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Stolen Bitcoin Mark Massive Share of Circulating Supply
Whilst centralised Bitcoin hacks have become less of an early technology hazard than in recent years, the money supply has been riddled with thefts and heists. Diar analysis shows that a whopping 10% of bitcoins circulating have been the victim of theft. But with a public ledger and companies that track movement of wallets with stolen goods, it may prove too difficult to withdraw into fiat as exchanges adhere to Know-Your-Client (KYC) and Anti-Money Laundering (AML) requirements. What this could mean however, is an additional sum of lost coins.
In early December, Bitcoin mining marketplace NiceHash was hacked and more than 4,700 BTC was stolen. While the news was treated as an innocuous event due to Bitcoin’s latest bull run and futures markets start, the hack was actually the third largest breach in Bitcoin’s history in US Dollar value at the time of the hack. NiceHash lost $63Mn at the time of the hack, which is only topped by the Mt. Gox and Bitfinex heists. The largest incident was the Mt. Gox debacle where $358Mn of funds disappeared from customers. The second largest hack was Bitfinex, which resulted in a loss of roughly $68Mn. Just the three largest thefts amount to approximately 774,500 BTC or roughly half a billion dollars at the time of these hacks.
The Bitcoin network itself has never been hacked and with the current technology, it is thought to be virtually unhackable. MIT Technology Review reported in November that quantum computers pose a serious threat to Bitcoin as they will be able to break the cryptographic encryption fairly easily. However, quantum computers are still not developed and when they are, all the existing encryption will be at immediate risk, not just Bitcoin.
The ecosystem’s largest weakness are the centralized institutions that hold users’ private keys. When the private keys are compromised, the bitcoins are forever taken as all the transactions are irreversible. All reputable companies now keep most of their funds in cold storage and secured vaults. Popular exchange Coinbase stores 98% of their cryptocurrencies offline. As Bitcoin’s value continues to increase, it is becoming a more attractive target to hackers – even a relatively small amount of Bitcoin can net a fortune making this blockchain network the biggest bounty in the world.
Diar has consolidated all the publicized Bitcoin thefts and found that at least 1.43Mn BTC were previously involved in theft, which is almost 9% of all the bitcoins in existence. This is a conservative estimate as it does not include undisclosed hacks or personal hacks of smaller quantities. If the bitcoins from Silk Road that were seized by the FBI were to be included, the amount would be more than 1.6Mn or about 10% of the existence. And according to a recent research from Chainalysis, a blockchain analysis company, at least 2.78Mn to 3.79Mn bitcoins are lost. These figures do not include hacked or stolen bitcoins. If the conservative estimate of lost bitcoins (2.78Mn) is subtracted from the bitcoins in existence, at most, 13.95Mn BTC are currently in circulation. Assuming that there is no overlap of lost and stolen Bitcoin, that would mean that a little under 12% of bitcoins in circulation were involved in theft or involuntarily appropriated.
Data Table: Stolen Bitcoins 10% of Current Supply
|Period||Description||Type||BTC Stolen||USD Value (Date of Theft)|
|Jun-11||Allinvain (user)||User hack||25,000||$ 500,000|
|Feb-12||Andrew Nollan Scam||Scam||2,211||$ 10,834|
|Mar-12||Linode||Cloud provider||46,703||$ 210,164|
|Apr-12||Tony76 Silk Road Scam||Scam||30,000||$ 160,500|
|Apr-12||Betcoin||Betting site||3,172||$ 15,638|
|Jul-12||Mt. Gox||Exchange||1,852||$ 14,816|
|Aug-12||The Bitcoin Savings and Trust||Scam||265,678||$ 2,922,458|
|Sep-12||Cdecker (user)||User hack||9,222||$ 114,353|
|Oct-12||Trojan horse||Virus||3,500||$ 41,650|
|Mar-13||Bitcoin Rain||Scam||4,000||$ 344,000|
|Oct-13||Silk Road||Asset forfeiture||171,955||$ 17,195,500|
|Oct-13||BASIC-MINING||Mining company||2,131||$ 332,436|
|Nov-13||BIPS||Payment processor||1,295||$ 1,010,100|
|Feb-14||Mt. Gox||Exchange||650,000||$ 357,500,000|
|Jan-15||796 Exchange||Exchange||1,000||$ 235,000|
|May-17||WannaCry Ransomware||Ransomware||52||$ 88,740|
|Dec-17||NiceHash||Mining company||4,736||$ 62,752,000|
|Excluding Silk Road||1,430,590||$ 529,681,103|
Digital Currency Group Invests Alongside Big Money
Since its start in late 2015, Digital Currency Group (DCG) has been investing in what have turned out to be some of the most active and influential Blockchain and Bitcoin companies. From popular exchanges and wallets, to press, DCG has expanded its presence and is only a few degrees of separation from the most prominent players on Wall Street and Silicon Valley.
