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Technical: A Brief History of Payment Channels: from Satoshi to Lightning Network
Who cares about political tweets from some random country's president when payment channels are a much more interesting and are actually capable of carrying value? So let's have a short history of various payment channel techs!
Generation 0: Satoshi's Broken nSequence Channels
Because Satoshi's Vision included payment channels, except his implementation sucked so hard we had to go fix it and added RBF as a by-product. Originally, the plan for nSequence was that mempools would replace any transaction spending certain inputs with another transaction spending the same inputs, but only if the nSequence field of the replacement was larger. Since 0xFFFFFFFF was the highest value that nSequence could get, this would mark a transaction as "final" and not replaceable on the mempool anymore. In fact, this "nSequence channel" I will describe is the reason why we have this weird rule about nLockTime and nSequence. nLockTime actually only works if nSequence is not 0xFFFFFFFF i.e. final. If nSequence is 0xFFFFFFFF then nLockTime is ignored, because this if the "final" version of the transaction. So what you'd do would be something like this:
You go to a bar and promise the bartender to pay by the time the bar closes. Because this is the Bitcoin universe, time is measured in blockheight, so the closing time of the bar is indicated as some future blockheight.
For your first drink, you'd make a transaction paying to the bartender for that drink, paying from some coins you have. The transaction has an nLockTime equal to the closing time of the bar, and a starting nSequence of 0. You hand over the transaction and the bartender hands you your drink.
For your succeeding drink, you'd remake the same transaction, adding the payment for that drink to the transaction output that goes to the bartender (so that output keeps getting larger, by the amount of payment), and having an nSequence that is one higher than the previous one.
Eventually you have to stop drinking. It comes down to one of two possibilities:
You drink until the bar closes. Since it is now the nLockTime indicated in the transaction, the bartender is able to broadcast the latest transaction and tells the bouncers to kick you out of the bar.
You wisely consider the state of your liver. So you re-sign the last transaction with a "final" nSequence of 0xFFFFFFFF i.e. the maximum possible value it can have. This allows the bartender to get his or her funds immediately (nLockTime is ignored if nSequence is 0xFFFFFFFF), so he or she tells the bouncers to let you out of the bar.
Now that of course is a payment channel. Individual payments (purchases of alcohol, so I guess buying coffee is not in scope for payment channels). Closing is done by creating a "final" transaction that is the sum of the individual payments. Sure there's no routing and channels are unidirectional and channels have a maximum lifetime but give Satoshi a break, he was also busy inventing Bitcoin at the time. Now if you noticed I called this kind of payment channel "broken". This is because the mempool rules are not consensus rules, and cannot be validated (nothing about the mempool can be validated onchain: I sigh every time somebody proposes "let's make block size dependent on mempool size", mempool state cannot be validated by onchain data). Fullnodes can't see all of the transactions you signed, and then validate that the final one with the maximum nSequence is the one that actually is used onchain. So you can do the below:
Become friends with Jihan Wu, because he owns >51% of the mining hashrate (he totally reorged Bitcoin to reverse the Binance hack right?).
Slip Jihan Wu some of the more interesting drinks you're ordering as an incentive to cooperate with you. So say you end up ordering 100 drinks, you split it with Jihan Wu and give him 50 of the drinks.
When the bar closes, Jihan Wu quickly calls his mining rig and tells them to mine the version of your transaction with nSequence 0. You know, that first one where you pay for only one drink.
Because fullnodes cannot validate nSequence, they'll accept even the nSequence=0 version and confirm it, immutably adding you paying for a single alcoholic drink to the blockchain.
The bartender, pissed at being cheated, takes out a shotgun from under the bar and shoots at you and Jihan Wu.
Jihan Wu uses his mystical chi powers (actually the combined exhaust from all of his mining rigs) to slow down the shotgun pellets, making them hit you as softly as petals drifting in the wind.
The bartender mutters some words, clothes ripping apart as he or she (hard to believe it could be a she but hey) turns into a bear, ready to maul you for cheating him or her of the payment for all the 100 drinks you ordered from him or her.
Steely-eyed, you stand in front of the bartender-turned-bear, daring him to touch you. You've watched Revenant, you know Leonardo di Caprio could survive a bear mauling, and if some posh actor can survive that, you know you can too. You make a pose. "Drunken troll logic attack!"
I think I got sidetracked here.
Bears are bad news.
You can't reasonably invoke "Satoshi's Vision" and simultaneously reject the Lightning Network because it's not onchain. Satoshi's Vision included a half-assed implementation of payment channels with nSequence, where the onchain transaction represented multiple logical payments, exactly what modern offchain techniques do (except modern offchain techniques actually work). nSequence (the field, but not its modern meaning) has been in Bitcoin since BitCoin For Windows Alpha 0.1.0. And its original intent was payment channels. You can't get nearer to Satoshi's Vision than being a field that Satoshi personally added to transactions on the very first public release of the BitCoin software, like srsly.
Miners can totally bypass mempool rules. In fact, the reason why nSequence has been repurposed to indicate "optional" replace-by-fee is because miners are already incentivized by the nSequence system to always follow replace-by-fee anyway. I mean, what do you think those drinks you passed to Jihan Wu are, other than the fee you pay him to mine a specific version of your transaction?
Satoshi made mistakes. The original design for nSequence is one of them. Today, we no longer use nSequence in this way. So diverging from Satoshi's original design is part and parcel of Bitcoin development, because over time, we learn new lessons that Satoshi never knew about. Satoshi was an important landmark in this technology. He will not be the last, or most important, that we will remember in the future: he will only be the first.
Incentive-compatible time-limited unidirectional channel; or, Satoshi's Vision, Fixed (if transaction malleability hadn't been a problem, that is). Now, we know the bartender will turn into a bear and maul you if you try to cheat the payment channel, and now that we've revealed you're good friends with Jihan Wu, the bartender will no longer accept a payment channel scheme that lets one you cooperate with a miner to cheat the bartender. Fortunately, Jeremy Spilman proposed a better way that would not let you cheat the bartender. First, you and the bartender perform this ritual:
You get some funds and create a transaction that pays to a 2-of-2 multisig between you and the bartender. You don't broadcast this yet: you just sign it and get its txid.
You create another transaction that spends the above transaction. This transaction (the "backoff") has an nLockTime equal to the closing time of the bar, plus one block. You sign it and give this backoff transaction (but not the above transaction) to the bartender.
The bartender signs the backoff and gives it back to you. It is now valid since it's spending a 2-of-2 of you and the bartender, and both of you have signed the backoff transaction.
Now you broadcast the first transaction onchain. You and the bartender wait for it to be deeply confirmed, then you can start ordering.
The above is probably vaguely familiar to LN users. It's the funding process of payment channels! The first transaction, the one that pays to a 2-of-2 multisig, is the funding transaction that backs the payment channel funds. So now you start ordering in this way:
For your first drink, you create a transaction spending the funding transaction output and sending the price of the drink to the bartender, with the rest returning to you.
You sign the transaction and pass it to the bartender, who serves your first drink.
For your succeeding drinks, you recreate the same transaction, adding the price of the new drink to the sum that goes to the bartender and reducing the money returned to you. You sign the transaction and give it to the bartender, who serves you your next drink.
At the end:
If the bar closing time is reached, the bartender signs the latest transaction, completing the needed 2-of-2 signatures and broadcasting this to the Bitcoin network. Since the backoff transaction is the closing time + 1, it can't get used at closing time.
If you decide you want to leave early because your liver is crying, you just tell the bartender to go ahead and close the channel (which the bartender can do at any time by just signing and broadcasting the latest transaction: the bartender won't do that because he or she is hoping you'll stay and drink more).
If you ended up just hanging around the bar and never ordering, then at closing time + 1 you broadcast the backoff transaction and get your funds back in full.
Now, even if you pass 50 drinks to Jihan Wu, you can't give him the first transaction (the one which pays for only one drink) and ask him to mine it: it's spending a 2-of-2 and the copy you have only contains your own signature. You need the bartender's signature to make it valid, but he or she sure as hell isn't going to cooperate in something that would lose him or her money, so a signature from the bartender validating old state where he or she gets paid less isn't going to happen. So, problem solved, right? Right? Okay, let's try it. So you get your funds, put them in a funding tx, get the backoff tx, confirm the funding tx... Once the funding transaction confirms deeply, the bartender laughs uproariously. He or she summons the bouncers, who surround you menacingly. "I'm refusing service to you," the bartender says. "Fine," you say. "I was leaving anyway;" You smirk. "I'll get back my money with the backoff transaction, and posting about your poor service on reddit so you get negative karma, so there!" "Not so fast," the bartender says. His or her voice chills your bones. It looks like your exploitation of the Satoshi nSequence payment channel is still fresh in his or her mind. "Look at the txid of the funding transaction that got confirmed." "What about it?" you ask nonchalantly, as you flip open your desktop computer and open a reputable blockchain explorer. What you see shocks you. "What the --- the txid is different! You--- you changed my signature?? But how? I put the only copy of my private key in a sealed envelope in a cast-iron box inside a safe buried in the Gobi desert protected by a clan of nomads who have dedicated their lives and their childrens' lives to keeping my private key safe in perpetuity!" "Didn't you know?" the bartender asks. "The components of the signature are just very large numbers. The sign of one of the signature components can be changed, from positive to negative, or negative to positive, and the signature will remain valid. Anyone can do that, even if they don't know the private key. But because Bitcoin includes the signatures in the transaction when it's generating the txid, this little change also changes the txid." He or she chuckles. "They say they'll fix it by separating the signatures from the transaction body. They're saying that these kinds of signature malleability won't affect transaction ids anymore after they do this, but I bet I can get my good friend Jihan Wu to delay this 'SepSig' plan for a good while yet. Friendly guy, this Jihan Wu, it turns out all I had to do was slip him 51 drinks and he was willing to mine a tx with the signature signs flipped." His or her grin widens. "I'm afraid your backoff transaction won't work anymore, since it spends a txid that is not existent and will never be confirmed. So here's the deal. You pay me 99% of the funds in the funding transaction, in exchange for me signing the transaction that spends with the txid that you see onchain. Refuse, and you lose 100% of the funds and every other HODLer, including me, benefits from the reduction in coin supply. Accept, and you get to keep 1%. I lose nothing if you refuse, so I won't care if you do, but consider the difference of getting zilch vs. getting 1% of your funds." His or her eyes glow. "GENUFLECT RIGHT NOW." Lesson learned?
Payback's a bitch.
Transaction malleability is a bitchier bitch. It's why we needed to fix the bug in SegWit. Sure, MtGox claimed they were attacked this way because someone kept messing with their transaction signatures and thus they lost track of where their funds went, but really, the bigger impetus for fixing transaction malleability was to support payment channels.
Yes, including the signatures in the hash that ultimately defines the txid was a mistake. Satoshi made a lot of those. So we're just reiterating the lesson "Satoshi was not an infinite being of infinite wisdom" here. Satoshi just gets a pass because of how awesome Bitcoin is.
