“Blockchain fintech companies can not only provide better security for bitcoin traders we can also solve the problems that plague conventional capital market companies.”
November 15, 2016 London
This is the opinion voiced at the Blockchain Money Conference in London last week. Speaking to an audience of investors, entrepreneurs, and experts including Jon Matonis, Michael Parsons and Roger Ver, First Global Credit’s CEO Smith proposed that companies needed to take a more pragmatic view of risk. During his talk he highlighted specific areas of risk that were being overlooked by bitcoin companies.
“In the conventional capital markets we have many metrics used to measure risk. They are not great; they are not foolproof, but they are a decent framework that [start to] measure where the risk comes from. In the cryptocurrency world, we don’t yet have that.” — Smith asserted.
His statement came in response to ongoing security threats that challenge bitcoin exchanges. There is not a single year that has gone without reports of online bitcoin wallets being hacked. Many speculators turn to bitcoin trading in hopes of making easy profits from its trademark price volatility. Exchanges such as BitFinex further attract traders by offering leveraged trading based on loans being made by bitcoin holders who are not skilled traders but still want to make a return on their crypto-assets.
Are these practices — and whatever returns they promise — worth the risk if the exchange cannot provide investors with insurance during a security breach? Even the most respected Bitcoin exchanges are not able to protect their customers from hacks that have led to over $80 million worth of losses in last two years.
“BitFinex was one of the largest and most respected Bitcoin exchanges and they still got hacked,” Smith stated. “It clearly illustrates how vulnerable our funds are in absence of adequate risk management protocols.”
Exemplifying his own company that allows bitcoins to be used as collateral margin to trade against fiat currencies, world-wide stock markets, precious metals and ETFs, Smith described what his company does to effectively reduce risk especially counterparty risk.
“First we actively grade bitcoin exchanges based on a weighted set of criteria including whether the exchange is domiciled in a respected jurisdiction, the transparency of their management structure and finally the longevity of the exchange. Once we have identified acceptable counterparties we spread assets across multiple exchanges. We need to be in a situation where we keep operating and continue to provide our customers with service even if one of our counterparties fail. So we don’t risk more than 15% of reserves on any one bitcoin exchange.”
“We further control risk by minimising the time that we have funds out of our control. We do this by continuously moving funds out of exchanges when not actively being used to trade.”
Exchanges are Centralising Bitcoin
“One of the benefits of bitcoin is that it should cut away middlemen from financial settlements, but bitcoin exchanges have failed to follow the vision themselves by acting like centralised authorities.” Smith highlighted these points and didn’t shy away from identifying that his own company was subject to the same issues. He then pointed to current and upcoming developments that are steps in the right direction of combating counterparty risk.
“I believe the real challenge over the next 2 years – for companies who operate in the cryptocurrency capital markets – is to move beyond this model of us holding client funds and being ourselves, a point of risk for the customer assets.”
“We’ve already seen some attempts to deal with this problem, but thus far these have failed because they do not cover the security of funds over the full trade lifecycle. They protect funds when they are initially placed on the exchange, but as soon as funds are committed to an active trade they are subject to the same risks as they are on a conventional bitcoin exchange because they are pooled with other trades. So while protecting inactive funds provides a partial solution, this benefit is counteracted as soon as you open a position and start trading. This is not a particularly useful innovation for funds lodged with First Global because we are actively moving dormant money out of the control of the exchange anyway. So a solution that only protects funds when there is no active trade does not really add value.”
“The second area is using smart contracts to replicate trading. Again, this is a move in the right direction but the problem with the practical use of smart contracts at the moment is lack of liquidity. There is a real challenge of creating a solution that provides good liquidity and real security through the full lifecycle of a trade including point of settlement. To my mind that is where the real benefit and the future lies; If we can create a solution that achieves this we have not only provided value in the cryptocurrency capital markets, we’ve created something that actually leapfrogs existing mainstream capital market risk.”
