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Reading this article made me wonder - how much of the bitcoin rally is due to counterparty risks? If I remember correctly the last ramp up happened during Mt.

Reading this article made me wonder - how much of the bitcoin rally is due to counterparty risks? If I remember correctly the last ramp up happened during Mt. Gox era. They were having USD withdrawal issues which resulted in BTC prices being very high on the exchange. But it din't deter them from publishing prices and making markets. Now is the case of Bitfinex suffered from a hack like Mt. Gox and are trying to stay afloat. As per coinmarketcap, has nearly 15% of bitcoin volume which is pretty high to ensure market follows in-step to their market making. A quick search on Google turns up pages of people asking about Bitfinex withdrawals. For people who are curious about this, there was an article yesterday about Zimbabwean Bitcoin soaring to 12k USD, which obviously hinges a lot on counterparty risks and resulting low liquidity: https://news.ycombinator.com/item?id=15627608 https://news.ycombinator.com/item?id=15627608

cm2187 9y ago
I am not sure I follow. Counterparty risk should push the price down, not up. This thing is not worth as much because there is a significant risk your investment may go away because of a bug or a mistake.
- nosuchthing 9y ago
  That assumes there's an immediate withdraw method on the exchange with higher rates. MTGox abused the latency of withdraws in an attempt to attract BTC desposits (after their original deposits were stolen) on their exchange and presumably sell those back for cash via other outlets to slowly pay off customers and appear solvent. MTGox also manipulated the market with trader bots. https://willyreport.wordpress.com/2014/05/25/the-willy-report-proof-of-massive-fraudulent-trading-activity-at-mt-gox-and-how-it-has-affected-the-price-of-bitcoin/ https://willyreport.wordpress.com/2014/05/25/the-willy-repor... https://www.theguardian.com/technology/2014/may/29/bitcoin-bots-bought-millions-in-the-last-days-of-mt-gox https://www.theguardian.com/technology/2014/may/29/bitcoin-b...
- thisisit 9y ago
  It is in exchanges favor to offer increased prices so as to shore up their balances using BTC commissions earned per trade. This inversely leads to them serving an increased percentage of daily trades. Add to the fact that, increased risks means people want more out of their BTC. So, if x is a fair price in other exchange, they want x + y% for the same BTC on exchange with issues. Some of these people become aware of withdrawal issues later or buy some other crypto currency, move to another exchange to cash out.
- runeks 9y ago
  > Counterparty risk should push the price down, not up. Not if the counterparty risk causes you to be unable to withdraw national currency, thus forcing you to buy bitcoins for national currency and then withdraw the bitcoins. The only way for the price to go down, in a scenario like this, is if it's possible to sell bitcoins on the exchange (thus pushing down the price) and withdraw the proceeds. In a BTCUSD market, if you are unable to withdraw BTC you will sell BTC for USD and withdraw USD, thus pushing down the price. And if you're unable to withdraw USD you will buy BTC for USD and withdraw BTC, thus pushing up the price.
  - gwern 9y ago
    It would only push the price up on the untrustworthy exchanges, and it would lower the price everywhere else because it indicates the asset is not useful, it could be stolen & dumped on the market, it discourages anyone from getting in, it forces them to use alternative usually less convenient exchanges, etc. And even the counterparty risk doesn't produce that much increase: right up to the end when it was too late, the Mtgox premium was only like 10%. Such a mechanism can't possibly explain all or even a little bit of a runup from $2k to $7k (not to mention, the market cap being an order of magnitude or two higher).