CLTV-protected Spilman Channels
Using CLTV for the backoff branch. This variation is simply Spilman channels, but with the backoff transaction replaced with a backoff branch in the SCRIPT you pay to. It only became possible after OP_CHECKLOCKTIMEVERIFY (CLTV) was enabled in 2015. Now as we saw in the Spilman Channels discussion, transaction malleability means that any pre-signed offchain transaction can easily be invalidated by flipping the sign of the signature of the funding transaction while the funding transaction is not yet confirmed. This can be avoided by simply putting any special requirements into an explicit branch of the Bitcoin SCRIPT. Now, the backoff branch is supposed to create a maximum lifetime for the payment channel, and prior to the introduction of OP_CHECKLOCKTIMEVERIFY this could only be done by having a pre-signed nLockTime transaction. With CLTV, however, we can now make the branches explicit in the SCRIPT that the funding transaction pays to. Instead of paying to a 2-of-2 in order to set up the funding transaction, you pay to a SCRIPT which is basically "2-of-2, OR this singlesig after a specified lock time". With this, there is no backoff transaction that is pre-signed and which refers to a specific txid. Instead, you can create the backoff transaction later, using whatever txid the funding transaction ends up being confirmed under. Since the funding transaction is immutable once confirmed, it is no longer possible to change the txid afterwards.
Todd Micropayment Networks
The old hub-spoke model (that isn't how LN today actually works). One of the more direct predecessors of the Lightning Network was the hub-spoke model discussed by Peter Todd. In this model, instead of payers directly having channels to payees, payers and payees connect to a central hub server. This allows any payer to pay any payee, using the same channel for every payee on the hub. Similarly, this allows any payee to receive from any payer, using the same channel. Remember from the above Spilman example? When you open a channel to the bartender, you have to wait around for the funding tx to confirm. This will take an hour at best. Now consider that you have to make channels for everyone you want to pay to. That's not very scalable. So the Todd hub-spoke model has a central "clearing house" that transport money from payers to payees. The "Moonbeam" project takes this model. Of course, this reveals to the hub who the payer and payee are, and thus the hub can potentially censor transactions. Generally, though, it was considered that a hub would more efficiently censor by just not maintaining a channel with the payer or payee that it wants to censor (since the money it owned in the channel would just be locked uselessly if the hub won't process payments to/from the censored user). In any case, the ability of the central hub to monitor payments means that it can surveill the payer and payee, and then sell this private transactional data to third parties. This loss of privacy would be intolerable today. Peter Todd also proposed that there might be multiple hubs that could transport funds to each other on behalf of their users, providing somewhat better privacy. Another point of note is that at the time such networks were proposed, only unidirectional (Spilman) channels were available. Thus, while one could be a payer, or payee, you would have to use separate channels for your income versus for your spending. Worse, if you wanted to transfer money from your income channel to your spending channel, you had to close both and reshuffle the money between them, both onchain activities.
Poon-Dryja Lightning Network
Bidirectional two-participant channels. The Poon-Dryja channel mechanism has two important properties:
No time limit.
Both the original Satoshi and the two Spilman variants are unidirectional: there is a payer and a payee, and if the payee wants to do a refund, or wants to pay for a different service or product the payer is providing, then they can't use the same unidirectional channel. The Poon-Dryjam mechanism allows channels, however, to be bidirectional instead: you are not a payer or a payee on the channel, you can receive or send at any time as long as both you and the channel counterparty are online. Further, unlike either of the Spilman variants, there is no time limit for the lifetime of a channel. Instead, you can keep the channel open for as long as you want. Both properties, together, form a very powerful scaling property that I believe most people have not appreciated. With unidirectional channels, as mentioned before, if you both earn and spend over the same network of payment channels, you would have separate channels for earning and spending. You would then need to perform onchain operations to "reverse" the directions of your channels periodically. Secondly, since Spilman channels have a fixed lifetime, even if you never used either channel, you would have to periodically "refresh" it by closing it and reopening. With bidirectional, indefinite-lifetime channels, you may instead open some channels when you first begin managing your own money, then close them only after your lawyers have executed your last will and testament on how the money in your channels get divided up to your heirs: that's just two onchain transactions in your entire lifetime. That is the potentially very powerful scaling property that bidirectional, indefinite-lifetime channels allow. I won't discuss the transaction structure needed for Poon-Dryja bidirectional channels --- it's complicated and you can easily get explanations with cute graphics elsewhere. There is a weakness of Poon-Dryja that people tend to gloss over (because it was fixed very well by RustyReddit):
You have to store all the revocation keys of a channel. This implies you are storing 1 revocation key for every channel update, so if you perform millions of updates over your entire lifetime, you'd be storing several megabytes of keys, for only a single channel. RustyReddit fixed this by requiring that the revocation keys be generated from a "Seed" revocation key, and every key is just the application of SHA256 on that key, repeatedly. For example, suppose I tell you that my first revocation key is SHA256(SHA256(seed)). You can store that in O(1) space. Then for the next revocation, I tell you SHA256(seed). From SHA256(key), you yourself can compute SHA256(SHA256(seed)) (i.e. the previous revocation key). So you can remember just the most recent revocation key, and from there you'd be able to compute every previous revocation key. When you start a channel, you perform SHA256 on your seed for several million times, then use the result as the first revocation key, removing one layer of SHA256 for every revocation key you need to generate. RustyReddit not only came up with this, but also suggested an efficient O(log n) storage structure, the shachain, so that you can quickly look up any revocation key in the past in case of a breach. People no longer really talk about this O(n) revocation storage problem anymore because it was solved very very well by this mechanism.
Another thing I want to emphasize is that while the Lightning Network paper and many of the earlier presentations developed from the old Peter Todd hub-and-spoke model, the modern Lightning Network takes the logical conclusion of removing a strict separation between "hubs" and "spokes". Any node on the Lightning Network can very well work as a hub for any other node. Thus, while you might operate as "mostly a payer", "mostly a forwarding node", "mostly a payee", you still end up being at least partially a forwarding node ("hub") on the network, at least part of the time. This greatly reduces the problems of privacy inherent in having only a few hub nodes: forwarding nodes cannot get significantly useful data from the payments passing through them, because the distance between the payer and the payee can be so large that it would be likely that the ultimate payer and the ultimate payee could be anyone on the Lightning Network. Lessons learned?
We can decentralize if we try hard enough!
"Hubs bad" can be made "hubs good" if everybody is a hub.
Smart people can solve problems. It's kinda why they're smart.
After LN, there's also the Decker-Wattenhofer Duplex Micropayment Channels (DMC). This post is long enough as-is, LOL. But for now, it uses a novel "decrementing nSequence channel", using the new relative-timelock semantics of nSequence (not the broken one originally by Satoshi). It actually uses multiple such "decrementing nSequence" constructs, terminating in a pair of Spilman channels, one in both directions (thus "duplex"). Maybe I'll discuss it some other time. The realization that channel constructions could actually hold more channel constructions inside them (the way the Decker-Wattenhofer puts a pair of Spilman channels inside a series of "decrementing nSequence channels") lead to the further thought behind Burchert-Decker-Wattenhofer channel factories. Basically, you could host multiple two-participant channel constructs inside a larger multiparticipant "channel" construct (i.e. host multiple channels inside a factory). Further, we have the Decker-Russell-Osuntokun or "eltoo" construction. I'd argue that this is "nSequence done right". I'll write more about this later, because this post is long enough. Lessons learned?
Bitcoin offchain scaling is more powerful than you ever thought.
I've been in since May 2017, lessons learned, and some real talk.
I've only been in the crypto game since mid 2017. I remember back then when I was assessing the market, BTC was below $1k a few months earlier, LTC was around $4 that January and by the time I finally got in BTC had more than doubled to around $2,500 and LTC was $30. I thought ETH and XRP (and everything else) were just shitcoins because I didn't know shit and I just listened to the herd (Back then the argument was "Bitcoin is digital gold and LTC is digital silver and everything else is a scam.") Now, I'm pretty invested in several coins, because this market is anything but rational. Screw off if you think otherwise. Try to think logically in this market, and you're going to get smacked in the face. After exchanging my first fiat for crypto, in the next couple of months the market "crashed" and I was fearful. By crashed, I mean BTC went from $2,800 to $1,800. I just decided to let my cryptos ride. I pretended that money was gone, but I'd check prices every day for whatever damn reason. I wasn't even putting that much in. Hell, I would spend more eating out and going to the bars every weekend with friends or work colleagues than I was dropping into BTC. It was pretty common that I'd drop $100 a night on sushi, beers, and Sake Bombs. But, when money you could get back loses value, it makes you feel dumb for putting money in. Logic is out the window when I can't get that $100 back from my sushi and drink purchases, but my crypto dropped 30% that week, so I was dumb for investing in crypto but not for my $500+ per month on eating out and drinking with friends. Several weeks later, I was back to even on my crypto investments. Well shit, that was fast. Then I was suddenly up 25%. "Fuck it, I'm just putting money in. I'm not missing out." By the the winter of 2017, I was up over 10x with my crypto speculation. My initial LTC went from $30 to over $350; my BTC went from $2,500 to $20,000. I also just threw $300-$1,000 here and there on random sub-200 market cap coins only to see them 6x in a few weeks. I remember thinking how stupid I was for not buying during that dip down to $1,800, but how good of an investor I was because my gains. What a fucking dope I was. I was sitting there looking at my account on December 10th, 2017. I was about to sell because I could have paid off my car and 50% of my student loans. I wasn't even using my car because I was in another country traveling. "Nah, I can't sell. This is just the beginning; let's wait until I can pay off all my student loans" my delusional self said. I never cashed out. I remember sitting there with a dude who had his GDAX account open after BTC "crashed" from $20k to $13k two weeks later. We just got back from surfing. He was still sitting at $250,000 in his account and was nervous as shit. "What should I do?" he asked rhetorically. Then immediately answered himself, "It will rebound," he said, "it always does." This guy had been through the MTGOX hack and gave me plenty of advice while we