“All counterparty risk management strategies in existing capital markets are based on allowing banks to transact business securely. Allow bank A to trade with bank B in a way that keeps them from having counterparty risk. Nobody considers the last step in the cycle, the piece that covers the transfer of funds to the end customer. That customer is still expected to assume all the counterparty risk of working with a bank or broker or other institution. If we can create an environment that allows customer A to trade with customer B without any added counterparty risk from working with an institution in the middle, that’s where I think the public blockchain can add real value to the whole finance industry and our market will pull ahead of conventional markets in what we can offer our customers. So in the next two years not only will counterparty risk become actively managed in the cryptocurrency space, I can imagine ways blockchain tech can be adapted for mainstream markets counterparty risk management as well.”
Common sense kicks in following the Bitfinex hack
By Marcie Terman, Communications Director, First Global Credit and XBT Corp Geneva
Those of us involved in the cryptocurrency space right now are all certified early adopters and we wear that badge with great pride. We are individualists, a bit edgy and a bit libertarian. Because of this, companies like First Global Credit that take a hard line on the Know Your Customer rules withstand a lot of criticism. Cryptocurrency aficionados do not like the fact that we are legally compelled by international convention to understand who we do business with. But I will tell you from a life-long responsible relationship with my money (crypto or otherwise), it makes sense knowing who is on the other side of monetary transactions.
That is why when First Global Credit was founded in 2014 we published the identity of everyone on our management team. It seemed only fair if we demanded transparency from our customers that we in turn would be equally transparent with them. It would seem that in the aftermath of the Bitfinex hack the sentiment of the rest of the bitcoin market are suddenly in step with our own as the numbers of customers signing up and immediately KYC’ing their live trading accounts on our bitcoin backed, stock, futures and FX trading platform have increased four times the usual level over the past 7 days.
At a cursory inspection it may seem eminently fair that Bitfinex’s founders have taken the view to spread losses over their entire pool of customers. But if you think about this critically, it wasn’t the customer’s fault that permitted an automated, unchecked process at BitGo to release funds to points unknown. And given that the identity of Bitfinex’s management is not generally known, it makes it much easier for the culpable to hide until the heat dies down. Perhaps giving the go ahead on ill-conceived policies like this would have been deliberated on with greater care if the decision makers knew they would be identified as responsible?
My thinking is that these issues with Bitfinex have raised the question of what kind of accountability you can expect from vendors that use their customers’ penchant for anonymity as a cloak that they themselves can hide behind? (Doubly bizarre since Bitfinex follows the KYC conventions for their customers to reveal their identities.) This kind of thinking is logically followed by the realization that platforms offering anonymity or exchanges that automate withdrawals (a thing you NEVER see in conventional online brokerages) are perhaps not the most trustworthy place to store capital. With anonymity not only is it very easy for a financial service business, its website and its founders to disappear if things suddenly go wrong, it also makes it much harder to make a bid to reclaim capital yourself after a hack if you have no way of proving that it was your money stolen in the first place!
We cryptocurrency advocates consider the sanctity of personal information inviolable but the standard for company founders is and should be different. If you choose to do business with companies that hide the identities of their founders creating an opportunity to avoid responsibility, you, yourself are equally as culpable. I believe strongly, as many in crypto do in the principle of personal responsibility which is why I know that people who do not stand behind what they are selling are looking to avoid the consequences of poor decisions.
Having recognised that anonymity is not desirable in a business where client assets are involved I would suggest substituting the goal of anonymity with the selection of business partners that show a high regard for the personal privacy of clients as we do at First Global Credit. Choose business partners domiciled in jurisdictions that share your values. Make sure that the jurisdiction follows rule of law and the concept of search and seizure as it existed before the panics of the last decade. A blanket request for all customer data is simply not acceptable. If a government feels that there is criminal activity associated with an account, the proper course of action is to obtain a warrant through an objective legal system only after due process has been exercised.
Customers have a responsibility as well where the security of their assets are involved. Do not complain if your financial service company uses manual processes for withdrawal. Consider multiple layers of validation for transactions over a certain level simply a cost of doing business that is there to protect you as well as your service partner. Restrict your financial dealings to companies that you have vetted to make sure that they have a serious approach to not only maintaining security but validating processes regularly to make sure your service partner stays as far ahead of thieves as humanly possible. But at the core of all these measures lies transparency which should do much to facilitate trust between customer and service provider.
