The Wolf Den #626 - The Problem With Proof Of Reserves
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In This Issue:
The Problem With Proof Of Reserves
Bitcoin Thoughts And Analysis
Altcoin Charts
Legacy Markets
BlockFi Files For Bankruptcy
Fidelity Now Services Retail Customers
My Recommended Platforms And Tools
The Problem With Proof Of Reserves
You have likely seen your favorite (or least favorite) exchange CEO mention the newly minted term “proof of reserves” no less than 1000 times since FTX collapsed. Proof of reserves is the new catch phrase for platforms looking to prove their legitimacy.
The idea is simple - prove that you have all of the assets that you should and that customer funds are secure and separated. This is the blockchain, after all. Transparency should be easy.
But unfortunately, that is not the case.
On November 10th, Binance announced that they would be sharing, “details of their hot and cold wallet addresses.” The plan was to release a Merkle tree POF (proof of funds) to share with the community. Everyone would be satisfied. But it turns out that, like everything else in crypto, it wasn't as black and white as one would expect.
A Merkle Tree is "a unique data structure that aggregates the total of all customer balances without exposing any private information.”
So why exactly is the community unsatisfied with Binance’s POF? After all, the blockchain never lies and Binance did show that they have over 100% of necessary assets in reserve.
The answer is actually simple. We don't know their liabilities.
Binance may have 2x more than their customer assets on the platform, which is great, but it means nothing if they have liabilities exceeding reserves if there is a bank run.
Jesse Powell, the CEO of Kraken, pointed this out.
Jesse continues…
“This is simply "here's a hash of your record in the BTC spreadsheet." ok... but what's the point? The whole point of this is to understand whether an exchange has more crypto in its custody than it owes to clients. Putting a hash on a row ID is worthless without everything else. People who oughta know better, journalists, especially, should take the time to understand this before overselling it and misleading consumers.”
Do we also need a proof-of-liabilities?
This also stretches the limits of what should be expected from a private company.
Coinbase is publicly listed, so they have to file these figures for everyone to scrutinize. A private company has no such obligation, but that does not mean that customers should not demand transparency. They should. We are navigating uncharted waters. Privacy is a privilege and exchanges have clearly lost their right to be shady.
So if Kraken is criticizing Binance, how does Kraken prove their liabilities and reserves?
Kraken's method is simple. Customers can verify that their balances are fully backed within their own account. Users can see the Merkle hash that verifies their funds. You can read more about the procedure HERE.
Kraken also clearly shares their liabilities. They believe that the auditor should calculate the sum of client liabilities, and that a negative balance should be included in the audit. No stone is left unturned.
Kraken's approach is superior. Their transparency puts an additional burden on other exchanges. That said, "proof" isn't easily produced overnight. These are billion-dollar companies and these things take time. For now, we should applaud Binance's effort but remain skeptical in advance of seeing liabilities.
Just a couple of weeks ago, we witnessed some odd behavior between Crypto.com and Gate.io that could suggest something questionable is going on behind the scenes. Demanding transparency and full accounting is the only path forward.
I do not expect that the crypto community will ever fully accept accounting from exchanges or third parties in light of recent events.
That said, proof-of-reserves are a major step in the right direction.
Bitcoin Thoughts And Analysis
WEEKLY CHART
Bitcoin continues to trade with minimal volatility and to tiptoe around support at $16,218. There's very little to analyze here, as price has been trading for 3 weeks in a small range.
Eventually we will get volatility again and a clear move up or down. Until then, go touch grass.
Altcoin Charts
I do NOT share signals in this section. I share setups and charts that I am watching, in an effort to help show you how I view a chart and what criteria would be necessary for me to consider taking a trade. NEVER blindly buy something because it is listed in a newsletter or posted on twitter. You need to have a plan when you enter a trade. These are just ideas, and are almost always “if, then” scenarios. If a certain set of things happen, then I would consider a trade.
ETH/USD
Ethereum is in an interesting spot. We have a clear descending triangle (blue), which is viewed as a bearish pattern. Think of it like a bouncing ball on the flat ground. Each bounce gives a lower high.
The expectation is that price will eventually break through the floor.
You may be surprised to find that descending triangles break UP 53% of the time, which is what Ethereum is currently attempting to do.
Volume is low, which decreases the veracity of any breakout, but if we do see increased volume on a move through either blue line, it should offer clues as to the next direction.
I bought at $1284 on the way down, which remains the key area to watch as resistance now.
Hard to get excited, but fun to watch the descending triangle.
Legacy Markets
"US equity futures pointed to a moderately stronger open on Wall Street as speculation mounted that unrest in Chinese cities over Covid restrictions would force authorities to move faster in loosening the curbs.
While Beijing on Tuesday stopped short of announcing any concrete steps toward reopening the world’s second-largest economy, it pledged to bolster vaccination among its senior citizens, a move regarded as crucial to ending the loop of harsh Covid Zero curbs. A spokesman for the National Health Commission also said local officials must avoid excessive restrictions.
