: lack of regulation, cheap credit, minimal due diligence, and broad optimism,” he said.

BitMEX Hires Derek Gobel as General Counsel

HDR Global Trading Limited (dba BitMEX) has appointed Derek Gobel as the group’s General Counsel, according to a release.

BitMEX is a large crypto derivatives trading platform that is licensed in the Seychelles.

Arthur Hayes, BitMEX co-founder and CEO issued the following statement:

“Derek brings extensive legal and corporate governance experience. Derek is perfectly qualified to lead our legal function and help us move forward in today’s continually evolving regulatory environment.”

Gobel was most recently BNP Paribas’ GC for APAC. He will oversee all of the company’s legal responsibilities.

Earlier, Crowdfund Insider reported on the departure of Angelina Kwan, BitMEX’s Chief Operating Officer.

This past July, it was reported that the US Commodities and Futures Trading Commission was investigating BitMEX for allegedly allowing US citizens to trade on the platform.

COO for Cryptocurrency Trading Platform BitMEX, Angelina Kwan, Departs

Angelina Kwan, a prominent Hong Kong advocate for women in STEM, has left her position as COO at the crypto derivatives platform, BitMEX, The Block reports.

“We can confirm that Angelina Kwan is leaving the company and is on gardening leave now. That’s all we can say on the matter at the moment, but we wish Angelina all the best,” a spokesperson for BitMEX told the outlet.

Kwan joined BitMEX in October 2018, and, according to Bitcoin Magazine, brought, “significant regulatory compliance experience, including eight years with the Securities and Futures Commission of Hong Kong (SFC).”

Commenting on her hire, Kwan said she would, “…be responsible for overseeing and driving the company’s growth…while guiding BitMEX on its mission to offer advanced, innovative financial products for the global cryptocurrency industry.”

Kwan also said she has a history of, “joining organizations that are at the cusp of making a major breakthrough, so it’s with a sense of great excitement that I take on the challenge of driving BitMEX to new market heights.”

She also claimed at the time that, “Regulatory compliance and prudent risk management is, and has always been, fundamental to the culture and practice of BitMEX globally…BitMEX prohibits residents of various jurisdictions, including the US, from holding positions or entering into contracts on BitMEX.”

But Kwan may have joined BitMEX at a particularly challenging time as crypto platforms around the world attempt to accommodate significant upticks in global regulatory standards and enforcement for crypto.

Like many crypto trading platforms and wallets, BitMEX has been accused of exercising minimal KYC/AML (customer background checks) in early days.

As well, in July of this year, Bloomberg reported that the US Commodity and Futures Trading Commission, which oversees commodities trading in the US, is investigating BitMEX for allegedly allowing Americans to trade on the platform despite the espoused ban.

“Gardening leave” is a pleasant-sounding term for what may be an adversarial situation.

According to Invstopedia

“Gardening leave is a protectionist measure used by an employer when an employee is terminated or when he tenders his resignation. Once in effect, it often prevents the employee from being involved in any work activity for their current employer, and typically restricts them from either taking on another job or working for themselves…(It) is sometimes considered to be a euphemism for being suspended and can be perceived to have negative connotations such as the employee being unfit for anything other than tending to his or her garden.”

BitMEX, 100x Leveraged-Crypto Trading Platform, Restricts Access in Base Jurisdictions

BitMEX, a platform that allows highly-leveraged trading of cryptocurrency derivatives, has announced that customers residing in Seychelles, Hong Kong, and Bermuda, where the company’s offices are located will be, “restricted from access to BitMEX.”

The company claims the change, “will have no financial impact on the business and will affect very few people.”

BitMEX, founded in 2014, has been navigating increasingly hot water of late.

First, BitMEX CEO Arthur Hayes, a reported “crypto billionaire,” engaged in a much-publicized debate with vociferous cryptocurrency detractor and Professor of Finance Nouriel Roubini debated BitMEX, and was later accused by Roubini of suppressing the video of the debate.

Roubini also levelled serious allegations against at Hayes in a subsequent article, “The Great Crypto Heist” and in tweets chronicling alleged misdeeds at BitMEX.

Roubini is also a former Senior Economist for International Affairs in the White House’s Council of Economic Advisers. He has worked at the International Monetary Fund, the US Federal Reserve and the World Bank.

In the article, Roubini accuses Hayes and BitMEX of enticing retail investors with dangerous amounts of leverage, of “front running…clients,” of using only IP addresses to conduct KYC/AML, and of processing criminal monies.

BitMEX is now also under investigation by the American Commodities and Futures Commission for allegedly turning a blind eye and tacitly allowing Americans to trade on the platform using VPNs to obscure their locations despite stated policies of not allowing American trades.

BitMEX’s announcement about precluding Hong Kong, Seychelles and Bahamas traders says that, “HDR Global Trading Limited (HDR) was founded in Mahé, Seychelles…to build a crypto trading platform geared toward experienced traders first.”

That focus appears to have been short-lived, however.

In the video below, Hayes tells attendees at an unnamed cryptocurrency event that, quite early on, BitMEX decided to court the business of, “degenerate gamblers, AKA retail investors,” by being one of few crypto firms to offer high-leverage trades to retail.

By doing so, Hays says, the company separated itself from the pack:

ASA: UK Advertising Regulator Sanctions Crypto Derivatives Platform BitMEX for “Misleading” Ad

The UK’s Advertising Standards Authority has upheld complaints against crypto-derivatives trading platform BitMEX claiming the company violated UK advertising standards with an ad it published on the front page of a national newspaper in January.

According to the ASA, the “misleading” ad featured a logarithmic graph showing “exaggerated returns” on Bitcoin between 2009 and 2019.

