Bitcoin markets change significantly over time, which creates an intriguing paradigm shift. China remains the largest market for Bitcoin trading in terms of volume with a whopping 96% domination. It is followed by the USD market which held this place firmly for a good period of time. Over the past few days, there has been a significant growth in the Japanese market, catapulting it to the second place in terms of volume. After the Mt. Gox debacle, the Bitcoin scenario in Japan has recovered cautiously from that point. Let dive deep into the dynamics to know how exactly Japan took volumes away from USA:
Drop of sales tax and efforts of exchanges:
The Japanese Government has dropped the sales tax on the purchase of Bitcoin and Cryptocurrencies in October. Initially a sales tax of 8% was levied on purchase of any cryptocurrency. While this move is attracting traders, it is also influencing the merchants across Japan for better adoption. Major exchanges in Japan like BitFlyer, Coincheck and Zaif have all launched campaigns that would attract the masses. BitFlyer launched a sophisticated trading platform for professional traders and an illustrated Blockchain explorer that have gone famous. Zaif bitcoin exchange launched an investment service that has been gaining lot of attention. The investment service is dollar cost averaging investment service, shielding users from bad investments.
Increasing merchant adoption:
Right from their launch, BitFlyer and Coincheck have pushed for merchant adoption by promoting Bitcoin transactions across merchants. So as to make Bitcoin a part of daily life, Coincheck has enabled payment of utility bills through Bitcoin. They have a dedicated ‘Coincheck Electricity’ platform that makes this possible. Having bitcoin payment available for something like a utility bill, that has a reliable image, has definitely put bitcoin in positive light. These efforts have surely paid off as Japan now has around 5,270 merchants and websites accepting Bitcoin. BitFlyer has even initiated talks with the Japanese Government for transacting in Bitcoin for Government operated websites and payments.
How does the future look like?
The given rise in volumes should not be treated as a momentary surge but rather as fruits of steady adoption. With Chinese exchanges looking to impose transaction costs on BTC-Yuan trading pair, BTC-Yen looks to be the better alternative. With no service tax, traders would find it lucrative to trade across Japanese exchanges. Especially automated traders that provide volumes to the market would look to cut down on cost through Japan. If not a complete Chinese volumes, at least a part of it would be redirected to Japan restoring its previous glory prior to Mt. Gox debacle.
When there is a digital ecosystem that is minting money, there would be graded tech hackers attempting to steal it. Story of Bitcoin and Bitcoin related businesses are no different. Major exchanges are always prime targets of such thefts and even high level security might turn out to be futile. Few of the notable examples are Mt.Gox which caused the rapid downfall of Bitcoin and the very recent Bitfinex hack. Even though Bitfinex is trying its best to reimburse the victims of the hack, it gets difficult to build a trustworthy Bitcoin exchange with such events. It also gets difficult for exchanges to operate in full confidence. Trying to change this landscape, Mitsui Sumitomo is offering insurance to exchanges against thefts. Let’s look into the details of this policy:
History of insurances in cryptocurrency world:
A formerly existing wallet service named Elliptic Vault was probably the first ever insured bitcoin service. They launched in January 2014 and named Lloyd’s as their insurer. Unfortunately, Lloyds backed out of the deal, but the service was able to find another insurer, CBC insurance. Following this, the Great American Insurance Company offered the first official Bitcoin Insurance coverage policy to businesses. Later, bitcoin vault Xapo announced that they were using AMBest to insure their high-security vaults. Following year, Coinbase and BitGo made insurance protection a common feature in the largest bitcoin wallet services.
What Mitsui Sumitomo offers?
Mitsui Sumitomo is offering a unique policy for Bitcoin exchanges around the world. The plan’s total theft cover ranges from ten million yen (US$88,500) up to one billion yen (US$8.85 million). In addition to theft, it also covers loss from internal and external threats, including employee theft, mistakes, cyberattacks, and other unauthorized access. Additional to the recovery amount, the policy comes with a range of damage control and prevention services.
The plan’s announcement states:
“In order to prevent damage caused by cyber-attacks, targeted mail training and information leakage risk, we provide cyber risk countermeasure services such as security diagnosis and checklist for employees.”
The new insurance product was developed in partnership with Japan’s largest exchange, Bitflyer. The exchange helped develop a policy that protects against losses at both the exchange and customer levels, and is the also the first policyholder. BitFlyer now accounts for an overwhelming 68 percent of the yen trading volume.
Mt.Gox is singularly regarded as the worst event to happen to Bitcoin development throughout the digital currency’s course. This has resulted in the onset of a bearish trend in the bitcoin markets for over a year. Ever since Bitcoin has taken good time to recover solely on the basis of widespread adoption and Venture capital backing. The Bitcoin eco-system in Japan has recovered cautiously from that point and now has improved tremendously. Let’s look into how Japan slowly recovered from the debacle:
Launch of new and diverse Exchanges:
Initially, bitFlyer, the exchange which succeeded Mt Gox in Japan, managed to raise $4 million in first round of funding. After that many exchanges were launched to recapture the vacuum created by Mt. Gox. BitOcean, Kraken and ANX are few initial examples of exchanges that have been thriving on Japanese Bitcoin markets. These exchanges were implementing strategies that would lead to better adoption of the currency in Japan. This way they envisaged to capitalize on the open market left by Mt. Gox that at one time accounted to 70 % of Bitcoin transactions in the world.
Currently Coincheck and Zaif are gaining major traction due to their various initiatives that are reaching to the Bitcoin demographic.