In October 2015 CEO of Digital Currency Group (DCG) Barry Silbert announced that he had completed his first round of funding for his firm which was structured as a company rather than a fund to give them the flexibility he believed required to start, invest and buy companies in the Bitcoin and Blockchain industry. DCG was able to attract investment from Bain Capital Ventures, MasterCard, CME Ventures, and 14 more investors since then, and have invested themselves in 90 companies, 82 of which remain active in a little over 2 years.
DCG has had a clear focus in the companies it has wished to invest in and fall into three main categories – exchanges & wallets, Blockchain technologies and more recently, the investment group has ventured into digital security and identity.
The company has invested in what are now some of the most popular exchanges and wallets that are used in the cryptocurrency community. Coinbase, one of the most well-funded outfits include investments from the New York Stock Exchange, ICE, and VC firm Andreessen Horowtiz. As of November 2017, Coinbase boasts over 13Mn users and stores a dizzying $10Bn of customer assets.
One not need look further than the addition of Ethereum in 2016, and Litecoin in 2017 which have both witnessed parabolic growth to understand that DCG has invested in a firm so popular it could be considered to be a cryptocurrency market maker.
Their investment in Shapeshift, which aside from being a standalone exchange platform, is capable of being integrated by other wallets, such as Jaxx and Exodus which have done so, allows quick and seamless exchanges between cryptocurrencies, has extended DCGs reach even further in the exchange/storage space.
Guardians of the Keys
Blockchain.com, the most popular bitcoin wallet, has 20Mn users and has attracted financing from Virgin’s Sir Richard Branson and Google Ventures. DCG has also invested in B2B wallet and payment processor BitPay who have processed over a $1Bn in 2017. And if people weren’t comfortable with software wallets, DCG also invested in hardware wallet Ledger.
DCG has its hands even in a quiet Bitcoin futures trading platform – UK based Crypto Facilities. The founder, a former Goldman Sachs VP, Timo Schlaefer, was the architect of the Chicago Mercantile Exchange (CME) Bitcoin Futures Reference Rate. A total of 23 of its 82 active investments are how people exchange, send and safely store cryptocurrencies.
The lion’s share of its ventures has been in various Blockchain technology companies offering a wide range of solutions from enterprise banking, to the issuance of bonds cleared directly on the Blockchain (See Table). DCG has invested alongside big money the likes of JP Morgan, Goldman Sachs, Bank of America, Citi, Wells Fargo, Standard Chartered, Capital One, CME Ventures Nasdaq and Visa. Companies Ripple, Token, Veem and Wyne are to facilitate cross-border payment. Axoni takes aim at capital markets and has completed equity swaps between major banks A more hush-hush UK enterprise, Nivaura, only recently announced that they had successfully become the first outfit to issue “the world’s first fully automated legally compliant cryptocurrency-denominated bond issuance that is also cleared, settled and registered on a public Blockchain [Ethereum].”
Better Safe Than Sorry
Considering the bad reputation bitcoin and the cryptocurrency space suffer due to the digital currencies being linked with nefarious activities, it was only in DCG’s best interest to invest in companies such as Chainalysis and Elliptic who perform wallet tracking and Blockchain data analytics for law enforcement and financial institutions.