surfed. And I listened as if he was prophetic. What a fucking dope I was. When hopium is in the air, we all get irrational. I still wonder about that guy and his cryptos. He went north back home for the Christmas holiday, while I headed south for more traveling, and I've never seen him again. February 2018 was both euphoric and scary as shit. "Holy shit! BTC is under $10k I never thought it would be down here again. But it could keep dropping. But it was just $20k a month ago." I was skeptical that it wouldn't keep dropping so I waited. Then, I didn't want to miss out. BTC was making a run from $6,500 up to testing $10k. "If it breaks $10k, I'm getting back in." A short time later, it did break $10k, only to be hit a wall at $12k, then again...then, the inevitable crash to $6,200 happened where it fluctuated in August - November of 2018 up until, what, November 10th-ish when BCH shitfork shat out and then BTC-Shit-Vision and BTC-LMNOP started paying miners to mine their forked fork of BTC and everyone shat themselves as the market tanked yet again. That was it for me. That was the day I stopped caring. I remember thinking how stupid I was to invest so much time in this. You can't predict this shit. I didn't regret investing in crypto, I regret all the time spent looking at my portfolio, trying to time the market, pretending I was some guru in my head because I threw $300 at POE when it was less than a penny and weeks later it was selling for $0.21 and could buy another trip to whatever country I wanted. Sure, you can use TA to see what support or resistance is there, but it's still a 50-50 chance whether Fake Satoshi is going to spoof trade or some rando is going to drop three 7,000 BTC market buys to break through resistance. So, what did I learn through this whole experience? Other than what I've already stated (You have no way to predict whether it's breaking through resistance or crashing through support). I just remember the main thing that has persisted this last two years. "I wish I could go back in time to when BTC was around $3,000 and LTC was $30." When BTC dropped below, $4k that was heaven. I never thought it would get back to when I was buying when I first got into the market in 2017. So, I bought, and I bought hard. This time around, I have strong buy strategies and sell strategies. They are set; no question. For me, I'm not selling until two weeks before the LTC halving in August. Even then, I'm only selling my LTC for BTC. Then I'll sell 25% of my BTC for fiat 2 weeks before the BTC halving in 2020. I will never have less than my preferred number of BTC's, ETH's, LTC's and a few others. Don't follow my advice here, I'm just saying I know what I want and what my strategy is. You need to have a strategy to buy and strategy to sell. Be reasonable. I previously had a "strategy." It was once I could pay off my student loans with all of my crypto gains minus taxes, I would sell. Yeah, well, looking back if I would have just sold when could pay off my car and 50% of my student loans, I would have been able to invest even more when BTC was down in $3,xxx range and LTC was $22-$35, etc from December 2018 through March 2019. DCAing is the way to go. No question. You don't need to do TA, you don't need to check your portfolio, you don't need to do shit but either 1) setup an automatic buy order with your exchange or 2) login and buy whatever you want. You have your buy strategy (DCA at x interval) and you have your sell strategy. Figure it out. Don't pretend you're gonna time the market. Don't pretend you're some guru. Those people, like me, learn the hard way. No TA, no waiting for google searches of BTC to increase, no waiting for BAKKT, no waiting for Faktoshi to shut the fuck up. Before November 2018, I would only throw money when BTC was on a run. "Oh, we're finally on the way up. It's time to buy!" Like when it went from $2,800 up to $6,200 in the summer 2017, then from $10k to $20k in late 2017. Or when it went from $6,200 back up to $10,000 then to $11,900 in February of 2018. I would think I could time the market. What a pathetic loser, right? Some people grow up in this market like the cable version of themselves only to transition to the directv version. Listen to us dopes that have been there and done that. Learn from our mistakes, but also don't think that we have all the damn answers. Anyone that comes in here acting like the 2nd coming of Craig Wright's dumpster twin, you can be rest assured they are as delusional as Justin Sun. The problem is, even if they are delusional, this market is anything but rational, so they might just be proven right enough for you to think you should follow their advice. This shit is crazy. Stop acting like you've got it figured out. Nobody does, but it feels good to have confidence in this random speculation, right? I'm here to tell you this. My life has drastically improved since November 2018 when I started viewing Crypto investments like a bill. Every two weeks, I would send money from my paycheck to my exchange. Then, I'd buy a certain amount every single week after it had cleared. That money, is all but "gone." It was a "bill" I paid. When the market is going down, I send more fiat and I buy more crypto. When it is rising, I still buy, but not as much; I pull back. You may say I'm trying to catch a falling knife. I just learned that the way I was investing before was bad practice. I'd rather people think I'm trying to catch a falling knife than to feel that FOMO and only buy when the market is up. Right now for example, I'm not buying this week. Not because I think I know what hell is going to happen, but because it's my strategy to not chase a run, and to spend more when it drops. I'll wait until next weekend and see what the market is doing. What happens in between now and next weekend, I don't give a shit. Could I miss out on another run? Sure, but I don't give a shit. Maybe it's because I'm 2 years in and I've seen this shit before, or maybe it's because I've been buying BTC when it was around $3,000 both in 2017 and just about a month ago, so I feel fortunate to have gotten another chance at BTC at $3,xxx. I also learned my lesson that fakeouts happen. I've been burned enough to not give a shit about being BTC going from $3500 to $5,200 in the last, what, 5 weeks? Been here, done it, don't give a shit. I don't know if this helps anyone, but seeing the last two years of this shit, I don't care about some random 30% pump. I also don't care that BCH is up 86%, or ADA is up whatever it is. I'm not into them, but if you made gains, I'm happy for you. I'm serious too. Maybe you're new to this game, or maybe you've only been in since $20k. If so, you're still here, and there are plenty others like you. I'm not a BTC maximalist, I don't think LTC is the truth, I don't think only ETH is the dApp platform. I don't know shit. I'm just some speculator that is speculating on some of this sit. There are also plenty of people that were like me in 2017 that are waiting in the wings, only to buy when the market is on the rise. There are plenty more that buy when it's rising then set stop losses that whales will fish for only to wreck the market in a day then to see a bounce back even stronger while those people FOMO back in. Also, the turd version of satoshi could start shitting in public this week and the media could write about how Satoshi is literally shitting on a physical Bitcoin as we speak and some shitcoin creator then posts a Twitter video that goes viral about how the hashrate and energy consumption of the satoshi shit-pile is not sustainable and then some whale market sells down to below the new TA shit-support level of $4,400 and then all the dopes with stop losses in that range get shit fucked only to see a spoof limit order set at $4,400 of 10,000 BTC and everyone's dick shrinks into their stomach as they hurry to Tether as BTC drops back down to $3,500 before whale #2 shit fucks your emotions with a $1,500 green dildo in a 15 minute span sees the "sell wall" disappear which starts the next FOMO run on up to $6,200 a few weeks later while TAers say "We broke out on great volume" then other TAers agree and the self-fulling prophecy starts another run only to get hit with more whale fuckers. You can't predict this shit. Give it up. Market goes up, market goes down, can't explain that. With the LTC halving in August, the BTC halving in May 2020, I think we are about to get into the 2017 euphoria again though. We are getting closeTM to the point you could just thrown money at any coin and get 10x your investment. What does "close" mean? I have no idea. Eff anyone that thinks they know. Someone could predict it is this week, next month, or after this current fakeout bull run, or in December, or next Spring, and someone will be right. The only advice I have is to do your best to not get emotional about your money or crypto. It's going to do the exact opposite of what you think it will. Even when you try to do the opposite, crypto will shit-fuck you in your sleep. If you believe that the sentiment is changing, and let's be real, we are in speculation phase and this is all based on hopium and belief, then DCA at certain intervals. This isn't some cult. It's all based on sentiment. If you think people are starting to get interested, then that is a sign speculation is about to be in our favor. If you are putting money in that needs to be rent money, do yourself a favor and just walk into a casino and put it all on red. If you win, then put your winnings in crypto. If you lose, I saved you the anguish of checking your portfolio every hour only wish you would have done the opposite of what you did. You're welcome... Or, do the opposite. Check the market every hour for the next 12 months only to look back and realize that you kept buying on the way up, got scared and sold on the way down, and then FUD yourself in your sleep because of your stop loss sells were triggered while whales were fishing for fear. So, there are all of my shit thoughts. What are yours? What are your strategies? There are plenty of people that have been in longer than me, what are your strategies? Are we heading for a the next bull run? Is the bottom in? Do we still have a massive, short-lived capitulation event coming? Let's chat. TL;DR: You can't predict this shit, just DCA, live your life, get a buy strategy, choose a sell point, make this shit as simple as possible. If you try to complicate things by predicting the next run, the next drop, the next consolidation, then you're probably going to be wrong like 99% of people. And don't be that guy that ends up $250,000 in your account in the next bull run only to see it drop down $67,000 literally a week later.
An extensive guide for cashing out bitcoin and cryptocurrencies into private banks
Hey guys. Merry Xmas ! I am coming back to you with a follow up post, as I have helped many people cash out this year and I have streamlined the process. After my original post, I received many requests to be more specific and provide more details. I thought that after the amazing rally we have been attending over the last few months, and the volatility of the last few days, it would be interesting to revisit more extensively. The attitude of banks around crypto is changing slowly, but it is still a tough stance. For the first partial cash out I operated around a year ago for a client, it took me months to find a bank. They wouldn’t want to even consider the case and we had to knock at each and every door. Despite all my contacts it was very difficult back in the days. This has changed now, and banks have started to open their doors, but there is a process, a set of best practices and codes one has to follow. I often get requests from crypto guys who are very privacy-oriented, and it takes me months to have them understand that I am bound by Swiss law on banking secrecy, and I am their ally in this onboarding process. It’s funny how I have to convince people that banks are legit, while on the other side, banks ask me to show that crypto millionaires are legit. I have a solid background in both banking and in crypto so I manage to make the bridge, but yeah sometimes it is tough to reconcile the two worlds. I am a crypto enthusiast myself and I can say that after years of work in the banking industry I have grown disillusioned towards banks as well, like many of you. Still an account in a Private bank is convenient and powerful. So let’s get started.