    - thisisit 9y ago
      That is assuming bitcoin and other cryptocurrency markets are mature and perfect. They are not.
      - gwern 9y ago
        Well then, why do you think they're mature and perfect enough to worry about counterparty risk? What's sauce for the goose is sauce for the gander.
        thisisit 9y ago
        Um? Let me use an example to explain what is happening here: Me - Cryptocurrency markets are not mature that is why we have lot of arbitrage opportunity between exchanges. You - Why do you think they're mature and perfect enough to worry about arbitrage opportunities? So, let me repeat again - It is exactly because they are not mature there are issues. If they are mature, there is nothing to worry. And that is the sauce you are looking for.
al_chemist 9y ago
> Now is the case of Bitfinex suffered from a hack like Mt. Gox and are trying to stay afloat. They were hacked few years ago.
- thisisit 9y ago
  Who? AFAIK, Bitfinex was hacked last year not years ago: https://en.wikipedia.org/wiki/Bitfinex_hack https://en.wikipedia.org/wiki/Bitfinex_hack
xiphias 9y ago
There were no hardware wallets in the days of MtGox, which meant that it was extremely hard to secure Bitcoins. It got easier since then, and many people learned from MtGox (though many people haven't). Also companies take bigger care of securing their cold wallets. I would never recommend BitFinex to anyone though (GDAX and BitStamp have VC money / long history)
- rudiger 9y ago
  > There were no hardware wallets in the days of MtGox, which meant that it was extremely hard to secure Bitcoins. It was never difficult to hold bitcoins. All you had to do was send them to an address you control with a long passphrase.
  - annabellish 9y ago
    What world are you living in? Software wallets are and always will be vulnerable to incalculable numbers of side-channel attacks that they cannot possibly defend against. It is intrinsic to running on a general purpose OS. Hardware wallets are the only method of having anything anywhere _near_ security here.
    - 45h34jh53k4j 9y ago
      A world where an offline, encrypted data file offers exactly the same security level as an offline, encrypted memory cell. You invoke side channels -- what about these side channels: https://jochen-hoenicke.de/trezor-power-analysis/ https://jochen-hoenicke.de/trezor-power-analysis/
      - hackerboos 9y ago
        "The new firmware 1.3.3 is immune against this attack since it (1) requires a PIN to compute the public key and (2) uses branch-free computations for deriving the public key from the private key."
    - kirillseva 9y ago
imaginenore 9y ago
> "has nearly 15% of bitcoin volume which is pretty high to ensure market follows in-step to their market making" That doesn't sound right at all. MtGox was huge, controlled most of the market. Bitfinex is way way smaller, percentage-wise. But more importantly, Bitfinex doesn't lead the price. https://coinmarketcap.com/currencies/bitcoin/#markets https://coinmarketcap.com/currencies/bitcoin/#markets
panarky 9y ago
If this was true then you'd expect the exchange rate on Bitfinex to be much higher than other exchanges. If you can't get USD out of Bitfinex, you'd buy BTC and withdraw, pushing the exchange rate up on Bitfinex. Then you'd sell the BTC on another exchange, pushing the exchange rate down there. We're not seeing that: https://imgur.com/a/2vxV7 https://imgur.com/a/2vxV7
- bdcravens 9y ago
  > If this was true then you'd expect the exchange rate on Bitfinex to be much higher than other exchanges. For a while earlier this year, it was

