FIDELITY DISCLOSURE: “…we’ve been mining bitcoin since 2015…”

Well, that just happened to slip in there. Without anybody taking serious notice of the larger implications, Fidelity, the worlds fourth largest asset manager with $7.2 trillion in assets under management, has been mining Bitcoin since 2015.

They also disclosed that they have been closely watching the digital asset class for at least five years. These ‘internal’ disclosures lead the firm to open up an institutional custody and warehouse platform that will allow institutional firms to trade bitcoin and, presumably, other digital assets (what assets besides Bitcoin could be available to institutions is yet to be known).

In their announcement yesterday, that made the biggest splash in the crypto and larger financial media space, Fidelity made it clear they aim to seriously compete with the likes of Bakkt, ErisX, Nasdaq, and others sure to jump into the fray.

From yesterday:

“Fidelity Investments is spinning off a stand alone company dedicated exclusively to bringing cryptocurrencies to institutional investors.

Called Fidelity Digital Assets, the limited liability corporation based in Boston will provide enterprise-grade custody solutions, a cryptocurrency trading execution platform and institutional advising services 24 hours a day, seven days a week designed to align with blockchain’s always-on trading cycle.”

Again, snuck into a small paragraph across several articles, Tom Jessop disclosed the Fidelity has been researching digital assets for about five years and “…mining Bitcoin since 2015.”

So it simply begs the question: How much Bitcoin has Fidelity actually mined and where are they keeping it? Interesting development indeed.

EXCLUSIVE: GOLDMAN SACHS AND BAKKT: Goldman Won’t ‘Go It Alone’ With Crypto Custody Product; Will Rely On Bakkt Infrastructure

Much has been made about the ‘on again, off again’ Goldman Sachs crypto initiatives. First, it was a trading desk for crypto and Goldman Sachs clients (their institutional clients i.e. family offices and hedge funds). Then the narrative turned away from a dedicated trading desk to custody services that would hold Bitcoin for clients.

And on both fronts, Goldman Sachs wouldn’t confirm or deny what they were building, discussing or the timing of any of it. The way it sounds today, there was a reason why they haven’t confirmed any reports. Goldman was aware of the multiple institutional offerings that were on the way and evaluating who they’d choose to use as the backbone of their digital asset offerings.

It looks like it will be Bakkt, and that the evaluation was easy and the decision swiftly made. Speaking to several sources at the investment bank the scale of Bakkt’s infrastructure was the deciding factor.

**a quick note about the decision making and what this all could look like, say, two years from now. All of the pipes, levers, and ‘factories’ that are being constructed to process billions of crypto trades per day will eventually all work together. Bakkt, Fidelity, Nasdaq, ErisX – all of them will eventually clear trades from a place like Goldman Sachs on a daily basis. These firms are just providing access and ‘regulatory insurance’ via custody and some warehousing services. Goldman choosing to work with Bakkt is a nice headline today but may be irrelevant by late 2019.**

Goldman Sachs trusts what Bakkt has built and already processes hundreds of millions, if not billions, of dollars of trades via ICE exchanges across all different commodity products each day. So the understanding of how the exchanges work, how they will function, and the architecture’s strength is not in question.

Rather than seeing Bakkt as a ‘new’ product and exchange, Goldman sees it as an extension of the NYSE, EuroNext, or any other exchange brand under the ICE umbrella. There is zero concern that Bakkt would run afoul of regulators or suffer any of the daily drama associated with current crypto exchanges like Bitmex, Bitfinex, or others.

In fact, Goldman reps actively advise clients to stay away from those exchanges for regulatory and AML (anti-money laundering) reasons. Goldman Sachs would rather clients tap into their ‘off-book’ OTC crypto network spread across large parts of the US, Asia, and Eastern Europe.

Bakkt’s architecture will allow Goldman Sachs to replace that narrative with a stable exchange narrative and remove the elevated risk they associate with digital assets.

Again, this isn’t some sort of watershed moment for Goldman Sachs or Bakkt. This is simply Goldman using the pipes that Bakkt has laid on top of an exchange network that is decades old and Goldman Sachs uses every second of every day the markets are open.

Still, Goldman trusts Bakkt in a way that is different from what Fidelity is offering at the moment. If there is anything significant here it is that factor – trust.

Trust in Bakkt’s leadership team. Trust in Jeff Sprecher and Kelly Loeffler. Trust in the process by which Bakkt went about planning and building it’s custody and warehouse facilities. And trust that Bakkt will execute in a way that satisfies the standards that exist at Goldman and that it’s clients expect.

TETHER IS SAFU? Tether Releases Statement Regarding US Dollar Backed Stablecoin; Attempting To Calm ‘In-Stability’ Concerns

Late this afternoon/evening Tether issued a statement in an attempt to calm the market reaction connected to Tether’s move lower and back up again over the past 36 hours.

