Crypto land: The Good, the Bad and the Ugly

Bitcoin remains range-bound, and is currently slipping to the lower end of its trading band at $10,900, having failed to conquer $12,000 over the past week.

And there's been a mix of the good, the bad and the ugly in cryptoland newsflow of recent days.

The good…from Robinhood

The best of the good news was probably that emanating from the US, where stock trading app Robinhood announced that its customers will be able to trade bitcoin and Ethereum sometime in February, and is now providing cryptocurrency prices on 16 coins.

That's good news for US buyers because the app will not be charging transaction fees, which is very bad news for Coinbase, among the largest of exchanges handling fiat currency. The downside to Coinbase's slick easy-to-use system, once you've jump through the compliance hoops to get an account, is the high transaction fees.

Robinhood has already made a name for itself with its commission-free share dealing and is thought to have a large footprint with younger investors. This move will help to further establish it among that demographic and beyond.

The bad… from Tether

Bad news came from Tether and its USDT coin, the cryptocurrency that is pegged to the US dollar and is used by traders to quickly park funds in a stable repository during times when markets are falling.

Friedman LLP, the firm Tether had hired to audit its accounts, is no longer working for the company. Suspicions have been mounting since last year that Tether does not in fact hold the US dollars that it claims back its coin, and this news will add to those concerns.

A memorandum drawn up by Friedman in September last year claimed that $442 million was held in reserves by Tether to back the $442 million USDT then in circulation.

Critics claim that Tether and its corporately related exchange Bitfinex, one of the largest in the world, are together creating money out of thin air by continually "granting" new tokens. This issuance was running at 100 million a day last week.

At the end of 2017 there were 500 million USDT in circulation. Today that figure stands at 2.2 billion. You can see the grants for yourself on Tether's blockchain.

A statement issued by Bitfinex in December 2017 in response to accusations from an anonymous blogger who goes by the name Bitfinexed, denied allegations that it was working with Tether to effectively print money:

"Every claim made by these bad actors has been patently false and made simply to agitate the cryptocurrency ecosystem. As a result, Bitfinex has decided to assert all of its legal rights and remedies against this agitator and his associates."

There could of course be nothing to worry about here. Tether's supporters could argue that the new issuance is just a response to the liquidity needs of the market and that the issuance is indeed backed by US dollars.

Observers are worried by the lack of transparency surrounding Tether's operations because although the sums seem small compared to the total market cap of the cryptocurrency sector at $556 billion, that headline figure does not mean there is $556 billion in hard cash slushing around the markets – the figure will be much less than this, meaning the 2.2 billion USDT could represent a significant portion of the market.

Any lack of confidence in the true value of USDT, given that it's held in large amounts by all major altcoin exchanges (altcoin exchanges don't offer fiat/crypto trading pairs or funding of accounts with fiat, so USDT acts as a proxy for the US dollar), Tether might have the ability to crash the market, perhaps by as much as 15%, according to Julian Hosp, co-founder of crypto debit card provider company TenX.

The news that Tether and Friedman are parting ways will not help to instil confidence in that regard.

And the ugly… from Coincheck

The truly ugly news arrived from Japan last Friday with perhaps the biggest theft ever on a crypto exchange, following the hacking of the Coincheck exchange's hot wallet to the tune of $534 million worth of NEM tokens. The hack happened at 3am local time, although the exchange admits it didn't discover it until some eight hours later.

There are currently 16 government-licensed exchanges in Japan and Coincheck is one of those waiting in the queue for approval, which makes the revelations regarding the poor custody arrangements at the exchange especially troubling.

Coincheck says it will reimburse clients, although is yet to reveal details of the proposed distribution. Many customers are understandably very concerned that they may have lost their funds as they worry that the company does not have the money to cover the losses.

The Japanese regulatory authorities have responded to the theft by announcing their intention to initiate spot checks at all of Japan's many exchanges, small and large. The NEM tokens have been transferred to a wallet presumably under the control of the criminals and where they still remain.

The Coincheck theft is the largest break-in at a crypto exchange since Mt.Gox "lost" 850,000 bitcoins in 2014. Mt.Gox was also based in Japan and at one stage accounted for 80% of all trading in bitcoin globally.

NEM, currently the 10th placed coin by market cap, dropped around 25% to $0.78 in the immediate aftermath of the hack, although has recovered somewhat to trade at $0.87 today, according to coinmarketcap.com.

Crypto payment company BITPoint president Genki Oda, thinks the hack will spread a pall over the entire market as hit refocuses consumer concerns about poor security on exchanges, despite the licensing system. "All cryptocurrencies will now be tainted in their minds, so there may be a mid-term negative impact," said Oda.

Other crypto news

The Weiss company released its Weiss Cryptocurrency Ratings last week, the first coverage of the cryptocurrency sector by a major ratings agency.

Fears among South Korean traders that certain coins were going to receive a poor scores led to attacks on Weiss' servers in an attempt to prevent the release, but they didn't succeed.

Bitcoin was rated C+ (fair) while Ethereum did better, scoring a B (good) by Weiss. No coin/token of the 74 rated by the company received an A rating, although Weiss is well-known for being reticent in awarding As in established asset classes so that's no surprise.

Weiss says cryptocurrency volatility is the main reason none were rated A (excellent). Weiss looks at risk, reward, a coin's technology and fundamentals in the modelling that determines its rating scores.

A survey conducted by Global Blockchain Business Council and SurveyMonkey has found that the number one reason among US investors for owning cryptocurrency was distrust of government, with 24% trusting bitcoin more than they do the US government with a third saying it was a way of avoiding government regulation.

The survey found that 71% of investors were male, 58% under the aged between 18 and 34 and nearly half were from ethnic minorities.

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.