Crypto ₿its: Bitcoin Hard Fork, SEC Drops a Hammer, Laundering Billions & Dinosaurs

Adam Pokornicky
Jul 30, 2017 · 14 min read

July 30- Issue #6

Crypto its is a weekly curation of links, commentary, tweets and news I’ve seen across the crypto world and thought were interesting. You can follow me on twitter @callmethebear . Not getting Crypto Bits? Click here to subscribe!

News:

Ethereum holders be like…… h/t @cointelegraph

Ethereum is treading water, tokens are under fire and Bitcoin continues to battle internal forces that may or may not destroy it.

Apologies for the delay in this week’s issue of Crypto Bits. Between traveling to the east coast, meetings and the incredible amount of confusion and uncertainty going on in, it’s been a challenge to tie this weeks newsletter together in a way that I feel proud about offering value and thoughtfulness.

There’s a lot going on right now so lets get started.

The next few days are going to be absolutely huge for the future of Bitcoin.

While last week we celebrated the successful implementation of BIP91, which avoided a chain split and laid the foundation for the activation of a long debated protocol upgrade known as SegWitness, a week later we find ourselves a user activated hard fork being executed and launched by one of the most powerful mining operations in the Bitcoin community.

So how did we get here and what does this mean?

While the community has a agreed to adopt SegWitness, the two sides have drastically different visions of what that implementation should look like that not everyone is happy with. On August 1, the Bitcoin Core Development team plans on activating BIP148, a version of Seg WItness that ignores the presence of miners. Because of this, a select group of miners plans on pursuing a highly controversial user activated hard fork that will create another version of Bitcoin called Bitcoin Cash.

Bitcoin cash will not include seg witness and offers a road map and path for those in the community that do not support Seg Witness and are hoping for a drastic increase in block size from 1MB to 8MB.

It is of my personal opinion that the miners that do not like Seg Witness and are executing this contingency plan are doing so for 2 reasons:

  • Seg Witness eliminates a bug in the protocol that permits a sneaky backdoor advantage called AsicBoost that the miners have secretly been exploiting to mine blocks faster than the rest of the community and in turn generate more profits. This tactical advantage is akin to an athlete taking steroids that no one else can get their hands on. Its Bulllshyt and should be phased out.
  • Bigger block implementation allows miners that can continue to exploit AsicBoost to control even more of the hashrate and thus create more centralization of their services. This goes against everything that the decentralization of Bitcoin is about and lays the groundwork for the network to be less secure long term.

******WARNING****** If you own Bitcoin PAY ATTENTION:

As we approach August 1, if you own Bitcoin, you want to make sure the Bitcoin you own is in a wallet or exchange that will automatically give you equal amounts of the newly created coin called Bitcoin Cash.

If you own Bitcoin and hold it at Coinbase like many people do, you must understand that Coinbase will not support the alternative version of Bitcoin being created. In a note to their customers, Coinbase said the following:

In the event of two separate blockchains after August 1, 2017 we will only support one version. We have no plans to support the Bitcoin Cash fork. We have made this decision because it is hard to predict how long the alternative version of bitcoin will survive and if Bitcoin Cash will have future market value.

This means if there are two separate digital currencies — bitcoin (BTC) and bitcoin cash (BCC) — customers with Bitcoin stored on Coinbase will only have access to the current version of bitcoin we support (BTC). Customers will not have access to, or be able to withdraw, bitcoin cash (BCC).

Customers who wish to access both bitcoin (BTC) and bitcoin cash (BCC) need to withdraw bitcoin stored on Coinbase before 11.59 pm PT July 31, 2017. If you do not wish to access bitcoin cash (BCC) then no action is required.

If you own a significant amount of Bitcoin, you would be foolish to leave your money in Coinbase and not move it to an exchange or wallet that will automatically credit you with the newly created Bitcoin Cash Coin. Unfortunately for users in New York, your options are limited as the two major exchanges that are accounting for the new BCC, Kraken and Bitfinex, don’t have NY Bitlicenses and do not permit residents of NYC to access their platform to trade.

