Coinbase Goes Down When Bitcoin Goes Up

It seems there is a correlation to Coinbase having network issues every time there is a Bitcoin bull run. It just appears to be a certainty at this point:

“When Bitcoin goes up, Coinbase goes down”

During the Bitcoin rally in 2017, when Bitcoin price value approached an ATH of $20K, Coinbase also experienced connectivity issues and trading was halted. This was the time Bitcoin suddenly surged and then came crashing down as soon as traders hit the exchange. It seems that the Coinbase system was not designed to accommodate or scale to handle millions of new users. That should have been a lesson to resolve the problem over the years.

It has not been solved. The most recent bouts of network outages and downtime have been occurring on and off. Between March and November of 2020, Coinbase has had a series of problems with their network. It may have affected the trading of Bitcoin in some way or another. No one is reporting the exact reason for these problems, but there have been reports of outages from Coinbase’s cloud provider AWS.

During a brief Bitcoin surge in November 2020, and also during an XRP rally, Coinbase suddenly goes down. It is frustrating traders who could have sold or bought more assets, but instead the system crashes. If it were a universal problem, it would also happen at the same time to other exchanges like Binance and Kraken. They all have to deal with issues on the network, but never at the level of Coinbase.

Coinbase CEO, Brian Armstrong, tweeted (in response to the problems):

“We’re working hard to add additional capacity (both in servers and customer support) to deal with increased traffic. Thank you for your patience during this time. And thank you to the team at Coinbase working hard to serve our customers! Bull runs can be exciting and stressful.”

— Brian Armstrong (@brian_armstrong) November 18, 2020

From an IT and network engineering perspective, the problem has to do with scalability and contingency. While AWS has autoscaling capabilities, if the whole infrastructure is affected, it will have an effect on Coinbase. There are other cloud IaaS (Infrastructure-as-a-Service) providers like Microsoft Azure and Google Cloud, which allows operations to continue in the event that one provider is down. For contingency, a more distributed and decentralized system would have kept the system operational to handle enormous workloads. Perhaps Coinbase had planned for capacity, but not agility.

A more distributed system can prevent downtime, but doesn’t totally eliminate it. If a server malfunctions it will go down and there is nothing that can be done to prevent it. However, the contingency in place is to plan for fault-tolerance and redundancy. Other IT professionals have aired the same opinion, like Hashoshi on his “404 Logic Not Found” section.

Coinbase has been a pioneer in the cryptocurrency space. It would be sad to see their trading business affected by downtime and outages. They have enabled millions to get into cryptocurrency as an onboard to more decentralized financial instruments. There are more options available for traders to buy/sell crypto, including the Robinhood app and even PayPal. They still need exchanges like Coinbase to convert cryptocurrency. Hopefully they can work things out, or else traders will flock to other digital exchanges or DEXes for their business.

The Halving Has Arrived

The third Bitcoin Halving has finally occurred on May 11, 2020 at block height 630,000 at 19:23 UTC without any glitches.

This was reported by Coindesk:

“In an homage to Satoshi Nakamoto’s iconic “brink of a second bailout” message in the 2009 genesis block, f2pool, which mined the 629,999th block (the last before the halving), embedded a reference to the current financial crisis: “NYTimes 09/Apr/2020 With $2.3T Injection, Fed’s Plan Far Exceeds 2008 Rescue.”

The reward for miners is now at 6.25 BTC per validated block. This means that although the block subsidy incentive has been reduced, the price remains volatile. Either a miner can earn more due to the appreciation in price value or profit less due to operating inefficiencies (e.g. old ASIC miners, higher costs of electricity, etc.). Miners who stand more to lose than gain should reconsider their configuration to adjust to the difficulty target and network’s hash rate.

Within the next two weeks after the halving occurred, difficulty should adjust (every 2,016 blocks). Miners should keep an eye out for the hash rate as well to see whether it has fallen (takes more time to produce blocks) or increased (more competition). Factor in the market price, and it gives an indication of whether the rewards are better or much worse.

