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At Quora, I occasionally play, “Ask the expert”. Today, I was asked if the difference between quotes at various Bitcoin exchanges presents a profit opportunity.

In addition to my answer, one other cryptocurrency enthusiast offered pithy, one-line response: He said “Buy local, sell internationally and pocket the difference!” I tend to believe the opposite is more likely to generate profit: Buy internationally and sell locally. But, I am getting ahead of myself. Here is my answer [co-published at Quora]…


Question:
A Bitcoin exchange in my country quotes a different rate than
international markets. Can I profit from the price difference?

Answer:
Buying and selling a commodity with the intention of profiting from the difference in price in various markets, regions or exchanges is called arbitrage. Typically, the item must be widely traded and fungible. Although it can be a tangible item (one that must be delivered or stored, like gold, oil, frozen orange juice or soy beans), arbitrage is more practical when applied to an ‘item of account’, such as foreign currency, equity shares, stock futures, or Bitcoin.

arbitrage-01tWith this in mind, Bitcoin qualifies as a fungible item of account. If you see a different price at vaious exchanges (or if you believe that you can source personal sales at a higher price than the market spot price), then you have found an opportunity for arbitrage. But hold on! It is not so easy…

  1. The arbitrage opportunity is often illusory. For example, the cost difference that you observe in market quotes may be overshadowed by the bid/ask spread or by fees, which can be both fixed and a percentage.
  2. The arbitrage opportunity is transient. It is there for a few seconds and then it vanishes in the next quote. For this reason, successful arbitrage players must be very adept at day-trade techniques. To avoid massive risks, you need up-to-the-second quotes, fast trading tools, and the ability to simultaneously freeze your purchase and sale price.
  3. Trust is never golden! Even with these tools and promises, when a commodity begins to move in either direction, you will find that a buyer or seller often finds a way to renege on the agreed price. These are not random events…When a trading partner abandons a transaction, it always work against you.
  4. Some exchanges (and even some national regulatory agencies) prohibit rapid and repeated trading. This may be to discourage speculation or it may be designed as a circuit-breaker (a mechanism to avert the cascade effect that sometimes results from pre-programmed trades). These halts on quick trades can wipe out your gains, or worse. They can turn your investment into a horrible mess.
  5. Some big exchanges have built-in arbitrage mechanisms that quickly adjust prices and even buy and sell on their own account to keep their limit order books in sync. They are on the front lines and you aren’t! This fact, alone, should suggest give you pause. The opportunities for an outsider are severely limited by these ‘inside’, self-adjusting trades.
  6. Other legal risks: If the transaction is later deemed to be illegal in the jurisdiction of any party, your exchange accounts may be frozen or your privileges revoked. Unlike p2p Bitcoin transactions, exchange transactions can be reversed. Again, these legal snafus will always work against you. In fact, sometimes, they were pre-planned scams from the start!
  7. Finally , there are sometimes good reasons for different prices in different markets. For example, national and local regulations may burden to the consumer cost for an item, or the seller may be required to pay a fee or tax to some authority or regulatory agency. If you dodge these costs, you may be violating laws and subject to penalties or punishment. You may even put your customer at risk.

I am neither an arbitrage player nor a day trader. These are just a few warning bells that come to mind when I think about such activity. You can be sure that this list of risks only scratches the surface. Bitcoin is remarkably fluid and many people flaunt regulations. For this reason, I am confident that opportunities for profitable arbitrage are rare and very tiny (small gain for a big risk).

Have I scared you away from Bitcoin arbitrage? If not, proceed with extreme caution and don’t bet the family ranch! Once you have some experience, come back and post feedback below. I have dabbled in options arbitrage, but never with Bitcoin or any currency. Since I don’t have first-hand experience, your feedback will be appreciated.

Philip Raymond is co-chair of Cryptocurrency Standards Association,
host of The Bitcoin Event (New York), and editor at A Wild Duck.

At Quora, I occasionally role play, “Ask the expert” under the pen name, Ellery. Today, I was asked “Is it too late to get into Bitcoin and the Blockchain”.

A few other Bitcoin enthusiasts interpreted the question to mean “Is it too late to invest in Bitcoin”. But, I took to to mean “Is it too late to develop the next big application—or create a successful startup?”. This is my answer. [co-published at Quora]…


The question is a lot like asking if it is too late to get into the television craze—back in the early 1930s. My dad played a small role in this saga. He was an apprentice to Vladamir Zworykin, inventor of the cathode ray tube oscilloscope. (From 1940 until the early 2000s, televisions and computer monitors were based on the oscilloscope). So—for me—there is fun in this very accurate analogy…

John Logie Baird demonstrated his crude mechanical Televisor in 1926. For the next 8 years, hobbyist TV sets were mechanical. Viewers peeked through slots on a spinning cylinder or at an image created from edge-lit spinning platters. The legendary Howdy Doody, Lucille Ball and Ed Sullivan were still decades away.