Lucrative platforms that attract customers:
As a means of increase adoption and attract customers, exchanges have been providing convenient platforms for trading. bitFlyer launched ‘chainFlyer’ a block explorer that provides illustrated environment to explore the ledger. It also launched ‘bitFlyer Lightning’ a professional trading platform targeting professional traders and a good chunk of market share.
On similar lines Zaif bitcoin exchange launched an investment service that has been gaining lot of attention. The investment service is dollar cost averaging investment service. This is particularly lucrative because you can protect yourself from the risk of investing money at the wrong time. By following a consistent pattern of adding new money to your investment at right time, risk will be averted.
Increasing merchant adoption and Regulation backing:
Owing to great publicity, over 48,000 merchants accept Bitcoin in Japan. So as to make Bitcoin a part of daily life, Coincheck has enabled payment of utility bills through Bitcoin. They have a dedicated ‘Coincheck Electricity’ platform that makes this possible. Having bitcoin payment available for something like a utility bill, that has a reliable image, will definitely put bitcoin in positive light.
Even the Regulation has been positive for the cryptocurrency. Recently the 8 % sales tax on Bitcoin has been abolished, showing how willing the authorities are in aiding the currency’s growth.
What is a Bitcoin Mining Pool?
A Bitcoin mining pool is a group of Bitcoin miners working together to earn Bitcoin. Bitcoin miners use computing power, which is measured in hash rate, to unlock blocks, for which they are rewarded in Bitcoin. Each time a block is unlocked, the Bitcoin system allocates Bitcoin to a miner who participated in unlocking the block. The hash rate of the participating miners determines which miner earns the Bitcoin through random distribution. As the number of miners unlocking blocks increased, miners with low levels of computing power would have to wait extended periods of time, even up to years, to earn Bitcoin rewards. In response to this problem, pools were created to group miners and distribute Bitcoin rewards on a more consistent basis. In other words, pools reduce the “granularity” of the rewards that miners earn.
What are the Largest Bitcoin Pools?
The three largest pools, measured by hash rate, are DiscusFish (also known as F2Pool), AntPool, and BW Pool. These pools comprise approximately 22%, 17%, and 15% of the total hash rate, respectively. DiscusFish is a Chinese mining pool, founded mid 2013. AntPool is owned by Chinese IC design company Bitmain Technologies Limited. BW Pool is also a China based firm.
Why does this Matter to Investors?
The successes and failures of pools could have serious implications for investors. Collectively, these pools make up more than 50% of the total hash rate. If they were to collude, they pose a security risk to the validity of the blockchain. Furthermore, hash rate is important because it indirectly reflects the projected value of Bitcoin. If confidence in the value of Bitcoin is high, people will be more inclined to mine. More mining means a higher hash rate. If these pools disband or suffer from internal error, it could send shockwaves through the Bitcoin community, reflected in its trading value. Given the geographic proximity of these pools, failure of one pool could be shared by others.
In looking at recent history, the primary sources of failure for Bitcoin have occurred during consolidation of information. Two, notable cases of consolidated information failure are the Mt. Gox and Bitfinex exchange incidents. Although pools have not had a severe adverse effect on Bitcoin value yet, investors should monitor the security and growth of pools with wariness.
Getting to know the Bitcoin Market
Given that Bitcoin market is relatively new, investors share uncertainty about its long-term viability. Like other currencies, Bitcoin is susceptible to fluctuations in price and value. However, the mechanisms that govern Bitcoin are radically different than those of traditional currencies. Bitcoin uses peer-to-peer technology, which is a selling point for people hedging their bets against centralized government. However, in the event of a systemic failure, such as a market collapse, there exists no central authority to respond. In a conventional capitalist system, such as the U.S., for example, the Federal Reserve can intervene in times of crisis with monetary policy. The question then becomes: how effective is Bitcoin in times of failure? Although there is no definitive answer to this question, by examining Bitcoin’s historical performance in times of crisis, investors can improve their understanding of the asset.
Three Bitcoin Crises
Three consequential crises of Bitcoin include the regulation of the central bank of China (December, 2013)¹, the collapse of Bitcoin exchange Mt Gox (February 2014)², and the security breach of Bitfinex (August 2016). Each of these events directly impacted the price of Bitcoin, pictured below.
Bitcoin is Risky
In examining each of these failures, investors should consider the recovery process and the probability that a crisis will repeat itself. The regulation of the central bank of China was an unusual event; many investors were forced to exit the market and the remaining pool of investors became increasingly aware of the potential for regulation. The resulting slide in value of Bitcoin reflects the shift in regulatory risk analysis. This shift demonstrates that changes in legislation are often unpredictable and can have severe implications for Bitcoin price. To date, the price has not recovered to its high of December 2013. However, despite regulatory burdens, China has resumed high levels of Bitcoin consumption.
The collapse of Bitcoin exchange Mt. Gox and security breach of exchange Bitfinex demonstrate the market risk of database failures. Importantly, each of these cases was a result of human error. The blockchain did not fail, which possibly contributed to value recovery. In considering the recovery periods of each of these events, Bitcoin price recovered to 100% of its value within three weeks of the Mt. Gox collapse³, and has recovered to 97.5% of its value within a week of the Bitfinex collapse³. Despite lacking a centralized system, in each of these cases, after an initial loss, Bitcoin retained much of its value.
- Library of Congress: Regulation of Bitcoin in Selected Jurisdictions
- CoinDesk: Mt Gox: The History of a Failed Bitcoin Exchange
- CCN.LA: China now Controls Bitcoin (and that’s just the Beginning)