While the Feds have quantitative easing, Bitcoin has quantitative hardening, a principle that has yet to be fully explained. The understanding is that Bitcoin is sound money because it uses an anti-inflationary model that limits the total supply (21 Million Coins). The code does not mint new coins at all and no one can mint more coins on the Bitcoin network. It is fixed at the supply set in code, and it is never created out of thin air.

While that sounds good in theory, in reality it has not been a perfectly deflationary model. While the supply is not reduced over time (it is fixed), there are new BTC still put into the circulating supply. It is when the amount of new BTC in circulation hits zero that it becomes deflationary. At that point, there will be no more rewards to miners but they can still collect transaction fees for their participation.

Right now the current economic landscape will have more influence on the price of BTC post-halving. What investors would like to see are the Fed’s injections into the economy trickling into BTC through stimulus. There are different ways that can happen and have been made available through the largest digital exchanges like Binance and Coinbase. For now, Bitcoin has proven itself once again as a stable and mature blockchain built on sound principles.

Note: While no bugs have been reported at the moment, it seems the halving occurred successfully.

DeFi Open Lending Protocols, Bringing Financial Inclusion To Everyone

When it comes to the significance of the blockchain, most would think about its decentralized organization which is not controlled by anyone and it is open to all. When applied to finance you could come up with a “killer app” for DeFi (Decentralized Finance). The implementations of DeFi are providing ways to offer traditional financial services like lending using the techniques from blockchain architectures. It cuts out the intermediary and lets anyone become their own financial service provider.

This is made possible using smart contracts that run on top of the Ethereum public network. This is yet the best implementation of Blockchain 2.0 with the innovations that introduce Blockchain 3.0 features (e.g. staking, digital governance). The blockchain provides a layer of trust between two parties, so that transactions are transparent. There is also no arbiter or middle man who can obscure details from a transaction. Everything is executed by the smart contract, containing the business logic and conditions.

This has led to the Open Lending protocols, providing ways for anyone to make money from interest lent out. It is based on cryptocurrency and other digital assets, which can be collateralized debt to gain credit. There are no background checks or personal information needed, just a form of collateral to secure a loan. This would be considered risky in the traditional finance sense, but an over collateralized debt position can mitigate risk along with conditions that will allow lenders to leverage digital assets to their advantage. Thus, if a lendee defaults on their loan, the lender will become the owner of the collateralized digital asset.

While most lenders need to be registered as a financial service provider due to compliance with regulators, that is not the case with DeFi products. Open Lending provides an API for DApp developers to create an interface that allows them to interact with a smart contract. The smart contract is created by the lender, who enters into the transaction based on a condition that is specified in the business logic’s code. There is no need for credit checks, employer endorsement or references to secure a loan. It is all based on trust in the blockchain, through the smart contract.

Open Lending can help a large sector of the underserved members of the community, particularly the unbanked. It provides everyone a path to capital resources they would otherwise never have a chance to obtain. People who don’t have access to micro-loans because of lack of documentation will have the opportunity for financial inclusion perhaps for the first time in their lives. People with poor credit scores will get a chance to access financial services they otherwise would not be able to enroll in with traditional banks. Since these protocols run over the Internet, anyone from around the world can be a lender for anybody that needs financing through digital assets. The money can be converted into a stablecoin to avoid the volatility of the cryptocurrency market, but most will just convert to fiat through digital exchanges. At times, the smart contract may also be a DeX (Decentralized Exchange) and allow the person to get their loan in their currency of choice.

The ecosystems for DeFi applications using Open Lending protocols can be a problem for first time users. They are not easily available, and requires some understanding of how cryptocurrency works. Developers are working to make the UI/UX easier and more convenient for users by integrating the DApp with smartphones or mobile devices. It will be hard to regulate this since it is not a particular company offering the services and the smart contracts are merely running on top of an open source platform. It would be hard for regulators to shutdown the Ethereum network since it is not a single entity, but rather a set of nodes that encompass the world. As DeFi becomes more mature, so will the applications. Then more users can enter the ecosystem and realize there is an alternative to banks and creditors when it comes to financial services.