The statement was attributed to Leonardo Real of Tether:

“Tether is the leading provider of tokenized fiat currencies and is listed on many exchanges worldwide. We would like to reiterate that although markets have shown temporary fluctuations in price, all USDT in circulation are sufficiently backed by U.S. dollars (USD) and that assets have always exceeded liabilities. In June 2018, a report from Freeh Sporkin & Sullivan, LLP (FSS), based on a random date balance inspection and a full review of relevant documentation of bank accounts, confirmed that all Tethers in circulation as of that date were indeed fully backed by USD reserves.”

Tether is making an attempt to adjust the dialogue around the ‘stablecoin’ that is nearly eponymous as a trading pair across crypto’s largest exchanges.

As it stands today, Binance as an example, holds more than 768.5 million in its reserves, according to a wallet posted to Tether.to. Tether, the company behind the stablecoin, comes in second with 486.7 million tokens.

Another Tether breakdown, or further discomfort with that kind of token asset base at stake, would cause market fluctuations that may not be as kind as the ones that occurred just 24 hours ago.

In our opinion, this statement is, at a minimum, 12 hours late. The Tether team would do well to stick a bit closer to their PR strategists and provide continued explanations should they be needed going forward.

A quick look at what led to the Tether statement/release:

Tether’s USDT/USD pair lost came crashing down below 0.95-fiat at the beginning of the Asian session. It eventually formed lower lows towards 0.85-fiat, before correcting higher towards 0.90-fiat. The pair, however, continues to be far from its $1-peg that is creating a negative sentiment about its future in the crypto space.

As per a tweet on KuCoin’s official Twitter handle, the firm has announced that it will be temporarily suspending all USDT transactions across its platform. While there appears to be no major reason for this sudden halt, it seems as though this move is part of a larger wallet maintenance regime that KuCoin adheres to regularly.

Crypto exchange Binance, the world’s largest by volume, suspended withdrawals of the tether (USDT) stablecoin Monday morning during what it called a period of heightened activity.

Withdrawal functionality has since been returned, according to Binance’s website, which previously stated “wallet maintenance, withdrawal suspended” on the page for USDT. A customer service administrator on the platform’s English-language Telegram channel had previously said that the suspension was due to “USDT network congestion.”

Withdrawal suspensions, market reactions, statements, and a stablecoin that seems to be having a problem with the ‘stable’ moniker at the moment.

As of this print, Tether was inching significantly closer to it’s stated 1:1 token/dollar ratio. The drop all the way to $0.86 simply shouldn’t happen. Unless there is a consortium of market manipulators at work. Nah, that could never happen, could it?

 

FIDELITY CRYPTO EXCHANGE: Fidelity Turned Down Bakkt Investment As They Pursue ‘In-House’ Crypto Exchange And Custody Solutions (and compete with Bakkt)

We’ve chronicled the coming scale, architecture, institutional excitement, and pedigree of Bakkt on these pages for the past few weeks. Every crypto centric organization and personality of means is either financially or emotionally invested in the Bakkt launch and what it will mean for Bitcoin and the crypto ecosystem. Except for one big name…

Fidelity.

In conversations with several sources in the know (some invested in Bakkt and some that are not; but still familiar with the equity offering) it came to our attention that Fidelity passed on a significant stake in Bakkt for one reason and one reason alone – they plan to compete directly with Bakkt in the crypto space with its own custody/warehousing and trading architecture.

This is the conversation in and around those in the know just beyond the ‘Bakkt story’.

Fidelity is said to have several working groups of scale preparing products and services within crypto that will compete directly with Bakkt for institutional clients, while on a faster path to offering those same products to its vast numbers of retail clients. A proposition that Bakkt has eschewed thus far.

One source with a deep understanding of Bakkt’s offering and knowledge of Fidelity’s decision to pass on an investment had this to say:

“The rumors out there stem from Fidelity passing on taking a stake in Bakkt and then have run amok from there. They’ve been just as secretive about their build as Bakkt was for nearly two years leading up to their announcement. All we know is what we hear from a couple guys that work at Fidelity, but even that is vague and a wink and a smile. But as we see stuff leaked via the media in some way it makes sense that they would scale up. Bakkt has all the institutional pipes, but Fidelity has that same access, but a massive retail name that can tap millions of customers.”

“The real intrigue here is the rumor that Fidelity considers themselves to be crafting a real competitor to Bakkt. That is a mouthful if you ask me. Bakkt is leveraging fifty plus years worth of exchange infrastructure to establish Bitcoin as a standard and then offer products that evolve from there. Fidelity is said to be further along in the way they plan to leverage that same architecture. If that is true, and that is a big if, it only furthers adoption, and the crypto ecosystem wins. Still, lots of chatter about what could come from a name like Fidelity.”

