Commentary on the economic , geopolitical and simply fascinating things going on. Served occasionally with a side of snark.
Monday, December 16, 2013
BitCoin news for December 16 - 19 , 2013........BitCoin smash related to rumor from China - Allegedly , sources close to China’s Central Bank today reported that the institution has banned third-party payment companies from doing business with bitcoin exchanges. ........ SecondMarket’s Bitcoin Investment Trust Amasses $61.1m in 3 Months ....... An explanation for whyMt. Gox Bitcoin Price Volatility is up to 50% Higher Than Rival Exchanges ...... Norwegian Tax official states BitCoin cannot be defined as money - but note the Swiss view BitCoin differently....
BitCoin news for the day - first my prior BitCoin post with interesting articles - news and views as a recap......
Yesterday it was the Us Treasury's Financial Crimes Enforcement Network that tightened its grip on businesses that accept Bitcoin. Today, it is China, where the world's largest Bitcoin exchange by trading volume, BTCChina announced that he had received word from "above" that his platform would no longer be able to accept renminbi from BTC buyers. "As of right now, we have received notice from our third-party payment company that they will disallow customers from making deposits into our exchange," Bobby Lee, a former Yahoo developer who co-founded BTCChina this year, told the Financial Times. The result, not surprisingly, is an overnight crash in BTC, which crashed by 50% from $900 two days ago to just $455 hours ago.
With its booming market for commerce, China had been seen by Bitcoin enthusiasts as fertile ground for the virtual currency. However, regulators were concerned that people could use Bitcoins to skirt the country’s capital controls. They also grew alarmed at the rampant speculative demand for Bitcoins, warning it had the makings of a bubble.
The Chinese central bank took a hard line two weeks ago, banning the country’s financial institutions from handling Bitcoin transactions.
Although the People’s Bank of China said individuals were still free to trade it at their own risk, the ban on third-party payment service providers from doing Bitcoin business effectively makes new purchases of the virtual currency impossible.
“I’m not that surprised,” said Hong Hao, chief China strategist at Bank of Communications. “Even if the amount of Bitcoin in circulation wasn’t that large yet, it was a potential threat to the monetary system.”
Mr Lee of BTCChina said the emphasis of the notice was on deposits, meaning that customers with existing renminbi balances would still be able to withdraw their cash from the exchange. “They are completely safe,” he said, adding that people with money already deposited on the exchange still had the option of buying Bitcoins.
...
China’s capital controls mean it takes time for investors to arbitrage the difference between prices in and outside the country.
In a world where the central banks are actively engaged in gold capital controls (and have been for over 40 years), and the BIS has its own in-house gold prices suppression team, nobody could have possibly seen this coming.
We are, of course, joking. But some who apparently were angry and did not see this coming, were the computer hackers of the world. As @george_chen reports, the PBOC reported it was promptly DDOSed in retaliation for China's overnight crackdown on Bitcoin.
Recent days have brought headlines about Chinese authorities clamping down on Bitcoin — not wanting various institutions to deal in the digital currency.
This makes sense. One of the big things that everyone was talking about was how Bitcoin made for the perfect tool to circumvent capital controls (restrictions on getting money out of the country).
So Bitcoin is getting crushed. Not that long ago it was above $1,000. Then it settled into around a $900 area, then it dropped to around $700.
ST. LOUIS (Reuters) - The U.S. Treasury Department's anti money-laundering unit is warning businesses linked to the digital currency Bitcoin that they may have to comply with federal law and regulation as money transmitters, a Treasury spokesman said.
Treasury's Financial Crimes Enforcement Network (FinCEN) has sent "industry outreach" letters to about a dozen firms, regarding potential anti-money laundering compliance obligations related to Bitcoin businesses, FinCEN spokesman Steve Hudak told Thomson Reuters' regulatory information service Compliance Complete.
Bitcoin, which unlike conventional money is bought and sold on a peer-to-peer network independent of any central authority, has grown popular among users who lack faith in the established banking system. It has also raised concerns among law-enforcement authorities that digital currencies could be used for laundering money.
The letters have had a "chilling effect" on Bitcoin businesses, which are intimidated by the threat of civil and criminal sanctions for non-compliance, said Jon Matonis, executive director of the Bitcoin Foundation, an advocacy group. The firms, he said, may effectively be "put out of business in an extrajudicial manner."
Brad Jacobsen, a lawyer representing one Bitcoin businessman who received a letter from FinCEN, said his client has chosen to suspend his business activity "while state and federal compliance matters are considered and/or appropriate exemptions are determined."