Those of us involved in the world altering cryptocurrency markets are absolutely ahead of the curve. We are doing exciting things, making the fiscal world more equitable, creating opportunities that will remove money from the hands of bankers and put it back in the hands of people who worked for the assets in the first place. Bringing opportunity to populations that have been abused by their governments for far too long. That’s pretty exciting stuff! But these paradigm changes do not mean that the sensible precautions that are part of the conventional financial markets should be ignored.
The success of the First Global Credit Trading competitions is due to the ingenuity and persistence of the people who choose to take part. We have old friends who have traded with us from almost the beginning. These people have profitable live accounts, who like the challenge of pitting themselves against others. We have other people who have never traded with us before.
Each competition is different, not only because the people taking part are different but because live market conditions are always in flux, always presenting new challenges. This time, traders who made the bulk of their money trading bitcoin FX were going to have a hard time making headway. The only thing in their favour, it’s a level playing field and all the bitcoin fx traders were going to have a hard time making a profit. But in the Fantastic Four Competition a higher number of players used bitcoin FX to try to increase their competitive edge.
It is also interesting to note that of all the people taking part in the competition, over half of the traders playing were at least somewhat in profit. But among those traders who were profitable 1.2% of them made over 70% of the profits. Since there could be only 4 winners, I think it should be noted that people really made an effort to aggressively trade a wide variety of strategies. And for so many people to be profitable during very difficult trading conditions speaks to the quality of the people taking part. So without further delay, I’d like to introduce you to the diverse and interesting group of traders who have won the Fantastic Four Trading Competition.
Winner – Futures Trading Category
Name: Alejandro Alvarez
Day Job: Serial Entrepreneur, Computer and Network Security Expert
Location: Malaga, Spain
Specialty: Futures Trading
Interviewer: What was your strategy that let you do so well in the competition?Alejandro is a serial entrepreneur and father of 4 who not only enjoys futures trading, but a rich and active lifestyle as well. He has not taken a position in bitcoin but observes several groups. He has seen several of First Global’s competitions advertised, but his interest was piqued when he saw that this time we had added futures to the roster of available markets.
I have learned not to trade the noise. I risk enough to maximize my available capital though I was a little overinvested several times during the competition. But I have learned to be patient, waiting for the right moment to enter the market. Once I am in a trade, if I’ve got the direction right, I hold onto it and add to my position. When I believe the conditions are about to change, then I exit. To judge the market conditions for a trading decision I analyze interrelated markets.
Interviewer: Which futures did you trade to win the competition?
I only traded the S&P, 10 Year US Treasury Notes and Gold. I did not use currency switch to move out and into bitcoin.
Interviewer: When you start trading the winning account, what are your plans for the profits you will make?
I plan to start immediately. I’m not interested in using the profits. I plan to leave them in the account to let the capital increase.
Interviewer: Did you discover or learn anything during the competition you’d like to tell us about?
I learned that you have to be aware that anything can happen. You need to be ready for unexpected things.
Interviewer: Is there anything you might have done differently in hindsight.
Yes of course, always. But asking that question is not useful because in real time you never know what will happen. Hindsight is 20/20.
Interviewer: Tell us about any memorable trades you made during the competition?
I remember one long S&P trade where I went long at 2030. I added to the position several times and exited at 2080. In hindsight I exited too soon as the market eventually reached 2105!
Winner – Stock Trading Category
Name: Perica Vukelj
Day job: Software developer
Specialty: Stocks and options
Perica is a happily married software developer living in the beautiful country of Montenegro. He has a daughter who is very important to his happiness. While he works in development, he is also a bitcoin holder who likes to occasionally trade stocks and options. We interviewed him to find out how he did so well in the stock trading category and to learn a bit more about his trading style.