A. What is required to open an account in a Private bank when you made your fortune through crypto.
There are two different aspects to your onboarding in a Swiss Private bank, compliance-wise. *The origin of your crypto wealth *Your background (residence, citizenship and probity) These two aspects must be documented in-depth. How to document your crypto wealth. Each new crypto millionaire has a different story. I may detail a few fun stories later in this post, but at the end of the day, most of crypto rich I have met can be categorized within the following profiles: the miner, the early adopter, the trader, the corporate entity, the black market, the libertarian/OTC buyer. The real question is how you prove your wealth is legit. 1. Context around the original amount/investment Generally speaking, your first crypto purchase may not be documented. But the context around this acquisition can be. I have had many cases where the original amount was bought through Mtgox, and no proof of purchase could be provided, nor could be documented any Mtgox claim. That’s perfectly fine. At some point Mtgox amounted 70% of the bitcoin transactions globally, and people who bought there and managed to withdraw and keep hold of their bitcoins do not have any Mtgox claim. This is absolutely fine. However, if you can show me the record of a wire from your bank to Tisbane (Mtgox's parent company) it's a great way to start. Otherwise, what I am trying to document here is the following: I need context. If you made your first purchase by saving from summer jobs, show me a payroll. Even if it was USD 2k. If you acquired your first bitcoins from mining, show me the bills of your mining equipment from 2012 or if it was through a pool mine, give me your slushpool account ref for instance. If you were given bitcoin against a service you charged, show me an invoice. 2. Tracking your wealth until today and making sense of it. What I have been doing over the last few months was basically educating compliance officers. Thanks God, the blockchain is a global digital ledger! I have been telling my auditors and compliance officers they have the best tool at their disposal to lead a proper investigation. Whether you like it or not, your wealth can be tracked, from address to address. You may have thought all along this was a bad feature, but I am telling you, if you want to cash out, in the context of Private Banking onboarding, tracking your wealth through the block explorer is a boon. We can see the inflows, outflows. We can see the age behind an address. An early adopter who bought 1000 BTC in 2010, and let his bitcoin behind one address and held thus far is legit, whether or not he has a proof of purchase to show. That’s just common sense. My job is to explain that to the banks in a language they understand. Let’s have a look at a few examples and how to document the few profiles I mentioned earlier. The trader. I love traders. These are easy cases. I have a ton of respect for them. Being a trader myself in investment banks for a decade earlier in my career has taught me that controlling one’s emotions and having the discipline to impose oneself some proper risk management system is really really hard. Further, being able to avoid the exchange bankruptcy and hacks throughout crypto history is outstanding. It shows real survival instinct, or just plain blissed ignorance. In any cases traders at exchange are easy cases to corroborate since their whole track record is potentially available. Some traders I have met have automated their trading and have shown me more than 500k trades done over the span of 4 years. Obviously in this kind of scenario I don’t show everything to the bank to avoid information overload, and prefer to do some snacking here and there. My strategy is to show the early trades, the most profitable ones, explain the trading strategy and (partially expose) the situation as of now with id pages of the exchanges and current balance. Many traders have become insensitive to the risk of parking their crypto at exchange as they want to be able to trade or to grasp an occasion any minute, so they generally do not secure a substantial portion on the blockchain which tends to make me very nervous. The early adopter. Provided that he has not mixed his coin, the early adopter or “hodler” is not a difficult case either. Who cares how you bought your first 10k btc if you bought them below 3$ ? Even if you do not have a purchase proof, I would generally manage to find ways. We just have to corroborate the original 30’000 USD investment in this case. I mainly focus on three things here: *proof of early adoption I have managed to educate some banks on a few evidences specifically related to crypto markets. For instance with me, an old bitcointalk account can serve as a proof of early adoption. Even an old reddit post from a few years ago where you say how much you despise this Ripple premined scam can prove to be a treasure readily available to show you were early. *story telling Compliance officers like to know when, why and how. They are human being looking for simple answers to simple questions and they don’t want like to be played fool. Telling the truth, even without a proof can do wonders, and even though bluffing might still work because banks don’t fully understand bitcoin yet, it is a risky strategy that is less and less likely to pay off as they are getting more sophisticated by the day. *micro transaction from an old address you control This is the killer feature. Send a $20 worth transaction from an old address to my company wallet and to one of my partner bank’s wallet and you are all set ! This is gold and considered a very solid piece of evidence. You can also do a microtransaction to your own wallet, but banks generally prefer transfer to their own wallet. Patience with them please. they are still learning. *signature message Why do a micro transaction when you can sign a message and avoid potentially tainting your coins ? *ICO millionaire Some clients made their wealth participating in ETH crowdsale or IOTA ICO. They were very easy to deal with obviously and the account opening was very smooth since we could evidence the GENESIS TxHash flow. The miner Not so easy to proof the wealth is legit in that case. Most early miners never took screenshot of the blocks on bitcoin core, nor did they note down the block number of each block they mined. Until the the Slashdot article from August 2010 anyone could mine on his laptop, let his computer run overnight and wake up to a freshly minted block containing 50 bitcoins back in the days. Not many people were structured enough to store and secure these coins, avoid malwares while syncing the blockchain continuously, let alone document the mined blocks in the process. What was 50 BTC worth really for the early miners ? dust of dollars, games and magic cards… Even miners post 2010 are generally difficult to deal with in terms of compliance onboarding. Many pool mining are long dead. Deepbit is down for instance and the founders are MIA. So my strategy to proof mining activity is as follow: *Focusing on IT background whenever possible. An IT background does help a lot to bring some substance to the fact you had the technical ability to operate a mining rig. *Showing mining equipment receipts. If you mined on your own you must have bought the hardware to do so. For instance mining equipment receipts from butterfly lab from 2012-2013 could help document your case. Similarly, high electricity bill from your household on a consistent basis back in the day could help. I have already unlocked a tricky case in the past with such documents when the bank was doubtful. *Wallet.dat files with block mining transactions from 2011 thereafter This obviously is a fantastic piece of evidence for both you and me if you have an old wallet and if you control an address that received original mined blocks, (even if the wallet is now empty). I will make sure compliance officers understand what it means, and as for the early adopter, you can prove your control over these wallet through a microtransaction. With these kind of addresses, I can show on the block explorer the mined block rewards hitting at regular time interval, and I can even spot when difficulty level increased or when halvening process happened. *Poolmining account. Here again I have educated my partner bank to understand that a slush account opened in 2013 or an OnionTip presence was enough to corroborate mining activity. The block explorer then helps me to do the bridge with your current wallet. *Describing your set up and putting it in context In the history of mining we had CPU, GPU, FPG and ASICs mining. I will describe your technical set up and explain why and how your set up was competitive at that time. The corporate entity Remember 2012 when we were all convinced bitcoin would take over the world, and soon everyone would pay his coffee in bitcoin? How naïve we were to think transaction fees would remain low forever. I don’t blame bitcoin cash supporters; I once shared this dream as well. Remember when we thought global adoption was right around the corner and some brick and mortar would soon accept bitcoin transaction as a common mean of payment? Well, some shop actually did accept payment and held. I had a few cases as such of shops holders, who made it to the multi million mark holding and had invoices or receipts to proof the transactions. If you are organized enough to keep a record for these trades and are willing to cooperate for the documentation, you are making your life easy. The digital advertising business is also a big market for the bitcoin industry, and affiliates partner compensated in btc are common. It is good to show an invoice, it is better to show a contract. If you do not have a contract (which is common since all advertising deals are about ticking a check box on the website to accept terms and conditions), there are ways around that. If you are in that case, pm me. The black market Sorry guys, I can’t do much for you officially. Not that I am judging you. I am a libertarian myself. It’s just already very difficult to onboard legit btc adopters, so the black market is a market I cannot afford to consider. My company is regulated so KYC and compliance are key for me if I want to stay in business. Behind each case I push forward I am risking the credibility and reputation I have built over the years. So I am sorry guys I am not risking it to make an extra buck. Your best hope is that crypto will eventually take over the world and you won’t need to cash out anyway. Or go find a Lithuanian bank that is light on compliance and cooperative. The OTC buyer and the libertarian. Generally a very difficult case. If you bought your stack during your journey in Japan 5 years ago to a guy you never met again; or if you accumulated on https://localbitcoins.com/ and kept no record or lost your account, it is going to be difficult. Not impossible but difficult. We will try to build a case with everything else we have, and I may be able to onboard you. However I am risking a lot here so I need to be 100% confident you are legit, before I defend you. Come & see me in Geneva, and we will talk. I will run forensic services like elliptic, chainalysis, or scorechain on an extract of your wallet. If this scan does not raise too many red flags, then maybe we can work together ! If you mixed your coins all along your crypto history, and shredded your seeds because you were paranoid, or if you made your wealth mining professionally monero over the last 3 years but never opened an account at an exchange. ¯_(ツ)_/¯ I am not a magician and don’t get me wrong, I love monero, it’s not the point. Cashing out ICOs Private companies or foundations who have ran an ICO generally have a very hard time opening a bank account. The few banks that accept such projects would generally look at 4 criteria: *Seriousness of the project Extensive study of the whitepaper to limit the reputation risk *AML of the onboarding process ICOs 1.0 have no chance basically if a background check of the investors has not been conducted *Structure of the moral entity List of signatories, certificate of incumbency, work contract, premises... *Fiscal conformity Did the company informed the authorities and seek a fiscal ruling.
B. The tax issue I am not a tax specialist, but I can say that this year I have seen it all. Again I am not judging. You made $100m hodling, and still wouldn’t pay your taxes ? Your decision.I personally advise everyone to pay their taxes, but also to be generous, to give to charities. I mean you eventually made it. Good for you. What about you contribute to make the world a better place now? I will stop patronizing you. It’s just my 2cts, and it’s your money.
For the record, I am not into the tax avoidance business, so people come to me with a set up and I see if I can make it work within the legal framework imposed to me. First, stop thinking Switzerland is a “offshore heaven” Swiss banks have made deals with many governments for the exchange of fiscal information. If you are a French citizen, resident in France and want to open an account in a Private Bank in Switzerland to cash out your bitcoins, you will get slaughtered (>60%). There are ways around that, and I could refer you to good tax specialists for fiscal optimization, but I cannot organize it myself. It would be illegal for me. Swiss private banks makes it easy for you to keep a good your relation with your retail bank and continue paying your bills without headaches. They are integrated to SEPA, provide ebanking and credit cards. For information, these are the kind of set up some of my clients came up with. It’s all legal; obviously I do not onboard clients that are not tax compliant. Further disclaimer: I did not contribute myself to these set up. Do not ask me to organize it for you. I won’t. EU tricks Swiss lump sum taxation Foreign nationals resident in Switzerland can be taxed on a lump-sum basis if they are not gainfully employed in our country. Under the lump-sum tax regime, foreign nationals taking residence in Switzerland may choose to pay an expense-based tax instead of ordinary income and wealth tax. Attractive cantons for the lump sum taxation are Zug, Vaud, Valais, Grisons, Lucerne and Berne. To make it short, you will be paying somewhere between 200 and 400k a year and all expenses will be deductible. Switzerland has adopted a very friendly attitude towards crypto currency in general. There is a whole crypto valley in Zug now. 30% of ICOs are operated in Switzerland. The reason is that Switzerland has thrived for centuries on banking secrecy, and today with FATCA and exchange of fiscal info with EU, banking secrecy is dead. Regulators in Switzerland have understood that digital ledger technologies were a way to roll over this competitive advantage for the generations to come. Switzerland does not tax capital gains on crypto profits. The Finma has a very pragmatic approach. They have issued guidance- updated guidelines here. They let the business get organized and operate their analysis on a case per case basis. Only after getting a deep understanding of the market will they issue a global fintech license in 2019. This approach is much more realistic than legislations which try to regulate everything beforehand. Italy new tax exemption. It’s a brand new fiscal exemption. Go to Aoste, get residency and you could be taxed a 100k/year for 10years. Yes, really. Portugal What’s crazy in Europe is the lack of fiscal harmonization. Even if no one in Brussels dares admit it, every other country is doing fiscal dumping. Portugal is such a country and has proved very friendly fiscally speaking. I personally have a hard time trusting Europe. I have witnessed what happened in Greece over the last few years. Some of our ultra high net worth clients got stuck with capital controls. I mean no way you got out of crypto to have your funds confiscated at the next financial crisis! Anyway. FYI Malta Generally speaking, if you get a residence somewhere you have to live there for a certain period of time. Being stuck in Italy is no big deal with Schengen Agreement, but in Malta it is a different story. In Malta, the ordinary residence scheme is more attractive than the HNWI residence scheme. Being an individual, you can hold a residence permit under this scheme and pay zero income tax in Malta in a completely legal way. Monaco Not suitable for French citizens, but for other Ultra High Net worth individual, Monaco is worth considering. You need an account at a local bank as a proof of fortune, and this account generally has to be seeded with at least EUR500k. You also need a proof of residence. I do mean UHNI because if you don’t cash out minimum 30m it’s not interesting. Everything is expensive in Monaco. Real Estate is EUR 50k per square meter. A breakfast at Monte Carlo Bay hotel is 70 EUR. Monaco is sunny but sometimes it feels like a golden jail. Do you really want that for your kids? Dubaï
Set up a company in Dubaï, get your resident card.
