Quantum computers may soon be able to decrypt all encrypted information. For cryptographers, cryptocurrencies and blockchain, time is of the essence. Stepping into bitcoin as an investor can look scary, but there are plenty of different ways to approach this exciting investment. Coinbase has announced that it will suspend trading of XRP after the US Securities and Exchange Commission (SEC) recently filed a lawsuit against Ripple Labs claiming the popular cryptocurrency is really a security. The reason for this is due to how Ripple raised at least $1.38bn by selling XRP without registering or seeking an exemption […]
A “stablecoin” is a type of cryptocurrency whose value is tied to an outside asset, such as the U.S. dollar or gold, to stabilize the price.
Cryptocurrencies such as Bitcoin and Ethereum offer a number of benefits, and one of the most fundamental is not requiring trust in an intermediary institution to send payments, which opens up their use to anyone around the globe. But one key drawback is that cryptocurrencies’ prices are unpredictable and have a tendency to fluctuate, sometimes wildly.
This makes them hard for everyday people to use. Generally, people expect to be able to know how much their money will be worth a week from now, both for their security and their livelihood.
Cryptocurrency’s unpredictability comes in contrast to the generally stable prices of fiat money, such as U.S. dollars, or other assets, such as gold. Values of currencies like the dollar do change gradually over time, but the day-to-day changes are often more drastic for cryptocurrencies, where the value jumps up and down regularly.
The following graph shows the price of bitcoin vs. the U.S. dollar (USD) compared to another fiat currency, the Canadian dollar (CAD), to see how much each currency fluctuates in relation.
Stablecoins were worth more than $10 billion as of May 2020. In countries like Brazil, many people are turning to stablecoins as an alternative to their national currencies in uncertain economic conditions. Meanwhile, in Hong Kong, some people are using stablecoins to avoid new internet censorship in a tumultuous political climate.
Stablecoins try to tackle price fluctuations by tying the value of cryptocurrencies to other more stable assets – usually fiat. Fiat is the government-issued currency we’re all used to using on a day-to-day basis, such dollars and euros, and it tends to stay stable over time.
Usually the entity behind the stablecoin will set up a “reserve” where it securely stores the asset backing the stablecoin – for example, $1 million in an old-fashioned bank (the kind with branches and tellers and ATMs in the lobby) to back up one million units of the stablecoin.
This is how a digital stablecoin and a real-world asset are tied together. The money in the reserve serves as “collateral” for the stablecoin. A user can theoretically redeem one unit of a stablecoin for one unit of the asset that backs it.
There is a more complex type of stablecoin that is collateralized by other cryptocurrencies rather than fiat yet still is engineered to track a mainstream asset like the dollar.
Maker, perhaps the most famous stablecoin issuer that uses this mechanism, accomplishes this with the help of Collateralized Debt Positions (CDPs), which lock up a user’s cryptocurrency collateral. Then, once the smart contract knows the collateral is secured, a user can use it to borrow freshly minted dai, the stablecoin.
A third variety of stablecoin, known as an algorithmic stablecoin, isn’t collateralized at all; instead, coins are either burned or created to keep the coin’s value in line with the target price. Say the coin drops from the target price of $1 to $0.75. The algorithm will automatically destroy a swathe of the coins to introduce more scarcity, pushing up the price of the stablecoin.
This type of stablecoin is much less popular so far. One of the most popular stablecoins following this model, basis, shut down in 2018 due to regulatory concerns.
Using this framework, stablecoins come in a range of flavors, and the collateralized stablecoins use a variety of types of assets as backing:
To give you a taste of the experimentation happening in stablecoin land, let’s run through some of the most popular stablecoins.
Diem (formerly known as Libra) is a stablecoin in the works, originally conceived by the powerful, worldwide social media platform Facebook. While libra hasn’t launched, it’s had more psychological impact than any other stablecoin.
Governments, notably China’s, are now exploring their own crypto-inspired digital currencies, in part because they’re worried Diem would be a competitive threat since Facebook is a multinational company with billions of users from across the globe.
Initially, the Diem Association, the consortium set up by Facebook, said Diem would be backed by a “basket” of currencies, including the U.S. dollar and the euro. But due to global regulatory concerns, the association has since backed off from its ambitious original vision. Instead, it is now planning to focus on developing multiple stablecoins, each backed by a separate national currency.
