5 Unanswered Questions about Coinbase’s launch of Bitcoin Cash

tl;dr: Coinbase’s surprise launch of Bitcoin Cash deserves closer scrutiny and clearer answers than what they’ve provided so far, especially in regard to their announced investigation into insider trading.

On December 19, 2017, Coinbase (and its exchange, GDAX) suddenly announced it would begin trading of a Bitcoin hardfork called “Bitcoin Cash” or “BCash”, traded under the symbol (BCH). The decision came as a surprise to nearly every Coinbase customer, since to that point Coinbase had assured its customers it had no plans to allow BCH trading on its platform.

The surprise launch, in short, was a disaster. Coinbase gave its customers just one hour between its announcement and the start of trading, and this created market panic. Coinbase had planned to allow three trading pairs: BCH/BTC, BCH/USD, and BCH/EUR — but by the time it was all over, GDAX had to cancel two trading pairs entirely, and as of writing GDAX only allows BCH/USD trading. Coinbase was inundated with accusations of insider trading, since BCH’s value experienced a strong run-up before Coinbase’s announcement that appeared untethered to any real changes in BCH’s fundamentals. And any Coinbase customer who had planned their taxes carefully suddenly found themselves in many cases with an unexpected capital gain.

If you know what a “hardfork’” is, go onto the next paragraph. If you don’t, here’s fork basics: a “hardfork” happens when people who don’t like Bitcoin’s direction decide to clone it into a different version over which they’ll have more control. People can switch over to the different version, or they can stick with the original Bitcoin. In many cases, they get both — 1 Bitcoin-Fork for every 1 Bitcoin they held when the fork first occurs. This particular fork was called “Bitcoin Cash” or “BCash,” and joined one of a number of Bitcoin hardforks that exist (Bitcoin Gold, Bitcoin Rhodium, etc.). BCash made its copy of Bitcoin as held on August 1, 2017. Coinbase told its customers that they’d receive 1 BCash for every 1 Bitcoin they held at that date — and that it wouldn’t issue these BCH to customers until Jan 1, 2018 at the earliest.

Coinbase (and its exchange, GDAX) has not provided a satisfactory explanation for its botched launch of “Bitcoin Cash” or “BCash” (traded as BCH) on 12/19. Its “Bitcoin Cash Retrospective” essay published on Tuesday, while an improvement on the lack of clear communication that preceded and followed the BCH launch, still left at least five important questions unanswered.

Here are the 5+ questions I hope anyone interviewing Coinbase/GDAX representatives gets answers to, on the record. If you keep reading, I’ll explain what each one means in more detail — and how Coinbase’s failure to provide answers for them threatens not only trust between Coinbase and their customers but also, because Coinbase is such a central player, threatens trust in the cryptocurrency space in general:

1. What were the results of the internal investigation into insider trading?
2. If Coinbase decided on 11/13 to begin work on allowing BCH trading, then why didn’t it update the roadmap it provided to customers?
3. Why allow just ONE HOUR between announcing BCH opening and beginning the start of BCH trading?
4. When will BCH/BTC and BCH/EUR trading pairs be released?
5. Why did GDAX change its trading rules on 12/21 — and why does the Retrospective Timeline it provided end just before it changed them?
6. (bonus!) What mistakes did GDAX make in the BCH launch, if any, and what changes will it implement moving forward?

1. What were the results of the internal investigation into insider trading?

After this BCH launch fiasco, Coinbase announced an internal investigation into insider trading from its employees, but the Retrospective makes no mention of this investigation or its findings. What were the results of the internal investigation?

Here’s some data that helps explain why some people believe there was insider trading at Coinbase. On November 13, the date Coinbase allegedly decided (but never told its customers) that it intended to support BCH, BCH’s volume and price against BTC skyrocketed — it soon calmed, but then volume and price skyrocketed again just before and during its launch on Coinbase/GDAX.

Check out that chart and consider this: Coinbase says it didn’t tell its employees about its plan to launch BCash until November 13, the day *just after* the volume and price for BCash spiked. I hope Coinbase chooses to double-check its internal communications and make sure it has this date right — because if something went out even a day earlier, these numbers could create an appearance of serious impropriety.

Given this data and Coinbase’s internal investigation, it’s only reasonable for customers to ask where it led. Does Coinbase believe those spikes in volume were a coincidence, or does it believe some insider trading occurred?

2. If Coinbase decided on 11/13 to begin work on allowing BCH trading, then why didn’t it update the roadmap it provided to customers?

GDAX’s Retrospective states that it decided to support BCH trading on 11/13/17:

“On November 13th, 2017, employees were notified of the decision to support BCH trading and were explicitly prohibited from buying and selling BCH. All employees were also barred from sharing this information with anyone outside of Coinbase.”

Why, then, didn’t it update the roadmap it provided its customers, which provided a timeline and expectations of which currencies would be supported, and when?

