What Are Bitcoins?

Bitcoins are a form of money. They can be used as a medium of exchange and they’re sometimes used as a unit of account, but they have no store of value. As a form of money, bitcoins are very similar to other widely used currencies such as the US dollar. Bitcoins are different from the US dollar in the way they are created, used, and exchanged.

A record of all bitcoin transactions are kept on a decentralized public ledger called a blockchain. Bitcoins are stored on addresses and the blockchain itself is maintained by miners. When miners contribute to maintaining the blockchain records, they earn bitcoins in return. This reward provides miners with an incentive to contribute computing resources to maintaining the bitcoin blockchain.

If you want some bitcoins, there are a few ways you can get them, but the easiest way is to buy them. You can buy bitcoins by using an online bitcoin exchange or bitcoin broker. In Canada, an easy way to purchase bitcoins is on a website called QuickBT or an exchange called QuadrigaCX.

Once you’ve purchased some bitcoins, what can you do with them? Bitcoins are not very useful as a way to buy consumer goods such as groceries or clothing. You’re probably better off using a currency more widely accepted as a medium of exchange in your country. But bitcoins can also be used as a way to conduct transactions and make investments online. One of the coolest things about bitcoins and other digital currencies is how they are outside the control of governments and can be used to conduct transactions relatively anonymously. Bitcoins can travel almost instantly across the world making them a truly global currency.

Bitcoins are a great currency for gambling, investing, and running online businesses, but if you’re not into any of these things, then you might as well just keep using whatever currency is popular in your day to day life. Its difficult for most people in American to see the appeal of bitcoins when the US dollar seems to work well enough. Most of us don’t question how the US dollar works either. But if you start to learn more about money, I hope you will see that bitcoins and other decentralized digital crypto currencies offer many opportunities.

Bitcoin ETF Likely Approved?

Trading on Bitmex implied odds now trading over 50%, and the price of bitcoins versus the USD spike today.

Investors chained to bitcoin bets as U.S. ETF decision looms

NEW YORK Investors are betting market regulators will approve what would be the first U.S. exchange-traded fund to track the price of bitcoin. From investment funds to wealthy individuals and even a Las Vegas strip club, the bitcoin ETF is generating a lot of buzz for a financial product.

CME Bitcoin Reference Rate Review

The CME CF Bitcoin Reference Rate (BRR) and CME CF Bitcoin Real Time Index (BRTI) are standardized reference rates and spot price indexes with independent oversight managed by CME Group that were launched on November 14, 2016. Several bitcoin exchanges and trading platforms will provide the pricing data that compose the indexes, including Bitfinex, Bitstamp, GDAX, itBit, Kraken and OKCoin.com.

The BRR aggregates the trade flow of major bitcoin spot exchanges during a specific calculation window into a once-a-day reference rate of the U.S. dollar price of bitcoin. The BRTI aggregates global demand to buy and sell bitcoin into a consolidated order book and reflects the fair, instantaneous U.S. dollar price of bitcoin. The BRTI will be published once every second. Calculation rules are geared toward a maximum of transparency and real-time replicability in underlying spot markets. CME Group and Crypto Facilities designed the BRR & BRTI around the IOSCO Principles for Financial Benchmarks.

Of particular interest to me is the BRR, as it provides a daily reference rate that can be used to settle some derivatives I have designed. The BRR is a price of US dollars over 1 bitcoin, and the min tick size is 0.01. The BRR represents a trade volume weighted price as it is built from trades on the referenced exchanges. The BRR dissemination time is daily between 4pm and 4:30pm GMT which is between 11am and 11:30am EST.

How to Buy Bitcoins in Canada

How do you buy bitcoins in Canada? Use an exchange like QuadrigaCX, a Canadian bitcoin exchange. To buy bitcoins in Canada, there are 5 steps:

  • Register
  • Verify
  • Fund
  • Exchange
  • Transfer

To get bitcoins, you’ll need to open an account with QuadrigaCX, verify your identity, and then fund your account with Canadian dollars. Once you take these steps, you’ll be able to buy bitcoins on the exchange and then use those bitcoins however you wish.