cm2187 9y ago

I am not sure I follow. Counterparty risk should push the price down, not up. This thing is not worth as much because there is a significant risk your investment may go away because of a bug or a mistake.

nosuchthing 9y ago
That assumes there's an immediate withdraw method on the exchange with higher rates. MTGox abused the latency of withdraws in an attempt to attract BTC desposits (after their original deposits were stolen) on their exchange and presumably sell those back for cash via other outlets to slowly pay off customers and appear solvent. MTGox also manipulated the market with trader bots. https://willyreport.wordpress.com/2014/05/25/the-willy-report-proof-of-massive-fraudulent-trading-activity-at-mt-gox-and-how-it-has-affected-the-price-of-bitcoin/ https://willyreport.wordpress.com/2014/05/25/the-willy-repor... https://www.theguardian.com/technology/2014/may/29/bitcoin-bots-bought-millions-in-the-last-days-of-mt-gox https://www.theguardian.com/technology/2014/may/29/bitcoin-b...
thisisit 9y ago
It is in exchanges favor to offer increased prices so as to shore up their balances using BTC commissions earned per trade. This inversely leads to them serving an increased percentage of daily trades. Add to the fact that, increased risks means people want more out of their BTC. So, if x is a fair price in other exchange, they want x + y% for the same BTC on exchange with issues. Some of these people become aware of withdrawal issues later or buy some other crypto currency, move to another exchange to cash out.
runeks 9y ago
> Counterparty risk should push the price down, not up. Not if the counterparty risk causes you to be unable to withdraw national currency, thus forcing you to buy bitcoins for national currency and then withdraw the bitcoins. The only way for the price to go down, in a scenario like this, is if it's possible to sell bitcoins on the exchange (thus pushing down the price) and withdraw the proceeds. In a BTCUSD market, if you are unable to withdraw BTC you will sell BTC for USD and withdraw USD, thus pushing down the price. And if you're unable to withdraw USD you will buy BTC for USD and withdraw BTC, thus pushing up the price.
- gwern 9y ago
  It would only push the price up on the untrustworthy exchanges, and it would lower the price everywhere else because it indicates the asset is not useful, it could be stolen & dumped on the market, it discourages anyone from getting in, it forces them to use alternative usually less convenient exchanges, etc. And even the counterparty risk doesn't produce that much increase: right up to the end when it was too late, the Mtgox premium was only like 10%. Such a mechanism can't possibly explain all or even a little bit of a runup from $2k to $7k (not to mention, the market cap being an order of magnitude or two higher).
  - thisisit 9y ago
    That is assuming bitcoin and other cryptocurrency markets are mature and perfect. They are not.
    - gwern 9y ago
      Well then, why do you think they're mature and perfect enough to worry about counterparty risk? What's sauce for the goose is sauce for the gander.
      - thisisit 9y ago
        Um? Let me use an example to explain what is happening here: Me - Cryptocurrency markets are not mature that is why we have lot of arbitrage opportunity between exchanges. You - Why do you think they're mature and perfect enough to worry about arbitrage opportunities? So, let me repeat again - It is exactly because they are not mature there are issues. If they are mature, there is nothing to worry. And that is the sauce you are looking for.

al_chemist 9y ago

> Now is the case of Bitfinex suffered from a hack like Mt. Gox and are trying to stay afloat. They were hacked few years ago.

thisisit 9y ago
Who? AFAIK, Bitfinex was hacked last year not years ago: https://en.wikipedia.org/wiki/Bitfinex_hack https://en.wikipedia.org/wiki/Bitfinex_hack

xiphias 9y ago

There were no hardware wallets in the days of MtGox, which meant that it was extremely hard to secure Bitcoins. It got easier since then, and many people learned from MtGox (though many people haven't). Also companies take bigger care of securing their cold wallets. I would never recommend BitFinex to anyone though (GDAX and BitStamp have VC money / long history)

rudiger 9y ago
> There were no hardware wallets in the days of MtGox, which meant that it was extremely hard to secure Bitcoins. It was never difficult to hold bitcoins. All you had to do was send them to an address you control with a long passphrase.
- annabellish 9y ago
  What world are you living in? Software wallets are and always will be vulnerable to incalculable numbers of side-channel attacks that they cannot possibly defend against. It is intrinsic to running on a general purpose OS. Hardware wallets are the only method of having anything anywhere _near_ security here.
  - 45h34jh53k4j 9y ago
    A world where an offline, encrypted data file offers exactly the same security level as an offline, encrypted memory cell. You invoke side channels -- what about these side channels: https://jochen-hoenicke.de/trezor-power-analysis/ https://jochen-hoenicke.de/trezor-power-analysis/
    - hackerboos 9y ago
      "The new firmware 1.3.3 is immune against this attack since it (1) requires a PIN to compute the public key and (2) uses branch-free computations for deriving the public key from the private key."
  - kirillseva 9y ago

imaginenore 9y ago

> "has nearly 15% of bitcoin volume which is pretty high to ensure market follows in-step to their market making" That doesn't sound right at all. MtGox was huge, controlled most of the market. Bitfinex is way way smaller, percentage-wise. But more importantly, Bitfinex doesn't lead the price. https://coinmarketcap.com/currencies/bitcoin/#markets https://coinmarketcap.com/currencies/bitcoin/#markets

panarky 9y ago

If this was true then you'd expect the exchange rate on Bitfinex to be much higher than other exchanges. If you can't get USD out of Bitfinex, you'd buy BTC and withdraw, pushing the exchange rate up on Bitfinex. Then you'd sell the BTC on another exchange, pushing the exchange rate down there. We're not seeing that: https://imgur.com/a/2vxV7 https://imgur.com/a/2vxV7

bdcravens 9y ago
> If this was true then you'd expect the exchange rate on Bitfinex to be much higher than other exchanges. For a while earlier this year, it was