Coinbase and Bitcoin Cash Scheme Damages Trust in Bitcoin and Cryptocurrency
A layman’s explanation of the Coinbase and Bitcoin Cash controversy that erupted in the cryptocurrency world yesterday.
Coinbase and Bitcoin Cash Surprise the Market
Yesterday some of the biggest brand names in the cryptocurrency industry were embroiled in accusations of deception and insider trading. Coinbase is a popular entry-point for newcomers to cryptocurrency markets. The company offers an exchange and the ability to trade US Dollars for Bitcoin, Litecoin, and Ethereum (three of the most well-respected cryptocurrencies available.) Recently Coinbase announced its intention to add more currencies to its platform. A well-planned rollout of new currencies was not surprising to most users. It was natural to expect Coinbase to try to capitalize on the interest in new coins. However there were reservations that Coinbase was adding new coins before making its existing systems secure and efficient.
In a sudden and surprise move, Coinbase users started receiving messages yesterday late afternoon that Bitcoin Cash was now available to trade on Coinbase. There was no warning, no preparation for this new offering. In the moments leading up to Bitcoin Cash becoming available for trade, the chart below remained on the Coinbase website indicating Bitcoin Cash was not offered for trade:
Again – this was live on the @coinbase website up until a few minutes before BCH started trading on their site.
How brazen are these thieves? pic.twitter.com/1nW2iIt8rO
— Haralabos Voulgaris (@haralabob) December 20, 2017
Suspicions of Insider Trading
The sudden availability was odd. Even more worrisome was the fact that mere hours before the rushed rollout there was a massive spike of activity in Bitcoin Cash suggesting insider trading. Availability on Coinbase would expose Bitcoin Cash to a lot of new buyers and it appeared people at Bitcoin Cash and/or people at Coinbase were taking advantage of insider knowledge of the impending offering. Simultaneously the price of Bitcoin plummeted suggesting a possible selloff or transfer of Bitcoin holdings into Bitcoin Cash. (Note that Coinbase defended itself amid accusations of insider trading by citing their policy in the below tweet.)
Sure, this volume before the announcement is purely coincidental. Good grief. pic.twitter.com/XUazkjJ411
— Jacob Mooallem (@JacobMooSF) December 20, 2017
Chaos in the Markets
The result of this series of events was a surge in the price of Bitcoin Cash that threw off the Coinbase markets. As users scrambled to buy, the artificially inflated price on Coinbase was not reflective of Bitcoin Cash prices on other exchanges. Thinking they may miss out on substantial profits, Coinbase users were purchasing Bitcoin Cash at an unsustainable price. With the price out of control Coinbase shut down trading and cancelled orders. Coinbase users were unable to buy or sell during the chaotic price swings and as the price fell back to earth Coinbase users were left watching without the ability to sell. It is still unclear what prices were actually executed for transactions. An example of the broken Coinbase market below:
Coinbase is showing $8,499.03 for Bitcoin Cash, and also showing $3,108.01 on the chart. pic.twitter.com/35L3mLqbvL
— Mike Cernovich 🇺🇸 (@Cernovich) December 20, 2017
There are a few major issues and questions that arise from these events. Why did Coinbase suddenly rush Bitcoin Cash to market without prior warning? Why did Bitcoin Cash trading volume jump massively just hours before the cryptocurrency was offered on Coinbase? Who coordinated this rushed rollout, who knew, who told, and who capitalized on the privileged information? Here is a timeline of events according to Coinbase:
— GDAX (@GDAX) December 20, 2017
A Violation of Trust and the Fallout
As cryptocurrency goes mainstream, the chief wariness of newcomers continues to be trust and legitimacy. Coinbase is viewed as an intro market for new adopters of cryptocurrency. For Coinbase to make such irresponsible decisions that jeopardized their customers money is shameful, especially since these skittish new adopters are taking risks to get involved. The crypto movement is not about making fast money, its about changing the nature of currency, empowering individuals, and liberating people from corrupt and predatory centralized banking systems and governments. Damaging the trust and legitimacy of potential new adopters hurts the cause and sets back the movement. Coinbase made a short-sighted money grab that violated trust, will harm the industry, may have been illegal, and will prove a terrible and possibly ruinous long-term business decision. In the future, alternative options to Coinbase such as Gemini should be recommended to anyone looking to get involved with Bitcoin.