I first learned about the Fantastic Four competition on the NewsBTC website. “I said to myself, this is great! Exactly what I needed. Now my bitcoin can be put to work. Because it was always annoying to me that the capital I have in bitcoin is just sitting there ‘only in bitcoin’. It is time consuming and expensive (trading fees and the time for international bank transfers) to be in bitcoin when I am bullish and when I am not so content with bitcoin to need to get fiat from a bitcoin exchange and put it somewhere else. And if I’m wrong and pull out of bitcoin, (which I am very often) I may miss big move and later get less bitcoins for the same money.
I love competitions and competing. After all, trading is, itself, a sort of competition, (In my humble opinion). So I decided to try for myself in the Fantastic Four Competition. I didn’t think I could get to the top of the list but with a bit of luck I did.
It was great experience. When you are competing there is always pressure to trade. During normal trading you might pass on some opportunities because you are not so confident. But in a competition you have to give it a try – after all the other competitors probably won’t pass on it. Also, you never know how close the other traders are behind you and how far away are the ones ahead of you! This pressure kept me trying to give my best every day. Keep looking for new trades all the time. It was fighting market moves and fighting with other competitors at the same time.
Winner – Bitcoin Fx Trading Category
Name: Eric Stein
Day job: Entrepreneur, Master trader, guitarist and Search Engine Optimization specialist
Location: Chicago, USA
Specialty: some stocks, some futures, bitcoin
Eric is a true Renaissance man who at age 35 has been involved in the bitcoin ecosystem since 2013. His most recent accomplishment is the launching the ‘bitcoin drudge report’ at http://Bitcoins.sx. He obtained many of his own bitcoins through mining. We caught up with Eric during a break in his hyper busy schedule to ask him about his opinions about the trading competition and the bitcoin market in general.
Interviewer: Do you use bitcoins to buy things?
Sure! When I can. I love supporting the bitcoin ecosystem.
Interviewer: What was the strategy that let you do so well in the competition?
I traded some stocks, had some good runs. Also traded a few futures but I did not have much luck in futures. Then I moved all my profits into bitcoins.
Interviewer: Do you have an opinion on why bitcoin has started to rise recently after having traded in a range for so long?
Yes, I believe it is due to increased mainstream adoption, increase in news exposure, increased blockchain believers, etc. I believe it is still way under priced.
Interviewer: Do you have any ideas about what will move bitcoin towards mainstream acceptance? Large merchants like paypal and amazon directly accepting bitcoin will help – or when they start using some kind of blockchain technology.
Interviewer: What do you think the price of bitcoin will be a year from now?
$999,999 per coin!
Interviewer: Would you like to build a career based on trading?
Yes. I want to be the worlds’ greatest cryptocurrency trader.
Interviewer: When you start trading the winning account, what are your plans for the profits you will make?
I will grow my portfolio to be holding millions of dollars’ worth of bitcoin.
Interviewer: Did you learn anything during the competition you’d like to share?
Yes. I learned a ton. Go big or go home. Stay focused, stay non-objective and stay fearless!
Interviewer: Is there anything you might have done differently in hindsight.
Stay focused and don’t jump into moves without the proper due diligence. Look at charts at different time scales.
Interviewer: Is there anything else you would like to say about bitcoin or the trading.
Yes. Bitcoin TO THE MOON!
Winner – Overall Trading Category
Name: [let’s just say] Entheogenism
Day job: Full time trader/gambler/ Entrepreneur
Location: Somewhere in the USA
Speciality: Stocks and currency
Here’s a cross section of his comments about the competition and cryptocurrency in general.I originally ran into Entheogenism on the bitcointalk.org forum and invited him to join the competition. He did join and by the end had achieved a top rank. Entheogenism is full of strong opinions and is absolutely another Renaissance man with a huge number of diverse interests. Among these accomplishments he is a self-styled crypto enthusiast and decade-long FX and stock trader. A transhumanist-futurist, creative writer, ambitious person interested in space colonization & human enhancement. His twitter profile is @Entheogenism for those that want to connect more directly with him.