The paths that Bakkt and Fidelity seem to be taking are very different, at this point. If Fidelity is just as far along, why not announce it and also market it in some way via PR? Bakkt has decided to go that route by announcing its existence and an assumption of a launch in November. Interviews, profiles, social media, etc have all been a part of the branding. Fidelity has yet to go down that road.

From CCN, a couple months ago, a leak from inside Fidelity mentioned the work being done inside the firm:

“Citing anonymous sources with knowledge of the matter, the publication further reported that Fidelity, which currently manages $2.4 trillion in assets, has been planning the initiative for approximately one year.”

“The company is also seeking staff to develop “first-in-class custodian services for Bitcoin and other digital currencies.”The latter position falls under the Fidelity Digital Asset Service division, which handles the firm’s limited cryptocurrency-related services.”

“At present, select clients can link their Coinbase accounts to their Fidelity portfolios, enabling them to view their cryptocurrency holdings on the Fidelity platform alongside their other investments. This new service would allow Fidelity to hold crypto assets directly.”

“It’s not clear whether the cryptocurrency exchange would be made available on the main Fidelity platform or whether it would exist as a separate entity under the company’s umbrella. Nor is it clear when the venue would launch.”

Whether it is an exchange, structured products, NDF’s, ETF’s, or any derivative therein – the rumors have become loud and not so hidden. Fidelity is set to announce something, and choosing to pass on as sure a bet in crypto (Bakkt) just a couple months ago is as clear a marker as any.

TETHER MESS: Tether Causes ‘Whacked Out’ Gyrations In Crypto Market As It Loses Value, USD Peg In Question

Tether is making headlines for all the wrong reasons in the last two weeks. Bitfinex alone has caused Tether to move in ways that have given even the most committed traders heartburn. Bitcoin bounced to better than 7,500 in a one candle spike as Tether pushed toward the $0.90 spot value. Shorts and longs were getting blown up all over the place – while Bitfinex was still processing weeks old deposits and withdrawals. Yuck. (ask Tone Vays about his latest trade!)

The BTC/USD pair closed yesterday on a modest 2 percent gain in pennant formation action following the recent drop. Nevertheless, the couple started picking momentum during the early Asian trading session and jumped to as high as 7800-fiat from its previous low near 6300-fiat.

At the same time, Tether’s USDT/USD pair lost came crashing down below 0.95-fiat at the beginning of the Asian session. It eventually formed lower lows towards 0.85-fiat, before correcting higher towards 0.90-fiat. The pair, however, continues to be far from its $1-peg that is creating a negative sentiment about its future in the crypto space.

Meanwhile…

As per a tweet on KuCoin’s official Twitter handle, the firm has announced that it will be temporarily suspending all USDT transactions across its platform. While there appears to be no major reason for this sudden halt, it seems as though this move is part of a larger wallet maintenance regime that KuCoin adheres to regularly.

Crypto exchange Binance, the world’s largest by volume, suspended withdrawals of the tether (USDT) stablecoin Monday morning during what it called a period of heightened activity.

Withdrawal functionality has since been returned, according to Binance’s website, which previously stated “wallet maintenance, withdrawal suspended” on the page for USDT. A customer service administrator on the platform’s English-language Telegram channel had previously said that the suspension was due to “USDT network congestion.”

Like we said – Tether is a mess and you can bet that professional traders are all over this dynamic and doing what they can to capitalize on Tether’s misfortune.

As per the rumor that Binance may ‘delist’ Tether (which would have significantly contributed to the below $0.90 price drop), CZ quickly dismissed it.

Notably, Binance is the largest holder of USDT tokens, with more than 768.5 million in its reserves, according to a wallet posted to Tether.to. Tether, the company behind the stablecoin, comes in second with 486.7 million tokens.

The very idea that Binance would delist Tether, effectively kicking itself in the shins was laughable.

Although reasons for the USDT price plunge are not confirmed, there have been reports of an alleged loss of market trust leading to a possible sell-off: yesterday, a Bloomberg article suggested that investors are “losing faith” because of the ongoing lack of transparency surrounding Tether’s claims to be backed one-to-one by the US dollar.

In the past, critics have accused Tether of operating a fractional reserve and covering over its alleged reserve deficit in complicity with associated exchange Bitfinex, with rumors mounting when Tether allegedly dissolved its relationship with a third-party auditor this January.

The ‘Tether Collapse’ narrative is real and should be closely watched. A loss of confidence in a ‘stablecoin’ as ubiquitous and essentially providing the trading architecture for the worlds largest crypto exchange is a serious, serious problem.