Privacy Coins – Protecting Your Right To How You Spend Your Money

If you were given a bag of cryptocurrency assets, what would it include?

Many would probably say coins that have the ability to cut the middle man out and use direct peer-to-peer (P2P) payments. That is the main point, but there is another one that is just as important … PRIVACY.

The right to spend your money the way you choose without being asked questions. How you spend your money is your right, and no one can decide what you can and cannot use it for. This is not to encourage illicit activity, which is usually the message regulators get. Instead it is about protecting a citizen’s right to privacy. Why should anyone track what a person buys? Should the government know who you donate your money to? If for example the current administration in your country is against the political ideology of the person you donate money to, they could use that information to cut you off. Another example which many would want to consider private is the purchase of adult content. Now there is a legitimate reason to go after criminal activities, but for non-illegal transactions that deserve the right to be anonymous should be allowed.

The type of cryptocurrency that should be in that bag of assets should include Privacy Coins. These provide a layer of protection for users to confidentiality and anonymity in their transactions. Someone can use these tokens to spend their money on things that they would otherwise be embarrassed to disclose. I won’t get into details, but people should be able to use digital payment systems that are like cash in the real world. It is what financial freedom should be all about.

When you use cash, it is a final transaction. There is no ledger that tracks what you spent your money on. It is the most anonymous and private way to transact. This is not how it is like with digital electronic payments today, even with most cryptocurrency like Bitcoin. Visa and Mastercard, both debit and credit, keep records of your transactions in a database. This is necessary for accounting, but it also reveals what you spent your money on. Bitcoin is not fully anonymous, it is pseudonymous. It is still possible to track a person down to the digital exchange where they convert BTC for fiat currency. Bitcoin provides plenty of transparency, and that is important for certain transactions.

Privacy Coins can provide anonymity using techniques that obfuscate transactions. They can also hide the user’s identity in a transaction. This is referred to as a double blind, in which the system does not know what you spent your money on and anyone outside the system as well. Only you and the other party you dealt with will have knowledge of the transaction. It can also be triple blind, in which case no one will know your identity, even the person you transacted with. Only you know about the transaction. This does pose a problem to regulators who want to be able to track down transactions or the movement of money. This is to check for AML (Anti-Money Laundering) purposes for financial rules and regulations in the banking and finance industry.

This is not to say that everyone will use Privacy Coins for purposes of laundering money, but the question is why do those laws exist in the first place? They are jurisdiction mandated to control the flow of money outside of the country. It is in fact necessary to keep track of the flow of money to prevent funding of terrorism and illegal financing. Privacy Coins can circumvent these laws, so it is not popular with regulators.

Monero (XMR), Dash (DASH) and ZCash (ZeC) are three of the top Privacy Coins. Each one has its main feature that provides privacy for its users. Monero provides untraceable source and destination of transactions using the CryptoNight PoW protocol. Dash uses PrivateSend, which mixes up data in a transaction to hide it from prying eyes. ZCash uses its Zero Knowledge Proof technique called Zk-SNARKS (Zero-Knowledge Succinct Non-Interactive Argument of Knowledge) which does not reveal the information in a transaction.

Privacy features are also being incorporated into other blockchain projects using cryptocurrency. It is becoming an important consideration despite the legal hurdles they could face. Privacy focused projects have significance when it comes to protecting identity and anonymity in transactions. Whether or not that is allowed is a subjective question depending on which perspective you are looking at it from. For the individual citizen it is a right to be able to choose how you spend your money, and Privacy Coins offer a way to do so without being tracked.

For regulators, it is not a good look because of the potential to provide criminals with a way to hide their illicit activities. This will certainly not be allowed in restrictive governments that are highly centralized, but it could find some leeway in less restrictive governments. In the US constitution there is an amendment that guarantees privacy, but under the rule of law:

“No State shall… deprive any person of life, liberty, or property,
without due process of law.”
– Liberty Clause of the 14th Amendment

As technology evolves, so to will the interpretation of due process since there is no specific law that guarantees the right to an individual’s privacy with their money. The best way to do this is for regulators to come up with a list of what are transactions that can be permitted for privacy (e.g. novelty items, direct P2P sales, etc.) and which ones certainly need to be regulated (e.g. cross border money transfers). Ultimately it will be decided by the courts. Banning them however will not be easy due to their decentralized nature, and that could be what keep Privacy Coins alive.