FinCEN's letters, which ask recipients for more information about their business models, put the firms on notice that there is a legal "gray area," so they are "better off to err on the side of caution" and comply with FinCEN's rules, Matonis said.
Certain Bitcoin businesses came under FinCEN regulation in March when the Treasury bureau issued guidance defining some players in the digital currency industry as money transmitters.
For more than a decade the money-transmission industry, which includes firms such as Western Union and PayPal, has been required to enact anti-money laundering controls, report suspicious activity, register with FinCEN and obtain state licenses.
These steps are required to comply with the Bank Secrecy Act, the main anti-money laundering statute, and avoid running afoul of a federal law that bans unlicensed money transmitters.
While some Bitcoin businesses reject FinCEN's assertion that they are money transmitters, a number have still registered with the agency, a search of the Treasury bureau's website shows.
FinCEN sent letters to Bitcoin-related businesses on the Internet that appeared to fall under its definition of money transmitters but had not registered, Hudak said. He said FinCEN will keep sending letters to unregistered Bitcoin businesses.
"As we come across them, and as people tip us off, we'll make inquiries. That is part of what we do," Hudak said.
PUTTING BUSINESSES ON HOLD
Mike Caldwell, who runs a business out of his Utah home that accepts digital bitcoins from customers and turns them into metal coins that hold the "private key" needed to redeem the currency, received one of FinCEN's letters, as first reported by the online publication Wired.
Jacobsen, Caldwell's lawyer, told Compliance Complete that "out of an abundance of caution" Caldwell's business, Casascius LLC, reacted to the letter by registering with FinCEN and suspending business activity.
"Laws and regulations related to virtual currencies are in a state of flux and we are working to determine how to appropriately comply with any that are applicable to our client. Casascius LLC is committed to furthering the use and acceptance of Bitcoins but is also committed to complying with applicable law," Jacobsen said.
The identities of the other recipients of FinCEN's letters are not known.
NEW ENFORCEMENT PRECEDENT
A legal expert with years of experience representing digital currency firms said FinCEN seemed to be establishing a new regulatory enforcement precedent by warning individual businesses of compliance obligations before taking action.
"Is this setting a new standard that in the future if there are any questionable business models there will be notice given before any action is taken?" said Carol Van Cleef, a partner with the Washington law firm Patton Boggs LLP.
In response, Hudak said the letters are an attempt at gathering information. He likened them to the letters that banks sometimes send to customers seeking information about the customer's transactions in an effort to determine whether suspect transactions are truly linked to illicit activity.
Recently some of the more naive, not to mention top-ticking, financial commentators assumed that just because US regulators had not snapped shut a trap surrounding Bitcoin and other digital currencies yet, that this state of blissful cohabitation would continue indefinitely. Unfortunately, as we warned back in March during the initial leg higher in BTC following the Cyprus deposit confiscations, the well-known "honeypot" strategy was meant to draw out as many digital currency fans and participants as possible - who after all were warned by none other than the ECB that the current regime will never adopt a parallel, and quite threatening monetary unit - only to see the regulatory and enforcement fist of the nation that (still) hosts the reserve currency slowly but surely start to clench around the binary currency.
Because, finally, after testing the ground long enough, the fist is starting to not only close but squeeze tight. And as Reuters reports, it is the U.S. Treasury Department's anti money-laundering unit that is now warning businesses linked to Bitcoin that they "may have to comply with federal law and regulation as money transmitters, a Treasury spokesman said. " Specifically, the Treasury's Financial Crimes Enforcement Network (FinCEN) has sent "industry outreach" letters to about a dozen firms, regarding potential anti-money laundering compliance obligations related to Bitcoin businesses, FinCEN spokesman Steve Hudak told Thomson Reuters' regulatory information service Compliance Complete.
What is interesting is that unlike in traditional cases of money laundering, where the law is cut and dry, in the case of digital currencies, nobody really knows what the Treasury's jurisdiction - if any - or the law is. Which is why FinCEN is not only treading lightly but effectively giving so-called offenders a warning in advance of potential future action.
According to Reuters, a legal expert with years of experience representing digital currency firms said FinCEN seemed to be establishing a new regulatory enforcement precedent by warning individual businesses of compliance obligations before taking action. "Is this setting a new standard that in the future if there are any questionable business models there will be notice given before any action is taken?" said Carol Van Cleef, a partner with the Washington law firm Patton Boggs LLP. In response, Hudak said the letters are an attempt at gathering information. He likened them to the letters that banks sometimes send to customers seeking information about the customer's transactions in an effort to determine whether suspect transactions are truly linked to illicit activity.