The regulators took issue with the graph which appears to show relatively modest volatility in the price of Bitcoin in recent years:

“We noted that the graph used a logarithmic scale on its y-axis which meant that the equally spaced values on that scale did not increase by the same amount each time and instead increased by orders of magnitude. In practice this meant that the y-axis of the graph increased incrementally by the power of ten. For example, after zero the scale went to 1, then 10, then 1000, up to 100,000, unlike an arithmetic scale which would increase by the same amount each time (100, 200, 300 etc.). This meant that the space at the top of the graph between 10,000 and 100,000 represented a change of $90,000 whereas the same space further down the graph represented only fractions of one dollar.”

The ASA says BitMEX argued that the graph in fact, “significantly understated the scale of the rise in its value which appeared as modest upward growth rather than the approximately 5,200,000% growth from 18 August 2010. They said the logarithmic scale was the only sensible way of depicting such a significant increase.”

While acknowledging that the logarithmic graph may be a better way to depict charges in a tight field, the ASA also said a general audience might fail to identify that the chart was logarithmic:

“(W)e considered that at least some specialist knowledge of that type of scale would be needed to interpret the graph and that, in the absence of clear explanatory information, the graph was unlikely to be familiar or readily understandable to the national newspaper audience to whom the ad was directed.”

The regulator also said that text features of the ad failed to temper the reassuring impression given by the graph:

“In addition, we did not consider that the text alongside the graph which stated that Bitcoin was ‘still very much an experiment,’ that ‘the road ahead will be challenging’ or ‘price volatility’ mitigated the overwhelming impression about Bitcoin’s value created by the graph.”

BitMEX claimed the ad was published to commemorate the ten-year anniversary of the invention of Bitcoin and was not taken out to promote the platform or its products.

But the ASA found that the ad was promotional.

As well, though the ad featured text acknowledging volatility:

“Despite price volatility and how entirely bonkers the system seems, the Bitcoin protocol appears robust. And although the road ahead will be challenging, there’s a reason to believe Bitcoin’s still got a chance at glory…”

…the ASA says it ultimately failed to realistically warn investors about the risks of investing in cryptocurrencies:

“We considered that was a clear promotional statement of Bitcoin’s merits and did very little to warn consumers of any risks. For those reasons we considered that the ad had misleadingly exaggerated the return on investment, failed to illustrate the risk of the investment and therefore concluded it was in breach of the Code.”

The ASA says it received four complaints about the BitMEX ad, and said it, “…must not appear again in its current form.”

The ASA also says, “We told HDR Global Trading Ltd to ensure that financial information in their ads was set out in a way that allowed it to be readily understood by the audience being addressed and that the risks of investments were sufficiently clearly signposted.”

Record Bitcoins Flow Out of BitMEX as CFTC Investigation Looms

More than half a billion dollars in Bitcoins ($525 million USD) left the building at BitMEX this month after news of a CFTC investigation broke in the press, CCN reports.

BitMEX is a crypto derivatives trading platform that allows 100X leveraged bets.

BitMEX does not have the necessary licenses/ permission to allow US trades. Reportedly, investigators are looking into whether or not the company has been tacitly allowing US residents to trade on the platform via VPN (virtual private networks), services that obscure users’ IP addresses and their nation of origin.

BitMEX has been known to shed as much as $100 million USD in Bitcoins in a single month in the past, but the $525 million USD exit in July is, “by far its worst-ever month by this metric.”

Even in 2018, when crypto markets crashed resoundingly and then crawled around for months, BitMEX reportedly, “recorded net inflows for every month of the year en route to a cumulative inflow of $1.3 billion.”

The CCN article sites data and charts from Token Analyst, a website, “on a mission to bring transparency to the decentralized economy.”

The investigation was fortunately timed for traders and unfortunately-timed for BitMEX given that two rival exchanges, Binance and Bitfinex, also launched leveraged Bitcoin trades in recent months.

Binance’s reputation remains stronger than Bitfinex’s at this point, however, as Bitfinex and associated companies iFinex, Tether and CryptoCapital are also now under official investigation for suspicion of fraud and money laundering.

Fortunes may be recovering at BitMEX in recent days, however.

Charts at TokenAnalyst show that Bitcoin outflows at BitMEX peaked July 30th, and currently (August 5th), inflows are outpacing outflows by more than 33%.

Transaction values, which affect income from fees, remain significantly down, however, according to token analyst data.


Report: CFTC Investigating BitMEX, Crypto Trading Platform Allowing 100x Leveraged Trades

The US Commodity Futures and Trade Commission (CFTC) is engaged in a “months-long” investigation of BitMEX, a cryptocurrency exchange that made its mark by enabling retail investors to conduct 100x leveraged trades of bitcoins, Bloomberg reports.

According to “people familiar with the matter,” the CFTC is trying to determine whether BitMEX allowed Americans to trade on its platform without first registering to do so.

The CFTC oversees the trading of commodities such as gold and any derivatives, including gold futures.

Bloomberg notes that no conclusion has yet been reached and that, often, investigations do not lead to formal allegations.

A spokesperson for BitMEX said the company, “as a matter of…policy, does not comment on any media reports about inquiries or investigations by government agencies or regulators and we have no comment on this report.”

BitMEX has been in the media hot seat for two weeks after CEO Arthur Hayes agreed to debate Professor Nouriel Roubini in Taipei at the Asia Blockchain Summit.

According to LinkedIn, before starting BitMEX in 2014, Hayes traded for Citibank and Deutsche bank for just over 5 years.

Roubini is a professor at NYU, a former Senior Economist for International Affairs in the White House’s Council of Economic Advisers and has worked at the International Monetary Fund, the US Federal Reserve, and the World Bank.

He is known for having predicted the 2008 financial crisis.

During the debate, Roubini called Hayes, “…a thug that is a public danger to thousands of small clueless investors who have lost their shirt because of his scam,” adding that BitMEX, “should be prosecuted for fraud and banned fully.”

In the days following the debate, both parties declared victory as observers decamped.

On Tuesday, Roubini launched a second formal attack against BitMEX in the form of an article, “The Great Crypto Heist,” in which he accuses BitMEX of enticing retail investors with dangerous amounts of leverage, of “front running…clients,” of using only IP addresses to conduct KYC/AML, and of processing criminal monies.