“We do not expect China policy to publicly shift away from the Zero Covid stance, however, we could see some easing of the policy privately and in localized areas,” Jefferies analyst Mohit Kumar wrote in a note. Despite Monday’s China-related setbacks, he said “markets are in a happy state and are comforted by the expected reduction in the pace of rate hikes from central banks.”
Many economists expect that Federal Reserve Chair Jerome Powell’s speech on Wednesday will cement bets that the central bank will slow its pace of rate increases next month -- while reminding Americans that its fight against inflation will run into 2023. That view, alongside the easing in China tensions, knocked the dollar lower against a basket of peers, following two days of gains.
Still, central bankers have signaled rate hikes have further to run. St. Louis President James Bullard, for instance, warned that investors may be underestimating the chances of higher rates. His New York counterpart John Williams and Fed Vice Chair Lael Brainard also flagged that rates need to go higher.
Elsewhere, European Central Bank President Christine Lagarde signaled on Monday that more rate hikes are likely.
The hawkish drumbeat from central bankers is raising fears of a downturn, with global bonds joining US peers in signaling a recession, as a gauge measuring the worldwide yield curve inverted for the first time in at least two decades.
Key events this week:
Euro area economic confidence, consumer confidence, Tuesday
US Conference Board consumer confidence, Tuesday
EIA crude oil inventory report, Wednesday
China PMI, Wednesday
Fed Chair Jerome Powell speech, Wednesday
Fed releases its Beige Book, Wednesday
US wholesale inventories, GDP, Wednesday
S&P Global PMIs, Thursday
US construction spending, consumer income, initial jobless claims, ISM Manufacturing, Thursday
BOJ’s Haruhiko Kuroda speaks, Thursday
US unemployment, nonfarm payrolls, Friday
ECB’s Christine Lagarde speaks, Friday
MLIV PULSE SURVEYWill the ugliest year for US credit get even uglier? Share your views here.
Some of the main moves in markets:
Stocks
The Stoxx Europe 600 was little changed as of 9:57 a.m. London time
Futures on the S&P 500 rose 0.2%
Futures on the Nasdaq 100 rose 0.4%
Futures on the Dow Jones Industrial Average were little changed
The MSCI Asia Pacific Index rose 1.5%
The MSCI Emerging Markets Index rose 2.1%
Currencies
The Bloomberg Dollar Spot Index fell 0.5%
The euro rose 0.2% to $1.0364
The Japanese yen rose 0.6% to 138.12 per dollar
The offshore yuan rose 0.9% to 7.1792 per dollar
The British pound rose 0.3% to $1.1990
Cryptocurrencies
Bitcoin rose 2% to $16,513.79
Ether rose 3.9% to $1,217.46
Bonds
The yield on 10-year Treasuries declined one basis point to 3.67%
Germany’s 10-year yield declined nine basis points to 1.90%
Britain’s 10-year yield declined three basis points to 3.10%
Commodities
Brent crude rose 2% to $84.85 a barrel
Spot gold rose 0.7% to $1,753.89 an ounce"
BlockFi Files For Bankruptcy
In news that literally everyone knew was coming, BlockFi has officially filed for bankruptcy. BlockFi has danced on the edge of insolvency multiple times, always finding a way to save the company with a Hail Mary in the final seconds of the game.
Not this time. Their last Hail Mary was a pass by FTX, so there was no way BlockFi was going to survive.
BlockFi put out the same bullshit statement as every other insolvent company.
“The most prudent decision for us, in the interest of all clients, was to initiate a pause of many of our platform activities.”
Last time I checked, platforms behaving in the interest of their clients remain solvent and functional.
While there is nothing funny about platforms going bankrupt, I did chuckle when I saw that BlockFi still owes the SEC $30 million, part of their original fine.
Take that Gary Gensler.
The list of creditors is making the rounds. The second largest on the list was FTX, who currently has an unsecured claim of $275 million against BlockFi. Both companies are now bankrupt and probably owe each other money.
What a mess.
Hopefully the crypto contagion is winding down, but I am sure there are more insolvencies and bankruptcies to come.
Fidelity Now Services Retail Customers
Users that signed up for Fidelity’s commission-free Bitcoin trading a month ago received an email announcing that the service is now available. The email noted, “the wait is over” and guided retail customers through the process of trading Bitcoin. According to the email, opening up a crypto account comes with the promised benefit of “commission-free trading,” but that a “spread of 1% will be factored into every trade execution price.”
Not exactly free.
Both Bitcoin and Ethereum can be traded on the platform. It will be very interesting to see how this product performs in light of current market conditions. We all know that few new retail traders and investors are coming into the space, so my immediate expectations are dampened.
My Recommended Platforms And Tools
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The views and opinions expressed here are solely my own and should in no way be interpreted as financial advice. Every investment and trading move involves risk. You should conduct your own research when making a decision. I am not a financial advisor. Nothing contained in this e-mail constitutes or shall be construed as an offering of financial instruments or as investment advice or recommendations of an investment strategy or whether or not to "Buy," "Sell," or "Hold" an investment.
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