Its first stablecoin, the Diem dollar, is expected to launch as early as January 2021.
Tether (USDT) is one of the oldest stablecoins, launched in 2014, and is the most popular to this day. It’s currently one of the most valuable cryptocurrencies overall by market capitalization.
The primary use case for USDT is moving money between exchanges quickly to take advantage of arbitrage opportunities when the price of cryptocurrencies differs on two exchanges; traders can make money on this discrepancy. But it has found other applications: Chinese importers stationed in Russia have also used USDT to send millions of dollars worth of value across the border, bypassing strict capital controls in China.
Tether Ltd., the company that issues USDT, is embroiled in a legal battle with the New York Attorney General concerning providing financial documents that would illuminate its financial relationship with the cryptocurrency exchange Bitfinex.
Launched in 2018, USD Coin is a stablecoin managed jointly by the cryptocurrency firms Circle and Coinbase through the Centre consortium.
Like tether, USD Coin is pegged to the U.S. dollar. It is the second-largest stablecoin by market capitalization.
Running on the MakerDAO protocol, dai is a stablecoin on the Ethereum blockchain. Created in 2015, dai is pegged to the U.S. dollar and backed by ether, the token behind Ethereum.
Unlike other stablecoins, MakerDAO intends for dai to be decentralized, meaning there’s no central authority trusted with control of the system. Rather, Ethereum smart contracts – which encode rules that can’t be changed – have this job instead.
There are still problems with this innovative model, however; for example, if the smart contracts underpinning MakerDAO don’t work exactly as anticipated. Indeed, they were gamed earlier this year, leading to losses of $8 million.
There are a few drawbacks to stablecoins to keep in mind. Because of the way stablecoins are typically set up, they have different pain points than other cryptocurrencies.
Crypto publication The Capital, for instance, argues that while stablecoins are called “stable,” they are only as stable as the asset that the stablecoin is tied to. Traditionally, the price of the dollar is very stable, but if that were to change, any fluctuations in the value of the dollar would be reflected in the stablecoin.
If the reserves are stored with a bank or some other third party, another vulnerability is counterparty risk. This boils down to the question: Does the entity really have the collateral it claims to have? This has been a question frequently posed to Tether, for instance, without clear answers. Tether has yet to provide a full open audit of its reserves.
Many stablecoin issuers don’t provide transparency about where their reserves are held, which can help a user determine how risky the stablecoin is to invest in. Knowing where their money is held, users can see if a stablecoin is operating without a license in the region where the reserves are held. If the stablecoin operators don’t have a license, a regulator could potentially freeze the stablecoin’s underlying funds, for instance.
Further, it’s possible the reserves backing a stablecoin could turn out to be insufficient to redeem every unit, potentially shaking confidence in the coin.
Cryptocurrencies were created to replace intermediary companies that are typically trusted with a user’s money. By their nature, intermediaries have control over that money; for example, they are typically able to stop a transaction from occurring. Some stablecoins add the ability to stop transactions back into the mix.
USD Coin openly has a back door to stop payments if coins are used in an illicit manner. Circle, one of the firms behind USD Coin, confirmed in July 2020 that it froze $100,000 of USD Coin at the behest of law enforcement.
Is quantum computing a threat to cryptocurrencies?
Even though the end user should not worry about whether or not a technology is quantum resistant, blockchain experts and the industry as a whole should be prepared… before it’s too late!
Takamaka, a third generation blockchain entirely developed in Java, is already completely quantum resistant: the algorithm used to sign blocks and transactions between wallets and nodes is, in fact, qTesla.
Recently, Google announced a breakthrough in quantum computing: the company was able to achieve “quantum supremacy”.
In traditional computing, a “bit” can exist in one of two states: “0” or “1”. However, quantum computers use “qubits”: they can also be either “0” or “1” but, thanks to the superposition principle, these two states can be linearly combined. This significantly increases the processing power of quantum computers.
In blockchain cryptography, it is quite difficult (if not impossible) to calculate the value of a private key starting from a public key. In order to do this, machines should be able to solve a problem called “discrete logarithm of the elliptic curve”, which would take a very long time (millions of years) even for a modern supercomputer.