According to Bloomberg, Hayes has admitted previously that US traders might be masking their location by using (VPNs) virtual private networks to redirect their communications with the platform.

Roubini also claims Hayes tried to suppress public access to the video of the debate:

In “The Great Crypto Heist,” Roubini claims Hayes made sure to acquire the rights to video footage before the debate:

“(U)nbeknownst to me, he had secured exclusive rights to the video of the event from the conference organizers, and refused for a week to release it in full. Instead, he published cherry-picked “highlights” to create the impression that he performed well. I suppose this is par for the course among crypto scammers, but it is ironic that someone who claims to represent the “resistance” against censorship has become the father of all censors now that his con has been exposed. Finally, shamed in public by his own supporters, he relented and released the video.”

Roubini has also been chipping away at BitMEX’s credibility in other tweets this week:

Hayes, for his part, has countered that Roubini doesn’t understand Bitcoin and the desirable service BitMEX provides, and is simply pumping his career and feeding an unscrupulous media by bashing the sector:

“Due to a lack of analytical rigor behind his criticisms of Bitcoin, Roubini attempted to focus the debate on the business practices of BitMEX…BitMEX provides safe, fast, and liquid ways for those who see the potential of crypto to trade and hedge cryptocurrency vs. fiat risk…He increases his publicity by being hyper-critical of Bitcoin regardless of the actual facts. And that is why the media trots him out whenever they need someone to bash Bitcoin and the cryptocurrency industry.”

As fallout from the debate settled, Hayes emphasized the convenience of BitMEX and denied the veracity of allegations of criminal conduct at Bloomberg:

“BitMEX provides safe, fast, professional and liquid ways for those who see the potential of crypto and to trade and hedge cryptocurrency risk. We continue to monitor all legal and regulatory developments around the world and will comply with all applicable laws and regulations; we reject any allegations of criminality, manipulation or unfair treatment of our customers, who are at the center of everything we do.”

In this video (at about the 8-minute mark), however, Hayes also describes how BitMEX turned itself profitable by offering leverage to “degenerate gamblers, AKA retail investors,” something no other exchange was doing at the time:

“There are people who are offering similar types of products but who are focussing on degenerate gamblers, AKA retail traders in Bitcoin, so why don’t we do the same…so we said, ‘OK, we’re going to create the world’s highest-leveraged Bitcoin-US dollar product and we want to enable anyone who has Bitcoin to trade financial derivatives.”

Several traders recently claimed that leverage -and not increasing demand- is behind recent price rises and volatility in crypto markets.

Following Controversial Debate, Crypto Skeptic Nouriel Roubini Levels Serious Allegations Against BitMEX Exchange

On the heels of a controversial debate held recently in Taipei, crypto skeptic and NYU Professor Nouriel Roubini has written an article, “The Great Crypto Heist,” to come back again against, “Some of the biggest crypto players…openly involved in systematic illegality.”

Roubini singles out Hong Kong-headquartered and Seychelles-registered crypto trading platform BitMEX, whose founder, Arthur Hayes, was Roubini’s opponent in Taipei (Hayes and co-founders Ben Delo, and Samuel Reed are all crypto billionaires).

Roubini accuses Hayes and BitMEX of enticing retail investor with dangerous amounts of leverage, of “front running…clients,” of using only IP addresses to conduct KYC/AML, and of processing criminal monies.

With regards to the 100X leverage available on BitMEX, Roubini writes:

“Consider BitMEX, an unregulated trillion-dollar exchange of crypto derivatives that is domiciled in the Seychelles but active globally. Its CEO, Arthur Hayes, boasted openly that the BitMEX business model involves peddling to “degenerate gamblers” (meaning clueless retail investors) crypto derivatives with 100-to-one leverage.”

In this video (at about the 8-minute mark), Hayes describes how BitMEX turned itself profitable by offering leverage to retail investors, something no other exchange was doing at the time:

“There are people who are offering similar types of products but who are focussing on degenerate gamblers, AKA retail traders in Bitcoin, so why don’t we do the same…so we said, ‘OK, we’re going to create the world’s highest-leveraged Bitcoin-US dollar product and we want to enable anyone who has Bitcoin to trade financial derivatives.”

By giving retail access to dangerous amounts of leverage in notoriously volatile markets, BitMEX really levered their money into its own pockets, Roubini says:

“To be clear, with 100-to-one leverage, even a 1% change in the price of the underlying assets could trigger a margin call and wipe out all of one’s investment. Worse, BitMEX applies high fees whenever one buys or sells its toxic instruments, and then it takes another bite of the apple by siphoning customers’ savings into a ‘liquidation fund’ that is likely to be many times larger than what is necessary to avoid counter-party risk. It is little wonder that, according to one independent researcher’s estimates, liquidations at times account for up to half of BitMEX’s revenue.”

Roubini also claims in the article that BitMEX insiders told him the exchange is processing criminal funds:

“BitMEX insiders revealed to me that this exchange is also used daily for money laundering on a massive scale by terrorists and other criminals from Russia, Iran, and elsewhere; the exchange does nothing to stop this, as it profits from these transactions.”

Roubini is a former Senior Economist for International Affairs in the White House’s Council of Economic Advisers during the Clinton Administration, and he has worked at the International Monetary Fund, the US Federal Reserve, and the World Bank.

Following his debate with Hayes, there was much discussion of who had won, and both parties declared themselves victorious.

Roubini says Hayes attempted to suppress public access to the whole video of the debate and, until forced by public pressure to do otherwise, released only the parts of the video that made him look well:

“(U)nbeknownst to me, he had secured exclusive rights to the video of the event from the conference organizers, and refused for a week to release it in full. Instead, he published cherry-picked “highlights” to create the impression that he performed well. I suppose this is par for the course among crypto scammers, but it is ironic that someone who claims to represent the “resistance” against censorship has become the father of all censors now that his con has been exposed. Finally, shamed in public by his own supporters, he relented and released the video.”

