Month: June 2021

The Financial Times explored the rise in crypto ransoming and crypto money laundering – how ransoms paid in cryptocurrency are converted by criminals into hard cash.

Earlier, says the FT, it used to be possible to simply ‘cash out’, that is, sell cryptocurrency for some local currency. For example a criminal in India who was paid in Bitcoin could use – years ago – an exchange to sell Bitcoin for Indian Rupees, then have those Rupees sent to their Indian bank account:

between 2011 and 2019, major exchanges helped cash out between 60 per cent to 80 per cent of bitcoin transactions from known bad actors.

But now every major exchange in India and across the world require that customers prove their identity (ie a “KYC”) before they’re allowed to withdraw money. 

It’s easier than ever now to identify suspicious behaviour: deposits of crypto followed by a sale into local currency followed by a cash-out. And to tie them to identifiable individuals.

What can criminals do? Well,

• ~ They can use exchanges that don’t require KYC. But “such exchanges tend to have lower liquidity, making it harder for criminals to transfer crypto into fiat currencies.”
• ~ They can use “over-the-counter brokers”, also described in the article as “treasure men”, who will “bury it underground or hide it behind a bush, and they’ll tell you the coordinates. There’s a whole profession.”
• ~ They can use similar middlemen who can exchange crypto for “gift vouchers, prepaid debit cards or iTunes vouchers”. These middlemen can be found on the ‘dark web’ Tor network

The article also explores how authorities can trace crypto ransoms even if they can’t identify the person holding it. But criminals can combat that too:

• ~ They can “chain-hop” between different cryptocurrencies
• ~ They can use privacy-centric cryptocurrencies that are inherently hard to trace
• ~ More interestingly, they can ‘tumble’ cryptocurrency, “mix up illicit funds with clean crypto before redistributing them” using services set up to do just that.

So. Bitcoin and crypto laundering is at least as involved and exciting as money laundering with regular, fiat currency. I think the FT article is a good introduction.

Big one: El Salvador makes Bitcoin an official currency (along with its current one, the US dollar). Interestingly, the president said it would make remittances to the country from its expatriates easier – most other countries see cryptocurrency as a way for money to leave the country. Here is Bloomberg on the news.

Moneycontrol, the Indian business website, has a profile of the Indian founder of Polygon, a project to ‘scale’ decentralised applications written on the Ethereum blockchain. In the Indian press, Polygon is an example of an Indian crypto success story.

Indian authorities launched an investigation into WazirX, a prominent Indian crypto exchange, over allegations of money laundering. Specifically, that Chinese nationals had converted the proceeds from online betting apps into cryptocurrency and then moved them out of WazirX into a foreign crypto exchange.

One of the most popular decentralised finance products is to earn interest and rewards through what is called ‘staking.’

Here are a couple of screenshots of interest rates that the Binance crypto exchange offers on staking a variety of tokens:

And rewards available on dedicated staking services like the clearly-named StakingRewards:

Given how attractive these interest rates may seem, I think it’s important to understand how staking your crypto holdings works, and what the risks are.

Here’s the crypto company Coinbase describing staking:

Staking is the process of actively participating in transaction validation (similar to mining) on a proof-of-stake (PoS) blockchain. On these blockchains, anyone with a minimum-required balance of a specific cryptocurrency can validate transactions and earn Staking rewards

a node deposits that amount of cryptocurrency into the network as a stake (similar to a security deposit).
The size of a stake is directly proportional to the chances of that node being chosen to forge the next block. 
If the node successfully creates a block, the validator receives a reward, similar to how a miner is rewarded in proof-of-work chains.

So, if you hold a set of crypto tokens that are on proof-of-stake blockchain, you can choose to ‘stake’ them and earn interest while also retaining ownership of them. Sort of like fixed deposit meets mutual fund.

Staking pools

Since it’s usually not worth an individual’s time doing this on their own, staking pools have emerged, like the examples we saw above. They aggregate crypto tokens from a large number of people and stake them as one.

As we’ve read, that increases the changes of being chosen as a transaction validation, and therefore of a reward. More such staking pools means more strong nodes, and – to an extent – a more secure network.

Aggregating also means there’s some flexibility in individuals depositing and withdrawing their crypto because there are others to fill in.

But there are risks:
For one, the service you’re using for staking could impose a certain lock-in period (or it could be inherent to the token’s blockchain), you won’t be able to sell your tokens during that period if you want to cash in, or if you want to get out.

Second, you’re effectively handing over ownership of your tokens to a third party to stake on your behalf. You’ll need to do your due diligence about that entity’s reliability: could it usurp my tokens? could it be hacked and my tokens stolen? are the rewards transparent (ie are there hidden fees?)

So. Crypto staking is one way to hold tokens for potential gain in price as well as earn interest on them, often at very attractive rates. Given that it’s all unregulated, beware of the risks and do your homework on who you stake with.

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(As always, none of the entities mentioned in this post are recommendations.)

A newly-popular cryptocurrency has been blamed for disrupting global supply chains of solid-state drives or SSDs.

The Chia network, with its Chia token, was founded as an eco-friendly alternative to Bitcoin’s energy-intensive proof-of-work mining algorithm. 

Instead, Chia uses what it calls proof of space and time, using empty computer storage to store ‘plots’, or files that are later ‘harvested’ as part of the ‘farming’ process when verifying transactions to add to the Chia blockchain.