Actually no: this is not a standard, new or otherwise, but is merely meant to telegraph the authorities displeasure with ongoing digital monetary activities, with an intent of halting all major activity before an enforcement mandate is handed down.
In the meantime, FinCEN's letters have had a "chilling effect" on Bitcoin businesses, which are intimidated by the threat of civil and criminal sanctions for non-compliance, said Jon Matonis, executive director of the Bitcoin Foundation, an advocacy group. The firms, he said, may effectively be "put out of business in an extrajudicial manner."
Which, basically, means the US government wants you to shut down regardless of what the law says. Which is precisely what happened with Utah's digital-to-coin converter Casascius as we reported previously.
And, as Reuters further adds, the fist grab is almost ready to pulverize:
While some Bitcoin businesses reject FinCEN's assertion that they are money transmitters, a number have still registered with the agency, a search of the Treasury bureau's website shows.
FinCEN sent letters to Bitcoin-related businesses on the Internet that appeared to fall under its definition of money transmitters but had not registered, Hudak said. He said FinCEN will keep sending letters to unregistered Bitcoin businesses.
"As we come across them, and as people tip us off, we'll make inquiries. That is part of what we do," Hudak said.
Perhaps this explains why at last check Bitcoin was now under $700 and gradually drifting lower. After all Uncle Sam is no longer shy about his true intentions regarding the digital currency.
Bitcoin dipped to its lowest price in a week, following yesterday’s reports that the People’s Bank of China had banned third-party payment firms from dealing with bitcoin exchanges.
Prices took a dive throughout the day, starting at around $876 on the CoinDesk Bitcoin Price Index in the early hours (GMT), and falling to as low as $645 later in the day. Prices briefly rallied up to $771 on the BPI, only to dip once again.
At its lowest point over the 24 hours, the virtual currency took a 22% loss.
CoinDesk’s BPI: 16th – 17th December 2013 (GMT)
Original reports of the ban came from a trusted source within China’s bitcoin community, who had spoken to a participant present at the meeting between third-party payment companies and the Bank itself.
Over the course of the day, Chinese news sites reportedly confirmed the claims with PayPal and Alipay (a subsidiary of the international trading company Alibaba). Alipay is said to deal with 65 financial institutions and have at least 700 million registered accounts.
TenPay, another third-party payment company, also reportedly confirmed the news to journalists. In China, third-party payment companies are licensed by the government-operated PBOC. TenPay received its licence back in May 2011.
December’s fluctuation
At the time of writing, the price fluctuation in bitcoin hasn’t yet matched that of 5th December, when the PBOC issued a statement warning financial institutions to steer clear of the currency.
Following that announcement, the currency lost $300 in a single morning on Mt. Gox. In turn, the Coindesk Price Index fell from $1,139 to $584 by that weekend.
History tells us that China’s role in bitcoin is large enough to spook investors into selling. The Chinese Yuan has outpaced the USD volume-wise as a fiat pair with bitcoin. 46% of bitcoin-fiat trades are conducted in the Chinese Yuan, while 44% are conducted in US dollars.
Nevertheless, market watchers urged the market to stay calm. Jaron Lukasiewicz, CEO of New York-based bitcoin exchange Coinsetter said:
“This development will have a negative influence on bitcoin’s near-term price potential, but I would encourage investors to remember that speculation doesn’t drive reliable value in general.”
“Bitcoin’s long term value will ultimately be derived through global usage as a payment network in less restrictive countries,” he added.
Funding and withdrawal options
Exchange users in China have reported a decrease in the number of funding and withdrawal options for BTC China.
The image below shows funding options, which still include banks but have been reduced to only one third-party provider, Yeepay:
BTC China Funding Options
The second image shows the withdrawing options available. There are only five remaining, and Yeepay is not included on the list:
BTC China Withdrawal Options
Zennon Kapron, a financial technology analyst and consultant whose companyKapronasia operates out of Shanghai, said as recently as three days ago one that of his friends had been able to fund a BTC China account through China Merchants Bank. The money arrived within a few hours.
Today, however, transactions resulted in errors and could not be completed.
Third-party companies
It seems that some existing relationships are continuing, said Kapron, but no new ones are allowed and third-party transfer options must close by the Chinese New Year (around the end of January on the Western calendar).
Kapron claimed third-party companies were likely the first warned by the authorities and that’s why they were the first to exit the scene. Banks could possibly come next.
However, Kapron also noted that these new revelations have come from meetings with business operators, and an official statement has yet to be published on the People’s Bank of China website.