Digital Currency Group Investments With Wall Street & Silicon Valley
|Company||Region||Type||Big Name Investors|
|Abra||USA||Exchange, Wallet||American Express|
|Axoni||USA||Blockchain||JP Morgan, Goldman Sachs, Citi, Wells Fargo, Nex, Andreessen Horowitz, Y Combinator, Data Collective, Thomson Reuters, Fintech Collective|
|Bitflyer||Asia||Exchange, Wallet||SBI Holdings, Sumitomo Mitsui, Mizuho Financial Group, Mitsubishi UFJ|
|Ripio||Latin America||Lending||Tim Draper, Pantera Capital, Medici Ventures, Funders Club, Fenbushi Capital, Boost VC, Huiyin Blockchain Ventures|
|Blockchain||Europe||Exchange, Wallet||Google (Alphabet), Roger Ver, Lightspeed Venture Partners, Mosaic Venture Partners, Prudence Holdings, Virgin and Sir Richard Branson, GV, Nokota Management|
|Chain||USA||Blockchain||Capital One, Citigroup, Fiserv, Nasdaq, Orange, and Visa|
|Circle||USA||Exchange, Wallet||Goldman Sachs, Pantera Capital|
|Coinbase||USA||Exchange, Wallet||Mitsubishi UFJ, Bank of Tokyo, NYSE, Andreessen Horowitz|
|Kraken||USA||Exchange, Wallet||SBI Holdings, Blockchain Capital|
|Ripple||USA||Blockchain||Google (Alphabet), Bank of America, SBI Holdings, CME Ventures, Standard Chartered, Pantera Capital,Andreessen Horowitz|
|Veem||USA||Blockchain||Google, SBI Holdings|
Better than Bitcoin?
Grayscale, a wholly owned subsidiary of DCG that invests purely in actual cryptocurrencies had $2Bn in Assets under Management (AuM) across its three investment funds, Bitcoin Investment Trust, Ethereum Classic Investment Trust, and ZCash Investment Trust on December 5. It took 1 short week for that to break past $3Bn in AuM on December 12 – a sizeable increase from its $164Mn at the start of the year. The Bitcoin Investment Trust (Symbol: GBTC) which is traded over the counter, actually outperformed Bitcoin itself this year.
Good Week for Crypto
DCG has invested in several companies that trade on cryptocurrency exchanges – identity platform Civic (CVC), cross-border payment platform Ripple (XRP), whose flagship product, xCurrent, has been adopted by the Japanese Banking Consortium (albeit not using XRP as a settlement currency as of yet) private cryptocurrency ZCash who has caught the hearts of JP Morgan as a security layer on top of its Blockchain technology Quorom, and Ripio, a P2P lending platform that raised over $37Mn in its Initial Coin Offering and caught the attention of infamous investor Tim Draper.
DCG is by and far the largest investor in the industry, followed by Blockchain Capital and Pantera Capital – of which they share many similar investments. The success of bitcoin this year, and cryptocurrencies, have made the investments in exchanges and wallets pay off handsomely.
However, aside from Ripple who has found a small audience in Japan to use its software, most of the Blockchain companies that DCG has invested in remain to find solid clientele.
This can be attributed to the fact that Blockchain is a very nascent technology – one that has fueled a lot of motion, but little adoption as of yet (Diar, October 30). However, should companies begin deployment and adoption of their Blockchain products, DCG, and Mr Silbert himself, could potentially be most influential in the Blockchain and cryptocurrency space.
The first outright purchase DCG completed was non other than the popular news website Coindesk in 2016. It's difficult to find articles that don't have the regular disclaimer that DCG has some investor stake in a company that the publication writes about – effectively giving DCG an overreaching influence over most of the cryptocurrency industry.
Bitfinex, Coinbase Double Bitcoin Trading Volume, Kraken in Decline
Cryptocurrency exchange platforms Bitfinex and popular Coinbase continue to increase their market share of bitcoin trading volume in the latest quarter of 2017 as people continue to pour in from apparent fear-of-missing-out.
In July 2017, Bitfinex traded 18% of the total bitcoin trading volume, and in just less than 6 months, till 18 December, has literally doubled that to 36%. However, it will be hard to estimate if Bitfinex can continue their dominance as they've exited the US market sending out reminders that unverified accounts from US residents will be banned.