As Chia’s FAQ describes it,

“Users of the Chia blockchain will ‘seed’ unused space on their hard-disk drive by installing software which stores a collection of cryptographic numbers on the disk into ‘plots’. These users are called ‘farmers’. When the blockchain broadcasts a challenge for the next block, farmers can scan their plots to see if they have the hash that is closest to the challenge,”

But as with anything that gains popularity, there have been unintended consequences. Since SSDs are faster than regular spinning-disk hard disk drives (like those typically found in desktops), farmers of Chia coins use setups with a lot of inexpensive SSDs. However, 

…plotting Chia uses loads of writes, so a cheap 512GB SSD can be trashed in 40 days… a higher capacity drive featuring a similar DWPD rating would have lasted longer, for about 160 days.

from Tom’s Hardware.

In fact, so many hard drives have been used and trashed that demand for them has gone up. From a Barron’s article in May:

… more than 8 exabytes of storage had been allocated to the Chia network, an increase of more than 2,000% in a month… The extra demand is spurring price increases, too: Mohan notes that the price of 14-terabyte drives on Amazon has increased between 73% and 75% in recent weeks, with 16 TB drives up between 53% and 61%

and, as the article notes, that’s been pushing the stock of hard drive manufacturers up. This is the one year trend for Seagate and Western Digital:

Finally, ironically, none of this has had much of an effect on the price of the Chia token at all:

This is one case where you’re better off investing in the ecosystem of companies around the token than the token itself!

In our last post, we looked at the hedge fund manager Ray Dalio’s opinions on cryptocurrency.

Recently, the hedge fund manager Stanley Druckenmiller was interviewed on a wide range of topics, which included cryptocurrency.

Druckenmiller, himself a billionaire, managed the legendary George Soros’ Quantum hedge fund for over a decade and then ran Duquesne, his own successful hedge fund, full-time. He is one of the major people profiled in the book More Money Than God by Sebastian Mallaby.

~ “So here’s something with a finite supply and 86% of the owners are religious zealots. I mean, who the hell holds something through $17,000 to $3000? And it turns out none of them — the 86% — sold it.” – on learning that people held bitcoin despite its massive volatility, which meant that there was something bigger in play.

~ His opinion used to be that “crypto and Bitcoin are a solution in search of a problem” but now he realises, that it’s a credible hedge against the wearing of the US dollar. He has come around to the ‘digital gold’ view. See our last post for more detail on this.

~ However, crypto markets are extremely shallow compared to other real assets: “I tried to buy $100m of Bitcoin at a price of $6,200. It took me 2 weeks to buy $20m. I bought it all around $6,500, I think… I can buy that much gold in 2 seconds… So like an idiot, I stopped buying it.”

~ Meanwhile, Ethereum is a leader in building decentralized applications today, but it could be like “Yahoo before Google came along. Google wasn’t that much faster than Yahoo, but it didn’t need to be. All it needed to be was a little bit faster and the rest is history”.

(Indeed, there do exist alternatives like Blockstack, Binance’s Smart Chain and Polkadot. But there are also sophisticated projects (Matic, Uniswap, Raiden and many others) to scale different aspects of Ethereum. We will explore these in upcoming posts).

~ Finally, follow the talent: “One of the ways we’ve always invested in the private sector is to try and figure out where the engineering kids from Stanford, Brown and MIT are going… So many of them are in love with crypto and that’s where they’re going.”

Two major, long-time hedge fund managers were recently asked in detail about their opinions on bitcoin and cryptocurrency. Today, we look at Ray Dalio of Bridgewater.

Dalio spoke at the Consensus conference, organised by the publication Coindesk.

~ Dalio thinks the US dollar is at risk of being devalued at a level not seen since 1971, when it moved off the gold standard

~ This is because of unprecedented amounts of dollar printing (and therefore creation of new debt) by the USA central bank, the Federal Reserve to finance the pandemic stimulus, which itself is larger than the one after the financial crisis:

~ The impact of this is seen, he says, in the recent rise in inflation (ie. how fast the price of goods and services rises because there is more money available). USA inflation in 2020-21 was over twice the USA central bank’s long term target of 2%.

~ Inflation reduces the purchasing power of people. As Dalio says, ‘cash is trash’, so people buy other assets: real estate, stocks, bonds. That drives bond prices up and yields down, leaving investors search for still other alternatives.

~ This has traditionally been gold, but bitcoin and other crypto is now an attractive option. Unlike the dollar there is no central bank like India’s RBI or the USA Federal Reserve to print more bitcoin. It needs to be mined, and new bitcoin will be distributed as mining rewards at a pre-determined rate. And there will only ever be a finite number of bitcoin.

~ After years of skepticism, Dalio says he now holds some bitcoin, and personally sees it as a favourable option to holding bonds. His fund, Bridgewater, wrote a detailed 6000+ word analysis of their thoughts on bitcoin.

~ Finally, as Dalio says in the document, “Bitcoin’s biggest risk is being successful, because if it’s successful, the government will try to kill it and they have a lot of power to succeed.” Specifically, if large investors start to hold bitcoin as a store of value instead of government bonds (especially in a low-yield environment).

In the next post: Stanley Druckenmiller, who managed George Soros’ Quantum Fund for over twelve years.

India’s central bank, the RBI, reminded banks yesterday that its own 2018 cryptocurrency guidelines were no longer valid because the Indian Supreme Court had struck it down in 2020.

The RBI had effectively banned Indian banks from processing payments to/from cryptocurrency exchanges in 2018, throwing the country’s crypto ecosystem into suspended animation. After a case that made its way to the Supreme Court, those guidelines were overturned, and the Indian government was told to draft a law regarding crypto. (That bill has been pending in Parliament for months now.)

However as we have discussed on this group, banks have recently been using those very 2018 guidelines to impose a sort of informal ban on Indian rupee deposits into crypto exchanges, even sending notices to customers. The scramble to use alternative payment methods has meant that access to crypto in India remains extremely inefficient.

It’s probably that yesterday’s clarification will put an end to that.

Here is a screenshot of the RBI’s note yesterday (and a link to the note).