I use Bitcoin & Ethereum to gamble on dice & gaming sites. I would use btc to pay Lyft, AirBNB and Expedia if I needed to, but this hasn’t come up yet. I also use bitcoin to buy on Steam or buy Amazon / Walmart gift cards & turn to fiat to pay bills.
Thoughts On himself
I belong and am active in transhumanism/futurism groups a lot more than crypto-related ones. However, I’ve been an active BitcoinTalk forum member since Feb. 2014 and have been on some other crypto forums as well, though sparingly. I’ve used bitcoin faucets since 2014. I use them even now, though much less than years ago, of course. I believe free or ad-based crypto/wealth distribution to unbanked and/or poor people is extremely valuable because otherwise they cannot participate online.
Thoughts on the competition and the FGC platform
During the competition I did not use the currency switch system. As far as I am concerned it would be simpler, more elegant & convenient to simply add FX currency pairs trading instead. I found your platform intriguing in that though it lacked FX, it did offer individual stocks. A ridiculously broad amount of them, in fact, far more than any FX broker or bitcoin site you’ll find (and I’ve reviewed almost all of them, for years). The ETFs & bond/Index Futures you offer are intriguing, however, they don’t seem practical except for a several-months/years even, style of trading, as those instruments take eons to manifest (finally) some macro price moves, compared to individual stocks. So, I focused my trading on the DOW (DIA), NASDAQ and the biggest IT Tech stocks exclusively. I made most money with NASDAQ by far.
Thoughts on bitcoins
BTC/USD price dynamics in 2009-2013 reflected the fact this was a new technology that changed the world dramatically, with unknowns as fundamental as ‘Gregory Maxwell in 2011 thought he would go to jail for working on bitcoin’ and ‘Satoshi was so uneasy about being a bitcoin dev/founder that he eventually disappeared in 2010, leaving matters to Gavin Andresen.
So, here you had something that the world had never seen before, suddenly creating a gold rush, yet with ginormous precedents worrying people about ‘going all-in’ on this: Liberty Reserve, 2012-2013 legal troubles. MegaUpload. Napster. eGold. There were so many internet projects that were similar in a lot of ways, that had got shut down, before BTC, that people were afraid, the whole way, until in November 2013, the US Congress, widely expected to eyebrow negatively BTC if not outright try to ban or illegalize it – Instead, acclaimed that crypto/bitcoin was a positive invention!!!! They were happy people would use it!!!! WHAT?? REALLY? So of course the price went ballistic in mid-Nov-2013 up to late December, by which time China’s involvement had come to a serious stopgap due to their central bank forbidding any big finance institution from using BTC (as it was deemed too risky/destabilizing).
These 2 giant BTC price bubbles in 2013 deflated dramatically in early 2014, helped even more by Mt. Gox’s final collapse. Crypto then took 1.5 years to recover from this drop, even as institutional & corporate investment flooded the scene. In late 2015 after the August stock market global scare (from China), wealthy Chinese were extremely worried about capital controls being imposed. So, they rushed to BTC, for the first time in such numbers again, since 2013. This was in addition to the russian MMM ponzi’s need for a useful utility vehicle to move funds around – bitcoin was perfect for this. When these inflows pumped BTC’s price in Oct 2015, people took notice. They had long awaited the signs of the ‘pump’ which should come from nearing the July 2016 block reward halving btc event. So, as soon as they saw this rise, they jumped in. This pyramid effect is what caused the price, relatively stagnant / hitting bottoms throughout 2014-2015, to finally rise & maintain such higher floors, during late 2015 & all of 2016 so far.
Winner prize accounts will be opened tomorrow. You’ll be able to follow the winners and watch their returns climb on the FGC blog or by following us on @firstglobalcredit on Twitter. and future articles on performance.
Here are the latest additions to the market list. Fifteen interesting new stocks to monitor and trade. Good luck.