BITCOIN EXPLODES HIGHER: Price Action Whipsaws To The Upside; What Happens Next?

Bitcoin breaks the upside of the mid-scale pennant as expected at the 6360 level. What was not as expected was the force and volatility that came with it. 

The overnight trading session (US CST) saw BTC seek out not only 6800 once again, but saw price reach almost 7800 instead. The 6800 level has been a key level for BTC to sustain any longer-term traction, therefore making it an important event in the few weeks of trading.

At the moment, BTC is trading a bit above the 6800 support level and is holding the uptrend with a higher low on the minor scale (15-minute chart) that has held less than 1/2 of the breakout leg up. This gives an indication that volatile price action will remain for most of the day.

Stochastic readings mid-scale seek overbought (>80) levels and now look to pivot to seek that region. MACD crosses to the upside and movement stays wide and positive. Bullish momentum is fully intact, even with minor retracements of any sort.

BTC is currently a hold (breakout entry at 6360 now up over 10%). Downside protection should be placed below support in case of any breakdown.

Futures Traders – trade the trend. The short-term trend is currently long.

BINANCE REBOOT: Looking Back At A Binance Hack; Are Exchange API’s A Massive Security Vulnerability?

This extraordinary article was constructed shortly after the Binance hack in July, by Anthony Xie, a well known Medium publisher and the founder of HodlBot. That hack saw the extraordinary ‘pump’ of SYS and an enormous amount of BTC essentially disappear into a small number of wallets.

The questions that followed, the explanation given by Binance, and the speed at which it was all forgotten still leave some in the crypto community concerned.

The original article can be found here, or below. It raises compelling questions that have yet to be answered.

**********************

Those of you who follow me know that I’m the founder of HodlBot. We built an easy way to diversify your cryptocurrency portfolio across the top 20 coins by market cap. Right now, our platform works on top of Binance’s API.

So when I read that Binance had been potentially hacked for $45 million last week, I was left feeling uneasy.

Since then, the storm has blown over; Binance announced that funds are safe and they would be covering any losses.

But I still feel unsatisfied. News coverage of the incident was extremely poor, there was little information released, and rumors are spreading like wildfire.

As someone who wants Binance to succeed, I feel conflicted about writing this article. Nevertheless, I have an obligation to my users, and to the community, to investigate this issue thoroughly.

I’m going to do my best to present a well-rounded perspective on the incident and clear up rumors.

What we know

Before we dig into the details, let’s put together a brief timeline of the incident using information released by official sources.

July 3rd at 8:44 PM UTC

The price of SYS shoots up to from 0.0004 BTC to 96 BTC.

July 3rd at ~9:00 PM UTC

Binance shuts down the exchange for unscheduled maintenance.

July 3rd ~ 11:00 PM UTC

Binance resets all API keys as a security precaution.

July 4th ~ 12:00 AM UTC

Binance re-enables API key creation.

July 4th ~ 4:00 AM UTC

Binance completes system maintenance.

July 4th ~ 6:00 AM UTC

Binance releases an official incident recap stating that the incident had been attributed to irregular API trading activity.

What Does Binance Mean by Irregular API Trading Activity?

To understand why API attacks often coincide with coins being pumped to ridiculous heights, we first need to understand how Binance’s API works.

For the layman, Binance’s API allows computers to programmatically interact with the exchange as if they were the user themselves. To enable API access, a user first generates a set of API keys. These keys are credentials that provide permission to interact with the account.

On Binance there are 3 distinct levels of API permissions:

  • Read — ability to get data about holdings, trade history, and the market.
  • Trade — ability to execute trades
  • Withdrawal — ability to withdraw funds

By default, read & trade permissions are enabled. However, withdrawal access is not. Because withdrawal access carries a much higher risk, Binance forces users to set up IP whitelisting and 2-factor authentication beforehand.

Consequently, when attackers steal usernames & passwords or API keys, they tend not to have withdrawal permission. Under this limitation, hackers have to find a way to move funds to accounts that have withdrawal access.

Here’s how they do it:

  • Before the attack, the culprits will accumulate a large quantity of a coin that has low volume and a small order book.
  • Attackers will use stolen accounts to send a torrent of buy orders via the API at a ridiculously pumped price (often 10,000x the normal price).
  • The attackers make a huge profit by selling the coins they previously bought.
  • Attackers try to withdraw their spoils from Binance. Once it’s off the exchange and onto the blockchain, it becomes almost impossible for anyone to reverse the trades.

What the Data Tells Us

Rather than fumbling around in the dark, we can use Binance’s API to pull historical data on SYS/BTC trades and see exactly what happened.

Price Activity & Volume

1 Day Candles for SYS/BTC from May 24 to July 2

There was nothing peculiar about the price of SYS until July 3rd when prices suspiciously shot up to 96 BTC.