Another source, who operates a bitcoin-related business in China, confirmed the funding and withdrawal options had been curtailed since the People’s Bank meeting, and likened the situation to poker-playing websites in the US.
The source explained that users are free to access the sites and play as much ‘poker’ as they like, but US financial institutions have been barred from transferring funds to them, effectively banning Americans from playing poker online.
At its peak in early December 2013, BTC China listed bitcoin prices topping $1,250. The exchange traded 109,841 bitcoins in the week preceding 4th November, compared with Bitstamp’s 93,372 and Mt. Gox’s 76,673.
Given the nature of business and government in China, and particularly the current climate regarding digital currencies, several of CoinDesk’s sources requested not to be identified by name.
Denmark’s Financial Supervisory Authority (FSA) today issued an official statement on the use of virtual currency in the country – and surprisingly, it’s not all bad news.
The statement highlights that virtual currency isn’t covered by Denmark’s existing regulatory framework. Thus, cryptocurrencies cannot be subjected to the country’s standard financial regulation.
According to the FSA, doing business with bitcoin and other cryptocurrencies does not qualify as issuance of electronic money, currency exchanges, brokerages or deposit services. The regulator stated:
“Virtual currencies are a form of unregulated electronic money, as opposed to real money they are not issued or guaranteed by a central bank, which in some cases can be used to make payments.”
It added that: “Virtual currencies have emerged in many different forms, first in the context of online gaming and social networks. Later, virtual currencies evolved to be used as an alternative to real currency.”
As a result, bitcoin entrepreneurs who want to build businesses and establish exchanges in the country will not need government approval. A translation from the FSA’s website reads:
“Companies do not need permission to be able to establish their operation in Denmark if they want to run bitcoin exchanges that also include exchanging real money.”
Risky investments
However, like the EBA, the FSA pointed out that investors who choose to buy, trade and hold virtual currencies risk losing their investments, having their virtual currency stolen, or simply watching the value of their currency drop to zero.
The EBA has also warned that there is no assurance that virtual currencies can be exchanged for national currencies, adding that trading virtual currencies carries implications for both tax and crime.
Interestingly, the FSA is the first national regulator to implicitly name altcoins in its warning. The somewhat unflattering reference includes litecoin, zerocoin andlinden dollars.
A Barclays customer in Scotland has claimed the bank blocked access to his account after he made two transactions to buy bitcoin.
The customer, who wanted to remain anonymous, wrote about his experience under the usernameApollo Moonwalker on reddit.
He has since revealed to CoinDesk that he bought bitcoin through Bitstamp andLocal Bitcoins in the first week of December. He claimed he sent about £100 each time, first through a SEPA payment to BitStamp and then a bank transfer to a seller on Local Bitcoins a week later.
After making the second transaction through Local Bitcoins, he said he could no longer access his account through internet banking, adding:
“My internet banking was immediately shut off as soon as I tried to make this particular payment and I couldn’t log on, but when I phoned [Barclays] they had me confirm both transfers.”
The customer said he was automatically logged out of Barclays’ internet banking platform and received an error notice saying: “Error RP309 you have been blocked from Barclays Online Banking.”
He claimed that he tried to login again through his phone, but was unable gain access.
The customer’s internet banking remained blocked for three days, from 6th to 9th December, he said. He claimed that he had to place two half-hour phone calls and a visit to a Barclays branch to get the matter resolved, adding:
“It was not a simple matter to get fixed. I have no idea what I would have done if this happened when I was out of the country three weeks ago.”
The customer, who works in the oil and gas industry, added that he had experienced similar restrictions to his internet banking when he had previously performed transactions abroad.
However, he noted that it had been easier to regain access to his account’s internet banking in those instances, usually requiring a one 30-minute phone call to the bank.
When CoinDesk contacted Barclays for clarification, a press officer said the matter would be looked into, but declined to comment on-record.
A search on Barclays’ online banking help pages revealed no results for the error code, nor reasons why the customer was automatically logged out of the platform.
The Barclays customer added that he had completed many purchases through Bittylicious and Local Bitcoins in the past without any restrictions.
Bitcoin in the UK
Bittylicious is a UK marketplace that allows individuals to sell bitcoin andfeathercoin to buyers via bank transfer. Bittylicious users can buy cryptocurrencies using Barclays’ Pingit mobile payment app. The app, which lets customers send and receive money from individuals and businesses, is available to the public and is not restricted to Barclays account holders.
The Barclays customer’s post about his experience on reddit has attracted 151 comments to date. The top comment read:
“Banks are scared and already making the same mistakes that the music industry made 15 years ago.”
