Category Archives: Bitcoin

Quite a few countries are contemplating how they should treat bitcoin moving forward. Cryptocurrency poses intriguing opportunities, yet it is difficult to regulate as there is no centralized entity controlling the ecosystem. Nigerian banks are contemplating to legalize bitcoin, which would give the popular cryptocurrency a significant boost, to say the least.

It is not the first time someone brings up the concept of Nigerian banks legalizing bitcoin. The same idea was proposedseveral months ago. Albert no one saw this as a hint of what the future could hold, it would appear various Nigerian banks are thinking along the same lines. This development caught quite a few people by surprise, even though it makes a lot of sense.

An article appeared in The Inquirer, which talks about how the Nigerian Bankers Committee is studying blockchain technology. That is anything but surprising, as nearly every bank around the world is well aware of what distributed ledgers bring to the table. However, there has not been any major product to come forth from this interest so far. Experts predict a few of these blockchain applications will see the light of day in 2017, albeit that remains to be seen for now.

What is more interesting, however, is how the Nigerian Bank Committee still feels bitcoin poses somewhat of a threat the national financial ecosystem. To be more precise, the group touched upon the concept of dubious virtual currencies flooding the country. It is not hard to see which projects they are talking about, as OneCoinhas become somewhat of a popular concept in Nigeria. Additionally, there is also the MMM Global scheme, which only accepts bitcoin deposits in Nigeria right now.

It is evident the Central bank of Nigeria wants to gain a better understanding of bitcoin and its blockchain technology. That open-minded approach can mean big things for cryptocurrency in the country moving forward. Moreover, it only appears to be a matter of time until Nigeria introduces bitcoin regulation, which could occur as soon as this year. Introducing such a regulation would effectively legalize bitcoin in Nigeria, even though the current is not issued by the countrys central bank.

Nigeria is not the only country in the world looking to regulate and legalize bitcoin. Japan will be doing the same later this year, which will bring a lot more legitimacy to cryptocurrency moving forward. Albeit no one can effectively regulate bitcoin itself, governments can impose specific guidelines for companies dealing with customer funds, either in the national currency or bitcoin. Then again, running a financial business will always be subject to specific regulation and bitcoin enterprises should not be exempt from those rules.

Bitcoin regulation does not have to be a bad thing by any means. Chinas central bank issued a few new regulatory measures over the past few weeks, which has only helped the bitcoin price stabilizes as time progressed. It is unclear what Nigeria will do exactly when it comes to blockchain and cryptocurrency, but it will be an intriguing situation to keep an eye on.

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Nigerian Bankers Committee Plans to Legalize Bitcoin - The Merkle

Forbes

China's Bitcoin Drama Isn't A Financial Meltdown Forbes China, currently the world's largest Bitcoin trader, has caused some complications for the cryptocurrency since the beginning of the year. The amount of Bitcoin traded in the country has plummeted from 10 million a day to 30,000-90,000 due to 'abnormal ... Bitcoin traders look to other digital currencies for returnsCNBC Size Matters: Japan Becomes Largest Bitcoin Exchange Market, Beats China and USCoinTelegraph Bitcoin Tracker: Denouement?PYMNTS.com CryptoCoinsNews -The Merkle -Brave New Coin all 16 news articles »

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China's Bitcoin Drama Isn't A Financial Meltdown - Forbes

Legislators in New Hampshire have advanced a bill aimed at carving out regulatory exceptions for certain bitcoin businesses, public records show.

As reported by CoinDesk last month, New Hampshire'sHB 436 seeks to create a regulatory exception for persons "using transactions conducted in whole or in part in virtual currency" who may otherwise be considered money transmitters under current laws.

Sponsored by state rep Barbara Biggie with Representative Keith Ammon as a co-sponsor the bill was passed along to the NH House Commerce and Consumer Affairs Committee. On 16th February, according to LegiScan, an 11-9 majority of the committee approved the bill to advance to the House floor for a vote, the date of which is not immediately apparent.