1 Day Candles for SYS/BTC from May 24 to July 10

During the same time period, there was a massive uptick in trading volume and the number of total trades.

Trading volume and the total number of trades spiked for SYS/BTC on July 3

Historical Orders

Things get interesting when we start pulling data from /api/v1/aggTrades

This endpoint GETs a history of completed trades. Trades that fill at the time, from the same order, with the same price will have the quantity aggregated.

Notice how everyone’s talking about the 11 SYS sold at 96 BTC (~$7 million) when they should be talking about the 13,152 SYS sold at 1.1 BTC (~USD $97 million) instead.

By plotting all aggregate trader orders on a bubble chart, we can get a better sense of scale. Every circle is an aggregate trade order. The size of each circle represents the total trading volume in USD.

It’s difficult to identify the exact moment in time when the pump begins. To be conservative, let’s consider our starting point to be the first time we see a 50% price jump from one trade order to the next.

Something is very, very fishy about the 13,152 SYS trade order.

Because we have the aggregate trade ID, we can use it to GET all individual trades that make up the order.

/api/v1/historicalTrades

I’ve linked all the historical trade orders in a google sheets doc.

What we find is 132 separate trade orders all buying 99 SYS for 1.1 BTC each. The last buy order is 84 SYS, capping the total aggregate to 13,512. This is strangely neat.

I’ve reached out to Binance and confirmed that every single individual trade comes from only one individual account.

Therefore, $96 million in trading volume must have come from only 1–133 accounts.

That’s a lot of money per account to keep on an exchange…

Unpacking the 11 SYS buy at 96 BTC

The 11 SYS buy at 96 BTC is even stranger. There is only one trade here. This means somebody must have had a whopping 1,056 BTC ($6,694,406) on their exchange account.

At this point, the simpler explanation would be a system glitch or exploit that allowed these erroneous trades to be placed.

Comparing the data against the VIA coin pump

Let’s compare this to the VIA coin incident, an attack we know that was instigated by hackers phishing API keys.

Price Activity & Volume

Prior to March 6, VIA experienced normal trading volatility.

Then suddenly on March 7, the price exploded.

Just like SYS, the number of trades and trading volume also spiked.

Historical Orders

While VIA’s trading activity chart and candlesticks chart looks similar to SYS, the historical trade data looks very different.

Unlike SYS/BTC where we saw a bunch of massive trade orders, VIA/BTC has a large number of accounts involved in making smaller trades. In my mind, the VIA trades are way more typical of an API phishing attack.

SYS is just weird.

Just look at these aggregate trade orders plotted on top of each other.

It’s difficult to identify the exact moment in time when the pump begins. To be conservative, let’s consider our starting point to be the first time we see a 50% price jump from one trade order to the next.

If the attackers used API keys to make bogus trades for SYS, I’d imagine we’d see a distribution of trading volume similar to the VIA incident.

But they’re not.

If we unpack all of the trades into individual ones and compare the distribution of trading volume between the two, it’s obvious that the SYS trades had much higher trading volume.

Note that we’re using a log scale here, so the differences are actually quite large.

Did we witness an API keys phishing attack? Or did we see something else entirely?

I’ll let you the reader, make up your own mind.

Clearing up the Rumours

~7,000 BTC leaving Binance’s hot wallet

Here is the link to the transactions under scrutiny. Many people are waving this around as evidence that funds were involuntarily withdrawn from Binance’s hot wallet.

So far, Binance has not responded to any of these accusations, which has added more fuel to the fire.

Clearing up a common misconception

I thought Binance’s maximum withdraw was 50 BTC, how could 2,000 BTC leave the hot wallet?

When the output of a transaction is used as the input of another transaction, it must be spent in its entirety.

Sometimes the coin value of the output is higher than what the user wishes to pay. In this case, the client generates a new Bitcoin address and sends the difference back. This is known as change.

Just like when you spend $20 to buy a $2 ice cream cone

Binance intelligently batches a bunch of withdrawals and sends all of them out in one transaction. However, it is not uncommon for there to be large amounts of change sent back to Binance’s change address.

I used the Blockexplorer API to pull a list of transaction outputs from April 30th to July 6th. Then I sorted them by transaction output in descending order.

As you can see, there a number of large transaction outputs above 2,000 BTC. This is because change is being sent back to the return address.

I’ve uploaded all 77,374 transactions from this wallet here. You can look up the transaction hash on BlockExplorer to confirm it is real.

I’m not saying I know for sure that the withdrawal was authorized by Binance, but high output transactions above 2,000 BTC are not out of the ordinary and is certainly not evidence of theft.

51% attack on SYS

I won’t cover this topic in much detail because the SYS dev team has released a full debrief on the situation. Long story short, they claim this incident was a strange coincidence. SYS was not hacked.