However, quantum computers are so fast they can perform these calculations in just under 10 minutes!
The issue of quantum computing is nothing new for cryptography: it has been talked about for quite some time and the “race” to develop a quantum resistant technology is still on. It is assumed that quantum resistant technologies will be available within the next 5 years. However, in the blockchain field there are already some concrete examples of quantum resistant products.
In order to make something “quantum-safe”, a completely different approach is needed: the Takamaka project is already prepared to face these challenges.
Giovanni Antino, CTO of Takamaka, said:
“Takamaka is an emblematic example, because the way the signature algorithm is specified is well defined and clear. Notably, the block signature algorithm is already qTesla. ED25519 (High-speed high-security signatures), a public key system, is used to sign transactions carefully designed for different levels of verification and implementation: it allows to reach a high network speed without undermining security.”
Although this signature is not exactly “quantum resistant”, to date there is no computer powerful enough to compromise it. However, if such a computer should appear, it will immediately be replaced with a q-resistant technology.
Takamaka’s CTO explained:
“The cryptographic system change is already supported and implemented in the Takamaka protocol. Transactions already sent will be covered by the ‘qTesla envelope’ and the sha3-512 hash. The reason why Takamaka does not currently apply qTesla to transactions is mainly due to the size of the signature this would generate, about 14 kilobytes. It would significantly affect the size of the transaction, which is just 600 bytes.”
The stakes are high: quantum computers may soon be able to decrypt all encrypted information, including bank accounts and government databases. For cryptographers, cryptocurrencies and blockchain, time is of the essence.
Author: By Crypto Advertising
– 29 Dec 2020
Bitcoin: Buy or Sell Now & How?
Bitcoin is an attention grabber. It has gained 271%, more or less, so far for 2020. That’s a whopper of a number. And no wonder that it’s getting the attention of everyone from newly minted super-speculative traders to old market veteran guys like me.
Source: Bitcoin U.S. dollar Spot — Source: Bloomberg
And that price gain includes the minor plunge in February-March of a mere 46.11% which, in perspective, may just be argued as a bad series of trading days for the cyber coin supporters.
Bitcoin is the leader among cyber coins that come into existence via solved algorithms on computers, as opposed to digital coins that represent actual assets.
I was involved with digital coins back in the 1990s when one of my old banks, Mark Twain Bank (now part of U.S. Bank (NYSE:USB)) contracted with David Chaum to utilize his encryption methodology. We utilized our multi-currency systems and products to offer ecash that was denominated in any currency of the customer’s choice that was effectively held in trust at the bank.
Ecash could then be used for truly anonymous transactions over the beginnings of the internet and the world wide web. And each coin was unique, like is the case for a U.S. dollar bill or a Swiss franc – they used an encryption system that is similar to blind key mechanisms that are now commonplace for things such as email accounts.
Bitcoin and other cyber coins are units that, after creation based on solved algorithms, are tracked using blockchain accounting that is effectively a distributed and shared ledger.
To buy bitcoin, investors need a digital wallet that is offered by a variety of online companies, including Coinbase. And then various exchanges offer the ability to buy and sell these cryptocurrencies, including Coinbase.
Bitcoin, like for other cyber coins or cryptocurrencies, is not yet an approved, regulated security by the U.S. Securities & Exchange Commission (SEC), so broadly there are no pure investment securities on U.S. stock exchanges that represent bitcoins. But there are some major exceptions
First is via futures contracts. The U.S. Commodities Futures Trading Commission (CFTC) has allowed the CME Group (NASDAQ:CME) to offer and trade bitcoin futures contracts. The contracts are based on the CME CF Bitcoin Reference Rate (BRR) that tracks the global spot market for bitcoin. Each contract is for five bitcoins, so that each represents a sizable sum.
Source: CME Bitcoin Future & Open Interest (March 2021, BTCH1) – Source: Bloomberg
The next contract is for March 2021 under the core symbol of BTC with H for March and 1 for 2021 for the effective trading symbol of BTCH1. And as you can see in the graph of that contract above, the open interest (active contracts) has been climbing with the price of the future contract, particularly through December of this year.