UK Banks have been cautious about dealing in bitcoin, as the cryptocurrency remains unregulated here. Additionally, bitcoin exchanges in the UK have faced difficulty finding banks willing to do business with them.
Tom Robinson, the founder of bitcoin exchange BitPrice, has said that finding a bank to work with is one of the main reasons he hasn’t launched his service yet.
Another high-profile exchange, Coinfloor, recently had to delay a much-hyped launch date.
One reason UK banks have treated bitcoin with caution is due to the digital currency’s uncertain status here. Regulators have struggled to understand the cryptocurrency.
For example, the tax authority recently met UK bitcoin lobbyers to gather information so that it could rethink its earlier decision to classify the cryptocurrency as a payment voucher, which would attract a 20% value-added tax to every transaction.
Gold And Silver Slammed; Retrace Yesterday's Gains
Submitted by Tyler Durden on 12/17/2013 08:21 -0500
Once again the precious metals market is moving in a highly efficient EKG-like manner - this time to the downside. As the US markets awake, Gold has been hit with heavy selling, retracing all of yesterday's gains, and Silver the same after some overnight shenanigans as Europe opened. The fits and starts with which these markets trade is remarkable - yet we suspect tomorrow will bring even more. Notably this drop in the PMs is also accompanied by further weakness in Bitcoin, a sell-off in bonds and USD strength (the latter of which suggest taper concerns).
UPDATE: The earlier rumors have been confirmed: People’s Bank of China told more than 10 third-party payment service providers yesterday not to give clearing services to online Bitcoin exchanges, China Business News reports, citing a central bank meeting with the companies. This news is pressuring Bitcoin to $678 (on Mt.Gox) but more notably, BTC China rates imply a $588 equivalent price - down 57% from its highs.From a $100-plus premium, BTC China now trades $130 cheap to Mt.Gox as the 'arb' flips.
Talk from the PBOC (via Sina) that "the central bank directs: third party payment institutions shall not undertake business with Bitcoin hosted sites," appears to be responsible for the slump in the virtual currency once again. This expands the PBOC's earlier Bitcoin ban to other institutions. Bitcoin prices have dropped over 20% from their overnight highs - trading at around $715 now. Perhaps even more notable is the relationship between Bitcoin and the precious metals today with the early Bitcoin weakness corresponding almost perfectly to gold and silver strength (and again mid-morning in the US).
Talk from the PBOC (via Sina) that "the central bank directs: third party payment institutions shall not undertake business with Bitcoin hosted sites," appears to be responsible for the slump in the virtual currency once again. This expands the PBOC's earlier Bitcoin ban to other institutions. Bitcoin prices have dropped over 20% from their overnight highs - trading at around $715 now. Perhaps even more notable is the relationship between Bitcoin and the precious metals today with the early Bitcoin weakness corresponding almost perfectly to gold and silver strength (and again mid-morning in the US).
Sources close to China’s Central Bank today reported that the institution has banned third-party payment companies from doing business with bitcoin exchanges.
A reputable source told CoinDesk that the People’s Bank of China(PBOC) met with most of the top third-party payment companies this morning.
The source said the meeting topic was unrelated to bitcoin, but digital currency became an important part of the discussion.
“PBOC, in no uncertain terms, directed third-party payment companies not to do business with bitcoin exchanges in China,” they explained.
At the moment, these claims are still rumours, as neither the PBOC nor any payment company has issued a statement to confirm what was discussed and what the outcome was. However, our source revealed they got their information from various channels, including those people who were at the meeting.
“The writing’s on the wall,” said our source, adding:
“Going forward, from this day, third-party payment companies will most likely sever their ties with bitcoin exchanges.”
They went on to say that if and when this happens, people will still be able to withdraw their money from Chinese exchanges, they just won’t be able to deposit new funds.
“There’s no need to panic and do a run on the bank. People will still be able to sell their bitcoins for local currency and then withdraw that currency,” they concluded.
Back on 5th December, the PBOC issued a statement saying that bitcoin was not a currency and, therefore, banks and other financial institutions were not allowed to deal with the digital currency.
The PBOC also said that merchants could no longer price their goods and services in bitcoin and couldn’t exchange their wares for bitcoin.
The statement did, however, leave a few doors open for bitcoin. It essentially said bitcoin exchanges are legal, people have the right to buy and sell bitcoins, and bitcoin companies should register with the ministry of information and industrial technology.
This was good news for bitcoin exchanges in China as they were not only given some degree of legitimacy, but they were exclusively allowed to deal with digital currency while banks and financial institutions weren’t allowed to touch them.