The bill also seeks to update the state's definitions for virtual currency with a revised version that would read:

"'Virtual currency' means a digital representation of value that can be digitally traded and functions as a medium of exchange, a unit of account or a store of value, but does not have legal tender status as recognized by the US government."

Despite the movement, however, there's no guarantee that the bill will pass.

Legislators in the state have expressed a degree of aversion to the tech in the past, killing a bill proposed last year that, if passed, would have allowed state citizens to pay their taxes in bitcoin.

Image via Shutterstock

New HampshireRegulation

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NH Lawmakers Advance Proposed Bitcoin MSB Exemption - CoinDesk

I'm strongly considering entering into a substantial investment in bitcoin as part of my passively managed, fully long portfolio. Before I do that, I decided to look into two questions regarding bitcoin's role in a portfolio:

My reasoning was that, if possible, it would be preferable to replicate exposure to bitcoin using existing financial assets because there are still substantial risks to owning bitcoin. First, a plot of bitcoin's price in both a linear and log scale to place the following analysis in context.

Can Bitcoin Be Considered a Financial Asset?

Before calculating bitcoin's correlation to other financial assets, it's useful to take a step back and think of whether bitcoin can be considered a financial asset based on its fundamental characteristics. And if bitcoin is a financial asset, how should it be classified?

A useful framework for thinking about this is in Robert J. Greer's paper, "What is an Asset Class, Anyway?" In this paper, Greer defines an asset class as "a set of assets that bear some fundamental economic similarities to each other, and that have characteristics that make them distinct from other assets that are not part of that class."

He proposes that any asset can be classified into one of three super classes:

In the real world, not every asset falls neatly into one of the three categories. Gold, for example, is both a consumable asset and a store of value asset. It's arguable that U.S. sovereign bonds are both a capital asset and a store of value asset. But it's still a useful framework to keep in mind when thinking about portfolio construction.

Where does bitcoin fall in this framework? Bitcoin can be safely categorized as a store of value asset in that it doesn't generate income, you can't consume it, and yet it has economic value. Store of value assets are often referred to by other names, including "safe haven assets" and "flight to safety assets". Thus, we should expect a priori that bitcoin should have a higher correlation to other store of value assets, including gold, other precious metals, and safe haven currencies like the Swiss franc, U.S. dollar, and Japanese yen.

Testing Bitcoin's Correlation Using the Brute Force Approach

In the past few years, ETF offerings have become sufficiently broad to represent virtually all asset classes across all major countries and geographies. ETF historical prices, therefore, represent a fairly high-quality source of asset returns. I wrote about how to obtain this data in a previous post: How to Scrape Data for Over 1,900 ETFs.

I first tested bitcoin's correlation to other financial assets using what I call the brute force approach: I calculate the correlation between bitcoin's weekly return and the weekly return of all ETFs with over $10 million in assets and plot the results in the following histogram.

The interpretation is that the correlation between bitcoin and other financial assets is extremely low. Most asset classes have a correlation between -0.1 and +0.1. The few ETFs with correlations outside of this range were mainly explained by the fact that some ETFs were launched recently and thus the correlation between bitcoin and these ETFs was largely spurious in nature.

This result was a bit disappointing since I was originally hoping to replicate bitcoin's exposure using a collection of highly correlated ETFs. On the other hand, this is a strong argument for including bitcoin as a significant part of a portfolio of risky assets. Finding and adding an uncorrelated asset to a portfolio can act as a powerful source of diversification by increasing the portfolio's sharpe ratio. There are extremely few assets that are this uncorrelated with other assets and that makes bitcoin extremely desirable from a portfolio construction perspective.

Testing Bitcoin's Correlation Using the Refined Approach

I decided to look into bitcoin's correlation further using a refined approach by calculating the one-year rolling correlation between bitcoin's weekly returns and the weekly returns of selected ETFs. There is evidence that bitcoin has become a more mature asset class over time in that its volatility has reduced and it has started to react more to macroeconomic factors and geopolitical events rather than things that are specific to bitcoin itself.