As fallout from the debate settled, Hayes emphasized the convenience of BitMEX and denied the veracity of allegations of criminal conduct at Bloomberg:

“BitMEX provides safe, fast, professional and liquid ways for those who see the potential of crypto and to trade and hedge cryptocurrency risk. We continue to monitor all legal and regulatory developments around the world and will comply with all applicable laws and regulations; we reject any allegations of criminality, manipulation or unfair treatment of our customers, who are at the center of everything we do.”

But Roubini is as savage as ever in his latest call out of the entire crypto sector:

“There is a good reason why every civilized country in the world tightly regulates its financial system. The 2008 global financial crisis, after all, was largely the result of rolling back financial regulation. Crooks, criminals, and grifters are a fact of life, and no financial system can serve its proper purpose unless investors are protected from them.”

“But the current regulatory regime does not capture all financial activity… Cryptocurrencies have given rise to an entire new criminal industry, comprising unregulated offshore exchanges, paid propagandists, and an army of scammers looking to fleece retail investors. Yet, despite the overwhelming evidence of rampant fraud and abuse, financial regulators and law-enforcement agencies remain asleep at the wheel.”

Roubini also tweeted this July 18:

 

Bitmex Partners with Cryptocompare on Futures Data

thought-catalog unsplash Bitcoin Ethereum CryptocurrencyCrypto exchange Bitmex has formed a partnership with CryptoCompare, a provider of cryptocurrency data and indices, to provide real-time cryptocurrency futures dataset to institutional investors via the Refinitiv Eikon terminal.

BitMex has always targeted professional traders and institutions. The exchange claims to be the “world’s most advanced cryptocurrency derivatives trading platform.” BitMEX enables traders the ability to exchange cryptocurrency risk at volume.

CryptoCompare has an established partnership with Refinitiv, according to a release. The CryptoCompare-Refinitiv partnership also offers exchanges and information providers a way to contribute data to Refinitiv.

BitMex CEO Arthur Hayes, commented on the deal stating when it comes to trading, good decision-making depends on access to solid data insights.

Charles Hayter, Co-Founder and CEO of CryptoCompare, added that they are excited to enter into a partnership with BitMex to bring a real-time, high-quality dataset to professional investors on the Refinitiv Eikon terminal.

“Our partnership will increase transparency and confidence in the cryptocurrency markets which in turn will attract greater institutional participation in the digital asset class.”

CryptoCompare says it provides data spanning 5,800+ coins and 270,000+ currency pairs globally.

Report: Former Bitmain CEO Working to Create “Biggest OTC (Crypto) Desk…Overnight”

Jihan Wu, departed CEO and co-founder of the world’s largest crypto-mining hardware producer, Bitmain, will launch an OTC cryptocurrency custody and trading desk called Matrix within a month, sources to  The Block report.

The unnamed commenters also believe the exchange will have a tremendous advantage in Asia given that the company will likely have direct wholesale access to “crypto assets” mined by Bitmain.

“Put it this way, they will be the biggest OTC desk and asset-manager [in the world] overnight,” said a source who works with local investors. “With liquidity like that, [low] prices follow…(and Asian markets are) a lot more price sensitive.”

The news is interesting because media and pundits had previously speculated that Wu’s departure from Bitmain may have been acrimonious.

In mid 2017, Wu teamed up with early Bitcoin entrepreneur Roger Ver to launch “a fork” of Bitcoin called Bitcoin Cash, and, according to rumour, sold a large amount of bitcoins to buy volumes of Bitcoin Cash and/or bankroll the network.

Bitcoin Cash is an alternate version of Bitcoin that relies on big blocks for scaling.Ver insists that Bitcoin Cash is “the real Bitcoin” according to “Satoshi’s (the inventor of Bitcoin’s) vision.”

For the first 6 months after it was created, Bitcoin Cash tracked Bitcoin’s price steadily around 10%, but currently trades at around 5%.

Bitmain also reported a loss of $500 million USD in Q3 2018, which likely resulted from a decline in hardware sales that was a side effect of price contractions across cryptocoin markets.

Matrix services will reportedly be available to all but American investors, and sources believe the company may be tolerated by Chinese, officials, who have otherwise and on paper pursued a total ban on cryptocurrency trading.

“It’s more of a ‘if we can’t beat them, how do we direct them’ attitude,” said the source regarding the Chinese government while adding that a nod of approval has not yet been granted.

Once launched, Matrix could be a huge competitor to Coinbase and BitMEX, The Block writes.

According to another source:

“This is going to make Asia the new centre of gravity for crypto OTC.” 

BitMEX Invests in Philippine Cryptocurrency Exchange PDAX

BitMEX Ventures, the investment arm the BitMEX crypto exchange (HDR Global Trading Ltd), has invested in Philippine Digital Asset Exchange (PDAX), a cryptocurrency exchange based in the Philippines. Terms of the investment were not disclosed.

In a release, BitMEX said its investment will help strengthen PDAX’s exchange platform to create a marketplace not just for cryptocurrencies but all kinds of digital assets. PDAX plans to enable the trading of commodities, real estate equities, and debt securities in tokenized form.

PDAX is approved by the Bangko Sentral ng Pilipinas to operate as a virtual currency exchange.

Nichel Gaba, co-founder and CEO of PDAX, said the current financial infrastructure in the Philippines has limited Filipinos’ access to financial products and services.

“Through digital assets and blockchain, we want to even the playing field to give every Filipino from all walks of life the ability to grow their hard-earned wealth. With the support of BitMEX and by leveraging blockchain technology, we hope to create a digital financial market that is accessible to everyone.”

BitMEX co-founder and CEO Arthur Hayes said that BitMEX Ventures is “committed to advancing financial inclusion and accessibility to trading cryptocurrencies.”

“We are confident in the transformative potential of cryptocurrency and PDAX’s ability to widen access to the Philippines market and provide the tools to learn more about financial markets,” stated Hayes.

In a blog post, Hayes stated that a substantial volume of cryptocurrency trading comes from Filipino users.

