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    Administrator Ross's Avatar
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    Bitcoin...Why you can't cashout.

    Excellent article:

    I've separated this article from the 'Bitcoin...a suckers paradise' thread so it doesn't get lost among all the other information.

    This particular article is one of the best reality checks when it comes to understanding Bitcoin for the novice speculator greed driven investor...and if you're one of them, then you'll get all that's coming.





    Article:

    Part 1: there is no single “price,” the market is horribly inefficient
    Part 2: KYC/AML
    Part 3: Coinbase

    Public discussion and media coverage of Bitcoin makes certain assumptions:

    Bitcoin has a price, that you could expect to buy or sell it around.
    Bitcoin is like buying a share in a company, or a commodity like gold — the market works the same way.
    Bitcoin is liquid — it’s reasonably easy to convert your money to Bitcoin, and your Bitcoin to money in your bank account.
    None of these are true.

    How much is a bitcoin worth?
    I’m looking at the CoinDesk Bitcoin Price Index. At this moment, it says $19699.46. Whoops, it’s $19691.76! Now it’s $19690.70! And so on.

    This number is marketing for Bitcoin. It’s meant to give the impression that Bitcoin is a solid tradeable object with an orderly market structure, that you can meaningfully price it down to the cent, and that all this is fine and sensible. But this is an illusion.

    The singular “price” of Bitcoin doesn’t exist — it’s a made-up number. It’s not a number you could expect to exchange a bitcoin for — it’s an average of the last sale price on a bunch of exchanges. (CoinDesk’s index uses Coinbase, Bitstamp, itBit and Bitfinex. Followers of crypto will have just exclaimed “what!” at that last one.)

    If you look at the spread between exchanges — the different prices for one interchangeable bitcoin — you’ll see spreads of hundreds of dollars, and in volatile moments it can be in the thousands.

    Quoting a number like “$19699.46” to seven significant figures when your data’s got a 5% spread would get your high school physics teacher slapping you upside the head. It’s entirely deceptive. It should say something like “$19,700 plus or minus $500 depending,” and that line graph should be a thick grey bar.

    “Market cap” is even worse. It’s literally just whatever the last price was, multiplied by the number of tokens in existence. This is a bogus number that’s not actually applicable to anything — it’s not money that was put into the crypto, it’s not a realisable value like a company market cap, it doesn’t affect prices — it’s just an easily-calculated splashy-looking number that looks good in a headline. Trading is so thin in any crypto, even Bitcoin, that you could never realise a fraction of the number. It is literally just marketing.

    Why is Bitcoin like this, though? Why isn’t the price a reasonably usable number?

    Isolated islands, posing as a continent
    (This section cribs from Paulo Santos‘ excellent article “Bitcoin Series Addendum — Market Structure”, which you should log into and read in full.)

    In normal securities trading, if a share is listed on multiple exchanges, orders will often be applied via smart order routing — so that a given buy or sell order is in the context of all the order books for that stock. This avoids liquidity fragmentation — where the various exchanges’ order books are unnecessarily isolated from each other, making each a separate trading pool, thus more volatile and harder to trade in. This is easy because, unlike bitcoins on exchanges, the actual exchanges don’t need to hold the stock for a trade to happen.

    This doesn’t work in Bitcoin — all trading is isolated on each individual exchange, and the bitcoins are actually there on the exchange. This is a recipe for huge volatility and wide discrepancies in price.

    Furthermore, in normal securities trading, spreads in pricing between exchanges tend to quickly equalise through arbitrage — buying on one exchange to sell on another, at a profit. This pulls the price up on the first and down on the second.

    The structure of the Bitcoin market is such that this doesn’t work very well. If you want to profit from spreads in the price of Bitcoin, you need to:

    Buy some Bitcoin on one exchange.
    Withdraw it from the exchange — let’s assume you send it directly to the second exchange’s Bitcoin deposit address — and confirm this transaction on the blockchain (at least 10 minutes’ delay), with at least a $25 transaction fee if you want it confirmed in the next block or two. Double that if you want to be sure.
    Sell it on the second exchange.
    The delays — ten minutes to over an hour — and fees add enough friction to generate the spread between exchanges, even if you assume everyone’s using trading bots as quickly as possible.

    So each exchange operates as an island. The “price” number doesn’t apply on any of the island exchanges.

    What’s life like on one of the islands?

    What “unregulated” means in practice
    When you buy normal securities or commodities, you assume that the trading environment is regulated sensibly, and that the exchanges keep to the rules set by law and, fundamentally, won’t mess you around.