Below I plot of the one-year rolling correlation between bitcoin's weekly returns and the weekly returns of a selection of risky assets followed by a plot of a selection of safe assets.

The interpretation is that even looking at a one-year rolling window, the correlation remains low with many correlations oscillating between positive and negative. Current correlation is still low even though bitcoin has had time to mature into a legitimate asset class.

Remember, I had expected a priori that bitcoin would have a higher correlation to these safe, store of value assets. Originally, I had hoped to replicate bitcoin exposure using a combination of gold, US sovereign bonds, and foreign currencies. These results strongly suggest that this is not possible and that bitcoin is a unique, uncorrelated asset class that is not strongly affected by the macroeconomic factors that drive most asset classes.

Doing this analysis has given me conviction that bitcoin should be a part of my passively held, long-only portfolio. First, there aren't that many store of value assets in the first place. There's gold, US sovereign debt, safe haven currencies, and that's it. Second, it's surprising that bitcoin's correlation is this low, even among other store of value assets.

At the same time, there are strong theoretical arguments that bitcoin will serve as a hedge against harmful geopolitical events due to its decentralized nature. There's a growing body of empirical evidence of this also with bitcoin price spiking in response to both Brexit and Donald Trump's win.

Bitcoin is uniquely positioned to hedge against geopolitical risks but remain unaffected by the macroeconomic factors that drive other store of value assets.

Exposure to bitcoin can be obtained either by buying bitcoin directly, through the upcoming bitcoin ETF (Pending:COIN), or the Bitcoin Investment Trust (OTCQX:GBTC).

The code for this post can be found on my Github.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

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What Is Bitcoin's Correlation With Other Financial Assets? - Seeking Alpha

Spencer Bogart is vice president of equity research for Needham & Co. He joined the firm in 2014 and currently leads the research efforts on blockchain technology and bitcoin while supporting research on cloud software (SaaS) companies. ETF.com recently sat down with Bogart, a former ETF.com analyst, to get his take on all the important developments in the bitcoin market ahead of the key SEC decision on the Winklevoss ETF, expected within the next month.

ETF.com: Before we jump into more specifics, in a nutshell, how would you describe what bitcoin is to the layperson?

Bogart: Bitcoin is peer-to-peer digital cash that's not issued by any central authority.

ETF.com: Tell us about the highly anticipated decision that's coming from the SEC. What is it ruling on and what are the odds the ruling will be positive? Spencer: There's a number of bitcoin ETFs that are going through the regulatory approval process. The one that's been going through the process the longest is the Winklevoss bitcoin ETF [Winklevoss Bitcoin Trust (COIN)]. That's been going on for about 3 1/2, four years now.

The exchange they would like to list that particular ETF onwhich in this case is Bats [owner of ETF.com]has filed a proposed rule change, which would be necessary to list the ETF. It's that proposal that essentially we've been watching go through the regulatory approval process.

At each point along the way, the SEC has had the option to approve, disapprove the ETF or to extend its time to make a decision. All along the way, its chosen the opportunity to extend the time to make a decision, including submitting requests for public comments.

Well now see an end to that process before March 11, which is the deadline. Before that, well either get an approval, a disapproval or Bats will withdraw its request for a rule change. Or, if no decision is made by March 11, then the rule change is automatically approved.

ETF.com: What factors are the SEC considering?

Bogart: I don't have any inside information, but my sense is that the majority of the things that the SEC is particularly concerned about revolve around bitcoin itself as opposed to anything specific about the Winklevoss filing.

They're asking if a digital asset such as bitcoinwhich, unlike a commodity doesn't have a physical form, and unlike a security or derivative, is not under any kind of regulatory supervisionis a suitable underlying asset for an ETF.

At the highest level, that's the kind of thing they're considering. A little bit more in the weeds they're asking if the specific markets that bitcoin trades on are stable, fair and efficient, and if they facilitate or enable or encourage any kind of market manipulation.

And then of course, there are the factors that are more specific to the ETF itself, which I think, in this case, probably the most important ones are what do you use as a reference price for bitcoin, and how are you going to securely store that bitcoin?