As of 12/13, a full month after Coinbase employees allegedly began work on supporting BCH trading, any customers seeking information about which currencies GDAX and Coinbase would support were greeted with this chart:

This chart told customers that neither Coinbase or GDAX had any plans to support BCH trading — only that they “projected” to later support BCH withdrawal.

As you can see, this chart — snapshotted on 12/13/17 — told customers that they could only expect, at some later date, to withdraw BCH. It gave no indication that Coinbase or GDAX was building functionality to buy/sell/deposit it. But if Coinbase and GDAX had been working on that for a month, why not change the Roadmap so BCH buy/sell/deposit was listed as “Projected”? Only after announcing the launch of BCH on 12/19/17 did Coinbase update this chart, so it now read to include BCH:

How did Coinbase take BCH from not even projected (“X”) to included alongside the other supported currencies, without ever notifying customers that it planned to change this roadmap? Others have written about the run-up in BCH’s price from ~Nov. 6 — Coinbase’s launch on 12/19, and accusations of insider trading, and I’ll show that later. It is odd that Coinbase knew for a whole month that it projected to support BCH, and never thought it proper to notify its customers that its intentions regarding BCH had changed.

3. Why allow just ONE HOUR between announcing BCH opening and beginning the start of trading?

The Retrospective states that it hoped to “create a fair and orderly market,” including establishing liquidity and matching buyers and sellers. Especially since Coinbase never updated its Roadmap to include BCH, why did they allow just one hour between announcing BCH buy/sell/deposit support, and then allowing trading on the market?

If the goal was proper price discovery, why not announce BCH support in advance, allowing a broader swath of customers to post buy and sell orders? Wouldn’t that better establish liquidity and price discovery then the mad-dash that happened after BCH trading was suddenly announced on Twitter? A major reason customers used Coinbase’s roadmap was to establish fair expectations of what would be offered for trading. So even if Coinbase forgot to update its roadmap until 12/19/17, what possible benefit did its customers receive from Coinbase’s near-immediate initiation of BCH trading?

4. When will BCH/BTC and BCH/EUR trading pairs be released?

Although Coinbase/GDAX allowed one hour to establish BCH/USD liquidity to match buyers and sellers, the BCH/BTC and BCH/EUR trading showed large sell walls and smaller buy walls, indicating that the price in both markets was liable to decline. Instead of opening those markets and allowing price discovery, GDAX cancelled those trading pairs altogether — and the Retrospective still gives no clear answer as to when it will reopen them. As I wrote at the time, the decision to ban BCH/BTC trading was very odd:

Here’s how the Retrospective explains it handled BCH/BTC and BCH/EUR trading — before deciding to disable BCH/BTC and BCH/EUR trading entirely until January 2018:

Even after this timeline, the Retrospective gives no update as to when European customers can expect BCH/EUR trading or when customers can expect to trade BCH/BTC. Is the timeline given on GDAX’s status — January 2018 — still accurate? If the problem in December was insufficient liquidity, what changes has GDAX made to support sufficient liquidity when these markets re-open?

5. Why did GDAX change its trading rules on 12/21 — and why does the Retrospective Timeline it provided end just before it changed them?

In the released Retrospective, GDAX provides a timeline of the events occurring before, during and after the BCH launch. Here are the events it lists on the last day of the timeline, 12/21/17:

…But why did GDAX end its timeline then, if 6 hours later GDAX made a significant change to its rules that appear to be related to this BCH launch?

Here’s the relevant section of GDAX’s rules just before they changed it on 12/21:

Access to GDAX
3.3 All Traders have equal access to the GDAX API and Web Interface. Coinbase does not provide prioritized access to any trader.

One minute later on 12/21/17 at 9:20 PST, GDAX added a new paragraph to this rule.

The rule now read:

Access to GDAX
3.3 All Traders have equal access to the GDAX API and Web Interface. Coinbase does not provide prioritized access to any trader.

GDAX Market Operations has the authority to take any action deemed appropriate to preserve market integrity. Such actions include, but are not limited to, the halting of trading, modifying risk-mitigating parameters, restricting Trader access to GDAX or any other actions deemed to be in the best interest of the Exchange.

It’s hard to read that rule change and not think it was related to the BCH launch and the halting of trading. Why, then, did GDAX not include this rule change or any explanation for it in its Retrospective, and why does it end its Retrospective timeline hours before it made this change to the rules?

6 (bonus!). What mistakes did GDAX make in the BCH launch, if any, and what changes will it implement moving forward?

The Retrospective promises “thoughts on improving future launches” but none are present in the essay. What lessons has GDAX taken from this launch, and what changes will it make moving forward?

…

I hope this was helpful. Coinbase has been a major on-ramp for people first getting started with Bitcoin and other cryptocurrency, and when you’re a company that handles peoples’ money, trust is everything. Coinbase did a lot of damage, in my estimation, with botching this launch. It should work to win that trust back — and that starts with giving a better explanation as to what went wrong.