Unfortunately, this didn’t last long.
On a potentially related note, several Chinese bitcoin exchanges, including BTC China, have just reintroduced trading commissions. A statement on BTC China’s site reads:
Dear BTC China valued customer: To stabilize the recent turbulent Bitcoin market and minimize potential market manipulation, BTC China will end the 0% trading fee promotion, effective immediately, and revert to the 0.3% trading fee. We deeply apologize for the sudden change. BTC China, December 16, 2013
CoinDesk has contacted PBOC and Chinese payment service provider Tenpayfor comment, but no responses had been received at the time of publication.
Almost three months have passed since SecondMarket launched the Bitcoin Investment Trust (BIT). How is it performing? Perhaps unsurprisingly (given bitcoin’s recent good fortune) not badly at all.
The BIT, launched as a vehicle for institutional investors to get into bitcoin, stood at a $61.1m (67,300 BTC) net asset value on Friday.
Shares in the Trust edged along for around two weeks after its inception on 26th September. Following this, they began creeping up, before beginning their meteoric rise around 4th November.
The net asset value (NAV) per share peaked a month later, before falling back. In short, the NAV of the BIT has tracked bitcoin’s own price movements very closely.
Barry Silbert, CEO at SecondMarket, said that performance has exceeded his expectations. The company’s initial goal was to hit $10m in asset centre management by the end of the year.
Five phases
Silbert describes himself as part of bitcoin’s second phase. The virtual currency will go through five phases, he says.
The first two-year phase was driven by hobbyist hackers, while the second, starting in 2011, bought in early adopters and entrepreneurs.
Phase three has just started, and it is bringing venture capital companies to the table. “VCs are now supporting and investing in a lot of companies that are building infrastructure on top of the protocol, which the average person is not going to see, for the foreseeable future,” Silbert says.
So what’s to come in stage four? According to Silbert, Wall Street.
Wall Street has been largely disinterested in bitcoin to date, but a significant portion of his investors still come from there. They’re individual professionals who are piling money into the BIT on their own behalf. Silbert said:
“It’s not the funds yet, it’s the people who work there. So it’s the portfolio managers, the traders, it’s the bank executives who are investing personally.”
Wall Street professionals are ahead of their companies for several reasons.
It’s fair to say that some institutions don’t yet feel well informed about virtual currency, but it’s also because in many cases they aren’t allowed to be.
Bitcoin is not yet defined as an asset, a commodity, or a currency, Silbert points out (indeed, it has characteristics of them all). “A lot of these institutions just don’t have the ability within their structure to invest in that.”
The other problem is that the auditors aren’t equipped to deal with it. And the reason for that is down to one of bitcoin’s fundamental characteristics: addresses are anonymous.
Like anyone, an auditor can see that a certain address holds inputs of a certain value. But it can’t prove that an investor owns them. “Access does not equal ownership, so you cannot prove title,” Silbert says.
Nevertheless, he believes that the funds will solve these problems over time. After all, SecondMarket did. It enlisted Ernst & Young as its auditor, showing that large accounting firms are prepared to get involved.
Tech entrepreneurs
Wall Street professionals join another group of people who are blazing a trail in bitcoin by investing ahead of their own companies: technology entrepreneurs.
They are a natural fit, because they have a natural affinity with and understanding of technology. They ‘get’ virtual currency, and believe in its potential.
Individuals in this category can take advantage of self-directed Investment Retirement Accounts (IRAs), which are retirement investment accounts, generally held by a qualified custodian, in which the account’s owner makes the investment decisions.
“In the US it’s very common for investors to use self-directed IRAs to do [activities] like angel investing, early-stage investing,” Silbert says.
Several of these IRAs – PENSCO, EnTrust, Equity Institutional, and Millennium Trust, are now listing the BIT as an investment option. But apparently, Fidelity Investments isn’t. Last week, CNBC and Marketwatch reported that the investment firm was allowing certain IRA clients to invest in bitcoin, but it subsequently changed its mind. ”
SecondMarket said in a statement:
“The Bitcoin Investment Trust was previously approved by Fidelity as an eligible investment for accredited clients in their self-directed IRA accounts and investments began closing last week. We understand that Fidelity has decided to reevaluate this decision.”
The BIT is currently most popular among tech entrepreneurs, who invest smaller sums, but in greater numbers.
Family offices
Between all of these investment types, the median investment (where half of all investments are lower, and half are higher) is $30,000.
However, the average investment is around $222,000, pushed higher by some weighty investments. There is another group currently bringing the most money into the BIT: family offices.
