Blockchain Bitcoin & Crypto Weekly CXO Briefing for week starting 20th November 2017

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The Blockchain Bitcoin & Crypto Weekly CXO Briefing is all you need to know, each week, jargon free for CXO level business leaders and investors who will use this technology to change the world. Each week we select the 3 news items that matter and explain why and link to one expert opinion.

For the intro to this weekly series, please go here.

News Item 1: British cryptocurrency Electroneum hit by cyber attack after raising £30m

Decrypted: Another week… another hack!

Initial Coin Offerings (ICOs) are a revolutionary new way for companies to raise money. With minimal regulatory control, hackers and opportunists have pounced on the chance to get away with our money.

Security is a major concern for Initial Coin Offering . Almost 10% of all the money invested in Initial Coin Offerings (ICOs) was stolen by hackers.

This unsettling pattern has repeated itself time and time again, over the past year. A hacker takes over the online accounts or the company’s website and tricks eager investors into sending them their money.

This past week, Electroneum joined a growing list of hacked or otherwise compromised Initial Coin Offerings.

Our take: The way an ICO works is simple. A company initiating an ICO has a smart contract on the Ethereum blockchain network. Interested investors send Ether to that smart contract’s address and then in return they receive an ERC20 token the company has issued.

But most hacks don’t occur because blockchain itself was compromised. Instead, the website on which the smart contract address was advertised, was compromised. Basically, ICOs are a perfect nexus of human greed. A river of money changes hands in a short time frame, using a weak security vector: a website.

Everyday, there are hacking attempts on websites and crypto wallets. Anyone that is planning on conducting an ICO, needs to be prepared for the possibility of being a target of hackers. Hackers will try every possible way to steal user information and money from the company and ICO backers.

Security should be a top priority. Taking shortcuts and rushing with implementations has led to terrible outcomes.

Here are some things to consider:

  • Passwords on Social Media. Use different randomized passwords for key accounts such as Twitter, Facebook, website, Slack and email accounts. This will ensure that even if one account is compromised, the rest of the accounts are safe. Twitter, Gmail Slack and other have 2FA functions that will stop hackers even if the account password has been compromised.
  • Limit Access. For critical infrastructure such as the web host admin passwords, ensure that passwords are ONLY shared on a need to know basis, with employees that you can trust.
  • Team Authentication. Mandate 2FA for your company staff accounts.
  • Community manager. Make sure to have a dedicated community manager monitoring your ICO Slack, Telegram and social media channels. Check through the member list regularly and proactively ban members with suspicious names, for example people using your company or founder name.
  • Don’t use Slack. Most crypto companies started to use Slack as a medium to communicate with the community, From a communication-perspective its a great idea, but unfortunately security is not Slack’s strong suit.
  • Systems Security. Keep systems up to date with the most recent security patches Make sure to split access and zones (DMZ, frontend, backend, etc.) Manage access to your hosting provider account (IP whitelists, close ports and use 2FA).
  • Crowdsale Address. Make your crowdsale address pubic in advance, on multiple channels and let your community about it. Use the Ethereum name service to purchase an address, that can be easily remembered by your community.
  • Smart Contract Audit. Check your smart contract very, very carefully.
  • Funds Wallet. Use a hardware wallet, such as Ledger Nano S or Trezor to access your ICO smart contract/wallets or store funds. Lock up your wallet in a safe so that it doesn’t get stolen or lost.
  • Use your App. If your platform is going to have a native app, then make sure to use your app to conduct your token sale.
  • Test, test and test again!

Cryptocurrency transactions are irreversible. Because of the immutable nature of blockchain, when hackers exploit a security vulnerability, they can walk away with hundreds of thousands of dollars, or even millions, without any chance of people getting their money back.

So, establishing trust is paramount.

Security breaches seriously undermine the faith in ICOs. These hacks undermine the trust and confidence and reinforce the misconception that all ICOs are vulnerable to hackers. They also validate questions about the readiness and preparation of the teams, that are raising all this money in pack one shot.

While many understand that there are many layers to these stories, the general perception of the public is that cryptocurrencies such as Bitcoin and other altcoins are not secure. This perception stands in the way, making it so much harder for digital currencies to go mainstream.

News Item 2: Square shares rise after Evercore ISI says Bitcoin test is innovative, upgrades stock

DecryptedSquare is rolling out a new feature that lets users of its Cash app buy and sell bitcoin. Square’s Bitcoin test is small-scale at the moment, and only select customers of its Cash app are allowed to buy and sell Bitcoin directly from the mobile app.