Each Bitcoin is entitled to receive 1 unit of the new Bitcoin Cash Coin. It is unclear what value this coin will have if any, although current market data suggests it trades at .125 BTC or $337. There is an element of game theory that suggests that massive manipulation by malicious actors could negatively effect the price and future of the real Bitcoin as we know it and having this “alternative” version of Bitcoin would be a natural and smart hedge for your exposure. To read more on game theory and how to think about it, please read: Is the Bitcoin Civil War Over? Here’s How I’m Thinking About Bitcoin Cash by my esteem colleague Michael Krieger.

Here’s a helpful resource to know how the different exchanges are handling everything.

Conclusion:

While some might suggest that the hard fork of Bitcoin and creation of Bitcoin Cash is a bad and unnecessary thing, I for one want it to succeed and for Roger Ver, Jihan Wu, Bitmain and the minority group of miners that do not share the consensus vision of Bitcoin to simply go away. If this is the vehicle and event that needs this to happen, I embrace it fully, wish them luck and bid them farewell. If you have any additional questions, feel free to email me.

BTC-e founder arrested for laundering $4bn, ties to Mt. Gox

In probably the craziest and most shocking development of the week, a U.S. grand jury indicted a Russian man, Alexander Vinnik on Tuesday as the operator of a digital currency exchange he allegedly used to launder more than $4 billion for people involved in crimes ranging from computer hacking to drug trafficking. Vinnick was arrested in a small beachside village in northern Greece and is linked to the failure of Mt. Gox, a Japan-based bitcoin exchange that collapsed in 2014 after being hacked. Vinnik “obtained” funds from the hack of Mt. Gox and laundered them through BTC-e and Tradehill.

This is personal for me. As someone who lost the majority of their early purchases of Bitcoin in the the Mt Gox collapse, I’ve been waiting years for any type of explanation as to how the hell it happened. While its unclear if any of those funds will ever be recovered (they likely won’t be), there is a bitter sweetness in knowing we are a little bit closer to unraveling the truth behind exactly what happened. You can read the report from WizSec, a Bitcoin security specialist firm that has been investigating the lost funds for the past 3 years.

SEC issues guidance on ICOs

The SEC dropped a hammer on the unregulated and wild west issuance of ICOs and tokens. In a thoughtful, yet fair report that you can read here, the SEC deemed the DAO, a decentralized hedge/venture fund and first of its kind token offering that subsequently launched and collapse due to hacking last year, was essentially set up as as a security and required compliance under federal security laws.

This is absolutely great news. I am a big big believer in tokens and the cryptoeconomy but the entire ICO space has become a race to raise capital by both innovative technologists and short sighted opportunists that threaten the sustainability and long term health of the ecosystem.

CFTC gives approval to LedgerX to trade options on Bitcoin

Now miners and digital currency investors can hedge volatile digital currency assets like bitcoin under the safety of regulation. LedgerX plans to start by offering one to six month options contracts on bitcoin-to-dollars due in late September to early October. Plans for similar contracts for Ethereum’s ether are in the works.

Personally I don’t love the idea of getting in bed with Wall Street and letting them corrupt price discovery with their financial wizardry and paper derivatives but this is a pretty big deal. This adds serious legitimacy to trading markets long term by allowing users and economic nodes the ability to both hedge and speculate.

Legendary investor Howard Marks denounces Bitcoin, says it’s not real

In his latest letter to investors, entitled “There They Go Again….Again”, Howard Marks takes aim at Bitcoin, saying its NOT REAL and that “Digital currencies are nothing but an unfounded fad”. To be fair, he takes a scathing swing across the entire investment landscape, seeing warped valuations and limited investment opportunities.

“People tell me these currencies are solid because (a) they’re secure against hacking and counterfeiting and (b) the software used to generate them strictly limits the amount that can be created. But they’re not REAL! Nobody has been able to make sense to me of these currencies”

As a former distressed and high yield investor, much of the investment framework I learned from my boss and mentor was based on the value investing principles of Warren Buffet, Seth Klarman and Howard Marks. Howard Marks is a legend but honestly, F*CK this guy.