These are teams appointed by families with a high net worth (typically $100m or more). Families at this level, which may have accumulated their money over many generations, will often use their own teams rather than outsourcing their investments to a fund manager.
Family offices, which serve single or multiple families, will handle a variety of personal services such as accounting, payroll, and wealth management.
“They’re taking allocations from what we think to be one or two buckets, says Silbert: gold, and early stage funding. “Family offices tend to be very diversified,” he says. “They tend to have a very long-term investment time horizon.”
If a family office puts some of its gold into bitcoin (which recently exceeded the precious metal’s price) then it can increase that diversity, while treating bitcoin as an early stage startup can help such investors get in on the ground floor. With some analysts predicting a value of $98,500 per bitcoin, such allocation carries a lot of potential.
Phase five
Family offices may be the largest investors now, but if, as Silbert believes, institutional investors get involved, they will be the largest group.
“Phase four is going to be Wall Street, so Wall Street [will have] bitcoin as an investable asset class,” he says, adding that we should expect to see this in the coming year.
All of this heralds the fifth and final phase of bitcoin, which will be mass consumer adoption, according to Silbert. That will happen in 2015, he says.
That promises to revolutionise the way people deal with money, driving efficiencies into the process and potentially saving people money. But for that to happen, the first four stages are necessary to evolve the virtual currency and drive liquidity into the market.
We’re still at the start of phase three, and liquidity is still limited, he says. That means that consumer users will lose a significant percentage on any exchange. This stops consumers from saving much money when using it as a form of money transfer, he says, adding:
“The reason is there’s just not enough liquidity at either end of the transfer. But if the monetary base of bitcoin grows to be $20bn, $50bn, $100bn, all of that becomes possible. So I believe that the monetary base needs to grow first before the promise of bitcoin can be fulfilled.”
That’s what SecondMarket is trying to do with the BIT, Silbert concludes: increase awareness, make it more investible as an asset class – and finally, to drive up price by reducing supply.
The Trust has been buying bitcoins from exchanges, merchants, individual users, and miners.
It will be a while before the BIT is publicly traded. But having accrued around 90 investors and just over half a % of all bitcoins mined to date, the Trust is off to a healthy start.
Last week we looked at price fragmentation across the different exchanges which currently comprise the CoinDesk Bitcoin Price Index: Mt. Gox, Bitstamp, and BTC-e. Analysis confirmed the common perception that significant, persistent price variations exist across exchanges.
Furthermore, the average price on Mt. Gox was shown to be higher than Bitstamp and BTC-e by $21 and $34 respectively. This phenomenon has been referred to as the ‘Mt. Gox Premium’, which posits that restrictions on US dollar withdrawals have led to bitcoins trading at a higher price on Mt. Gox than the other exchanges.
The ‘Mt. Gox Premium’ is increasing
In last week’s article we looked at data from just over a three-month period, covering late August through to early December. Looking at a more recent one-month window of data, depicted in the chart below, we see a more than doubling of the average price difference between Gox and BTC-e of $70.
In short, the Mt. Gox premium has increased significantly in recent weeks.
Bitcoin volatility
Price variations are not the only way in which Mt. Gox stands out from other exchanges.
It is well known that bitcoin is volatile; the price of a bitcoin is prone to significant fluctuations over short periods of time. But how should bitcoin price volatility be expressed?
For securities like stock, volatility is often expressed by its beta coefficient (or ‘beta’). Beta is a measure of an individual stock’s price volatility against a broader market measure, which is typically an index like the S&P500.
Since the S&P500 is used as a proxy for the market then the S&P500 is assigned a beta value of 1. Thus, a stock with a beta of 1.2 has 20% greater price volatility than the S&P500 index.
Should we calculate beta for bitcoin?
To calculate a beta coefficient for bitcoin, a number of inputs and assumptions are required – such as a risk-free rate of return. In today’s Zero Lower Bound world, central banks have effectively set nominal interest rates as very close to nothing.
Thus, the risk free rate of return is arguably also zero, which presents methodological issues.
There is also the question of which index to measure bitcoin’s volatility against. Should the Dollar Index (DXY) be used? Or perhaps a basket of alternative assets?
In addition, over what time period should we measure bitcoin volatility? Bitcoin has gone through relatively lengthy stretches of flat price performance.
For example, the relative price lull between the March-April period and the recent October-November run-up, where volatility skyrocketed. Volatility measured during the May-September period will yield a very different picture than volatility during the November-early December timeframe.
In sum, calculating a beta for bitcoin at this point in time would appear to offer dubious value.