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Bitcoin ETFs For Dummies - ETF.com

Eric Lombrozo, a Bitcoin Core developer, believes that bitcoin is about financial independence and freedom, rather than providing a centralized settlement network which already serves as the backbone of todays global financial ecosystem.

Over the past two years, various bitcoin communities, analysts and experts have debated on the characterization of bitcoin; specifically whether bitcoin demonstrates the qualities of a settlement network or digital gold.

Since the initial deployment of the bitcoin network, Bitcoin Core developers and other talents in the open source development community of bitcoin have focused on strengthening security measures to eliminate the presence of a central authority within the bitcoin network and ensure the network itself will not be compromised in the future.

The prioritization of security instead of flexibility and functionality as seen in alternative failed blockchain projects allowed bitcoin to prosper and evolve into a decentralized financial network that cant be censored or restricted by a governing entity. It allowed users to settle payments with low fees and at relatively fast speeds, in comparison to traditional banking.

As the bitcoin network grew in size, transactional delays caused discomfort for daily users. Some individuals expressed their concerns over the increasing transaction fee of bitcoin, which is currently at US$0.32 for an average transaction. A $0.32 fee should be enough to have transactions confirmed within a few hours.

However, the Bitcoin Core development team and industry leading companies arent particularly concerned of the rising fees as it is the result of the prioritization of security. Bitcoin Core developers are focused on introducing software like Segregated Witness (Segwit), which allows bitcoin to scale significantly without imposing major security risks unlike hard forks.

Users and investors shouldnt necessarily be overly concerned about the scalability of bitcoin as well because there already exists a scalability and transaction malleability solution in Segwit and two-layer solutions such as Lightning and TumbleBit that can contribute to the scalability of bitcoin. Lightning in particular enables the facilitation of micropayments, that open doors for many applications which intend to rely on bitcoin micropayments.

Bitcoin is still a technology at an early stage. Currently, the Bitcoin network allows users to make payments that werent possible before. Before bitcoin, users couldnt imagine the possibility of transacting millions of dollars within a few hours with less than $1 in transaction fee without the presence and involvement of a governing entity or a bank.

As Lombrozo explains, Bitcoin is about financial sovereignty. If you think its merely about fast and cheap youre short-changing yourself.

The contemporary structure of bitcoin makes it difficult for two-layer solutions to exist. Soft forks like Segwit however allows bitcoin to eliminate transaction malleability and alter its design to welcome two-layer solutions that could enable bitcoin to become a fast, cheap and secure financial network for mainstream users.

Lombrozo believes that the activation of Segwit, implementation of layers and introduction of innovative solutions will allow bitcoin to serve as an important technology to provide users with financial freedom, privacy, independence and flexibility.

You can make it fast and cheap with layers. Current network design does not allow it at large scale. I wish this werent so. Unfortunately HFs carry significant political cost and security risks. I also wish this werent so, noted Lombrozo.

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Core Developer: Bitcoin is About Financial Sovereignty, Not Speed - The Merkle

The bitcoin price rose on Thursday after Chinese digital-currency exchange BTCC said it would temporarily halt withdrawals while it upgrades its anti-money laundering systems, becoming the third major exchange to do so. Last week, OKCoin and Huobi, which, along with BTCC, comprise China's "big three" bitcoin exchanges, made similar announcements, saying the necessary upgrades should take a month, if not less. One bitcoin cost $1,019 in recent trade, according to Coin Market Cap. In the past, the bitcoin price has fallen following reports of Chinese regulators stepping up pressure on the exchanges. Instead, the price reaction on Thursday suggests that investors are less worried about interference from Chinese authorities, who have sought to tighten oversight over the country's exchanges in recent months. "The market is kind of numb," said Chris Burniske, blockchain analyst and products lead at ARK Invest. "It's priced in this information and it's not concerned." Earlier in the week, a former governor of the People's Bank of China, the country's central bank, said on local television that bitcoin will continue to exist in China.