It was reported earlier this year that BitMEX had been compelled to stop providing services in various markets where regulations create a challenge to its operations. By investing in PDAX, BitMEX gains immediate access to a regulated crypto exchange.

Several Reports Indicate Bitcoin Cash is Victim of Double Spend Attack

Multiple reports this weekend indicate that Bitcoin Cash (BCH) is the victim of a double spend attack or 51% attack.

A double spend attack is exactly what it sounds like. You can spend “money” twice. For a good explanation of how this may occur with a 51% attack (basically once you capture more than 50% of blockchain you control it) – is available here.

Yesterday, Bitmex Research posted a long explanation of the attack pointing to a hard fork that took place on May 15 creating a vulnerability that nefarious actors exploited.

Bitmex explains:

“Bitcoin ABC, an important software implementation for Bitcoin Cash, appears to have had a bug, where the validity conditions for transactions to enter the memory pool may have been less onerous than the consensus validity conditions. This is the opposite to how Bitcoin (and presumably Bitcoin Cash) are expected to operate, consensus validity rules are supposed to be looser than memory pool ones. This is actually quite an important characteristic, since it prevents a malicious spender from creating a transaction which satisfies the conditions to be relayed across the network and get into a merchants memory pools, but fails the conditions necessary to get into valid blocks. This would make 0-confirmation double spend attacks relatively easy to pull off, without one needing to hope their original payment doesn’t make it into the blockchain. In these circumstances, an attacker can be reasonably certain that the maliciously constructed transaction never makes it into the blockchain.

An attacker appears to have spotted this bug in Bitcoin Cash ABC and then exploited it, just after the hardfork, perhaps in an attempt to cause chaos and confusion. This attack could have been executed at any time. The attacker merely had to broadcast transactions which met the mempool validity conditions but failed the consensus checks. When miners then attempted to produce blocks with these transactions, they failed. Rather than not making any blocks at all, as a fail safe, miners appear to have made empty blocks, at least in most of the cases.”

Bitmex states that the total value of the 25 double spent transactions is 3,391.7 BCH or about $1.36 million.

Bitmex said the attack was quite sophisticated and required extensive planning on the part of the hackers.

As well, yesterday Guy Swann posted a series of Tweets on the attack and the fact “no one seems to be talking about it.”

Swan said that “just 2 miners, in secret & w/ no trouble, took it upon themselves to remove 2 blocks w/ another’s TXs, & replace with their own. Bizarrely, some are celebrating! Some devs are quiet, but jtoomim (#BCH dev) called it “justice,” & “punishment” for “antisocial behavior.””

The allusion to a celebration is representative of the diverse opinions regarding Bitcoin Cash which is an offshoot of Bitcoin that is attempting to solve the shortcomings of its older sibling.

Perhaps more worrisome is the fact that hacks like this impact the entire crypto community as it rips the  veneer off of a value system that is unregulated and too frequently easy to exploit. Bitmex says this is “not positive news for Bitcoin” as it “shows that it may be possible in Bitcoin.”

 

Hong Kong-Based Bitcoin Derivatives Exchange Bitmex Forced to Stop Providing “Illegal” Trading Services to American and Quebecois Customers

Bitmex, a Hong Kong-based Bitcoin derivatives exchange popular for allowing 100X leveraged bets, has deactivated the trading accounts of clients from the US and the Canadian province of Quebec, The South China Morning Post (SCMP) reports.

The move has likely been made in response to increased regulatory pressure being exerted from both jurisdictions.

Bitmex is registered in the Seychelles.

Bitmex has imposed similar restrictions against clients from North Korea, Iran, Syria, Cuba, Sudan in the Crimea, likely in order to not to run afoul of global anti-money laundering and anti-terrorist financing laws (AML/CFT)

Quebec financial regulator the Autorité des marchés financiers (AMF) reportedly contacted Bitmex recently by letter advising them to stop serving customers from Quebec because the exchange is not authorized to do so in the province.

Regarding the advisory, the AMF’s director of media relations told the Post:

“BitMEX is not registered with the AMF and is therefore not authorised to have activities in the province of Quebec…We informed this company that its activities were illegal.”

In response to its notice, says the AMF spokesperson, Bitmex immediately closed all Quebec customer accounts.

On the home page of Bitmex, the company has posted the following announcement:

In accordance with Section 1.4 of our Terms of Service:

  • Persons that are located in or a resident of the United States of America or Québec (Canada)are prohibited from holding positions or entering into contracts at BitMEX.
  • Persons that are located in or a resident of Cuba, Crimea and Sevastopol, Iran, Syria, North Korea and Sudan, or any other jurisdiction where the services offered by BitMEX are restricted, are prohibited from holding positions or entering into contracts at BitMEX.
  • BitMEX reserves the right to immediately close the accounts and to liquidate the open positions of persons determined to have breached our Terms of Service.

The US Securities and Exchange Commission (SEC) would not comment on the matter, nor would Bitmex founder, Arthur Hayes.

2018 was characterized by an unprecedented crackdown on fraudulent activities involving cryptocurrencies by multiple North American justice agencies

These actions include “Operation Cryptosweep”, an joint-investigative/ enforcement push by 40 North American state and provincial regulators and law enforcement agencies that began last May.

Exchanges have also come under increased scrutiny in the US.

Under US securities laws, businesses facilitating crypto trades must register as securities exchanges or receive an exemption. It is not believed that Bitmex has done so.

A source to the SCMP, speaking on the condition of anonymity, told the outlet that traders in Asia comprise the majority of Bitmex customers, though the US is another “major” market.

“Several” other sources speaking on condition of anonymity told SCMP that US-based traders account for 7% of trades on Bitmex.

Bitmex reports that close to a billion dollars in Bitcoin-derivatives trades take place on the exchange every day, though that number has been contested at Coinmarketcap.com, where the business has appeared in different places on the site’s “reported” versus “adjusted” volume rankings of exchanges.