 

  1. Register

Follow this link to open a QuadrigaCX account. From the QuadrigaCX homepage, look for the “Register Now” button in the top right corner of the homepage.

 

 

Clicking the “register now” will take you to the registration page where you submit basic information about yourself. Fill out and submit the registration form and you’ll be asked to choose a password and a pin for your account.

 

 

Once you’ve made your initial registration, you’ll be provided with a client ID which will serve as your username. You’ll also be sent an e-mail to confirm your registration. Save your account credentials in a secure way so you can easily access your account in the future.

 

2. Verify

Now that you’ve opened an account and logged in, you’ll land on a “Member Dashboard” screen. Before you can exchange Canadian dollars for bitcoins, you’ll need to verify your account. See your name listed in the top right corner of the header menu?  Click on your name to reveal a drop down menu, then choose “Verify”.

 

 

To verify your identity, you can either connect your Equifax account, or you can upload your identification manually. The information required includes:

  • A Photo or scan of a Passport or Drivers license – must be in colour
  • A Photo or scan of a bank statement or utility bill showing your name and full address
  • A Photo of yourself holding the government issued ID that you have provided

When I registered, I took a picture of my drivers license from my phone, I downloaded a copy of my phone bill from Rogers.com, and I took a picture of myself holding my drivers license. A few minutes later, a representative from QuadrigaCX called me to confirm my identity, and even asked me to confirm some credentials listed on my LinkedIn profile.

 

3. Fund

Once you’re verified, you’ll need to transfer Canadian dollars into your account. Click on the Canadian dollar balance listed in the header menu of the “Member Dashboard” page. Doing this will reveal a drop down menu, choose the “fund account” link that is listed.

 

 

There are a few ways to transfer Canadian dollars into your account. For most of us, the best way is to use Interac Online. It will cost 1.5% for this method, it might be cheaper to use a wire transfer if this is a capability your bank provides.

 

4. Exchange

Now that you’ve got some Canadian dollars in your QuadrigaCX account, you’re very close to buying bitcoins!  The next step is to exchange your Canadian dollars for bitcoins. Find the “Trade” tab in the main menu of the “Member Dashboard”. Once on the trading page, you’ll see a market to buy and sell bitcoins (XBT) for Canadian dollars.

 

 

To make a trade, the QuadrigaCX exchange will charge you a 0.50% fee. So between your 1.5% Interac fee and the 0.50% exchange fee, the explicit fees are 2.00% to buy bitcoins.

On the “Trade” page, you’ll see a list of orders to buy and sell. To buy bitcoins, you’ll need to find someone that will sell them to you. Notice the sell orders are higher than the buy orders, the cheapest price you can buy is the lowest offer listed for sale. You can either bid a price that matches the lowest sell offer for the amount of bitcoins you’d like to buy or the amount of Canadian dollars you’d like to sell. Either way, you’ll need to pick a price. If you decide to work an order at a particular price, simply enter it in the buy side and your order will appear in the order book and be listed as an open order in a section on the “Trade” page.

If this part seems confusing to you, then maybe you can enlist a friend or financial advisor to make the trade with you.

 

5. Transfer

Once you’ve exchanged your Canadian dollars for bitcoins, you’ll see a XBT balance appear in the balances listed in the header menu of your QuadrigaCX account. To transfer your bitcoins to another bitcoin address, choose the XBT balance from the header menu and click the “withdraw” option. You will be asked to input an amount, a bitcoin address, and your pin. You’ll also be sent an e-mail to confirm your request. Transferring bitcoins requires a few checks. First, QuadrigaCX will confirm that you made a valid request, and then your transaction will go to the bitcoin blockchain for confirmation. Once your transaction has been confirmed by the blockchain, your bitcoins will now be in the new bitcoin address you wanted to transfer to. This may take a few minutes or more.  If it takes more than 1 hour to process your withdrawal request, something is wrong.

That’s it!  Whenever you want to buy or sell bitcoins for Canadian dollars, login to your QuadrigaCX account and make a trade. A few other tips, to further secure your account, check out the “profile settings” and “notification” pages on QuadrigaCX. You will be able to add 2 factor authentication to your account and notifications when logins or requests are made.