    You can’t assume this at all in crypto trading. This is what “unregulated” means.

    The important thing about securities regulations is that every single one is there because someone ripped a lot of people off that way. They ensure market integrity. So even investors who understand high risk — and what it means when we say that cryptos are ridiculously volatile and not backed by anything — may not be fully aware of the degree to which the trading environment itself is part of the threat model in cryptos.

    (One glaring example was the 2016 collapse of iGot in Australia, which hit a lot of small-time retail investors: “I just assumed that since they’re in Australia there would be some sort of safety net or regulation or something like that — bare minimum — where he could be accountable for his actions.”)

    There are various shenanigans that are banned on real securities exchanges for good reason, but are standard in crypto:

    wash trades — where you trade with yourself, to pump the price up or down, or just create the illusion of trading volume. You could literally do this in the Bitfinex trading engine quite recently.
    spoofing — where you place a large order to create the illusion of market optimism or pessimism, and cancel as soon as the price gets anywhere near it. This is endemic on Bitfinex and Coinbase/GDAX.
    painting the tape — like wash trading, but with two or more participants. Mark Karpelès admitted in court that he had been using the “Willybot” to pump up the Bitcoin price on the Mt. Gox exchange during the 2013 Bitcoin bubble.
    front-running — where an exchange operator takes advantage of a buy or sell order before other customers can.
    insiders with access to the database trading on their own exchange — Bitfinex officers trade on the exchange themselves. They state that they avoid conflicts of interest, but there is no oversight or transparency on this.
    The US Commodities and Futures Trading Commission has listed many of these (PDF) as specific problems that are notably worse in the Bitcoin marketplace than in other markets:

    Beyond their practical and speculative functions, the emergence of these nascent markets has also been negatively marked by a variety of retail customer harm that warrants the Commission’s attention, including, among other things, flash crashes and other market disruptions,52 delayed settlements,53 alleged spoofing,54 hacks,55 alleged internal theft,56 alleged manipulation,57 smart contract coding vulnerabilities,58 bucket shop arrangements and other conflicts of interest.59 These types of activities perpetrated by bad actors can inhibit market-enhancing innovation, undermine market integrity, and stunt further market development.

    Because inside the exchanges is the Wild West, the interface between exchanges and the world of regular finance is stringently regulated. This causes tremendous problems for getting actual money out of exchanges, as we’ll see in part 2. And does questionable things to send the price up …

    Next time: why it’s hard to get actual money from the exchanges into your bank account. A little bit KYC/AML, a little bit oddly-advantageous incompetence, a little bit dubious practices.
    Last edited by Ross; 01-03-2018 at 11:15 AM.
    Ross
    ***Fred Coleman, Founding Partner, Beloved Friend***
    who passed away 11/10/2016
    Rest in Peace
    ***

  2. #2
    Administrator Ross's Avatar
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    Re: Bitcoin...Why you can't cashout.

    Part 2 article

    Why you can’t cash out pt 2: Bitcoin and Know Your Customer/Anti Money Laundering laws (KYC/AML)

    The Know Your Customer anti-money laundering (KYC/AML) regulations are an endless source of woe for the Bitcoin trader.

    “Know Your Customer” as we know it came in as part of the USA PATRIOT Act after 9/11. The idea was to catch money laundering by terrorists and criminals.

    The tricky part for you, the customer, is that it requires your bank to treat you as the threat. And Bitcoin is notoriously a favourite of criminals and drug dealers, so it gets special attention from bank compliance officers.

    This applies to Bitcoin exchanges as well as banks. Coinbase is well known for requiring people to re-upload identification they’ve already provided, putting accounts into “restricted” mode (where you can’t get out what is in fact your money) and demanding more identification to withdraw than they required for you to deposit. All of this is also automated, with effectively no customer service. But they aren’t just holding on to your money for the sake of it — they are legally required to treat you as a threat.

    Banks hate Bitcoin for compliance reasons.
    Even when your exchange feels clear to send the money to your bank, the bank may have strong concerns about touching Bitcoin in any manner — for instance, this letter to one Coinbase user:

    We are happy to have you as a Lakestone Bank & Trust customer and would like to fulfill your banking needs, but it has come to my attention that you are making purchases and receiving funds from Coinbase.com — a type of business transaction that is against Lakestone’s policies and will need to be discontinued immediately.

    We will continue to monitor your account and if we see that these types of transaction continue we will be forced to take other action, up to and including closing the account.