Spend one day every 6 month there
Be tax free
US tricks Some Private banks in Geneva do have the license to manage the assets of US persons and U.S citizens. However, do not think it is a way to avoid paying taxes in the US. Opening an account at an authorized Swiss Private banks is literally the same tax-wise as opening an account at Fidelity or at Bank of America in the US. The only difference is that you will avoid all the horror stories. Horror stories are all real by the way. In Switzerland, if you build a decent case and answer all the questions and corroborate your case in depth, you will manage to convince compliance officers beforehand. When the money eventually hits your account, it is actually available and not frozen. The IRS and FATCA require to file FBAR if an offshore account is open. However FBAR is a reporting requirement and does not have taxes related to holding an account outside the US. The taxes would be the same if the account was in the US. However penalties for non compliance with FBAR are very large. The tax liability management is actually performed through the management of the assets ( for exemple by maximizing long term capital gains and minimizing short term gains). The case for Porto Rico. Full disclaimer here. I am not encouraging this. Have not collaborated on such tax avoidance schemes. if you are interested I strongly encourage you to seek a tax advisor and get a legal opinion. I am not responsible for anything written below. I am not going to say much because I am so afraid of uncle Sam that I prefer to humbly pass the hot potato to pwc From here all it takes is a good advisor and some creativity to be tax free on your crypto wealth if you are a US person apparently. Please, please please don’t ask me more. And read the disclaimer again. Trust tricks Generally speaking I do not accept fringe fiscal situation because it puts me in a difficult situation to the banks I work with, and it is already difficult enough to defend a legit crypto case. Trust might be a way to optimize your fiscal situation. Belize. Bahamas. Seychelles. Panama, You name it. At the end of the day, what matters for Swiss Banks are the beneficial owner and the settlor. Get a legal opinion, get it done, and when you eventually knock at a private bank’s door, don’t say it was for fiscal avoidance you stupid ! You will get the door smashed upon you. Be smarter. It will work. My advice is just to have it done by a great tax specialist lawyer, even if it costs you some money, as the entity itself needs to be structured in a professional way. Remember that with trust you are dispossessing yourself off your wealth. Not something to be taken lightly. “Anonymous” cash out. Right. I think I am not going into this topic, neither expose the ways to get it done. Pm me for details. I already feel a bit uncomfortable with all the info I have provided. I am just going to mention many people fear that crypto exchange might become reporting entities soon, and rightly so. This might happen anyday. You have been warned. FYI, this only works for non-US and large cash out. The difference between traders an investors. Danmark, Holland and Germany all make a huge difference if you are a passive investor or if you are a trader. ICO is considered investing for instance and is not taxed, while trading might be considered as income and charged aggressively. I would try my best to protect you and put a focus on your investor profile whenever possible, so you don't have to pay 52% tax if you do not have to :D
C. The cash out itself So you have accumulated patiently a good amount of wealth. For some of us who have been involved in crypto since 2010, it took years. Remember when BTC was stuck at 200$ for months? I personally feel like it was yesterday. There is no way you screw up your wealth by cashing out in a hurry or with low security standards. Here is how the cash out takes should place.
Full cash out or partial cash out? People who have been sitting on crypto for long have grown an emotional and irrational link with their coins. They come to me and say, look, I have 50m in crypto but I would like to cash out 500k only. So first let me tell you that as a wealth manager my advice to you is to take some off the table. Doing a partial cash out is absolutely fine. The market is bullish. We are witnessing a redistribution of wealth at a global scale. Bitcoin is the real #occupywallstreet, and every one will discuss crypto at Xmas eve which will make the market even more supportive beginning 2018, especially with all hedge funds entering the scene. If you want to stay exposed to bitcoin and altcoins, and believe these techs will change the world, it’s just natural you want to keep some coins. In the meantime, if you have lived off pizzas over the last years, and have the means to now buy yourself an nice house and have an account at a private bank, then f***ing do it mate ! Buy physical gold with this account, buy real estate, have some cash at hands. Even though US dollar is worthless to your eyes, it’s good and convenient to have some. Also remember your wife deserves it ! And if you have no wife yet and you are socially awkward like the rest of us, then maybe cashing out partially will help your situation ;) What the Private Banks expect. Joke aside, it is important you understand something. If you come around in Zurich to open a bank account and partially cash out, just don’t expect Private Banks will make an exception for you if you are small. You can’t ask them to facilitate your cash out, buy a 1m apartment with the proceeds of the sale, and not leave anything on your current account. It won’t work. Sadly, under 5m you are considered small in private banking. The bank is ok to let you open an account, provided that your kyc and compliance file are validated, but they will also want you to become a client and leave some money there to invest. This might me despicable, but I am just explaining you their rules. If you want to cash out, you should sell enough to be comfortable and have some left. Also expect the account opening to last at least 3-4 week if everything goes well. You can't just open an account overnight. The cash out logistics. Cashing out 1m USD a day in bitcoin or more is not so hard. Let me just tell you this: Even if you get a Tier 4 account with Kraken and ask Alejandro there to raise your limit over $100k per day, Even if you have a bitfinex account and you are willing to expose your wealth there, Even if you have managed to pass all the crazy due diligence at Bitstamp, The amount should be fractioned to avoid risking your full wealth on exchange and getting slaughtered on the price by trading big quantities. Cashing out involves significant risks at all time. There is a security risk of compromising your keys, a counterparty risk, a fat finger risk. Let it be done by professionals. It is worth every single penny. Most importantly, there is a major difference between trading on an exchange and trading OTC. Even though it’s not publicly disclosed some exchange like Kraken do have OTC desks. Trading on an exchange for a large amount will weight on the prices. Bitcoin is a thin market. In my opinion over 30% of the coins are lost in translation forever. Selling $10m on an exchange in a day can weight on the prices more than you’d think. And if you trade on a exchange, everything is shown on record, and you might wipe out the prices because on exchanges like bitstamp or kraken ultimately your counterparties are retail investors and the market depth is not huge. It is a bit better on Bitfinex. It is way better to trade OTC. Accessing the institutional OTC market is not easy, and that is also the reason why you should ask a regulated financial intermediary if we are talking about huge amounts. Last point, always chose EUR as opposed to USD. EU correspondent banks won’t generally block institutional amounts. However we had the cases of USD funds frozen or delayed by weeks. Most well-known OTC desks are Cumberlandmining (ask for Lucas), Genesis (ask for Martin), Bitcoin Suisse AG (ask for Niklas), circletrade, B2C2, or Altcoinomy (ask for Olivier) Very very large whales can also set up escrow accounts for massive block trades. This world, where blocks over 30k BTC are exchanged between 2 parties would deserve a reddit thread of its own. Crazyness all around. Your options: DIY or going through a regulated financial intermediary. Execution trading is a job in itself. You have to be patient, be careful not to wipe out the order book and place limit orders, monitor the market intraday for spikes or opportunities. At big levels, for a large cash out that may take weeks, these kind of details will save you hundred thousands of dollars. I understand crypto holders are suspicious and may prefer to do it by themselves, but there are regulated entities who now offer the services. Besides, being a crypto millionaire is not a guarantee you will get institutional daily withdrawal limits at exchange. You might, but it will take you another round of KYC with them, and surprisingly this round might be even more aggressive that the ones at Private banks since exchange have gone under intense scrutiny by regulators lately. The fees for cashing out through a regulated financial intermediary to help you with your cash out should be around 1-2% flat on the nominal, not more. And for this price you should get the full package: execution/monitoring of the trades AND onboarding in a private bank. If you are asked more, you are being abused. Of course, you also have the option to do it yourself. It is a way more tedious and risky process. Compliance with the exchange, compliance with the private bank, trading BTC/fiat, monitoring the transfers…You will save some money but it will take you some time and stress. Further, if you approach a private bank directly, it will trigger a series of red flag to the banks. As I said in my previous post, they call a direct approach a “walk-in”. They will be more suspicious than if you were introduced by someone and won’t hesitate to show you high fees and load your portfolio with in-house products that earn more money to the banks than to you. Remember also most banks still do not understand crypto so you will have a lot of explanations to provide and you will have to start form scratch with them! The paradox of crypto millionaires Most of my clients who made their wealth through crypto all took massive amount of risks to end up where they are. However, most of them want their bank account to be managed with a low volatility fixed income capital preservation risk profile. This is a paradox I have a hard time to explain and I think it is mainly due to the fact that most are distrustful towards banks and financial markets in general. Many clients who have sold their crypto also have a cash-out blues in the first few months. This is a classic situation. The emotions involved in hodling for so long, the relief that everything has eventually gone well, the life-changing dynamics, the difficulties to find a new motivation in life…All these elements may trigger a post cash-out depression. It is another paradox of the crypto rich who has every card in his hand to be happy, but often feel a bit sad and lonely. Sometimes, even though it’s not my job, I had to do some psychological support. A lot of clients have also become my friends, because we have the same age and went through the same “ordeal”. First world problem I know… Remember, cashing out is not the end. It’s actually the beginning. Don’t look back, don’t regret. Cash out partially, because it does not make sense to cash out in full, regret it and want back in. relax. The race to cash out crypto billionaire and the concept of late exiter. The Winklevoss brothers are obviously the first of a series. There will be crypto billionaires. Many of them. At a certain level you can have a whole family office working for you to manage your assets and take care of your needs . However, let me tell you it’s is not because you made it so big that you should think you are a genius and know everything better than anyone. You should hire professionals to help you. Managing assets require some education around the investment vehicles and risk management strategies. Sorry guys but with all the respect I have for wallstreebet, AMD and YOLO stock picking, some discipline is necessary. The investors who have made money through crypto are generally early adopters. However I have started to see another profile popping up. They are not early adopters. They are late exiters. It is another way but just as efficient. Last week I met the first crypto millionaire I know who first bough bitcoin over 1000$. 55k invested at the beginning of this year. Late adopter & late exiter is a route that can lead to the million. Last remarks. I know banks, bankers, and FIAT currencies are so last century. I know some of you despise them and would like to have them burn to the ground. With compliance officers taking over the business, I would like to start the fire myself sometimes. I hope this extensive guide has helped some of you. I am around if you need more details. I love my job despite all my frustration towards the banking industry because it makes me meet interesting people on a daily basis. I am a crypto enthusiast myself, and I do think this tech is here to stay and will change the world. Banks will have to adapt big time. Things have started to change already; they understand the threat is real. I can feel the generational gap in Geneva, with all these old bankers who don’t get what’s going on. They glaze at the bitcoin chart on CNBC in disbelief and they start to get it. This bitcoin thing is not a joke. Deep inside, as an early adopter who also intends to be a late exiter, as a libertarian myself, it makes me smile with satisfaction. Cheers. @swisspb on telegram
Hodl Hodl launches new project called "Predictions" on TESTNET
From the related blog post (https://medium.com/@hodlhodl/predictions-by-hodl-hodl-available-on-testnet-83f8ff97a98d): Today we’re officially announcing our project “Predictions by Hodl Hodl” which is now available on TESTNET — predictions.cc. In this blog post we want to give instructions, explain how everything works, and give you some use-cases for our new project. Let’s get everything in order. Overview Predictions is a project by Hodl Hodl that is a marketplace where you can go and create a contract with someone else, where the conditions of the payout depend on the outcome of a certain event. The payouts are only made in Bitcoin. Let’s say you want to predict that the price of Bitcoin will be above $15,000 by July 2019. The other party may disagree with you. The condition of the contract states that each one of you locks 1 Bitcoin into escrow and whoever turns out to be correct in the prediction of the price of Bitcoin gets 2 bitcoins in July. We provide you with a solution to make this possible:
An offer desk
Simply put, it’s a place where you can find other users’ predictions and create your own;
For each contract we generate two multisig addresses, where the funds are being stored safely during the prediction contract, with two out of three keys needed for release.