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Bitcoin price rises as third Chinese exchange halts withdrawals - MarketWatch

It seems that the drama with the PBOC and regulations in China is becoming less and less significant, as these news dont seem to have as much impact on the price. In fact, the price is on the way to recovered to pre-crackdown prices as Bitcoin is trading at $1035 on Bitstamp. On Feb. 9th, the PBOC released quite a threatening statement which tanked Bitcoins price 10%, on the bright side it looks like the worst is behind and Bitcoin is setting a new price floor at $1000.

While Bitcoin is receiving scurrility in the East, the Western markets are showing massive support for the cryptocurrency. We can see that the Chinese markets are loosing dominance becausethere is now a premium of $40-50 for the Western markets, while the value per Bitcoin on the Chinese exchanges is lower than average. This chart from Tradeblock shows the price difference best:

Its only expected that Bitcoins price would be cheaper in China as many users refuse to convert their Yuan into Bitcoin for the fear that they wouldnt be able to withdraw the coins later. However, some more opportunistic traders are also doing just the opposite which is buying up those cheap coins in the hopes of the price stabilizing again once cryptocurrencywithdrawals turn back on.

People were doing the same thing when MtGox was going under, they bought coins on MtGox much under market price, since they bet on the exchange to returning to normal. Unfortunately for them we all know how that situation turned out MtGox filed for bankruptcy and every investor took a loss.

Other relevant news include the fact that Investing.com, one of the most popular investment resources has labeled Bitcoin as a strong buy. According to their technical summary chart for the cryptocurrency, Bitcoin is worth buying at the moment:

It seems that traders are optimistic about Bitcoins support. However, in such a volatile free market any hint of drama can send the chart sideways. With the Bitcoin ETF decision coming March 11th, tensions will only increaseas traders bet on the outcome.

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Bitcoin Price on the Rise Again After Regulatory Crackdown in China - The Merkle

Satoshi Nakamotos creation is often seen as something it is not, as there are a lot of misconceptions that simply dont want to go away. Sometimes, because some want to smear bitcoin, and often because others fail to do their homework properly. Here are a few common misconceptions about bitcoin that the average joe keeps on believing:

Ponzi schemes usually involve a central entity trying to persuade possible investors, telling them they will make a huge profit. In these schemes, the only way those on top can make money is at the expense of others. Bitcoin is a decentralized peer-to-peer currency, there is no central entity. It does not require a constant flow of money to sustain itself, not does it require new adopters to survive.

Moreover, it is important to note that, if it was all a Ponzi scheme, we would assume Satoshi Nakamoto, bitcoins creator, would live an extravagant lifestyle. He owns roughly 1 million bitcoins a little over US$1 billion at the time of press. Yet, these coins havent been moved in years.

It is true that Silk Road, an infamous dark web marketplace, helped bitcoin grow in 2011. In 2013, the FBI took down the Silk Road, but that did not stop bitcoin from growing. Recently, bitcoins market caphit $15 billion, as the ecosystem of legitimate businesses who accept bitcoin keeps on growing. In some cases, businesses can even get a special license that allows them to legally accept bitcoin as a form of payment.

Nevertheless, bitcoin is used by criminals, just like fiat currencies, commodities, app store gift cards, gym membership vouchers and pretty much anything with value.

In the early days, it was very hard to use bitcoin as almost no one was accepting the cryptocurrency. Nowadays, however, there are thousands of businesses accepting bitcoin throughout the world, and one can not only buy food, but also get a haircut, hire a lawyer, and even get a lightsaber. Theres a useful app out there, called Bitcoin Map, that lets users know which brick-and-mortar businesses around them accept bitcoin.

Heres a video of a transaction at Subway:

Hackers have been successful at stealing large amounts of bitcoin in the past, but that doesnt mean the cryptocurrency isnt safe. Most bitcoin thefts were a result of inadequate wallet security, and since then risk-mitigating measures have been taken. Yet, these high-profile bitcoin heists can make the currency look unsafe.

Users need to properly secure their wallets , and that means backing them up and encrypting them. Offline wallets are the safest way one can store their bitcoins, and even these should be backed up.