    Name:  lakestone.jpg
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    (The user’s fellow crypto users reacted as one would expect — i.e., they descended upon the bank’s Facebook and Yelp pages like rabid cultists.)

    The problem is that Bitcoin was intended from the outset to be resistant to government control. The creators were idealistic anarcho-capitalists who envisaged this being used for free individual citizens to conduct commerce between themselves without the spectre of government theft — i.e., taxation.

    What it obviously attracted were criminals — who are endlessly creative in finding ways to convert bad money into good-enough money — and drug dealers and others who have trouble using proper money, so need to use a substitute currency.

    That is: Bitcoin was literally designed for tax evasion and money laundering. It isn’t technically anonymous — if you care enough, you can do the tedious legwork to trace the flows of bitcoins on the blockchain — but your bank isn’t going to be keen to accept that burden just so you can cash out some bitcoins.

    The other problem is that Bitcoin users tend to be serial entrepreneurs — which can mean having founded multiple successful businesses, but more often means chronically unemployed, bad with money and predisposed to fraud. Even if they give the bank the history of every Bitcoin involved, they’re already risky customers.

    (And then there are the bitcoiners who think they’re obviously smarter than bank compliance officers — e.g., bitcoiners who tell their bank that Coinbase is a coin collector’s site. Please trust me that this trick never works.)

    How this affects cashing out


    Coinbase claims that cashing out is a simple button-click. This is true for some, but false for too many. Cashing out can be slow and painful.

    The reporting requirements on banks are stringent. Banks are required to report on large deposits, and will sometimes refuse any wire transfer they think looks dubious.

    This particularly affects those who discovered an old Bitcoin stash and want to turn it into cash. I know of one such case where the user had sold a car for bitcoins years ago, and wanted to cash in on the current bubble. The best the exchange could come up with was sending it in daily in amounts of several thousand dollars — and dribbling a million-dollar balance out a few thousand dollars at a time is not only tedious, it looks like structuring, when someone’s trying to dodge reporting requirements.

    US bank users are most affected by these requirements. As I understand it, things are better for UK and Australian residents — though your bank may still fire you as a customer. One UK report from July this year shows HSBC assuming transactions from a direct person-to-person sale on LocalBitcoins were fraudulent, with the recipient’s account being locked for several days until everything was sorted out.

    Contact your bank first. Be prepared to provide the full history of every crypto you’ve ever touched and where the money for it came from. Be prepared to give enough information to your tax office that they could reconstruct you from a nail clipping. If it’s any substantial sum, get a proper accountant.

    Reports from Coinbase users suggest that if you successfully get your money out and into your bank once, you should have less trouble on future transactions. Not no trouble — but less trouble. The screenshot to the right was taken by a UK user on 22 December 2017, assuring them they’d have their money by the 15th …

    KYC/AML affects the exchanges too
    Exchanges take these issues very seriously, because KYC/AML issues can get an exchange cut off from any banking. And this has happened.

    Bitfinex — still the largest Bitcoin exchange by volume — and its associated company Tether lost access to their US dollar banking in April 2017, when Wells Fargo, the only correspondent (intermediary) bank between their Taiwan banks and their US customers, refused to process wire transactions to or from Bitfinex. Bitfinex sued — which is a good way to make sure no other bank wants to have anything to do with you — but to no avail. As Phil Potter of Bitfinex put it:

    We’ve had banking hiccups in the past, we’ve just always been able to route around it or deal with it, open up new accounts, or what have you … shift to a new corporate entity, lots of cat and mouse tricks.

    As I detail in chapter 8 of the book, I’m pretty sure this is how the 2017 crypto bubble was kicked off — when people couldn’t get US dollars off Bitfinex, so they bought Bitcoin and other cryptos to withdraw, pushing the price up.
    Ross
    ***Fred Coleman, Founding Partner, Beloved Friend***
    who passed away 11/10/2016
    Rest in Peace
    ***

  3. #3
    Administrator Ross's Avatar
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    Re: Bitcoin...Why you can't cashout.

    Anyone doubting above articles information, particularly in regards to cashing out, need to follow this link.

    While some have had no problem with cashing out through Oct, Nov 2017, and I say some (many have on going issues still) most are in limbo with strangling frustration wanting to convert Bitcoin into cash.
    Ross
    ***Fred Coleman, Founding Partner, Beloved Friend***
    who passed away 11/10/2016
    Rest in Peace
    ***

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