Once again, please use my referral link to open your QuadrigaCX account. I will receive 10% of the fees generated from your account as a commission 🙂

Bitfinex and the CFTC

Bitfinex recently paid the CFTC $75,000 USD related to a settlement between the US federal government agency and the digital currency exchange. A copy of the CFTC order can be found here. Bitfinex explains it this way:

Today, the United States Commodity Futures Trading Commission (CFTC) issued an order instituting proceedings against BFXNA Inc. (BFXNA), an entity that conducts business with U.S. customers through the website www.bitfinex.com. In the order, the CFTC accepted BFXNA’s offer of settlement to resolve certain alleged violations of the U.S. Commodity Exchange Act (the Act). A copy of the order is here. In the order and settlement, the CFTC found that BFXNA violated sections 4(a) and 4d(a) of the Act. BFXNA neither admits nor denies the CFTC findings in the order and settlement.

 

Bitfinex proactively contacted the CFTC in September 2015—before the CFTC announced enforcement action involving bitcoin trading platforms—to provide information about Bitfinex related to a potential investigation. According to the order, “Bitfinex’s cooperation with the Commission’s investigation was significant … Bitfinex consistently responded to requests for information fully and quickly, both in writing and via oral presentations.”

 

In response to these constructive discussions with the CFTC’s Division of Enforcement, BFXNA has made significant changes to the way in which U.S. customers engage in financed trading on Bitfinex. Bitfinex remains committed to continually improving its customers’ experience while complying with applicable laws and regulatory requirements.

 

In closing, we are pleased to announce this settlement with the CFTC. The CFTC has engaged in a productive, open, and timely dialogue with us, and, as a result, we believe we have a better understanding of the regulatory framework governing financed trading on our platform. The Division of Enforcement has demonstrated that, while they will work diligently to enforce existing rules even as they apply them to new markets, they also are sensitive to innovation and development in sectors that the CFTC regulates.

 

We look forward to providing best-in-class service to U.S. customers. We will continually work to make our customers’ experience safer and better.

This comes as no surprise to bitcoin investors. We are used to dealing with mountains of arbitrary regulations from governments around the world.  The CFTC is aggressively defending its regulatory powers in the United States. I just hope that instead of forcing exchanges like Bitfinex to shut down, the CFTC can find a way to create a regulatory environment where new ideas and technological innovation can flourish. I’m looking forward to this fall when the CME bitcoin index experiment might lead the way to a regulated US based exchange offering bitcoin derivatives.

The editorial linked below spells out the main issues of this case and gives market participants a good idea of what to expect next.  Market participants should be watching other exchanges that offer leveraged bitcoin trading in the US such as Huobi/BitVC to see how they are able to adapt to the changing regulatory environment.

Why the CFTC Bitfinex Enforcement Actually Benefits Bitcoin Exchanges – CoinDesk

Kevin Batteh is currently a partner with Delta Strategy Group, the leading government affairs firm in the derivatives and blockchain industries. He is also an advisor to the Chamber of Digital Commerce, the world’s largest trade association representing the digital asset and blockchain industry.

Bitcoin Options Coinut Initial Thoughts

I’ve been investing in bitcoins for the past year, but I have expertise in derivatives, and I’ve been wishing that a bitcoin derivatives market would emerge soon. I have various bitcoin investments such as funding loans on p2p sites, funding margin on fx sites, and cloud mining pools, but the financial system for bitcoin is still nascent. Benchmark rates don’t really exist at this point, although a bunch of different bitcoin price indexes exist.

I’ve been watching a site called Coinut, which is a bitcoin option exchange, to see whether any liquidity will develop. But it seems over the past few months that liquidity hasn’t really picked up. Instead of waiting on the sidelines, I’ve decided to open an account on Coinut and start making markets myself.

Opening an account on Coinut is fairly easy, you just need a username, password, and e-mail address. Seems like each new account gets a small bonus of bitcoins just for signing up. Once I confirmed my account, I logged in and noticed 7 menu choices on the top main menu of each page. Tutorial, FAQs, Trade, Funding, History, Profile, Audit.