In case of a disagreement between the two parties on the prediction contract’s outcome, Hodl Hodl intervenes and resolves the dispute. Use cases The use case described above is the simplest one. Here are just a few more examples from an infinite number of options:
You can buy public company shares, and try predicting the price of that stock. Choose any public company, e.g. Google, and predict the price of its shares by, for example, the end of 2019.
If you’re long on renewable energy, you would probably expect the price of oil to fall at some point — predict when exactly.
Payouts to creditors of MtGox
If you’re a MtGox creditor (a Bitcoin exchange that was hacked and went bankrupt back in 2014) and awaiting the payout, you might be interested in creating a contract that says “creditors of MtGox will not be paid anything in 2019” even though your expectation is that they will be. Thus, if you get paid by MtGox, you receive bitcoins from them, but lose the ones you locked in your contract. If you don’t get paid by MtGox, you’d get some of the bitcoins that will be sort of a compensation for a longer wait period.
The outcome of the Champions League final
You can make the final more exciting by creating a prediction of who gets to be the Champions League winner in 2019.
Peter McCormack VS Craig Wright
If you follow these kinds of events and want to support either side, make a prediction of who wins the trial, or whether it goes to trial at all. Offer creation To make a prediction offer, simply press the “Add offer” button on the front page of the website, or on “My offers” page. When creating offers, you have to describe the event, the outcome you predict, how many bitcoins you would like to lock in escrow and how much your counterparty should lock in escrow. We made the process as simple as possible, and creating offers won’t take much of your time. Please note:
Every offer is pre-moderated by Hodl Hodl admins Your offer should not describe anything illegal You should be as specific and unambiguous as possible when describing the event outcome
Contract workflow When you create an offer and someone accepts it, or you accept an existing offer, a contract is created. Let’s analyze this step by step. 1) Contract is created; Right after the contract is created, Hodl Hodl generates two unique escrow addresses. It’s worth mentioning: We support native Bech32 SegWit addresses. This means you can send and receive the funds from escrow to Bech32 addresses when the contract is completed We generate P2SH-P2WSH SegWit multisig escrow addresses. For every contract we generate multisig addresses in SegWit format. 2) Both parties make deposits; Both offeror and acceptor make deposits to the escrow addresses we present them with, sending funds from their own Bitcoin wallets. 3) Waiting for the event to take place; When both counterparties have sent bitcoins to the escrow addresses and transactions are confirmed, we inform users that everything is alright, and we’re waiting for the event to take place. 4) Acknowledging the contract outcome; Once the event has happened, we ask both parties to decide who was right and who was wrong regarding the prediction made. Both parties are given 3 days to acknowledge this. If there’s a disagreement between them or one party doesn’t make the decision as to the outcome of the contract within 3 days, a dispute is started. It’s also possible for both parties to declare a draw — in this case, both parties are able to refund the funds they’ve previously locked in escrow. 5) Prediction contract is now complete! If the parties agreed on the contract outcome, the party that predicted the outcome correctly can release all locked funds from the escrow to their own Bitcoin wallet: both the funds the party itself locked and the funds that the counterparty locked. That’s it, the workflow is as simple as that. Dispute case It’s worth asking, what exactly happens in case of a disagreement between the two parties in a prediction contract? Say we have a dispute in which case Hodl Hodl intervenes and resolves the dispute by:
Analyzing the prediction contract;
Verifying the event outcome;
Deciding, who predicted the outcome correctly.
Administrator has the following options: either resolve the dispute in favor of one of the counterparties, or to recognize a draw. We do not expect this scenario to be difficult or waste our resources, because every offer is pre-moderated and we apply strict rules for offer creation. That’s it A new milestone begins in our company’s development, we would appreciate support from your side: please share this news, send us suggestions and bugreports about this project, and be sure you’ll see more exciting things to come very soon. Predictions on MAINNET The mainnet version is going live in June 2019, follow our news to stay informed!
The simplest explanation is usually the right one (Occam's Razor): "Willy" was not a conspiracy. It was exactly what Mark Karpeles said it was: a bot/API for high value clients.
I'm a little surprised that so many people are jumping straight to conspiracy theories in the last 48 hours following the "Willy Report". It especially surprises me because Willy follows the exact same patterns that so many people here have theorized would be done by "whales". Imagine you are a high value trader or company. You want to enter bitcoin or increase your position. Do you really think you would simply open up a regular trading account on MtGox, put millions of dollars into your web account, and start making million dollar trades? Absolutely no way. I've worked for two large Wall Street banks, and I can tell you flat out that high value clients have access to products and services that "normal" people do not. High value clients have dedicated staff to service them, they get taken out to dinners and events, they have exceptions done for them, they simply operate outside of the normal world that you and I live in. Willy didn't pay fees or fiat because it operated outside the purview of what a normal trader would have to do. High value clients would have direct relationships with MtGox, and would likely have special fee structure in place that they would pay to MtGox separately and at a different time than trades. Willy didn't back up trades with fiat because fiat was likely wired to MtGox separately, in bulk. Willy only bought because these high value clients weren't looking to really "trade". They were looking to enter the market, and likely couldn't find enough early adopters off-market to facilitate their needs. So, they had to go on-market. Second Market has publicly stated that they started having issues finding off-market individuals to buy from. What then? Just stop buying? Absolutely not. They instead needed to start coming on-market. However, you can't simply start making buy orders for several millions dollars. So instead, MtGox would offer an automated API that was directly connected to their servers (just like Mark said) and could make small buys at frequent intervals so as to try to not influence the market too much and cause the price to go skyrocketing. Willy had "??" in data fields because Willy likely facilitated several different clients at once. There is no grand conspiracy there. Again, I'm surprised that people aren't coming to these simple conclusions, especially since this is exactly how all of us have assumed "whales" work. What we're seeing in Willy is exactly what we expected to see in whales. Also, does anyone really think that Willy, a bot that was a small percentage of MtGox's volume, could really single-handedly incite an entire bubble when there were at least 2 or 3 other similarly sized exchanges? The truth is that Willy was just one form of high value clients entering the market on one exchange. Other exchanges likely have their own forms of "Willies" that contributed to the bubble just like it did on MtGox. And trust me, those "Willies" are no more conspiratorial than this MtGox Willy is.
I just launched a new exchange for Gox BTC <=> Real BTC!
Heya! https://www.bitcoinbuilder.com/ has been re-purposed (I made it two years ago originally as a way to buy bitcoins on mtgox with dwolla!) to a full-fledged "Gox" BTC to "Real" BTC exchange! It works simply enough.. you deposit "Gox" BTC to the "Gox" address on your account (internal transfers of BTC within mtgox still work) and/or regular BTC to your "Real" BTC address. You can then place bids and asks (there's a 2% fee on all trades) and then withdraw your "Real" or "Gox" BTC (only to a mtgox address will work for "Gox" BTC!). Withdrawals are all manually processed once per day by me around 11pm, for SAFETY! Anyway, it really works.. already today there have been 11 completed trades it looks like, and hopefully you can trust me. I'm Josh Jones, founder of DreamHost.com, the Los Angeles Bitcoin Meetup, ChunkHost, BitMadness.com, and 310-570-COIN (which I just switched off of the mtgox price)! Please check it out and lemme know what you think! josh! EDIT: Just a note that the order book and trade history (as a json feed at https://www.bitcoinbuilder.com/trades.php) are now live and public on the front page!
The New Crypto Order & Escaping Financial Repression
The Vigilante’s View It is our first issue in months that bitcoin hasn’t hit an all-time high! And it’s the last issue of the year. And what a year for cryptos it was. To put it in perspective, bitcoin could fall 90% from current levels and it will still have outperformed stocks, bonds and real estate in 2017. Bitcoin started 2017 at $960.79. At the time of this writing it is near $13,000 for a gain of 1,250% in 2017. And, bitcoin was actually one of the worst performing cryptocurrencies in our TDV portfolio in 2017! Ethereum (ETH) started 2017 at $8. It has since hit over $800 for a nice 10,000% gain in 2017. That’s pretty good, but not as good as Dash which started the year at $11.19 and recently hit $1,600 for a nearly 15,000% gain. I hope many of you have participated in these amazing gains! If not, or you are new, don’t worry there will be plenty more opportunities in the years ahead. It won’t all be just home runs though… in fact, some of the cryptos that have performed so well to date may go down dramatically or collapse completely in the coming years. I’ll point out further below why Lightning Network is not the answer to Bitcoin Core’s slow speeds and high costs. And, I’ll look ahead to 2018 and how we could already be looking beyond blockchains. Yes, things are moving so fast that blockchain just became known to your average person this year… and could be nearly extinct by next year. That’s why it is important to stick with us here at TDV to navigate these choppy free market waters! New Years Reflection On The Evolution Of Consensus Protocols Sooner or later crypto will humble you by its greatness. Its vastness is accompanied by a madness that is breathtaking, because you quickly realize that there is no stopping crypto from taking over the world. The moment you think you have everything figured out, is the moment the market will surprise you. We are for the first time living and witnessing the birth of the first worldwide free market. Throughout this rampage of innovation, we all are implicitly aiming for the best means of harnessing consensus. As we leave this bountiful 2017 and aim at 2018, it is important for us to meditate and appreciate the progress we have made in transforming the world through the decentralization of consensus. It is also important to reflect on the changes in consensus building we have partaken in and those yet to come. Consensus is the agreement that states “this is what has occurred, and this is what hasn’t happened.” Throughout the vastness of history, we humans have only really had access to centralized means for consensus building. In the centralized world, consensus has been determined by banks, states, and all kinds of central planners. As our readers know, any centralized party can misuse their power, and their consensus ruling can become unfair. In spite of this, many individuals still praise the effectiveness of consensus building of centralized systems. People from antiquity have had no other option but to trust these central planners. These systems of control have created still-water markets where only a few are allowed to compete. This lack of competition resulted in what we now can objectively view as slow innovation. For many, centralized consensus building is preferred under the pretense of security and comfort. Unfortunately, these same individuals are in for a whole lot of discomfort now that the world is innovating on top of the first decentralized consensus building technology, the blockchain. Everything that has occurred since the inception of bitcoin has shocked central planners because for the first time in history they are lost; they no longer hold power. We now vote with our money. We choose what we find best as different technologies compete for our money. What we are witnessing when we see the volatility in crypto is nothing more than natural human motion through price. The innovation and volatility of the crypto market may seem unorthodox to some, because it is. For the first time in history we are in a true free market. The true free market connects you to everybody and for this reason alone the market shouldn’t surprise us for feeling “crazy.” Volatility is a sign of your connection to a market that is alive. Radical innovation is a sign of a market that is in its infancy still discovering itself. In juxtaposing centralized consensus building with decentralized consensus building, I cannot keep myself from remembering some wise biblical words; “ And no one pours new wine into old wineskins. Otherwise, the new wine will burst the skins; the wine will run out and the wineskins will be ruined.” – Luke 5:37 The centralized legacy financial system is akin to old wineskins bursting to shreds by the new wine of crypto. Decentralized consensus building has no need for central