CEO of Bitmex Exchange Predicts 18 More Months of Bitcoin Bear Market

Arthur Hayes, CEO of the Hong Kong-based Bitcoin-derivatives exchange BitMEX, has told an audience in London that the bear market for Bitcoin could last another 18 months, Yahoo Finance reports.

“My view is the volatility environment that exists right now could persist for another 12 to 18 months, the flatness,” said Hayes.

After trading at an all-time high price of $20 000 US last December, the price of one Bitcoin has fallen to around USD $6300 now. Trading volumes are also low.

Hayes, a former conventional ETF trader at Deutsche Bank and Citi, cofounded BitMEX in 2014.

The Seychelles-registered platform with offices in Hong Kong allows 100X leveraged trading, and offers Bitcoin futures, although Americans cannot trade there because of SEC prohibitions.

Hayes told the audience at the Yahoo Finance UK event that he has seen similar “nuclear bear market” conditions for Bitcoin before:

“I’m just basing it off my previous experience. I started in bitcoin in 2013 when the price went from $250 to $1,300 and then 2014 to 2015 was sort of the nuclear bear market. Price crashed, volume crashed — very, very difficult to make money.”

Dedicated Bitcoiner, former Wall Street risk analyst and technical analyst Tone Vays has been calling the Bitcoin bear market for months and has said that if the price doesn’t consolidate to around $3000 soon, that the bear market could persist well into 2019.

Will Warren of the Ox exchange told Yahoo that the current period constitutes a normal cyclical “wind down” of interest in Bitcoin.

“The market is blowing off some steam right now,” he said.

Analyst Mati Greenspan of the eToro exchange told Yahoo that he believes the understanding of the new asset sector is expanding, which may mean the next breakout will be more intense than before.

“In 2016 the gains started very gradually until it snowballed. Now that awareness and education have skyrocketed, I have a feeling that it’s going to happen a lot quicker the next time.”

For the record, eToro representatives frequently issue bullish price predictions about Bitcoin and crypto in the media.

Fellow crypto-mancer / fundamental analyst Tom Lee told CNBC on Monday that he has been surprised by Bitcoin’s recent price stability. (Bitcoin has been trading at around $6300 for the past three months.)

To Lee, Bitcoin’s next ascension will require two favourable conditions.

The first is adoption – “fiat inflows,” in his words – which Lee thinks will start happening at the end of this year with the launch of institutional crypto platforms and products from Nasdaq, Fidelity, and the like.

The second factor to boost “heavily oversold” Bitcoin markets, said Lee, would be a decline in the strength of the US dollar, a factor that could comprise a “tailwind” for Bitcoin in Lee’s opinion.

Chinese Crypto-mining Hardware Companies May Be Hit Hard By US Tariffs

New tariffs in the US that raise taxes on imports of crypto-mining machines from 2.6% to 27.6% may significantly impact revenues at Chinese companies like Bitmain, South China Morning News (SCMP) reports.

The tariffs have come into place after American trade overseers in August reclassified, for example, Bitmain’s Antminer S9 as an “electrical machinery apparatus” rather than a “data processing machine,” a change that accounts for the tax jump of 25% now being imposed on Bitmain imports to the US.

Bitmain is one of three Chinese crypto-mining hardware companies mentioned in the SMCP report, but unlike competitors Canaan and Ebang, whose overseas markets account for only 8.5% and 3.8% of sales revenues each, Bitmain overseas markets produced 51.8% of Bitmain’s 2017 revenues, though a further breakdown of that geographical data was not available to SCMP.

Now Bitmain, which began raising what it hopes will be at least US $3 billion from investors in an IPO that started September 26th, is also facing competition from rival mining hardware producers Canaan and Ebang in the public offering sphere.

Canaan is seeking US$400 million in its own IPO and and Ebang hopes to raise US$1 billion, says SCMP.

According to SCMP, Mark Li, a senior analyst at Sanford C. Bernstein has written that he believes US tariffs will make Chinese crypto mining hardware companies less competitive.

In October, Li wrote about an “abrupt downturn” in recent revenues from the sale of mining equipment at Bitmain, down from US$1.8 billion in the first quarter to US$850 million in the second.

Total revenues at Bitmain are also down from US$1.9 billion in the first quarter of 2018 to US$950 million in the second, wrote Li.

All told, Lee believes the numbers are not promising:

“We believe Q2 2018 marks the beginning of a very rapid deterioration at Bitmain.”

As the Bitmain IPO was approaching, numerous crypto-industry commentators said publicly that they suspected Bitmain’s spectacular sector performance, which for a while culminated into a virtual monopoly over the sector, is a thing of the past.

Bitcoin developer Jimmy Song speculated in September that Bitmain was rushing its IPO to take place close to the end of the second quarter of 2018 so the offering wouldn’t be adversely affected by what Song suspected would be even worse third-quarter performance numbers.

As well, at the end of August, researches at the BitMEX crypto exchange wrote in their blog that they suspected Bitmain founder Jihan Wu had lost millions after backing a chain split of Bitcoin called Bitcoin Cash:

“Bitmain also spent the majority of its operating cash flow acquiring Bitcoin Cash and may have suffered mark to market losses of US$328 million as a result.”

Hong Kong Securities Regulator Seeking Balanced Crypto Rules Says Chief

Properly regulating the cryptocurrency sector is a complex affair, says outgoing Hong Kong Securities and Futures Commission (SFC) chairperson Carlson Tong, but a complete ban is futile:

“We do not think imposing a total ban on these platforms is necessarily the right approach, and it will not work in today’s internet world when trading can cross national boundaries.”

Mr. Tong made the remarks to reporters from the South China Morning Post (SCMP):

“Even if we were to ban them, transactions can still be easily conducted via platforms in overseas markets.”

The regulation of cryptocurrencies and “utility tokens” has proven challenging for legislators worldwide as they attempt to foster innovations in capital formation and investor access while protecting investor rights.

Across the globe and for the past several years, ICOs (initial coin offerings) have allowed some barely-established companies to raise millions with little obligation to investors. Returns to Main Street have been mixed at best, and many companies that ICO’d have failed to deliver on their business and tech development promises.