The new feature will allow Square to directly compete with cryptocurrency exchanges such as Coinbase and Gemini. Sqaure has millions of users, which will be far more likely to buy Bitcoin through an app they already use, instead of creating a new account on a Bitcoin exchange.

Our take:  Square Cash, is a payment platform that allows users to send and receive money or accept payments for businesses. Now its beginning to test Bitcoin in its offering.

While the interface looks very simple, users can easily swipe right from the Cash Card page to access Bitcoin functionality. Wallet balances are displayed in USD and BTC, and there is a graph that displays portfolio performance over the past year. Despite having a very basic interface, it does provide all the functionality one would expect.

If this actually happens it’s a huge development for Bitcoin, making it useful as a payment service, without losing its decentralization features. This move would give Sqaure a first mover advantage in the financial services and payment process space versus competitors like PayPal HereCloverSpark Pay and others. It will be interesting to see how other companies position their offerings for cryptocurrency payments, I wouldn’t be surprised to see the competitors scrambling to catch up.

Jack Dorsey, Square’s CEO, has already said that blockchain is the “next big unlock”. Indeed, the Square Bitcoin wallet could be a big step towards widespread Bitcoin adoption.

Square’s new feature in still in beta, but both the stock and cryptocurrency markets met the news with great optimism. Square shares rose 2.3% on Wednesday, bringing its stock price near $41. Meanwhile, the price of Bitcoin jumped 7% to $7,208. Bitcoin currently has a market cap of approximately $129 billion.

While Square’s Cash app only lets users buy and sell Bitcoin, what’s far more important in the long-term, is the ability to transact with Bitcoin. Users could soon be able to transfer Bitcoin from a Bitcoin wallet to friends and merchants with zero fees, just like they already do today with fiat currencies.

All it takes is that one app to make it simple, and people will be coming in the masses to a faster payment settlement system. It would almost instantaneously give Bitcoin a wider base of acceptance, greater utility, and make the cryptocurrency far more valuable.

News Item 3: Vontobel and Leonteq Securities Launch Bitcoin Futures

Decrypted: Two major financial institutions in Switzerland are making it easier to short Bitcoin. Vontobel announced the launch of new futures contracts designed to short the world’s most active cryptocurrency. The first two mini futures to short BTC will give investors the ability to bet against the value of Bitcoin or to hedge positions in the crypto asset.

But, Vontobel wasn’t the only Swiss company to announce a Bitcoin futures contract this week. Leonteq Securities will also offer a product allowing investors to profit from price declines of Bitcoin.

The introduction of Bitcoin futures contracts will allow traders to hedge against this volatility and eliminate the currency risk. This will make Bitcoin more attractive for both individuals and corporations.

Our take: These products come a few weeks after an announcement by the CME Group, the world’s largest exchange operator and owner, to launch a futures contract for Bitcoin in the second week of December.

Also, Britain’s Man Group could be next to get in on the act, with Luke Ellis, CEO, saying they expect to emulate their transatlantic counterparts. As the world’s largest publicly traded hedge fund, with $103.5 billion under their management, Man Group has some clout. If it joined the Bitcoin bandwagon, it would be another major boost for the cryptocurrency.

The Bitcoin market is undeniably booming.

Yet, Bitcoin’s use has been limited in the mainstream economy, in part because of it’s price volatility. The value of the currency might go up or down significantly, between the time a deal is struck and delivery.

The value of Bitcoin has fluctuated wildly this month, plunging as much as 29% last week from its Nov. 8 record high of $7,888 and recovering more than a third of its value in the last few days. So far this year, it is up more than 600%, a meteoric rise that has prompted many to warn that Bitcoin is a bubble about to burst. Its has drawn flak from several top bankers, including Jamie Dimon, JP Morgan’s CEO, who called Bitcoin a fraud and said he would fire any traders at his bank that touched it.

The introduction of Bitcoin futures will allow investors to manage this risk, and make it safer to hold and trade in Bitcoin. This will make the cryptocurrency more accessible to individuals and businesses, and encourage developers to build more products and services on top of the technology.

Bitcoin futures signal the cryptocurrency is now a mainstream asset class. Access to Bitcoin futures could serve as the tipping point to drive institutional investors to engage with the crypto economy. Bitcoin futures solve four big pain points, that have made institutional investors hesitant to enter the crypto markets: familiar counter-party risk, asset custody, liquidity, and hedging.

Bitcoin futures could also pave the way for a Bitcoin ETF (Exchange-Traded Fund). It’s likely, that they will pave the way for an ETF approval, triggering a rush of institutional capital.