Stock Market Selections
New Stocks for 22 February 2016
|APA||Apache Corporation||Energy||Oil & Gas Exploration & Production||Apache is an independent energy company, which explores for, develops, and produces natural gas, crude oil, and natural gas liquids.|
|APC||Anadarko Petroleum Corporation||Energy||Oil & Gas Exploration & Production||Anadarko Petroleum is an independent exploration and production company engaged in the exploration, development, production, and marketing of natural gas, oil, condensate, natural gas liquids (NGLs), and anticipated production of liquefied natural gas (LNG).|
|BBY||Best Buy Co., Inc.||Cyclical consumer goods & services||Computer & Electronics Retailers||Best Buy is a provider of technology products, services and solutions in the United States, Canada and Mexico.|
|CAT||Caterpillar, Inc.||Industrials||Heavy Machinery & Vehicles||Caterpillar Inc. is a manufacturer of construction and mining equipment, diesel and natural gas engines, industrial gas turbines and diesel-electric locomotives.|
|CMG||Chipotle Mexican Grill||Cyclical consumer goods & services||Quick Service Restaurants||Chipotle Mexican Grill restaurants serve a focused menu of burritos, tacos, burrito bowls (a burrito without the tortilla) and salads.|
|COP||ConocoPhillips||Energy||Oil & Gas Exploration & Production||ConocoPhillips is an independent exploration and production company. The Company explores for, produces, transports and markets crude oil, bitumen, natural gas, liquefied natural gas (LNG) and natural gas liquids.|
|DDD||3D Systems Corporation||Technology||Technical & System Software||DDD develops intellectual property in the field of image analysis and stereoscopic 3D image processing and deploys in software and hardware products that are licensed primarily for use with 3D mobile telephones and tablets, televisions, and personal computers.|
|DE||Deere & Company||Industrials||Heavy Machinery & Vehicles||Deere & Company is engaged in equipment operations and financial services. The Company operates through three business segments: agriculture and turf, construction and forestry, and financial services.|
|FSLR||First Solar, Inc||Energy||Renewable Energy Equipment & Services||First Solar, Inc. is a global provider of solar energy solutions. The Company designs, manufactures and sells photovoltaic (PV) solar modules, and also develops, designs, constructs and sells PV solar power solutions. The Company operates through two segments: components and systems.|
|HD||Home Depot||Cyclical consumer goods & services||Home Improvement Products & Services||The Home Depot, Inc. (The Home Depot) is a home improvement retailer. The Home Depot stores sell an assortment of building materials, home improvement products and lawn and garden products and provide services.|
|MU||Micron Technology, Inc||Technology||Semiconductor – Memory Chips||Micron Technology, Inc. provides semiconductor systems worldwide. It operates in four segments: Compute and Networking Business Unit, Mobile Business Unit, Storage Business Unit, and Embedded Business Unit.|
|SUNE||SunEdison, Inc||Energy||Photovoltaic Solar Systems & Equipment||SunEdison, Inc. (SunEdison) is a developer and seller of photovoltaic energy solutions, an owner and operator of clean power generation assets, and a developer and manufacturer of silicon wafers. The Company operates in three segments: Solar Energy, TerraForm Power and Semiconductor Materials through SunEdison Semiconductor Ltd.|
|SSYS||Stratasys, Ltd||Technology||Computer Peripherals||Stratasys Ltd. provides additive manufacturing (AM) solutions for the creation of parts used in the processes of designing and manufacturing products; and for the direct manufacture of end parts. The company offers entry-level desktop 3D printers for idea and design development.|
|WFM||Whole Foods Market, Inc||Non-Cyclical Consumer Goods & Services||Supermarkets & Convenience Stores||Whole Foods Market, Inc. (Whole Foods Market) is a retailer of natural and organic foods and grocer. The Company has one operating segment, natural and organic foods supermarkets. As of September 29, 2013, Whole Foods Market operated 362 stores in the United States, Canada, and the United Kingdom.|
|WYNN||Wynn Resorts Ltd||Cyclical Consumer Goods & Services||Casinos||Wynn Resorts, Limited is a developer, owner and operator of destination casino resorts which integrate accommodations and amenities, including fine dining, premium retail offerings, distinctive entertainment and convention facilities.|