Stablecoins – Stability In A Sea Of Volatility

The cryptocurrency market is highly volatile. That is the main risk involved due to the speculative nature for cryptocurrency. Price changes can suddenly shift in a matter of seconds. A typical phenomenon observed in the market is called “pump and dump”, and involves a large injection of capital followed by a large outflow of it as well. This is an example of market manipulation, often carried out by investors called “whales”, who have large funds that can influence the market.

Since there is little regulation and lack of clarity in this space, it is really hard to control how money moves in and out of the market. Price valuation depends on the market cap that is the total capital of the cryptocurrency asset. The idea here for most investors is a future return of value, which is typical of a security. However, cryptocurrency are meant to be a form of payment or medium of exchange which has utility. It is supposed to be a currency like the US Dollar or the Euro, but speculators are treating it as a valuable asset. In other words, most cryptocurrency especially Bitcoin, are being treated as a store of value. Investors are “HODling” or holding on to them with the expectation of higher values in the future.

The problem with holding is the price volatility of cryptocurrency assets. The market shifts and swings, with 100% gains getting wiped out in seconds. Those who continue to hold are using a long term strategy but traders who go short will often lose more money than they expect. There is actually a solution to avoid the price volatility in the market for traders. Enter stablecoins, a cryptocurrency that is pegged to the value of fiat currency.

The best and oldest example of a stablecoin is Tether. The token is named USDT and is pegged to fiat currency like the US Dollar, Euro and Japanese Yen. This provides price stability for traders who want to keep their funds in the cryptocurrency market without the volatility of price swings. It makes sense to keep USDT as a trading pair with the top cryptocurrency in the market. Traders who hold USDT, don’t have to undergo any conversion at exchanges from fiat to cryptocurrency any longer. This will cost traders more money because of the associated fees with exchanging between fiat and cryptocurrency. With USDT, traders can conveniently hold their cryptocurrency assets without being affected by price swings since the USDT token is always pegged one to one to the US Dollar, etc. Since USDT has existing trading pairs with many cryptocurrency it is much simpler to trade on digital exchanges.

The complexity of moving large amounts of money from a bank to a digital exchange and vice versa, is in itself a hassle. Not to mention the scrutiny and the fees involved. Traders who have to convert fiat from their bank back to cryptocurrency to trade on exchanges are also incurring a loss because they could miss the moment to trade because of the process involved. A trader will be able to trade faster by just holding a stablecoin like USDT which they can convert and pump back into the market with an order book on digital exchanges.

According to Wikipedia, a stablecoin is:

“… designed to minimize the volatility of the price of the stablecoin, relative to some “stable” asset or basket of assets.”

The basket of assets can include precious metals or even other types of cryptocurrency. In the case of Tether, 1 US Dollar is supposed to back each USDT token issued. Maintaining that price point requires auditable proofs, which stablecoins must be able to provide to regulators.

Stablecoins even have a practical business application not just for traders, but for businessmen and financiers. Moving money across borders with cryptocurrency is actually faster and much simpler than using a bank of money transfer service. It does however, circumvent jurisdiction laws and that is the issue with transactions like this. There have also been criticisms that stablecoins may not actually have the fiat reserves to back their cryptocurrency. This has been the controversy with Tether. It is more a lack of transparency in their financial information that has regulators investigating.