Bitcoin futures have enormous potential. They unlock some of the value being built on cryptocurrencies and blockchain technology, which today is only accessible by a small number of the early enthusiasts and those building the technology.

An entire industry has emerged, with multiple businesses creating Bitcoin through a mining process, selling mining equipment and offering trading services. More than 120 crypto-funds have also launched. What was once a fringe item, is becoming a globally-traded digital asset.

The future is looking brighter!

Opinion: Many ICOs are fraudulent, say men behind two top bitcoin rivals

ICOs are a way for start-ups to raise money by issuing a new crypto coin, that users purchase with Bitcoin or Ethereum. It’s similar to crowdfunding, but with digital money. So far this year, start-ups have raised $3.5 billion from ICOs, according to data website Coindschedule.com

While there’re many legitimate projects out there, many of these crowdfunding attempts are complete scams. Today, there aren’t many legal guidelines for ICOs. Scammers can potentially get away with little or no legal trouble.

Tezos is the first ICO I’ve heard of, where investors sued the founders of the ICO, on the basis that they defrauded and misled participants during the token sale.

In most cases, because there’s lack of accountability and regulation, scammers can easily run off with the money. Usually with any investment, there is always a high level of risk, but with ICOs, scammers can just claim the project failed and pocket the money.

At the end of September, the Securities and Exchange Commission charged two ICOs with fraud, saying they attempted to defraud investors.

China banned ICOs in early September, lumping them with pyramid schemes. Canadian regulators said token are securities, and should be regulated. The U.S. Securities and Exchange Commission (SEC) warned of pump-and-dump schemes, where companies cashed out following the ICO, without delivering the product.

This is a real problem for legitimate ICOs.  These scams are caused by low moral standards. The actions taken by ICO scammers is a problem for the community at large. While blockchain technology can be used to raise funds legitimately, it can also be abused, creating mistrust and confusion in the market. ICO backers don’t know how to choose a project, because they all look so real, with teams, advisors, white papers and websites. Many ICO scams are just copycats, where people copy all the materials from other projects.

Reasonable regulation would be beneficial for the entire blockchain industry. It would solve issues that are otherwise unsolvable, and will ensure a level of protection for investors and ICO backers. This way, it would be easier to filter out ICO scams, leaving room for real projects to get funding and build useful products.

Regulation can reduce moral hazards for issuers of tokens and make sure there is less room to behave opportunistically or fraudulently. Mandatory transparency for token sales and the punishment of immoral behavior can have the same effect here as it had in traditional securities. The token market can and will not stay unregulated for much longer, as investors’ interests need protection

Today, its hard to tell which ICO is a scam and which is not. There are good ICOs that will create good products and give good returns to investors, but for now it’s a crap shoot. All I can say before you invest in ICOs is, educate yourself, use common sense, invest in something you trust, invest what you can afford to lose, and be prepared for the worst, to loose it all.

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Ilias Louis Hatzis is a Blockchain entrepreneur who writes the Blockchain Bitcoin & Crypto (BBC) Weekly CXO Briefing each Monday.

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3 comments

  1. Re Item 3: So shorting Bitcoin is NOT like shorting stock – you don’t need to borrow Bitcoin from somebody in order to short it. I think CME does not own Bitcoin. Will be interesting to see how this plays out. I don’t have any hard data but I believe % of Bitcoin held by short term traders vs long term Hodlers is very small.

    Like

  2. Thank you @louishatzis. So much happening that it is mind-boggling to keep track of it.
    Regarding the derivatives market, there are more players positioning themselves in the space so they are grab share as the market gains traction.

    I’d like to add ProShares Capital Management who wants to create two bitcoin-tied funds: the ProShares Bitcoin ETF and the ProShares Short Bitcoin ETF. ProShares isn’t planning to buy direct stakes in the cryptocurrency; rather, it intends to create exposure through derivatives contracts (to your point @bernardlunn)

    LedgerX just initiated its first long-term bitcoin futures option.Called a Long-Term Equity Anticipation Security (LEAPS), the trade was matched by the platform on Nov 18 and is set to expire on December 28, 2018. Under the terms of the deal, the buyer has the right to buy bitcoin at a price of $10,000 at that date, or almost a 30 percent premium on today’s price.

    Yet, because the buyer only makes money if the price is more than $10,000 (called the strike price), the investment can be seen as a reflection of the level of confidence that the price will reach that level by the agreed upon date. More details of the structure https://www.coindesk.com/first-long-term-ledgerx-bitcoin-option-pegs-price-10000-one-year/

    Liked by 1 person

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