For the same period, Coinbase went from 10% to 20%. And while both impressive, Bitfinex has been on a very steady increase in stealing market share, whilst Coinbase seems to have been the winner of the rush towards the end of November and first week of December where Bitcoin reached new highs and experienced a surge in price, due to demand that even the exchanges struggled to keep up with (Diar, 11 December).
Cracks Appear In Kraken?
For the same period were Bitfinex and Coinbase doubled their bitcoin trading volume, Kraken experienced a steep decline losing 66% of its market share from 15% in June down to just 5% as of writing.
Kraken does still reign leader however in BTC/EUR transactions averaging 58% of the total traded volume across all exchanges in 2017, up from 46% in 2016. However, that too in the last quarter of this year has seen a very steep decline losing its share to Bitstamp and Coinbase.
Your Loss, My Gain
Coinbase went from 12% for BTC/EUR in October 2017 to a whopping 28% of total traded volume in December 2017, more than doubling its share. Kraken lost what Coinbase won over the same period dropping from 50% to 33% as of writing.
Bitstamp also has been winning market share for the Euro as it went from 5% of volume at the start of 2017, to over 22% in December 2017 as of writing.
Bitcoin Cash Finds Target Audience With BitPay, Blockchain Wallet
BitPay, the largest bitcoin payment processor, announced on Friday that it will begin to support payments on the other blockchains starting with Bitcoin Cash this year. The news came out one day after Blockchain.info, a Bitcoin wallet with more than 20Mn users, has announced on Thursday that it now fully supports Bitcoin Cash as a result of a growing demand. BitPay started in 2011 with a mission to make payments faster, safer, and more efficient through Bitcoin.
According to BitPay, merchants are receiving $110Mm in bitcoin payments per month and BitPay has already processed more than $1Bn in 2017. In the press release, they say that adding more cryptocurrencies will open up new customer bases to the merchants. With Bitcoin’s sharp rise in popularity, the average fees have already reached around $20, which is making Bitcoin impractical to accept as a medium of exchange.
Merchants such as Steam have recently stopped accepting Bitcoin as a payment option (Diar, 11 December). However, BitPay also stated that they will continue build on the Bitcoin blockchain starting with the implementation of Segwit and carefully monitoring the current development efforts on the Lightning Network. BitPay will begin adding support for a Bitcoin Cash payment option this year, starting with BitPay Card loads.
Roger Ver, an early advocate of Bitcoin, is an outspoken believer in Bitcoin Cash, and an investor in both companies mentioned, BitPay and Blockchain.info Wallet. Mr Ver had been advocating for larger blocks and lower fees as the popularity of Bitcoin grew, and has been a driver of the cryptocurrency within the community since 1 August 2017 when Bitcoin forked as what remains a controversial answer to transaction times and fees.
Bitcoin Cash Increase 62% vs. Previous Week On Adoption News
CME Bitcoin Futures Launch, Clearing Firms Sit on Sidelines
In the most anticipated financial product of 2017, the CME Bitcoin Future launched this week as the biggest institutional backing of the cryptocurrency yet, one week after cross-town rivals CBOE launched their Bitcoin futures (Diar, 11 December).
However, the wall of institutional money that the Bitcoin community seemed to be awaiting has yet to arrive as clearing firms, mainly, big investment banks such as JP Morgan, Royal Bank of Canada, Societe Generale, have not made the futures product available to clients citing volatility which puts the firms at high risk if clients cannot cover their losses.
And even if that hurdle can be overcome and clearing firms begin to allow some, or all their clients to trade Bitcoin futures, the margin requirements could be enough to put off retail and institutional investors. Interactive brokers requires a 50% margin for long position and an eye-balling 240% for short selling. Interactive brokers cleared over half the CBOE contracts on the first day, and volumes have been falling ever since. On December 11, CBOE cleared 4100 contracts, and is now averaging 1640 contracts for the week – a 60% slide in demand.
Meanwhile, Bitcoin futures are trading above the spot market making arbitrage profits more feasible during the early days of this new financial product, however, even that opportunity is tightening from 13% at launch, to 2% on the CME.