Starting with the audit tab, the audit page lists some details about the user balance and how much is in the Coinut wallet. There is also an audit time lists, but today it looks like the last “audit” was done 5 months ago, that doesn’t give me much confidence!? Seems like the audits are done using a Merkle Tree, which is a type of cryptology that I’m not familiar with, but I should do more research on.

The Profile tab allows users to change their password and enable two factor authorization, they support Google Authenticator.  Users can also change their e-mail address, obtain an API key for integration, and use an affiliate link which provides the referrer with 10% of the fees generated from referred accounts.

The History tab allows users to view their transaction histories and export to CSV.  The Funding tab shows the user’s deposit address which can be re-generated and a withdrawal address. The Trade tab is the order entry screen and a Tutorial tab that I haven’t explored with an FAQs tab with common questions.

There are two types of options available to trade: binary and european. The european options are called “vanilla” options on the site. The contract size is 0.01 BTC or 1% of a bitcoin in other words.  The contracts are based on an internal index that gives various weights to the major BTC platform prices. The index formulation is listed below:

Exchange Price Weight
Bitfinex 452.690000 0.029100
Bitstamp 452.800000 0.011472
Coinbase 455.440000 0.165079
OKCoin 453.170000 0.019601
BTCC CNY 454.953321 0.261188
Huobi CNY 454.973352 0.433884
itBit 453.590000 0.019020

The index is realtime and works just fine for me as I already use Coinbase and Bitfinex.

In terms of account level security, users are sent an e-mail each time an event occurs (logins, trades, etc).  I’ll post more about this site as I gain more experience with it.  I’m going to study various aspects of it including margin requirements, liquidity, etc in future posts. So far, the Coinut market architecture looks promising, although the liquidity looks thin.  I guess this provides both risks and rewards depending on what my strategy will be.

How Volatile is Bitcoin?

A frequent criticism of bitcoins from the lay person revolves around the perceived bitcoin price volatility compared to fiat currencies such as the US dollar.  But although this type of commentary is common, its often not backed up with any type of data.  The assumption that the price of something is volatile is not itself proof of the fact.

I thought it might be helpful to publicize a website that tracks the volatility of bitcoin prices as measured by standard deviation. Standard deviation is a backward looking measurement of historical volatility. At present, there is no reliable source of implied volatility data about bitcoin due to the lack of an open derivatives market, so historical volatility is the best we can do right now. Here is a link to The Bitcoin Volatility Index, which is a website that tracks the standard deviation of various bitcoin prices.

Its important to keep in mind when discussion the bitcoin price (or any price for that matter) that the price of something is simply a expressed ratio between the value of two things. So to say there is one price for something assumes a standard base currency. We take this for granted since in North America at least, most of us use either the Canadian dollar or US dollar to buy and sell things during our daily lives at the retail level. But theoretically we could also value goods and services by any other price ratio too.

How does the volatility of the bitcoin/US dollar price compare to other currency pairs or other assets?  The price of bitcoin is indeed more volatile than CAD/USD, CNY/USD or any other major fiat currency pair. This may be because most central banks around the world have similar monetary systems and policies, therefore, they all tend to move in the same direction (whether you think these directions are “right” or “wrong” is beside the point). But what about the volatility of Gold/USD or other assets? It turns out the bitcoin price has also been much more volatile.

At this point in bitcoin’s history, its price has a similar level of volatility as stocks.  The historical 30 day standard deviation of the price of bitcoins/USD is currently 1.39 according the btcvol.  I used the standev excel function and data on the SPY from Google Finance to calculate the standard deviation of the SPY and got 2.09. So right now, over the past month, stocks/USD is more volatile than btc/usd. But they are close.

Bitcoin Derivatives One Step Closer

The CME and ICE have each announced they will begin providing data on a bitcoin price index last this year.  This is very exciting news for bitcoin participants as it get the market one step closer to derivatives trading, which would bring the possibility of listed futures & options, which would also enable the market to price all sorts of new information that derivatives trading would reveal about bitcoin.  Bitcoin derivatives would also open another way for the market to earn a rate of return from the investment of bitcoin and also contribute to better pricing information on the implied interest rate for various types of bitcoin financial transactions.