Between an update to SYS 3.0.6, many miners set the fee they were requesting to be higher than the default rate. As such, many transactions with fees below this rate were left unmined.

With fewer active miners, transactions that would normally take a minute to clear were waiting in the mempool for hours. When this happened, many transactions were lumped into a single block. This caused huge block outputs, some over 1 billion SYS, and a build-up of unconfirmed transactions

Among the unconfirmed transactions, the SYS team saw a bunch of attempted withdrawals from the richest SYS account suspected to be an exchange hot wallet. At first, the SYS team thought it was suspicious activity and alerted the exchanges. Since then, they have confirmed the transactions were not the product of an attack.

What we think about Centralized Exchanges

In times like this, you can hear the crowd calling for change.

Do you hear the people sing? Singing the songs of angry men?

And I agree, decentralized exchanges are the future.

But before we completely bash centralization. We should ask ourselves:

Are we not too idealistic about decentralization and the immutability of the blockchain?

After all, centralizing power in the face of disaster is standard protocol for most organizations because it is fast and efficient.

Take Binance for instance. Binance does not process trades on the blockchain but instead records them on an internal ledger. Because they do this, they are able to roll back all malicious trades.

So far, Binance has done a great job spotting irregular trading activity early enough to take preventative action. They averted disaster not once, but twice with VIA & SYS. Should we not give them credit for it?

They take responsibility for attacks that are not their fault. They have extremely deep pockets that allow them to cover any user losses during an attack. They are even putting 10% of all transaction fees into an insurance fund to protect against future mishaps.

Compare this to mistakes that happen on the blockchain.

Remember the DAO blunder which caused $60 million ETH to be lost? What do you do? Some argued that code was law, while others wanted to roll back the mistakes. The argument was so severe that it caused a hard fork and the birth of ETH classic.

I don’t know what the answer is to all of this, but it’s definitely not that all centralized exchanges should go to hell. We’re a long ways away from being able to throw away centralized exchanges altogether.

This is what Jesse Powell, the CEO of Kraken, had to say about Vitalik’s comment that “centralized exchanges should go burn in hell as much as possible”. He echoes my thoughts well.

I can assure you that we are already burning in hell quite a bit. Not as much as possible, thankfully, but it’s far from comfortable here in the 6th circle. The heretic’s plight is an eon of dealing with regulators, banks, hackers and confused newbies.

I don’t take Vitalik’s comments personally. The dream is getting to a point where decentralized exchanges are so great that centralized exchanges no longer have any advantages. Today, that point is a very long way off, and we’ll need centralized exchanges to get there.

You have to build the bridge before you can burn it.

SHORT IT! Ethereum Price Action Points To Short-Term Downward Pressure

**This analysis is brought to you by one of our preferred technical analyst partners: @SatoshiiHeavy

As Ethereum gave way to yet another support in the overnight session and can be seen trying to swing back over. 

The entire cryptocurrency market is on its heels as we are ‘oh so close’ to breaking pivotal supports that may turn the entire market into turmoil, as once strong support now can be resistance.  

As anxiety builds for bag holders and traders alike we turn to the charts to give us clarity.

Diving into the H2 chart we can see us coming to a climax and we are bound for more action soon. In my opinion, if we cannot swing over 40 RSI within the next 6 hours we will seek my 170-175 target zone for shorts. 

We broke below an H4 order block which is also home to a very strong and important RSI floor point, which I have labeled in gold. 

A close on a D1 chart would spell disaster and further aid my 170 targets. A close above of that and we can get into a long and set aim to the red and gold box above where we will again short because I do not think we break back over that huge consolidation block. 

Too many trapped orders, too much time spent, we need to drift away to reload and then come back to crush it with more force and volume.

No trades should be placed yet unless you are hedged as volatility is looking and you do not want to get trapped o the wrong side. 

Remember to always practice good risk management by abiding by strict stop loss rules and proper position sizing.

 

BITCOIN BEAR OR BULL: “There is no indication that we are seeking new lows…”

Bitcoin trades with low volatility as yesterday’s trading brought extremely quick downside movement to break support at 6400. This move was also followed by the firm test of the major pivot area at 6250. 

This range has served as an important area for BTC as this marked a higher low* on the longer term scale for BTC to hold. This remains in effect until broken. One thought process that must be accounted for is the fact that what goes up must come down. 

Although BTC did break down fast, there is no indication of price point seeking new lows until this level is broken and the major support at 6k is reached.

At the moment, BTC struggles to maintain any sort of meaningful retracement. After 6250 held firm by candle open/close*(body), there has been about 100 points worth of upside in the last day or so. This will need to be watched as 6400, currently acting as resistance, must be re-tested. The most bearish news thus far remains with BTC breaking below the long-term upper trend line marked in orange. This line has remained active for the entire year.