But the Televisor was not quite a TV. Like the oscilloscope and the zoetrope, it was a technology precursor. Filo T. Farnsworth is the Satoshi Nakamoto of television. He is credited with inventing TV [photo below]. Yet, he did not demonstrate the modern ‘cathode ray’ television until 1934. The first broadcast by NBC was in July 1936, ten years years after the original Baird invention. (Compare this to Bitcoin and the blockchain, which are only 7 years old).

Most early TV set brands died during the first 10 years of production: Who remembers Dumont, Andrea and Cossor? No one! These brands are just a footnote to history! Bear in mind that this was all before anyone had heard of Lucille Ball, The Tonight Show or the Honeymooners. In the late 1950s, Rod Serling formed Cayuga Productions to film the Twilight Zone in New York. Hollywood had few studios for dramatic television production, and the west coast lacked an infrastructure for weekly episode distribution.

Filo T. Farnsworth demonstrates an advanced television receiver

Through the 1950s (25 years after TV was demonstrated), there was no DVR, DVD or even video tape. Viewers at home watched live broadcasts at the same time as the studio audience.

The short answer to your question: No. Absolutely not! It’s not too late to get into Bitcoin and the blockchain. Not too late, at all. That ship is just pulling into the dock and seats are mostly empty. The big beneficiaries of blockchain technology (it’s application, consulting, investing or savings) have not yet formed their first ventures. In fact, many of the big players of tomorrow have not yet been born.

Philip Raymond is a Lifeboat columnist and contributor to Quora. He is also co-chair of Cryptocurrency Standards Association and editor at A Wild Duck.

Worried about security for your bitcoin in the face of quantum computing? According to computer researchers, there’s no reason to be.

Source: https://hacked.com/breathe-easy-bitcoiners-quantum-computing…encryption

Quantum mech

Some people assume that once quantum computing comes along modern encryption technologies will be outpowered. But experts are starting to posit that hash functions and asymmetric encryption could defend not only against modern computers, but also against quantum attackers from the future.

Matthew Amy from Canada’s University of Waterloo proposes just this in a paper by the International Association of Cryptologic Research.

Amy, and researchers from Perimeter Institute for Theoretical Physics and the Canadian Institute for Advanced Research, examined attacks against SHA-2 and SHA-3 with Grover’s algorithm.

Grover’s algorithm is a quantum algorithm that finds with high probability the input to black box functions that produce particular, and predictable, output values.

Grover’s algorithm could brute-force a 128-bit symmetric cryptographic key in roughly 264iterations,” Wikipedia states, “or a 256-bit key in roughly 2128 iterations. As a result, it is sometimes suggested that symmetric key lengths be doubled to protect against future quantum attacks.”

Researchers surmise SHA-256 and SHA3-256 need 2166 “logical qubit cycles” to break, and the paper suggests quantum papers pose little threat, though classical processors will need to manage them.

The paper notes: “The main difficulty is that the coherence time of physical qubits is finite. Noise in the physical system will eventually corrupt the state of any long computation,” the paper states. “Preserving the state of a logical qubit is an active process that requires periodic evaluation of an error detection and correction routine.”

With ASICs running at a few million hashes per second, it would take Grover’s algorithm 1032 years to crack SHA-256 or SHA3-256. That is longer than the universe has existed.

As The Register adds: “Even if you didn’t care about the circuit footprint and used a billion-hash-per-second Bitcoin-mining ASIC, the calculation still seems to be in the order of 1029 years.”

SHA-2 is the set of cryptographic hash functions designed by the National Security Agency (NSA), an intelligence branch of the US government under scrutiny for ubiquitous surveillance due to revelations released by Edward Snowden. SHA stands for “Secure Hash Algorithm.”

These hash functions represent mathematical operations run by digital means Cryptographic hash functions boast collision resistance, which means attackers cannot find two different input values that result in the same hash output. The SHA-2 family is comprised of altogether six hash functions with hash values that are 224, 256, 384 or 512 bits: SHA-224, SHA-256, SHA-384, SHA-512, SHA-512/224, SHA-512/256.

SHA-256 and SHA-512 are novel hash functions computed with 32-bit and 64-bit words, respectively.

By now, most Bitcoin and Blockchain enthusiasts are aware of four looming issues that threaten the conversion of Bitcoin from an instrument of academics, criminal activity, and closed circle communities into a broader instrument that is fungible, private, stable, ubiquitous and recognized as a currency—and not just an investment unit or a transaction instrument.

These are the elephants in the room:

  • Unleashing high-volume and speedy transactions
  • Governance and the concentration of mining influence among pools, geography or special interests
  • Privacy & Anonymity
  • Dwindling mining incentives (and the eventual end of mining). Bitcoin’s design eventually drops financial incentives for transaction validation. What then?

As an Op-Ed pundit, I value original content. But the article, below, on Bitcoin fungibility, and this one on the post-incentive era, are a well-deserved nod to inspired thinking by other writers on issues that loom over the cryptocurrency community.

This article at Coinidol comes from an unlikely source: Jacob Okonya is a graduate student in Uganda. He is highly articulate, has a keen sense of market economics and the evolution of technology adoption. He is also a quick study and a budding columnist.

What Happens When Bitcoin Mining Rewards Diminish To Zero?