Another issue that seems to beg scrutiny are how centralized stablecoins are under their respective companies. Most all stablecoins – Tether, Paxos, Gemini, TrueUSD – were developed by a company. Though they use a blockchain-based digital ledger technology, their governance and business process is not truly decentralized. They still make money from fees, but what if the government or a certain jurisdiction shuts down the company for non-compliance to regulations? What happens to the stablecoin holders? Digital exchanges can choose to blacklist the stablecoin token, and this would be disastrous for holders who have plenty of them to exchange. Stablecoins may also lead to an increase in the supply of money leading to inflation that is pegged to a national currency. That is another possible problem that stablecoins could introduce or exacerbate.

There are hurdles and many regulatory clarity questions regarding stablecoins. They can eventually lead to greater adoption with further cooperation with jurisdictions and regulators. Even Facebook and Walmart are planning to release their own cryptocurrency that uses a stablecoin. This can impact the mainstream since those are two of the world’s biggest companies. The potential is there, so it is just a matter of how they will be regulated and how companies who issue them will be able to comply. Stablecoins are beneficial to the cryptocurrency market as a whole. Whenever USDT trading volumes are high, it usually correlates to more trading activity of cryptocurrency assets like Bitcoin. Digital exchanges like Huobi and Binance reported 40-80% of transactions use USDT. It is also originating from China, where traders are using stablecoins like USDT to avoid banking restrictions (From article “Why Tether Volume Is At All-Time High” on Coindesk).

A Cointelegraph article “Stablecoins to Play Key Role in Crypto Adoption, Says New Report” states that stablecoins will have a key role in cryptocurrency adoption. This is optimistic news for stablecoins as they aim to address market volatility in cryptocurrency and hyperinflation with fiat currency. Countries with a high inflation rate can adopt stablecoins to stabilize their funds as a sort of safe haven, though this has not yet been seen on a proven scale. There are plenty of new projects being mentioned now that have the use for stablecoins. It could possibly draw the attention of institutional investors. The stability it can bring to a volatile market is what makes it an attractive solution for trading and perhaps even investing.

Bitcoin Pizza Day – May 22

May 22, 2010 was the day software developer Laszlo Hanyecz agreed to pay 10,000 Bitcoins for two delivered Papa John’s pizzas.

Call that a waste of money, now that BTC is worth over $8,000?

Not really. Instead buy this man a drink for being the first person to use BTC as a payment. Even though it was pizza worth around $41.00 at that time, it is considered the first truly successful use of BTC. It is a medium of exchange and electronic payment system after all. This proved the use case for it. Now today it is much different of course, because BTC has become many times more valuable with a larger market cap.

Laszlo was no idiot who wasted away his BTC. He is actually one of the original volunteer developers who helped in the early days of Bitcoin. He got rewarded with BTC, and he probably should still have some around. 10,000 BTC today will probably set you for life. In the significance of the moment, what Laszlo did was actually quite bold. He used BTC in a real world situation, even if it was just to buy pizza.

Since then, BTC has had a bad rap from mainstream finance people e.g. Jamie Dimon, Warren Buffet. They associate it as “rat poison” with no instrinsic value used by criminals for illegal transactions i.e. The Silkroad. Then again this argument falls apart when you point out that cash is the most used currency for illegal transactions, which cannot be easily traced while BTC can be traced on the blockchain (transparency). The drug deal on the corner is most likely done with the use of cash rather than BTC. Perhaps Jamie Dimon has come around because he sees the potential for the blockchain rather than Bitcoin itself. Mr. Buffet though, has not, but we are talking about a successful investor in the tradtional finance economy. Today it is a different story with how our economy is transforming digitally.

Today BTC is used more as a store of value, like gold. It can also be used to transfer value across borders, pay for retail items e.g. Overstock accepts BTC and lock into a deposit as a digital asset for loans or future payments. There are new non-mainstream financial instruments that allow holders to use their BTC to make investments into funding projects, donations and even pension funds. More new services will surely come as financial giants enter the cryptocurrency space.

Pizza is great comfort food. When you know you can buy it with cryptocurrency, it just gives a better feeling of what is to come as it evolves. For now if you have 10,000 BTC, HODL it. With that much BTC, you can buy pizza anytime for the rest of your life.

Note: This opinion piece are thoughts about Bitcoin and is not meant to be financial advice. Do your own research always.