Even though the market pricing gap can narrow further and becoming more congruent, the number of contracts that investors can make their speculative bets on begin to shrink as CME margin requirements increased from 35% to 47% of the value, meaning investors would have to fork a great deal of capital compared to other futures contracts.
Bitcoin Futures Trading Above Spot Price on 18-Dec, Albeit Tightening
IOTA Takes Aim at Solving Blockchain Scaling Conundrum
Cryptocurrencies that are based on blockchain are struggling to scale without an increase of fees and slowing down confirmation times. The transactions on Ethereum were slowed down by Cryptokitties, a website that lets user collect and breed digital cats. Bitcoin notoriously struggles to settle on a solution with consensus that would scale the network and make microtransactions feasible. To a certain extent, these issues can be solved by indefinitely increasing the block size or using a second layer infrastructure but no such solutions have been properly tested and proven to work on a large scale as of yet.
An integral part of any blockchain implementation are the miners that maintain the stability and security of the network for which they get compensated in terms of transaction fees and a "subsidy" of newly created coins. In the long term, when all (or most) of the coins are in circulation, the only possible way to incentivize the miners will be to pay them transaction fees. Therefore, blockchain technology might never be feasible for the really small microtransactions. Ethereum is working on implementing Proof of Stake (PoS) algorithm, which would require much less computational power to find the correct block. In the long run, it would also likely decrease the transaction fees as there wouldn’t be large investments in equipment and electricity such is the case with Proof of Work (PoW).
Directed Acyclic Graph (DAG) or the so-called “Tangle”, which is used by IOTA and Byteball, is an alternative solution to blockchain technology that is promising to solve scalability and fees without the need of any miners in the network. Tangle does not batch the transactions in blocks that are consequently mined but rather, it builds a graph of transactions that reference older transactions. When a transaction is broadcasted to the network, it validates two other random transactions. The consensus is created by the users rather than the miners, which results in all transactions having no fees. Theoretically, when more people use Tangle, the faster and stronger the network becomes and there is no limit for the amount of transactions that are processed per second.
The Tangle implementations are still in early stages of development. Because the state of Tangle network is modified by every transaction as opposed with every block, the synchronization becomes more challenging and latency of each user is important.
Moreover, without enough users in the Tangle network, trusted parties must serve as the so-called Coordinator nodes that are required for enhancing the security. Since these nodes are not incentivized by fees or subsidies, the network with Coordinator nodes can’t yet be truly permissionless and decentralized.
IOTA has seen a growth in awareness and its value grew by more than 300% in the past three weeks. At the moment, IOTA is dealing with a spam attack where the network is being spammed by transactions that are purposely invalid and thus can’t be confirmed. Some legitimate transactions can take days before they are confirmed in this state of the network. Sergey Ivancheglo, a co-founder of IOTA, claimed that the spam attack is allowed deliberately because it can be used to analyze behavior of Tangle in high-load regime. Moreover, Mr. Ivancheglo said that it is easy to neutralize such attacks by requiring to set cap for inflow of new transactions.
IOTA was introduced in 2016 with a goal to secure communications and payments between the Internet of Things (IoT) devices. IOTA foundation, a non-profit overseeing the development of the platform, collaborates with Volkswagen and Innogy to develop a technology for smart cars and their automatized compatibility with charging stations and toll booths. Microsoft, Fujitsu, Samsung are currently participants of IOTA’s data marketplace amongst others. However, there are some questions regarding the development team of IOTA and its integrity.
In July, Massachusetts Institute of Technology (MIT) researchers discovered a serious vulnerability that allowed others to spend users’ funds. MIT contacted IOTA privately to inform them about it but IOTA refused to acknowledge that such vulnerability was an issue. The MIT team publicized the bug in September when it was already fixed but Mr. Ivancheglo claimed the vulnerability was intentional to prevent copycats to use the same code. MIT also pointed out that the code is ternary instead of binary, which makes it less efficient and harder to read and understand.
Tangle is a promising alternative to solve scalability issues that blockchain has been battling with. However, all of the implementations are still in early development and haven’t been properly tested with as much traffic as Bitcoin and Ethereum have to withstand.
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