planners. For example, think about how ludicrous it would be for someone to ask government for regulation after not liking something about crypto. Sorry, there is no central planner to protect you; even the mathematical protocols built for us to trust are now competing against one another for our money. These new mathematical protocols will keep competing against one another as they provide us with new options in decentralizing consensus. As we look unto 2018, it is important that we as investors begin to critically engage and analyze “blockchain-free cryptocurrencies.” HASHGRAPHS, TANGLES AND DAGS Blockchain-free cryptocurrencies are technologies composed of distributed databases that use different tools to achieve the same objectives as blockchains. The top contenders in the realm of blockchain-free cryptos are DAGs (Directed Acyclic Graphs) such as Swirlds’ Hashgraph, ByteBall’s DAG, and IOTA’s Tangle. These blockchain-free cryptos are also categorized as belonging to the 3 rd generation of cryptocurrencies. These technologies promise to be faster, cheaper, and more efficient than blockchain cryptocurrencies. Blockchains were the first means of creating decentralized consensus throughout the world. In the blockchain, the majority of 51% determine the consensus. The limits of blockchains stem from their inherent nature, whereupon every single node/participant needs to know all of the information that has occurred throughout the whole blockchain economy of a given coin. This opens up blockchains to issues akin to the ones we have been exposed to in regards to Bitcoin’s scaling. It is important to make a clear distinction in the language used between blockchains and blockchain-freecryptocurrencies. When we speak about blockchains it is more proper to speak about its transactionconsensus as “decentralized”, whereas with blockchain-free cryptocurrencies it is best if we refer to transaction consensus as “distributed.” Swirlds’ Hashgraph incorporates a radical and different approach to distributing consensus. Swirlds claims that their new approach will solve scaling and security issues found on blockchains. They use a protocol called “Gossip about Gossip.” Gossip refers to how computers communicate with one another in sending information. In comparison to the Blockchain, imagine that instead of all of the nodes receiving all of the transactions categorized in the past ten minutes, that only a few nodes shared their transaction history with other nodes near them. The Hashgraph team explains this as “calling any random node and telling that node everything you know that it does not know.” That is, in Hashgraph we would be gossiping about the information we are gossiping; i.e., sending to others throughout the network for consensus. Using this gossiped information builds the Hashgraph. Consensus is created by means of depending on the gossips/rumors that come to you and you pass along to other nodes. Hashgraph also has periodic rounds which review the circulating gossips/rumors. Hashgraph is capable of 250,000+ Transactions Per Second (TPS), compared to Bitcoin currently only allowing for 7 TPS. It is also 50,000 times faster than Bitcoin. There is no mention of a coin on their white paper. At this moment there is no Hashgraph ICO, beware of scams claiming that there is. There is however a growing interest in the project along with a surge of app development. IOTAs DAG is known as the Tangle. Contrary to Hashgraph, IOTA does have its own coin known as MIOTA, currently trading around the $3 mark. There are only 2,779,530,283 MIOTA in existence. The Tangle was also created to help alleviate the pains experienced with Blockchain scaling. IOTAs Tangle creates consensus on a regional level; basically neighbors looking at what other neighbors are doing. As the tangle of neighbors grows with more participants the security of the system increases, along with the speed of confirmation times. IOTA has currently been criticized for its still lengthy confirmation times and its current levels of centralization via their Coordinators. This centralization is due to the fact that at this moment in time the main team works as watchtower to oversee how Tangle network grows so that it does not suffer from attacks. Consensus is reached within IOTA by means of having each node confirm two transactions before that same node is able to send a given transaction. This leads to the mantra of “the more people use IOTA, the more transactions get referenced and confirmed.” This creates an environment where transactional scaling has no limits. IOTA has no transaction fees and upon reaching high adoption the transactions ought to be very fast. Another promising aspect about IOTA is that it has an integrated quantum-resistant algorithm, the Winternitz One-Time Signature Scheme, that would protect IOTA against an attack of future quantum computers. This without a doubt provides IOTA with much better protection against an adversary with a quantum computer when compared to Bitcoin. ByteBall is IOTA’s most direct competitor. They both possess the same transaction speed of 100+ TPS, they both have their own respective cryptocurrencies, and they both have transparent transactions. ByteBall’s token is the ByteBall Bytes (GBYTE), with a supply of 1,000,000; currently trading at around $700. ByteBall aims to service the market with tamper proof storage for all types of data. ByteBall’s DAG also provides an escrow like system called “conditional payments;” which allows for conditional clauses before settling transactions. Like IOTA, ByteBall is also designed to scale its transaction size to meet the needs of a global demand. ByteBall provides access to integrated bots for transactions which includes the capacity for prediction markets, P2P betting, P2P payments in chat, and P2P insurance. ByteBall’s initial coin distribution is still being awarded to BTC and Bytes holders according to the proportional amounts of BTC or Bytes that are held per wallet. IOTA, ByteBall and Hashgraph are technologies that provide us with more than enough reasons to be hopeful for 2018. In terms of the crypto market, you don’t learn it once. You have to relearn it every day because its development is so infant. If you are new to crypto and feel lost at all know that you are not alone. These technologies are constantly evolving with new competitive options in the market. As the technologies grow the ease for adoption is set to grow alongside innovation. We are all new to this world and we are all as much in shock of its ingenuity as the next newbie. Crypto is mesmerizing not just for its volatility which is a clear indication of how connected we are now to one another, but also because of the social revolution that it represents. We are experiencing the multidirectional growth of humanity via the free market. Meanwhile Bitcoin Is Turning Into Shitcoin It is with a great degree of sadness that I see bitcoin is on the cusp of destroying itself. Bitcoin Core, anyway. Bitcoin Cash may be the winner from all of this once all is said and done. Whether by design or by accident, bitcoin has become slow and expensive. Many people point out that IF the market were to upgrade to Segwit that all would be fine. I’ll explain further below why many market participants have no incentive to upgrade to Segwit… meaning that the implementation of Segwit has been a massively risky guess that so far has not worked. Others say that the Lightning Network (LN) will save bitcoin. I’ll point out below why that will not happen. Lightning Networks And The Future Of Bitcoin Core If you’ve been following bitcoin for any length of time, you’re probably aware of the significant dispute over how to scale the network. The basic problem is that although bitcoin could be used at one time to buy, say, a cup of coffee, the number of transactions being recorded on the network bid up the price per transaction so much that actually sending BTC cost more than the cup of coffee itself. Indeed, analysis showed that there were many Bitcoin addresses that had such small BTC holdings that the address itself couldn’t be used to transfer it to a different address. These are referred to as “unspendable addresses.” In the ensuing debate, the “big blockers” wanted to increase the size of each block in the chain in order to allow for greater transaction capacity. The “small blockers” wanted to reduce the size of each transaction using a technique called Segregated Witness (SegWit) and keep the blocks in the chain limited to 1MB. SegWit reduces the amount of data in each transaction by around 40-50%, resulting in an increased capacity from 7 transactions per second to perhaps 15. The software engineers who currently control the Bitcoin Core code repository have stated that what Bitcoin needs is “off-chain transactions.” To do this, they have created something called Lightning Networks (LN), based on an software invention called the “two-way peg.” Put simply, the two-way peg involves creating an escrow address in Bitcoin where each party puts some bitcoin into the account, and then outside the blockchain, they exchange hypothetical Bitcoin transactions that either of them can publish on Bitcoin’s blockchain in order to pull their current agreed-upon balance out of the escrow address. Most layman explanations of how this works describe the protocol as each party putting in an equal amount of Bitcoin into the escrow. If you and I want to start transacting off-chain, so we can have a fast, cheap payment system, we each put some Bitcoin in a multi-party address. I put in 1 BTC and you put in 1 BTC, and then we can exchange what are essentially cryptographic contracts that either of us can reveal on the bitcoin blockchain in order to exit our agreement and get our bitcoin funds. Fortunately, it turns out that the video’s examples don’t tell the whole story. It’s possible for the escrow account to be asymmetric. See:. That is, one party can put in 1 BTC, while the other party puts in, say, 0.0001 BTC. (Core developer and forthcoming Anarchapulco speaker Jimmy Song tells us that there are game theoretic reasons why you don’t want the counterparty to have ZERO stake.) Great! It makes sense for Starbucks to participate with their customers in Lightning Networks because when their customers open an LN channel (basically a gift card) with them for $100, they only have to put in $1 worth of Bitcoin. Each time the customer transacts on the Lightning Network, Starbucks gets an updated hypothetical transaction that they can use to cash out that gift card and collect their bitcoin. The elephant in the room is: transaction fees. In order to establish the escrow address and thereby open the LN channel, each party has to send some amount of bitcoin to the address. And in order to cash out and get the bitcoin settlement, one party also has to initiate a transaction on the bitcoin blockchain. And to even add funds to the channel, one party has to pay a transaction fee. Right now fees on the bitcoin blockchain vary widely and are extremely volatile. For a 1-hour confirmation transaction, the recommended fee from one wallet might be $12 US, while on another it’s $21 US. For a priority transaction of 10-20 minutes, it can range from $22-30 US. Transactions fees are based on the number of bytes in the transaction, so if both parties support SegWit (remember that?) then the fee comes down by 40-50%. So it’s between $6 and $10 US for a one hour transaction and between $11-15 for a 15 minute transaction. (SegWit transactions are prioritized by the network to some degree, so actual times may be faster) But no matter what, both the customer and the merchant have to spend $6 each to establish that they will have a relationship and either of them has to spend $6 in order to settle out and get their bitcoin. Further, if the customer wants to “top off” their virtual gift card, that transaction costs another $6. And because it adds an address to the merchant’s eventual settlement, their cost to get their Bitcoin goes up every time that happens, so now it might cost them $9 to get their bitcoin. Since these LN channels are essentially digital gift cards, I looked up what the cost is to retailers to sell acustomer a gift card. The merchant processor Square offers such gift cards on their retailer site. Their best price is $0.90 per card. So the best case is that Lightning Networks are 600% more expensive than physical gift cards to distribute, since the merchant has to put a transaction into the escrow address. Further, the customer is effectively buying the gift card for an additional $6, instead of just putting up the dollar amount that goes on the card. But it gets worse. If you get a gift card from Square, they process the payments on the card and periodically deposit cash into your bank account for a percentage fee. If you use the Lightning Network, you can only access your Bitcoin by cancelling the agreement with the customer. In other words, you have to invalidate their current gift card and force them to spend $6 on a new one! And it costs you $6 to collect your funds and another $6 to sell the new gift card! I’m sure many of you have worked in retail. And you can understand how this would be financially infeasible. The cost of acquiring a new customer, and the amount of value that customer would have to stake just to do business with that one merchant, would be enormous to make any financial sense. From time immemorial, when transaction costs rise, we see the creation of middlemen. Merchants who can’t afford to establish direct channels with their customers will have to turn to middlemen, who will open LN channels for them. Instead of directly backing and cashing out their digital gift cards, they will establish relationships with entities that consolidate transactions, much like Square or Visa would do today. Starbucks corporate or individual locations might spend a few USD on opening a payment channel with the middleman, and then once a month spend 