If you read his words carefully, he clearly hasn’t spent any amount of time understanding what Bitcoin, Blockchains and cryptocurrencies are about. He’s had conversations with people that haven’t been able to explain or make sense of it to him. Give me a break. That is some of the laziest and most irresponsible analysis period and one shouldn’t pay him even an ounce of credibility until he actually does his own work.

Now admittedly he does say the following:

“Maybe I’m just a dinosaur, too technologically backward to appreciate the greatness of digital currency. But it is my firm view that the ability of these things to gain acceptance is just one more proof of the prevalence today of financial naïveté, willing risk-taking and wishful thinking.

Yes, Howard you are dinosaur.

Stuff worth reading

Bitcoin Cash: Why It’s Forking the Blockchain And What That Means — Coindesk

Bitcoin investors: things may get very ugly soon, if this chart overlay is right (this article is super stupid as it completely ignores Bitcoin price history and previous hype and blow off, but contrarian opinions are always helpful so decide for yourself) — — Marketwatch

Why New Decentralized Internet Can Be Formed With Ethereum — CoinTelegraph

The Feds Are Terrified Of Cryptocurrencies… But They’re Powerless To Stop ThemZero Hedge

Bankers Continue to Switch To Crypto As Wild West Days Are NumberedCoinTelegraph

Sequoia, Andreessen Back Cryptocurrency Hedge Fund — Fortune.com

Bitcoin Options Will Be Available This Fall through LedgerX Bloomberg

Major Wall Street analyst: Here’s what needs to happen for the bitcoin boom to keep going CNBC A Bank of America Merrill Lynch analyst said he expects bitcoin to go mainstream as soon as banks begin accepting it.

American Express Brings Credit Card Buying to Bitcoin App Abra Coindesk

Getting started resources:

Several people have asked me what they can read to get started figuring out the ins and outs of Bitcoin. I am going to create a running resource of links below as starting points. I have a lot of stuff so I will begin curating it with what I find to be relevant yet easy to understand. For now try these:

What is Bitcoin? A Step-By-Step Guide For Beginners
How To Buy Bitcoin Anywhere in The World (Ultimate Guide)
What is An Ethereum Token: The Ultimate Beginner’s Guide
Dapps And The Decentralized Future

A Gentle Introduction To Bitcoin
A Gentle Introduction To Blockchain Technology
A Gentle Introduction To Digital Tokens

Price Action

BITCOIN (BTC) was up $101 (3.77%) over the past week with total volume over $8.77B. Even with the uncertainty of the user activated hard fork, the rise in Bitcoin was mostly a function of traders wanting to own Bitcoin outright to get access to free distribution of the new Bitcoin Cash Coin(BCC). It is quite possible after Aug. 1 and the distribution of the Bitcoin Cash Coin (BCC) that the price of Bitcoin will drop by around $200-$400 to account for the Bitcoin Cash Coin which is currently embedded into the price. Nevertheless, get your popcorn ready as this should be another crazy week of price action and volatility in Bitcoin land.

ETHEREUM (ETH) dropped -$25.03 (-11.40%) to end the week reversing last weeks gains of 17%. There were two big drivers of ETH this week: the SEC warning about ICO regulation and an asset rotation from speculative and weaker ETH & tokens into Big Daddy Bitcoin which looks to take another step forward. Volume dropped by over 50% week over week as a slow and steady supply of Ether for sale weighed on price as traders and investors alike began dumping Ether for the stronger and steadier Bitcoin.

I continue to be a buyer of Ether at these levels and believe it offers great value both intrinsically and relative to Bitcoin but caveat emptor, it feels awful and its certainly possible I’m dead wrong.