BTC now remains in a high-risk category as the downtrend is still intact on the short and mid-term. A higher low* must be achieved in order to sustain the consideration period to move back into an uptrend of some sort.

Stochastic readings continue to seek higher levels hourly, while the mid-term and larger scale remains negative. There is an opportunity to play the retrace, however, the risk here also remains high as there is no confirmation of the trend short term until a higher* low is registered.

MACD momentum looks to cross to the upside midterm, a sign that BTC may seek out the 6400 resistance test again.

BTC is currently a No Play.

Futures Traders – trade the trend. The short-term trend is sideways – No Play unless catching retrace longs on the 15-minute scale.

CRYPTO ON WALL STREET: Wall Street Infrastructure And Trading Strategies Will Transform The Crypto Landscape In 2019

With Bitcoin prices down almost 70% and some alt-coins faring worse, the crypto space is doing surprisingly well. The number of wallets is increasing, there are new projects starting all over the world and while volume on the exchanges has tempered, OTC trading is exploding.

The proverbial cat is out of the beg, cryptocurrencies are creating alternative business models and alternative payment options all over the world. Forcing governments with their national currencies to compete for capital and the transactions of their citizens. That is a beautiful thing. 

To me, this is the real mission of cryptocurrencies, to create alternatives, offering people all over the world options. In many places in the world, people have no political power, votes mean very little, but people vote every day with their capital, it is a lot easier to vote with the money in your pocket.

With that said, as the market expands, how will cryptocurrency trading evolve going forward? Is it different this time? How will crypto instruments trade as more and more participants join the market? 

The short answer it isn’t inherently different than other markets. Cryptocurrencies are just another asset class, another market. Investors and traders are looking at it with the same set of tools. From the fundamental standpoint it is not easy to figure out what the fair market value of Bitcoin should be, but from a technical analysis standpoint, traders are looking at the same charts, same candlesticks, moving average, etc., using the same order types to execute trades. 

To that end, the crypto market is just another financial market, another asset class, it will follow the evolution of every other electronic market — fees will be reduced, numerous exchanges will disappear (some will close doors, some will be bought out) institutional grade tools, pre, and post-trade mechanisms will be developed. 

Institutional trading will be decoupled from retail and participants are looking for credit and leverage so the market will provide it. Institutional investors are looking for settlement with very limited and quantifiable counter-party risk, so institutional clearing solutions that exist in other markets will be adapted (look at CLS functionality as a model). 

Transaction fees? Exchanges make money on volume, and when there are hoards of new participants joining the market, exchanges can charge whatever they want. But if there are 10 venues offering the same services and competing for the same customer, the only way to steal market share is to reduce transaction fees. Once the first exchange does that, others will follow. They have no choice, otherwise, their volume will disappear. 

Before Binance opened its doors the average fee was ridiculous; so it is no wonder Binance stole market share from others by offering deep discounts on the average crypto trade commission. Of course, another way to increase trading volume is to buy out your competitors. I think we will start seeing these transactions later this year. Look at how online stock brokers fared over the last 20 years. Does anyone even remember “full service” brokers, or that online brokers used to be called “discount brokers”? Transaction fees went down about 10x over the last two decades. 

And now you can even trade for free. Crypto exchanges, will follow the same trajectory. 

**Btw, as a side note, I have a hard time calling these trading houses exchanges. They really are very much like retail FX brokers. They hold your deposit, you trade on their platform, they provide leverage and credit and settle your transactions but you really have no idea if they take the other side of your trades, and what other market manipulations they engage in.**

Credit and leverage. In traditional financial markets, these concepts are related, you need credit to obtain leverage. professional traders need leverage to generate desired returns. To some extent, the volatility of the crypto market reduces the need for leverage and with current volatility, trades can generate enough juice without much leverage to make it interesting. 

But volatility has been coming down and will continue to come down as more and more participants enter the market. So credit and leverage are needed. Currently, some exchanges started offering leverage or ability to short coins. Thus these venues are offering credit to some of their customers.

Offering credit puts these exchanges at risk and since they also handle customer deposits (that is how they offer credit) they put all their customers at risk. None of the exchanges in traditional finance offer credit and take this kind of risk. Crypto trading will move to use credit intermediaries, using the same model that exists on Wall St. thus reducing the risk of crypto exchanges but also reducing their revenue.

Clearing and settlement. This is probably the biggest change that crypto trading will see as it evolves to support institutional clients. From Wall Street’s standpoint, both centralized and decentralized exchanges are bad options (see more on this below) and Wall Street has a very hard time using either model. 