Jacob addresses this last issue with clarity and focus. I urge Wild Ducks to read it. My response, below touches on both issues 3 and 4 in the impromptu list, above.


Sunset mining incentives—and also the absence of supporting fully anonymous transactions—are two serious deficiencies in Bitcoin today.
I am confident that both shortcomings will be successfully addressed and resolved.

Thoughts about Issues #3 and #4: [Disclosure] I sit on the board at CRYPSA and draft whitepapers and position statements.*

Blockchain Building: Dwindling Incentives

mining-incentive-02Financial incentives for miners can be replaced by non-financial awards, such as recognition, governance, gaming, stakeholder lotteries, and exchange reputation points. I am barely scratching the surface. Others will come up with more creative ideas.

Last year, at the 2015 MIT Bitcoin Expo, Keynote speaker Andreas Antonopoulos expressed confidence that Bitcoin will survive the sunset of miner incentives. He proposed some novel methods of ongoing validation incentives—most notably, a game theory replacement. Of course, another possibility is the use of very small transaction fees to continue financial incentives.

Personally, I doubt that direct financial incentives—in the form of microcash payments— will be needed. Ultimately, I envision an ecosystem in which everyone who uses Bitcoin to buy, sell, gift, trade, or invest will avoid fees while creating fluidity—by sharing the CPU burden. All users will validate at least one Blockchain transaction for every 5 transactions of their own.

Today, that burden is complex by design, because it reflects increasing competition to find a diminishing cache of unmined coins. But without that competition, the CPU overhead will be trivial. In fact, it seems likely that a validation mechanism could be built into every personal wallet and every mobile device app. The potential for massive crowd-sourced scrutiny has the added benefit of making the blockchain more robust: Trusted, speedy, and resistant to attack.

Transaction Privacy & Anonymity

Bitcoin’s lack of rock-solid, forensic-thwarting anonymity is a weak point that must ultimately be addressed. It’s not about helping criminals, it’s about liberty and freedoms. Detectives & forensic labs have classic methods of pursuing criminals. It is not our job to offer interlopers an identity, serial number and traceable event for every transaction.

Anonymity can come in one of three ways. Method #3 is least desirable:

  1. Add complex, multi-stage, multi-party mixing to every transaction—including random time delays, and parsing out fragments for real purchases and payments. To be successful, mixing must be ubiquitous. That is, it must be active with every wallet and every transaction by default. Ideally, it should even be applied to idle funds. This thwarts both forensic analysis mining-incentive-03and earnest but misguided attempts to create a registry of ‘tainted’ coins.
  2. Fork by consensus: Add anonymizing technology by copying a vetted, open source alt-coin
  3. Migrate to a new coin with robust, anonymizing tech at its core. To be effective, it must respect all BTC stakeholders with no other ownership, pre-mined or withheld distribution. Of course, it must be open, transparent and permissionless—with an opportunity and incentive for all users to be miners, or more specifically, to be bookkeepers.

That’s my opinion on the sunset of mining incentives and on transaction anonymity.
—What’s yours?


* Philip Raymond is co-chair of the Cryptocurrency Standards
Association. He was host and MC for the Bitcoin Event in New York.

I was pointed to this article by Jon Matonis, Founding Director, Bitcoin Foundation. I was sufficiently moved to highlight it here at Lifeboat Foundation, where I am a contributing writer.

On Fungibility, Bitcoin, Monero and ZCash … [backup]

This is among the best general introductions I have come across on traceability and the false illusion of privacy. The explanation of coin mixing provides and coin_mixing-03excellent, quick & brief overview.

Regarding transaction privacy, a few alt-coins provide enhanced immunity or deniability from forensic analysis. But if your bet is on Bitcoin (as it must be), the future is headed toward super-mixing and wallet trading by desgin and by default. Just as the big email providers haved added secure transit,
Bitcoin will eventually be fully randomized and anonymized per trade and even when assets are idle. It’s not about criminals; it’s about protecting business, government and individuals. It’s about liberty and our freedoms. [Continue below image]

coin_mixing-04
How to thwart forensic investigation: Fogify explains an advanced mixing process

The next section of the article explains the danger of losing fungibility due to transaction tracing and blacklisting. I can see only ONE case for this, and it requires a consensus and a hard fork (preferably a consensus of ALL stakeholders and not just miners). For example, when a great number of Etherium was stolen during the DAO meltdown.

My partner, Manny Perez, and I take opposing views of blacklisting coins based on their ‘tainted’ history (according to “The Man”, of course!). I believe that blacklists must ultimately be rendered moot by ubiquitous mixing, random transaction-circuit delays, dilbert-060219and multiple-transaction ‘washing’ (intentionally invoking a term that legislators and forensic investigators hate)—Manny feels that there should be a “Law and Order” list of tainted coins. Last year, our Pro-&-Con views were published side-by-side in this whitepaper.

Finally, for Dogbert’s take on fungible, click here. I bought the domain fungible.net many years ago, and I still haven’t figured out what to do with it. Hence this Dilbert cartoon. smile
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Philip Raymond is co-chair of The Cryptocurrency Standards Association.
He also presents on privacy, anonymity, blind signaling & antiforensics.