LOL 😂

This is a chart that gold bugs have been all over for years. Ever since the Federal Reserve was created and began printing money, the purchasing power of the USD has depreciated over 95% against gold. The chart would look the same against Bitcoin the past 8 years which brings up a good question: Why is it that we use an incentive structure that pays us in a decaying currency??!?!? This is why tokens are such an interesting concept and asset. Equity, network value and incentives are all included in a fungible token. Th/t @AlexDeluce

Initial Coin Offerings (ICO’s)

Last week I began ranting about ICOs given the irresponsible behavior and downright scams I was seeing, noting:

“There is absolutely no transparency, standards or best practices being utilized and the large sums of money being raised are a fcking joke. I went to a recent meetup/roadshow in last night in LA for Unikrn to learn more about their ICO and experience first hand what the team and underlying token is about and I am seriously appalled at what I heard. It goes against EVERYTHING the token economy is about. The fact that Mark Cuban is endorsing this is dangerous in and of itself.”

Well a week later, it seems like many in the community have positively welcomed the long arm of the SEC giving a shot across the bow with its comments on the DAO token. While it is my hope that the SEC will have a light touch, it’s comforting to know they are watching and the community welcomes the opportunity for a set of standards and rules in which we can invest and bring new products to the market.

Links I’m reading on tokens

  • Here’s How Entrepreneurs Are Making Cryptocurrency Mainstream and Starting a Revolution — Inc
  • With ICO Coming Under Attack, Market Participants Still Wary of Govt Regulation — Cointelegraph

Required Reading:

Noteworthy things this week

This is good stuff. A recent survey by YouGov about Bitcoin and Ethereum showed that wile 66% of respondents have heard of Bitcoin, only 13% of them have ever used it. Ether was far less known, with only 24% of respondents saying they’d heard of it. Of those who are aware of Ether, 21% said they had used it.

Meanwhile, 29% of Americans think Bitcoin and Ether are mostly for illegal dark web transactions….Seems like a lot of misinformation out there as to what cryptos are for.

Additionally, 37% of all respondents said they weren’t sure if Bitcoin and others like it would become an accepted means of transaction in the next 10 years, and 28% believed that they would not. While many Americans may be slow to come around to digital currencies, nearly half of all 18–34 year olds said they think that they’ll be widely accepted in the next decade. See full results of the survey here.

Education || Learning

I’ve decided to add an educational section each week to help people who are curious about Bitcoin learn something new and tie things together. To me, the most exciting part about Bitcoin and the crypto space is the possibility of fundamentally changing the way we allocate trust on this planet

Videos seem to offer the best mix of education/entertainment and I hope to be able to bind it all together in a format that allows you to follow along and learn so you can get comfortable with this evolving technology and asset class. There is a lot to consume to get up to speed but if you are willing to commit, learn and go down the rabbit hole, I promise you it will all begin to click.

In the video above Andreas Antonopoulos gives a keynote address at the Future of Money conference in South Africa in which outlines the necessary criteria that will help you distinguish blockchains from bullshit, and why the goal of developing this technology should not be “banking the unbanked” but rather de-banking all of us.

Watch this video. I am going to pin this post to the newsletter for the next few weeks. It’s one of the best things you could do to understand how blockchains enable user empowerment by cryptoeconomics is by watching this recent talk by Ethereum founder Vitalik Buterin: The CryptoEconomic Way

Twitter Spotlight

When the SEC dropped the hammer on ICO’s and it’s warning about some tokens being securities and need to be compliant with Federal securities law, it marked a wave of ICOs doing their offerings to now lock out US based investors. Floyd “Money” Mayweather had bragged on Instagram about wanting to participate in the upcoming STOX ICO, a decentralized betting exchange…Welp, turns out Money Mayweather is being blocked out as a US investor. LOL 😂

That’s it for this week. If you liked what you read, share this with your friends and colleagues. I’m hoping to contribute weekly and if you want to subscribe directly to Crypto Bits, my Bitcoin/Crypto newsletter you can subscribe directly HERE.

-Adam

Adam Pokornicky

Written by

Bitcoin & crypto asset investor, Managing Partner Cryptochain Capital,ex-HF trader 10yrs founder @doggybnb, @gosniffer & @candycasserole , http://21.co/adampoko

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