Although you dont need a bank account or a social security number to pay with bitcoin, transactions arent completely anonymous. Every transaction is publicly recorded on the blockchain in order to prevent certain actions, such as spending the same bitcoin twice.

Granted, its hard to use bitcoin transactions to uncover someones real identity, but it is possible. If someones transactions are tracked down to an exchange, for example, it is possible authorities uncover the persons identity through a subpoena. To protect ones privacy, a bitcoin address should only be used once.

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5 Common Misconceptions About Bitcoin - The Merkle

Mining centralization is probably one of the biggest challenges digital currencies face.

Many of Bitcoins properties, such as censorship resistance and double-spend protection, rely to a large extent on a decentralized mining landscape. But over the years, the Bitcoin mining system has increasingly centralized into fewer hands and fewer geographical regions. There are several explanations for this trend. But one of them is the emergence of specialized mining hardware: ASIC chips and miners.

In an attempt to solve this issue, scientists at the University of Luxembourgs Interdisciplinary Centre for Security, Reliability and Trust (SnT) have developed a mathematical algorithm called Equihash. Equihash is the brainchild of Prof. Alex Biryukov, head of SnT research group CryptoLUX focused on research and technology transfer in cryptology and CryptoLUX researcher Dr. Dmitry Khovratovich. The algorithm was first unveiled at the Network and Distributed System Security Symposium 2016 in San Diego.

Probably its most significant success to date, Zcash, the new decentralized and open-source digital currency that aims to set a new standard for privacy and anonymity through the use of groundbreaking cryptography, announced the integration of Equihash in April 2016. In a post titled Why Equihash?, Zcash founder Zooko Wilcox and engineer Jack Grigg noted that Equihash has very efficient verification which could enable light clients on constrained devices and Zcash clients inside Ethereum. But the main reason for the enthusiasm of the Zcash tech is, indeed, Equihashs resistance to ASIC mining.

Equihash is a memory-oriented Proof-of-Work, which means how much mining you can do is mostly determined by how much RAM you have, said Wilcox and Grigg. We think it is unlikely that anyone will be able to build cost-effective custom hardware (ASICs) for mining in the foreseeable future. Wilcox and Grigg added that it is unlikely that major optimizations of Equihash could give the miners who know the optimization an advantage.

Equihash is a memory-hard problem, more suited to general-purpose computers with lots of memory than to special hardware chips. If 10,000 miners with a single PC were active, in Zcash the investment to compete with them would be 10,000 times the price of a PC, while with Bitcoin, the investment would be significantly smaller, said Khovratovich. The strength of a cryptocurrency comes from the fact that the ledger is globally distributed. Our Equihash algorithm reverses the situation back to this more ideal world.

According to the CryptoLUX scientists, the algorithm permits avoiding centralization of the mining process in the hands of a few first-class miners with specialized mining hardware, thus contributing to the democratization of digital currencies based on Equihash.

Since Equihash is based on a fundamental computer science problem, advances in Equihash mining algorithms will benefit computer science in general, added Biryukov. Equihash is so far unique among all the mining algorithms: it is memory-hard on the one hand and very easy to verify on the other.

Speaking to Bitcoin Magazine, Equihash inventor Biryukov also emphasized that Equihash is a portable algorithm, not limited to specific digital currencies.

We don't have any formal relation with the Zcash project, he said. Equihash is not limited to Zcash, it can be used in any cryptocurrency. That said, Biryukov did sound cautiously enthusiastic about Zcash. Compared to many other cryptocurrencies Zcash definitely brings in new features based on state-of-the-art academic crypto. Whether it will scale well or not the future will show.

Given the portability of Equihash, its interesting to speculate about its possible integration in Bitcoin itself. I am not aware of such attempts, but it would be technically easy to do, noted Biryukov.

For more details on Equihash, see the research paper Equihash: asymmetric proof-of-work based on the Generalized Birthday problem.

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How the Equihash Algorithm Could Democratize Zcash Mining - Bitcoin Magazine