Institutional investors, first and foremost, are concerned with two things: Is my capital safe? And can I trade where I want to trade? Not surprisingly these questions have been addressed very well by traditional financial infrastructure. We don’t have to look much further than the Spot FX market to see how billions, no scratch that, trillions of dollars traded every day on numerous venues with very little counter-party risk. Security of the client funds and settlement risk are addressed. The FX trading venues catering to the institutional investors all trade on credit. Credit is provided by the custodians or by Prime Brokers, and all major banks offer prime brokerage services.

Opening a PB account would be daunting for a small investor. Google ISDA agreement and read one for fun, but for any institutional investor, or fund, this is a must have to operate properly. But once the PB account is established, to trade on a particular platform all a client would need to do is ask the PB, say Citi, to set up a trading account on that platform. 

The platform only knows that Citi asked to set up an account. with specified trading credit, i.e. 10 million USD. Many times, the platform may not even know who the actual customer trading is, it could be just a numbered account. Every time that account (Account A) trades, the trade is reported by the platform to both counterparties. So if Account A traded with Account B and Account B has credit provided by Barclays. The Platform is sending the trade confirmation to Citibank that their Account A made a trade with Barclays and the Platform sends the trade confirmation to Barclays that their account B made a trade with Citi. That is it! 

Now banks book the trades to the client’s accounts and settle among themselves. There is more to it but this is the basic process. As a consequence of that structure, a fund could ask their PB to provide credit to trade on two platforms, so if it bought Euros on one platform and sold it on another, at the end of the day both trades will be reported to the prime broker and PB will see that the fund is flat and will credit or debit p&l into the account, no money or coins have to be sent around. That’s it. 

All the funds stay in one place, clients trade where they want to trade and all can go home every night knowing that all the trades were netted out and settled.

If a fund needs leverage the PB will provide it, trading platforms don’t even need to know if the fund has leverage or not, how the credit is secure is a different issue, it could be secured by some collateral or just on the strength of the balance sheet. It doesn’t matter to the trading venue or exchange. All they know is that Citibank guarantees the trading account, full stop. So you can see, that spot FX trading is way ahead of crypto “exchanges”; exchanges are decentralized, and settlement is also decentralized. 

Clients can trade anywhere and don’t have to worry about who is on the other side of that trade. Client’s only link is the prime broker and the PB lets the client trade anywhere where the PB’s credit is accepted. With that said, not all trading will move to these credit-based institutional platforms, some retail trading will stay with existing exchanges, some exchanges will become regulated and therefore will offer more transparency and security to their clients, but exchanges that would want to cater to the institutional investors will have to change, will have to offer trading on credit and separate trading and custody.

So why are the current crypto trading solutions both centralized and decentralized bad? In short, neither can handle the volume and are open to abuse and unsafe. Centralized exchanges have to deal with too much risk, both by holding customers deposits and by offering leverage.

Decentralized exchanges fragment the order books, open to abuses such as order front-running, limited to trading the coins/tokens that the settlement smart contract could handle.

And both don’t offer what institutional market participants are looking for: custody, credit, settlement, trade netting, etc.

To be fair, cryptocurrencies are not built for HFT and institutional trading, and existing exchanges do not help it. Recording trades in blocks where both first and last trades in the block are confirmed at the same time, slow forming consensus by independent nodes, all slow by design. It may be counter-intuitive but the immediate settlement of all the coin trades is detrimental to institutional settlement. 

Why should my buy transaction go through settlement when I know I will sell it back in 30 seconds or less? And if I do a few hundred trades a day can I just settle my net exposure before I go home?

Both centralized and decentralized exchanges are bad options, traditional Wall St. options are much better addressing the needs and concerns of institutional investors — there should be a separation between trading (aggregating orders, managing risk) and holding the assets. 

Traditional trading venues, exchanges handle order aggregation, order matching and manage trading risk. Independent clearing firms handle settlement and settlement is really just a utility, it is rarely is a big money maker. Credit, leverage, product landing is provided by independent third parties, banks, brokers, etc.

And finally there are tons of services pre and post-trade professional traders are looking for: order averaging and allocation, TCA, tax reporting. All these services are needed and will be available in short order.

Here’s my final thought – cryptocurrencies and blockchain are major innovations, it opens the door to new business models, tokenomics, new ways to deploy capital, but from the trading standpoint, it’s just another asset class. Show a Bitcoin chart to any professional trader and they see candlesticks and moving averages just like they would see with any other instrument. They are looking for the traditional trading tools, credit and platforms they use every day. 

Follow these traders and you will see the future of cryptocurrency trading.

**This article was written by Dan Raykhman, CEO of RFO Capital.

Full disclosure, my firm RFO Capital is offering algorithmic selling services, for more information click here: http://consignment.rfocapital.com