Some bitcoin exchanges are more volatile than others
One simple measure of exchange volatility is standard deviation. The standard deviation simply expresses the degree of price movement around the average price over a given period of time.
In short, the greater the standard deviation, the higher the price volatility on the exchange.
Table 1: Standard deviation of exchange prices, 27th August – 5th October 2013 (Source: CoinDesk Bitcoin Price Index)
MtGox
Bitstamp
BTC-e
Standard Deviation
$6.06
$4.43
$4.16
Looking at minute-by-minute price data for the period from 27th August through 5th October (a relatively steady state period when the price for a bitcoin was comparatively flat) we see that the standard deviation for Bitstamp and BTC-e are roughly inline at $4.43 and $4.16, respectively.
Mt. Gox’s standard deviation, however, is much greater at $6.06. This is close to $2 more (or 50% greater) than the standard deviation of BTC-e.
A volatility mystery at Mt. Gox?
But what explains the significantly greater bitcoin price volatility on Mt. Gox?
One of the first explanatory variables to examine on questions of volatility is trading volume. Specifically, lower relative volume could be one factor behind higher volatility, as deep, liquid markets will often bring together more buyers and sellers across a greater range of prices.
Mt. Gox, while not possessing the same dominant 80% share of bitcoin trading volume that it did earlier in the year, still reports total volume market share of 20%-30% of all bitcoins traded.
In other words, if the Gox market share estimates are correct then it would seem unlikely that volume data would explain the higher volatility.
Yet another government official has released a statement on bitcoin, and once again the news is mixed.
This time, Bloombergreported that Norway’s director general of taxation said bitcoins “don’t fall under the usual definition of money or currency”.
The comments, made in an interview with Christian Holte, have been marked by some as yet another failure to gain legitimacy in the eyes of the authorities.
International statements
The comments echo a similar statement from the People’s Bank of China, which was followed by New Zealand and Australia. Although all these statements have carried the message that governments and central banks cannot view bitcoin as a currency, some have been official edicts and others simply offhand comments in interviews.
The bitcoin price has wavered between $785 and $991 on CoinDesk’s BPI for the past week, after recovering from a drop that occurred right after China’s comments. The trend has been gradually downward since the $991 week high, standing at $828 at the time of writing.
Price uncertainty
The price in Norwegian krone fell, going from 6,086 to 5,164 NOK in the period since the statements were made.
It is possible these government comments (or at least the media’s reaction to them) are responsible for the price uncertainty.
Bitcoin’s November surge to over $1,200 followed more favourable comments by US authorities.
Whether the negative comments should come as any great surprise, or even a ‘blow’ to bitcoin is debatable. Most central banks have a fairly narrow legal definition of ‘currency’ anyway, according to the same Bloombergreport.
Real-world power
Most, including the IMF (International Monetary Fund), recognize currency as something issued only by a nation-state, thus ruling out bitcoin automatically.
Even gold, which appears on some currency conversion charts (like bitcoin), is generally referred to as a commodity and is not accepted in day-to-day life.
As for the Norwegians, there is at least one resident who recognizes bitcoin as something with real-world purchasing power.
Kristoffer Koch made headlines in October when his forgotten stash of bitcoins suddenly reached over $800,000 in value, allowing him to cash out and buy an apartment.
He might now be wishing he’d held them for a few weeks longer.
The Swiss Parliament is considering a postulate that asks for bitcoin to be treated as any other foreign currency. The goal of the postulate, introduced by representative Thomas Weibel, is to eliminate ambiguities and increase legal certainty related to bitcoin.
...
The postulate petitions the executive branch to reply to four basic questions: whether or not bitcoin represents an opportunity for the financial sector, should bitcoin be treated as a foreign currency, what regulatory instruments should be used to establish legal certainty for bitcoin and similar currencies, and what sort of regulatory changes are needed and when can they be implemented.
The postulate was co-signed by 45 members of parliament (out of a possible 200) after they came to the conclusion that bitcoin can create new opportunities for the Swiss financial sector and that measures should be taken to regulate the application of VAT and the execution of money laundering controls.
...
Luzius Meisser, president of Bitcoin Association Switzerland, told CoinDesk: “This would be quite revolutionary, as it provides bitcoin with additional legitimacy and could serve as a precedent for other countries. Also, it would pave the way for businesses to use bitcoins without legal uncertainty in Switzerland.”
The crucial point here, of course, is if Bitcoin is 'deemed' an asset (as EU regulators appear to want), it can (and will) be taxed; but it seems the Swiss beg to differ with that definition.
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