ICOs continue to be issued into a regulatory grayscape because lawmakers are having a hard time defining them.“They do not fit in the custodian, audit or valuation requirements, for instance, normally expected under the Securities and Futures Ordinance,” said Tong Ka-shing. “But no other international market currently has a comprehensive regulation framework for these cryptocurrency platforms.”

But this does not mean the sector cannot be properly regulated, Tong believes:

“We need to see if and how these platforms can be regulated to a standard that is comparable to that of a licensed trading venue, while at the same time ensuring investor’s interest are being protected.”

The SCMP says that Tong’s SFC, “is now anxious to to get some more formal cryptocurrency regulations firmly in place,” and has in the meantime been urging investors to be careful,

He says they have also warned cryptocurrency exchanges operating locally to strictly adhere to any relevant SFC rules.

A spokesperson for the crypto exchange BitMEX told the SCMP that she looks forward to clearer rules if they are enlightened. “We hope the guidelines or regulations being considered will keep pace with market developments,” said Angelina Kwan.

Jeremy Allaire of Circle told the SCMP that the industry is watching very closely and is eager to cooperate:

“We’ll pay very close attention when new licensing or regulatory frameworks emerge, and will proactively work with the government on those frameworks.”

He also said that a lack of clear rules may be putting investors at risk:

“We also recognise there are real risks for investors and rules need (to be) set in place to deal with those risks. So we try to be constructive in working with regulators in all the markets we are in.”

BitMEX Crypto Exchange Hires Former Compliance Head of Hong Kong Exchanges and Clearing Limited

BitMEX (Bitcoin Mercantile Exchange), a sophisticated cryptocurrency trading platform, has hired Angelina Kwan as its new Chief Operating Officer. Kwan was previously Managing Director and Head of Regulatory Compliance for Hong Kong Exchanges and Clearing Limited (HKEX). Kwan also spent eight years working at the Securities and Futures Commission of Hong Kong (SFC). Kwan will be based in Hong Kong. In her role at BitMEX, Kwan will oversee the growth of its advanced trading platform.

Kwan is a Hong Kong Government-appointed member of the Women’s Commission, the Council for Sustainable Development, the Lord Wilson Heritage Trust and the Administrative Appeals Board; a Director and Chairman of the Audit Committee of the Securities Industry Development Corporation of Malaysia; Vice-Chairman and Director of The Women’s Foundation; a Fellow and Member of the Regulatory Accountability Board; Hong Kong Institute of Certified Public Accountants; and an Honorary Adjunct Professor of Finance for the Hong Kong Polytechnic University.

BitMEX CEO and Co-founder Arthur Hayes welcomed Kwan to his company calling the hire a significant milestone.

“I believe Angelina’s decision to join us is a signal that the global markets are shifting focus to the rapidly-expanding domain of crypto-coins. Angelina’s vast experience in regulation, trading platforms, business development, restructuring, and investor and stakeholder relations will be pivotal as we continue the push towards mainstream cryptocurrency adoption and broaden our community.”

Kwan said it’s with a sense of great excitement that she takes on the challenge of driving BitMEX to new market heights.

“In addition to being a true market leader among trading platforms, BitMEX shares my value of gender inclusion, particularly in STEM fields. Cryptocurrency markets present an exciting new opportunity for women to get involved in the intersection of finance and technology, two fields in which they are chronically under-represented. BitMEX has made its commitment to meritocracy clear, and is sending the message that women with deep backgrounds in finance and business can execute at the highest level within cryptocurrency companies,” said Kwan.

The Securities and Exchange Commission is Right on Bitcoin ETF

The SEC Rejects Bitcoin ETF Proposals.

The SEC has rejected nine more Bitcoin ETF proposals, one of them from a fairly well-established ETF distributor, ProShares.  The ProShares filing was due for comments on Thursday, but the SEC promptly responded a day early, as well as denying filings from Direxion that were due for comments at a later date.  All nine proposed products used Bitcoin derivatives in-place of Bitcoin to cunningly avoid the custody issues surrounding Bitcoin that the SEC might point to.

Instead, the SEC’s rejection was primarily attributed to potential manipulation of the Bitcoin market, which is not alleviated by trading futures, only amplified.  The SEC is right, not just on this point, but many others.

As background, I spent almost a decade of my career manufacturing many financial products, including ETFs – everything from product development, to writing indexes and methodologies, and portfolio management and portfolio construction.  I have seen much less esoteric ETF filings, such as investment grade bond portfolios, be rejected by the SEC or be approved after more than five years of comments.

An ETF’s Purpose

Bitcoin was created to decentralize and disintermediate.  ETFs are the opposite of that.  They centralize and intermediate.  However, the focus of this article is on the wrapper itself.  An ETF is not a suitable wrapper for a portfolio of Bitcoin. For context, ETFs are designed to give retail investors exposure to a broad, diversified investment strategy for a low fee.  They are also passively managed and based on an index that is rules-based.  These rules are not arbitrary, but due to the exemptive relief that give ETFs the right to be traded on an exchange and the special tax advantage given to ETF holders, which will be discussed later.  Most of the current Bitcoin ETF filings miss the point of what an ETF is, hence the rejection from the SEC.

[easy-tweet tweet=”#Bitcoin was created to decentralize and disintermediate.  ETFs are the opposite of that.  They centralize and intermediate. “]

Portfolio Diversification

The goal of an ETF is to provide investors diversification in their portfolio. Generally, you can purchase an ETF that tracks broad indexes of a sector or market, not an individual security.    An ETF that only holds Bitcoin is as ridiculous as an ETF that only holds Apple stock. There is no point in purchasing a fund that gives the same exposure as the individual stock or asset that you can buy directly.  If the only portfolio position goes to zero, so does the ETF.  Diversification hedges the investor against potential downside.  The investor is actually worse off in the ETF due to the additional fees.  Instead of gaining exposure to a portfolio of stocks, you are exposed to only one stock and its daily price swings.  A meaningful ETF product would need to contain a basket of cryptoassets to attain the diversification mandate. The winner in a Bitcoin ETF: the ETF manager who charges you fees for the privilege of doing something you can do yourself.