Then I come to the grayer part of the market exchange-traded funds, or ETFs. There is the Grayscale Bitcoin Trust (OTCMKTS:GBTC) that’s organized by Grayscale Investments. This ETF is set up for accredited investors (meaning those with investable assets in excess of $1 million or other criteria) but there is limited policing on this restriction. The ETF supposedly holds assets both real and synthetic that track the market rate for bitcoin. But be warned as the premium over the implied asset value can be widely higher than the current level of 17%.
Then there is the Bitwise 10 Crypto Index Fund (OTCMKTS:BITW) organized by Bitwise Investments. This ETF synthetically represents cyber coins, including bitcoin, that Bitwise deems to be in the top 10 of coins by market capitalization, trading volume and other proprietary characteristics that are made up inside its own Bitwise 10 Large Cap Crypto Index (BITX).
Source: Bitwise 10 Crypto Index (BITW) – Source: Bloomberg
This ETF has some major challenges, including premiums over the implied synthetic value of assets that currently is at 233.32%. And the other implied coins in the ETF have other challenges, including for XRP from Ripple Labs. XRP is now considered an unregistered security by the SEC and is charging Ripple and its executives with breaking U.S. securities laws.
Source: XRP (Ripple Labs) – Source: Bloomberg
XRP will soon be a coin with fewer to no exchanges or wallets, as Coinbase will be dropping it Jan. 19 on the SEC charges.
Then outside the U.S. is BTCetc Bitcoin ETP. ETP stands for exchange-traded product, which is the German equivalent of the U.S. ETF. BTCetc is represented as a fully fungible ETP with bitcoin. That might be the good news, along with German regulation overseeing what’s going on under the hood and in trading. But for U.S. investors, it is a challenge outside of those that are well-heeled with a global trading account such as with Interactive Brokers (NASDAQ:IBKR).
Source: BTCetc Bitcoin ETP (BTCE, White) & Bitcoin (XBTUSD, Blue) – Source: Bloomberg
There are other alternatives to Bitcoin for ETFs in the U.S. that include ETFs that track companies and their stocks that are part of blockchain development and usage. These include First Trust Indxx Innovative Transaction & Process ETF (NASDAQ:LEGR) and Capital Link NextGen Protocol ETF (NYSEARCA:KOIN).
Both of these ETFs synthetically have allocations to technology and other companies that are either part of blockchain technology or utilize it in their operations.
Source: Indxx Innovative Transaction & Process ETF (LEGR) & Capital Link NextGen Protocol ETF (KOIN) Total Return – Source: Bloomberg
While not directly participating in bitcoin or other coins, both ETFs have impressive returns so far this year with LEGR returning 18% and KOIN returning 31%.
Bitcoin’s attraction comes from three primary attributes. First, it is a store of value that’s supposed to be untraceable. Second, it is supposed to be able to be transferred across legal jurisdictions, again with supposed untraceable conditions. Third, as a non-currency-based security it can be a hedge against local currency challenges.
As a store of value, bitcoin has its own valuation proposition. It is worth what the market will bid and offer it. There is no intrinsic value, nor any industrial or other use for it. So, it is like gold in a way, outside of gold’s industrial and jewelry demand. And like gold, it can be valued based on opportunity costs for cash interest which, for U.S. dollars, is very low to nil given interest rates. And for U.S. investors, the dollar has been under control at lower levels, as measured by the Bloomberg U.S. Dollar Index.
But also, as for for gold, it competes with U.S. stocks and bonds for investor cash. So, with the buoyant U.S. stock and bond markets this year, gold has run out of heavy investor demand. Yet for bitcoin, it has continued to gain — particularly very recently.
Source: Bitcoin (XBTUSD, Blue) & Gold Spot (GOLDS, White) Price – Source: Bloomberg
But it is far from untraceable as a store of value. Unlike gold that can be physically delivered and held, bitcoin is held in wallets. And wallet companies require identification and registration. And blockchain by its definition has a full history of ledger transactions embedded in each bitcoin, making for tracing a doable venture by regulators.
As for transferability, bitcoin can move from market to market or from nation to nation just like gold or other securities or assets including currency in cash. That’s a good thing – but again, the traceability of blockchain as well as registered wallets takes out the anonymous transfer attribute.