6 USD to cash out their revenues in order to cover accounts payable. In the meantime, the middleman also has to offer the ability to open LN channels for consumers. This still happens at a fixed initial cost, much like the annual fee for a credit card in the US. They would continue to require minimum balances, and would offer access to a network of merchants, exactly like Visa and MasterCard today. This process requires a tremendous amount of capital because although the middleman does not have to stake Bitcoin in the consumer’s escrow account, he does have to stake it in the merchant’s account. In other words, if the Lightning Network middleman wants to do business with Starbucks to the tune of $100,000/month, he needs $100,000 of bitcoin to lock into an escrow address. And that has to happen for every merchant. Because every month (or so) the merchants have to cash out of their bitcoin to fiat in order to pay for their cost of goods and make payroll. Even if their vendors and employees are paid in bitcoin and they have LN channels open with them, someone somewhere will want to convert to fiat, and trigger a closing channel creating a cascading settlement effect that eventually arrives at the middleman. Oh, and it triggers lots of bitcoin transactions that cost lots of fees. Did I mention that each step in the channel is expecting a percentage of the value of the channel when it’s settled? This will come up again later. Again, if you’ve worked in the retail business, you should be able to see how infeasible this would be. You have to buy inventory and you have to sell it to customers and every part that makes the transaction more expensive is eating away at your margins. Further, if you’re the middleman and Starbucks closes out a channel with a $100,000 stake where they take $95,000 of the bitcoin, how do you re-open the channel? You need another $95,000 in capital. You have revenue, of course, from the consumer side of your business. Maybe you have 950 consumers that just finished off their $100 digital gift cards. So now you can cash them out to bitcoin for just $5700 in transaction fees, and lose 5.7% on the deal. In order to make money in that kind of scenario, you have to charge LN transaction fees. And because your loss is 5.7%, you need to charge in the range of 9% to settle Lightning Network transactions. Also, you just closed out 950 customers who now have to spend $5700 to become your customer again while you have to spend $5700 to re-acquire them as customers. So maybe you need to charge more like 12%. If you approached Starbucks and said “you can accept Bitcoin for your customers and we just need 12% of the transaction,” what are the odds that they would say yes? Even Visa only has the balls to suggest 3%, and they have thousands and thousands of times as many consumers as bitcoin. The entire mission of bitcoin was to be faster, cheaper and better than banks, while eliminating centralized control of the currency. If the currency part of Bitcoin is driven by “off-chain transactions” while bitcoin itself remains expensive and slow, then these off-chain transactions will become the territory of centralized parties who have access to enormous amounts of capital and can charge customers exorbitant rates. We know them today as banks. Even for banks, we have to consider what it means to tie up $100,000/month for a merchant account. That only makes sense if the exchange rate of bitcoin grows faster than the cost of retaining Bitcoin inventory. It costs nothing to store Bitcoin, but it costs a lot to acquire it. At the very least the $6 per transaction to buy it, plus the shift in its value against fiat that’s based on interest rates. As a result, it only makes sense to become a Lightning Network middleman if your store of value (bitcoin) appreciates at greater than the cost of acquiring it (interest rate of fiat.) And while interest rates are very low, that’s not a high bar to set. But to beat it, Bitcoin’s exchange rate to fiat has to outpace the best rate available to the middleman by a factor exceeding the opportunity cost of other uses of that capital. Whatever that rate is, for bitcoin, the only reason the exchange rate changes is new entry of capital into the “price” of bitcoin. For that to work, bitcoin’s “price” must continue to rise faster than the cost of capital for holding it. So far this has happened, but it’s a market gamble for it to continue. Since it happens because of new capital entering into the bitcoin network and thus increasing the market cap, this results in Bitcoin Core becoming the very thing that its detractors accuse it of: a Ponzi scheme. The cost of transacting in Bitcoin becomes derived from the cost of holding bitcoin and becomes derived from the cost of entering bitcoin. Every middleman has to place a bet on the direction of bitcoin in a given period. And in theory, if they think the trend is against Bitcoin, then they’ll cash out and shut down all the payment channels that they transact. If they bought bitcoin at $15,000, and they see it dropping to $13,000 — they’ll probably cash out their merchant channels and limit their risk of a further drop. The consumer side doesn’t matter so much because their exposure is only 1%, but the merchant side is where they had to stake everything. If you’re wondering why this information is not widely known, it’s because most bitcoin proponents don’t transact in bitcoin on a regular basis. They may be HODLing, but they aren’t doing business in bitcoin. Through Anarchapulco, TDV does frequent and substantial business in bitcoin, and we’ve paid fees over $150 in order to consolidate ticket sale transactions into single addresses that can be redeemed for fiat to purchase stage equipment for the conference. For Bitcoin to be successful at a merchant level via Lightning Networks, we will have to see blockchain transactions become dramatically cheaper. If they return to the sub-$1 range, we might have a chance with centralized middlemen, but only with a massive stabilization of volatility. If they return to $0.10, we might have a chance with direct channels. Otherwise, Lightning Networks can’t save bitcoin as a means of everyday transaction. And since that takes away its utility, it might very well take away the basis of its value and bitcoin could find itself truly being a tulip bubble. One final note: there are a some parties for whom all these transactions are dramatically cheaper. That is the cryptocurrency exchanges. Because they are the entry and exit points for bitcoin-to-fiat, they can eliminate a layer of transaction costs and thus offer much more competitive rates — as long as you keep your bitcoin in their vaults instead of securing it yourselves. Sending it out of their control lessens their competitive advantage against other means of storage. It comes as no surprise, then, that they are the least advanced in implementing the SegWit technology that would improve transaction costs and speed. If you buy bitcoin on Poloniex, it works better for them if it’s expensive for you to move that coin to your Trezor. In fact, an exchange offering Lightning Network channels to merchants could potentially do the following… 1) Stake bitcoins in channels with merchants. These coins may or may not be funds that are held by their customers. There is no way to know. 2) Offer customers “debit card” accounts for those merchants that are backed by the Lightning network 3) Establish middle addresses for the customer accounts and the merchant addresses on the Lightning Network. 4) Choose to ignore double-spends between the customer accounts and the merchant addresses, because they don’t actually have to stake the customer side. They can just pretend to since they control the customer’s keys. 5) Inflate their bitcoin holdings up to the stake from the merchants, since the customers will almost never cash out in practice. In other words, Lightning Networks allow exchanges a clear path to repeating Mtgox; lie to the consumer about their balance while keeping things clean with the merchant. In other words, establish a fractional reserve approach to bitcoin. So, to summarize, Bitcoin Core decided increasing the blocksize from 1mb to 2-8mb was “too risky” and decided to create Segwit instead which the market has not adopted. When asked when bitcoin will be faster and less expensive to transfer most Bitcoin Core adherents say the Lightning Network will fix the problems. But, as I’ve just shown, the LN makes no sense for merchants to use and will likely result in banks taking over LN nodes and making BTC similar to Visa and Mastercard but more expensive. And, will likely result in exchanges becoming like banks of today and having fractional reserve systems which makes bitcoin not much better than the banking system of today. Or, people can switch to Bitcoin Cash, which just increased the blocksize and has much faster transaction times at a fraction of the cost. I’ve begun to sell some of my bitcoin holdings because of what is going on. I’ve increased my Bitcoin Cash holdings and also increased my holdings of Dash, Monero, Litecoin and our latest recommendation, Zcash. Other News & Crypto Tidbits When bitcoin surpassed $17,600 in December it surpassed the total value of the IMF’s Special Drawing Rights (SDR) currency. Meanwhile, Alexei Kireyev of the IMF put out his working paper, “ The Macroeconomics of De-Cashing ,” where he advises abolishing cash without having the public aware of the process. Countries such as Russia are considering creating a cryptocurrency backed by oil to get around the US dollar and the US dollar banking system. Venezuela is as well although we highly doubt it will be structured properly or function well given the communist government’s track record of destroying two fiat currencies in the last decade. To say that the US dollar is being attacked on every level is not an understatement. Cryptocurrencies threaten the entire monetary and financial system while oil producing countries look to move away from the US dollar to their own oil backed cryptocurrency. And all this as bitcoin surpassed the value of the IMF’s SDR in December and in 2017 the US dollar had its largest drop versus other currencies since 2003. And cryptocurrency exchanges have begun to surpass even the NASDAQ and NYSE in terms of revenue. Bittrex, as one example, had $3 billion in volume on just one day in December. At a 0.5% fee per trade that equaled $15m in revenue in just one day. If that were to continue for 365 days it would mean $5.4 billion in annual revenue which is more than the NASDAQ or NYSE made this year. Conclusion I never would have guessed how high the cryptocurrencies went this year. My price target for bitcoin in 2017 was $3,500! That was made in late 2016 when bitcoin was near $700 and many people said I was crazy. Things are speeding up much faster than even I could have imagined. And it is much more than just making money. These technologies, like cryptocurrencies, blockchains and beyond connect us in a more profound way than Facebook would ever be able to. We are now beginning to be connected in ways we never even thought of; and to some degree still do not understand. These connections within this completely free market are deep and meaningful. This is sincerely beautiful because we are constantly presented with an ever growing buffet of competing protocols selling us their best efforts in providing harmony within the world. What all of these decentralized and distributed consensus building technologies have in common is that they connect us to the world and to each other. Where we are going we don’t need foolish and trite Facebook’s emojis. As we close a successful 2017 we look with optimism towards a much more prosperous 2018. The Powers That Shouldn’t Be (TPTSB) can’t stop us. As we move forward note how much crypto will teach you about ourselves and the world. In a radical free market making our own bets will continue to be a process of self discovery. Crypto will show us the contours of our fears, the contours of our greed, and will constantly challenge us to do our best with the knowledge we have. Remember, randomness and innovation are proper to the happenstance nature of a true digital free market. Happy New Year fellow freedom lovers! And, as always, thank you for subscribing! Jeff Berwick
For those who haven't seen it, Roman just posted the update we've all been waiting for on bitfloor.com:
We are pleased to announce that we are ready to start returning USD funds. Please follow the instructions on the withdraw page. If your account balance is over 3000 USD, you must first open an account with IAFCU and then provide your IAFCU account number.
=== === === Update July 6, 12:56 PM Pacific: I'm already getting emails and seeing responses here about various login/withdrawal/balance-related issues. I imagine it may take a few days for all the ins and outs of the refund process to become clear to all of us. If you are experiencing USD withdrawal-related issues (such as $0 balance showing up on your account when you know you had a positive balance) that are not resolved by 7/12, please send me a PM or email and I will start tracking those issues and reporting them to those on the update email list. If you would like to be added to that list, PM me your email address. Update July 6, 12:59 PM Pacific:sodoubleoggood reports that Bitfloor has removed all pending withdrawals, so for users who were seeing $0 balances due to pending withdrawals, check your account again to see if that's cleared up. Update July 7, 10:36 PM Pacific: I have been receiving numerous reports of bugs and account access issues from users who are trying to submit their withdrawal requests. I am keeping track of these comments, but because Bitfloor just announced the refund process yesterday, I am asking everyone to give Bitfloor one more week (until 7/12) to start working through their backlog of customer support emails. If by the end of next week there does not appe