[easy-tweet tweet=”An ETF that only holds #Bitcoin is as ridiculous as an ETF that only holds Apple stock. There is no point in purchasing a fund that gives the same exposure as the individual stock or asset that you can buy directly.”]

Ease of Use

An ETF is used to conveniently purchase commodities or basket of securities that are normally difficult for an individual to purchase on their own, without incurring high fees. Buying an ETF of Bitcoin is not any easier than buying Bitcoin directly. In order to buy an ETF, one must go through the effort of signing up with an online brokerage such as Robinhood, Etrade or Schwab.  It is not exactly a simple process, but takes little skill to set up an account, fund it, and begin trading.

If you use Robinhood, you can buy Bitcoin and any ETF side-by-side with the same effort. Conversely, if a retail investor wanted direct exposure to Bitcoin, Coinbase and Gemini are also options that have an even easier setup than online brokerages since they are a money transfer agent, not a broker dealer.

Although many argue that you do not own your Bitcoin if it is in the custody of Gemini or Coinbase (because ownership of private keys is ownership of Bitcoin), but the same would be true if you owned an ETF of Bitcoin. A third-party would have custody of your private keys.  Ease of use is the argument for allowance of single commodities, such as gold, in an ETF.  It is difficult and expensive for an individual to purchase and store commodities.  An intermediary can purchase commodities in bulk closer to the spot price on behalf of their collective shareholders.  In an illiquid market like Bitcoin, with digital ownership and transactions, there is little benefit for an intermediary to consolidate investors to get a better transaction price.

Derivative Layers

ETFs also give an investor the ability to purchase options, both calls and puts, on the entire basket of underlying securities.  In addition, you may short an ETF on Margin.  The nine rejected ETF filings all proposed investing in derivatives of Bitcoin. This is beginning to look like a bad idea.

Take an asset (Bitcoin), create a derivative of that asset without owning the asset, only tracking the price (CBOE Bitcoin Futures), structure it in a vehicle that is offered to non-accredited retail investors (ETFs), then allow them to invest in derivatives based on that vehicle that holds the derivatives (options).  The concept sounds very familiar to a product called CLO Squared and CLO Cubed; these were derivatives of derivatives of mortgage loans created ahead of the Housing Crisis.  Aside from theoretical poor vehicles, this once again defeats the spirit and use of Bitcoin and Blockchain in general.

The beauty of Bitcoin is that it has a finite supply.  Derivatives create false supply, much like governments printing money with no gold in its coffers.

Market Manipulation

Though an ETF holding only Bitcoin, or ETH, or EOS, doesn’t make a lot of sense. An ETF that holds a basket of indexed cryptocurrencies conceptually makes more sense.  However, the biggest issue that the SEC referred to in its comments rejecting the nine proposals were all the same:

“…the Commission is disapproving this proposed rule change because, as discussed below, the Exchange has not met its burden under the Exchange Act and the Commission’s Rules of Practice to demonstrate that its proposal is consistent with the requirements of the Exchange Act Section 6(b)(5), in particular the requirement that a national securities exchange’s rules be designed to prevent fraudulent and manipulative acts and practices.”

It is still widely believed that there are fraudulent and manipulative acts and practices in the trading of Bitcoin.  The OTC equity markets are a great comparison, as they are so thinly traded, micro-cap public equities can be easily manipulated as well.

For this reason, the SEC has taken a hard stance on the liquidity and trading volume requirements on public equities in ETFs, making OTC markets unavailable in ETFs.  Until market manipulation in Bitcoin subsides, the SEC should hold off allowing it in an ETF.  As market cap, trading volume, and liquidity grow, those issues will go away.  But if Bitcoin has liquidity issues, altcoins have much more, making a portfolio of altcoins as unsuitable in an ETF as a Bitcoin ETF in the near future.

It is important to note, though, that SEC commissioners are actively reviewing the comments on the ProShares application rejection. Though I do not believe the SEC will or should overturn the decision, some of the other issues stated may be resolved, and a better understanding of how to treat cryptocurrencies will come out of it.

[easy-tweet tweet=”Until market manipulation in #Bitcoin subsides, the SEC should hold off allowing it in an ETF”]

Latest Happenings

  • Ethereum had an important developer call on Friday regarding its system wide upgrade in October 2018. Three major points of contention for this call were difficulty bomb (increasing the difficulty of finding an ETH block), Ether issuance (amount of ETH issued) and ASIC resistance. Each one of these points have an immense amount of impact on the future of the Ethereum blockchain – as such, developers, large stakeholders, and miners were all in attendance, each with incompatible viewpoints. Arca Funds continues to be bearish on ETH.
  • On August 21, Bitmex closed for scheduled maintenance, leaving a window for Bitcoin bulls to push the price up 5% within an hour. Bitmex allows leveraged shorting (and leveraged long positions) of Bitcoin and other cryptocurrencies.  This spike certainly does not bode well for any argument against potential price manipulation of Bitcoin.
  • House Representative Tulsi Gabbard of Hawaii disclosed her crypto holdings of ETH and LTC this week, adding to a growing list US Congress members revealing holdings.  Hawaii has my vote for the next Crypto Island. The upcoming primaries also have many crypto-friendly candidates. I am watching US Senate candidate Deaglan McEachern in the New Hampshire primaries very closely.  He is pro-crypto, and is a former member of the US Rowing team.  Federal legislation is very important on how crypto will be handled.

Steven McClurg is a founding partner and CIO at Arca Funds, a full service asset management firm specializing in blockchain. Prior to Arca Funds, Mr. McClurg was a Managing Director and Portfolio Manager at Guggenheim Partners. Mr. McClurg holds an MBA and MS from Pepperdine University, where he has served as a guest lecturer.