And for a currency alternative, bitcoin is another store of value. And as the U.S. dollar moves lower bitcoin can rise in value in U.S. dollar terms. But again, there are plenty of alternatives to currency, including for the U.S. dollar — gold, other commodities or even stocks, bonds or other securities.
One of the biggest reasons that I believe is behind bitcoin’s performance from October through to now is that it is attracting more investors and traders. That reads as inane of course.
Source: Bloomberg Bitcoin (BTC, White), S&P 500 (SPX, Blue) & S&P Information Technology (S5INFT, Red) Indexes – Source: Bloomberg
But like for the S&P 500 Index and its tech-heavy stock weighting — and more so for the S&P Information Technology Index and its go-go tech stocks — traders and investors are buying bitcoin because of expectations for further appreciation. Buy now as its going up makes for a reason — particularly for momentum investors or traders.
But U.S. stocks are being bought at high valuations that are based on expectations for higher sales and earnings gains in 2021. These may well have challenges to come to fruition and may or will change, but there are fundamental arguments behind valuations for member stocks of the S&P 500 and S&P Information Technology Indexes.
Unless there are fundamental arguments for a dramatic downturn in the U.S. dollar or a dramatic downturn in U.S. stock and bond markets, bitcoin doesn’t have an immediate compelling reason to buy and buy higher right now.
And if the U.S. stock and bond markets do take a big drop, such as what happened in February through March of this year, bitcoin will likely drop as well. Everyone wanted or needed actual cash, and that sent the U.S. dollar soaring for that same time period. Remember that 46.11% drop in bitcoin for that dark time this past February-March when the U.S. dollar soared by nearly double-digits as measured by the Bloomberg U.S. Dollar Index.
But for now, individual investors are onboard and increasingly institutional investors including fund managers are indeed on board with bitcoin. Buyer beware as you count gains on any given day. Just keep an eye on it and have your digital wallet at the ready to sell if or when the market turns again.
About Neil George:
On the date of publication, Neil George did not hold (either directly or indirectly) any positions in the securities mentioned in this article.
As the editor of Profitable Investing, Neil George helps long-term investors achieve their growth & income goals with less risk. With 30+ years of experience in the financial markets, Neil recommends undiscovered and underappreciated companies that offer subscribers double-digit yields now and triple-digit returns over time.
Neil George, Editor, Profitable Investing
Coinbase has stopped trading one of one of the world’s largest cryptocurrencies
Coinbase has announced that it will suspend trading of XRP after the US Securities and Exchange Commission (SEC) recently filed a lawsuit against Ripple Labs claiming the popular cryptocurrency is really a security.
The reason for this is due to how Ripple raised at least $1.38bn by selling XRP without registering or seeking an exemption for seven years.
In a new blog post, chief legal officer at Coinbase Paul Grewal laid out how the exchange’s delisting of XRP will work for its customers, saying:
“In light of the SEC’s lawsuit against Ripple Labs, Inc, we have made the decision to suspend the XRP trading pairs on our platform. Trading will move into limit only starting December 28, 2020 at 2:30 PM PST, and will be fully suspended on Tuesday, January 19, 2021 at 10 a.m. Pacific Standard Time.”
Although Coinbase has now made the decision to delist XRP on its exchange, Grewal said that the company will continue to monitor legal developments related to the cryptocurrency and that customers will receive updates with new information when it becomes available.
He also noted that the trading suspension will not affect Coinbase customers’ access to their XRP wallets which will remain available for deposit and withdraw functionality even after the trading suspension. Additionally, the company’s customers will also remain eligible for a previously announced Spark airdrop and it will continue to support XRP on Coinbase Custody and Coinbase Wallet.
Since its announcement last week, the SEC’s lawsuit has led XRP’s price to fall by more than 50 percent from $.45 cents per coin to around $.20 cents per coin.
While Coinbase wasn’t the first cryptocurrency exchange to delist XRP, the move does make sense ahead of its historic IPO as the company’s preliminary documents still need to be reviewed by the SEC. However, if Ripple is able to succeed in its defense, Coinbase will likely be able to relist XRP fairly easily.
Author: Published 18 hours ago on December 30, 2020
By GCFR NG