CME Group to publish daily bitcoin settlement price

CHICAGO CME Group Inc (CME.O) plans to begin publishing a daily settlement price for bitcoin and real-time price data as the futures market operator moves into the world of the digital currency. Starting in the fourth quarter, the new settlement price will be published in U.S. dollars at 4 p.m.

Loanbase is Adding Autoinvest

Loanbase, one of the peer-to-peer (p2p) bitcoin lending platforms announced today that they will soon unveil a new auto-invest feature.  This comes as good news to the bitcoin p2p community, but the change could have some drawbacks for certain users. One of the differences between some of the main p2p lending platforms is in the way they price their loans. For the leading platform BTCJam, borrowers are assigned an interest rate for their prospective loans based on how the borrower rates according to BTCJam’s credit rating system. The benefit of this loan pricing format is it takes most of the onus off the lender. The lender doesn’t have to do their own diligence, they can just rely on BTCJam to price the loans accurately. It therefore makes it easier for novice “investors” to participate in the BTCJam p2p community without having to build much of a investment policy. For example, if a BTCJam investor knows that the system has assigned a loan a specific interest rate based on the risk criteria as set out by the BTCJam credit rating system, the investor no longer has to bother researching individual credits. Under the BTCJam system of risk pricing, the investor can indiscriminately invest in a large number of loans, and so long as those loans are randomly chosen, they will provide the required diversification to earn a profit. BTCJam is becoming the rater of individual credits.  This system makes it possible to offer an auto invest feature because credit rating doesn’t matter as much.

The problem with this “risk based pricing” model is that since almost all credits on the bitcoin p2p lending platforms are high risk and low quality, the prices charged must always be high. The system does not allow a good credit to post their own price.  The system of risk based pricing as implemented by BTCJam excludes good credits and makes the platform one for bad credits only. For investors, returns on diversified portfolios will look like the returns on a payday lending portfolio.

The difference of Loanbase to BTCJam and Bitbond was that borrowers on Loanbase could negotiate their own rate. It was up to lenders to decide whether this rate reflected the estimated risk of the loan itself. My suspicion is that this system was too sophisticated for the bitcoin p2p lending community at this stage of development. The platforms can probably drive more liquidity by using the autoinvest feature. Casual lenders on Loanbase probably found that their loans were having a default rate greater than what they were earning in interest and so casual lenders were loosing money. For sophisticated lenders, the Loanbase system was better because sophisticated lenders know how to calculate an APR and only invest in loans that had APRs that considered the likely default risk. Since Loanbase allowed lenders to negotiate a rate, I would often change the rate to meet my lending criteria and most of the time the borrower would accept my negotiated price. The data is available from BTCJam and Loanbase about default rates, lenders need to charge an APR around 50% or more because more than 40% of loans (of all ratings) will default.

My own Loanbase portfolio is outperforming my friend’s BTCJam auto-invest portfolios because I’m taking advantage of loans where the borrow is mis-pricing their own loans, since my knowledge of Loanbase credit risk is better than most borrower’s.  Specifically with short term loans, sometimes the fixed rate would be 8% (which doesn’t sound so bad) but since it was a loan of 90 or less, the APR was in the many hundreds of percent.

Now that Loanbase will move to a risk base pricing model, the advantage of the sophisticated user will largely disappear since loan pricing will no longer be negotiated. This is too bad in my opinion because it will limit the ability of good credits to raise funds. Along this vain, I have been finding the lowest rated credits on Loanbase have similar rates of return to A and B credits since the lowest rating (E) included all new borrowers and borrowers who were otherwise less risky, but that included borrowers who were unwilling to disclose additional personal information (which kept them in the lowest rating category).

Ponzi schemes are also a key risk on these anonymous p2p platforms. Consider the borrower who plans to take out a loan on a p2p site and then abscond. At the lowest rating, the site limits the size that they can borrow, but as their rating increases with more personal disclosure and the repayment of past loans, they can borrow larger amounts. The ponzi operator will use the lowest rating for their first few loans, and make sure they pay those loans back. As successful repayment enables them to increase the amount they can borrow with a higher rating, they will default at a credit rating higher than the lowest. I have found that the lowest credits may have a better repayment history because those borrowers are trying to increase their rating (whether because they are honest or because they are planning a ponzi is irrelevant to the lender).