Duke University and NBER Innovation and Cryptoventures Cryptocurrencies Campbell R. Harvey Duke University and NBER January 23, 2018

Cryptocurrencies: Trading Purposes of money: Primary Unit of Account: A way to compare the value of various goods and services Medium of Exchange: Allows for non-barter transactions. Secondary Store of Value: Allows value to be retained – even if partially – rather than complete decay (e.g. storing food). Transfer of Value: Ease of transfer of value and to defer value. Original vision of bitcoin was for a technology that would make transactions more efficient (the transfer of value motive) Campbell R. Harvey 2018

Cryptocurrencies: Trading Three ways to obtain cryptocurrency Win a block. Receive a gift or be paid for goods or services Buy on an exchange Currently 109 exchanges that trade bitcoin Campbell R. Harvey 2018

Cryptocurrencies: Trading https://www.coinhills.com/market/exchange/rank-for/btc/ Campbell R. Harvey 2018

Cryptocurrencies: Trading Beware of exchanges Largely unregulated. This is the reason that the SEC has blocked the formation of ETFs based on “physical bitcoin” Exchange often holds your keys and pools all the keys – acting like a bank The advantage is that transactions can happen on the exchange in an “off chain” way. This is what Coinbase.com does. Their exchange is GDAX The exchanges are a centralizing force Campbell R. Harvey 2018

Cryptocurrencies: Trading Beware of exchanges: Bitfinex Approximately 10% of all bitcoin trading; registered in BVI History of multiple hacks: May 2015, 1,500 BTC stolen; 2016, 119,756 BTC stolen – customers forced to take a 36% haircut on deposits; Bitfinex does not use fiat currency wire transfers – it uses a cryptocurrency called Tether (USDT) Campbell R. Harvey 2018

Cryptocurrencies: Trading Beware of exchanges: Bitfinex Tether is supposedly back 1:1 with USD; capitalization is $1.6 billion Campbell R. Harvey 2018

Cryptocurrencies: Trading Beware of exchanges: Bitfinex Tether hacked in November 2017 for $30 million. Once you have a tether, the value is stable and you can use that on many different exchanges to quickly trade (wire transfers could take days) If you receive a tether, one dollar is deposited in your vault https://www.coindesk.com/tether-claims-30-million-stable-token-stolen-attacker/ Campbell R. Harvey 2018

Cryptocurrencies: Trading Beware of exchanges: Bitfinex Supply of tether has increased dramatically https://qz.com/1149772/the-murky-relationship-between-bitfinex-and-tether-is-raising-suspicions/ Campbell R. Harvey 2018

Cryptocurrencies: Trading Beware of exchanges: Bitfinex Tether based in British Virgin Islands How do we know that the dollar deposits match the outstanding tether? November 21, 2017 Nathaniel Popper of NYT breaks story that Bitfinex and Tether are operated by the same people. This was revealed in the Paradise Papers. Why is this an issue? https://www.nytimes.com/2017/11/21/technology/bitcoin-bitfinex-tether.html Campbell R. Harvey 2018

Cryptocurrencies: Trading Beware of exchanges: Bitfinex First, Bitfinex was not transparent about its relationship with Tether Second, read the fine print for tether https://www.nytimes.com/2017/11/21/technology/bitcoin-bitfinex-tether.html Campbell R. Harvey 2018

Cryptocurrencies: Trading Beware of exchanges: Bitfinex Third, if not fully collateralized, it is possible that Bitfinex is creating money that could artificially increase the price of cryptocurrencies like bitcoin. “Bitfinex appears to be creating Tether coins out of thin air and then using them to buy Bitcoin and push the price up.” https://tether.to/wp-content/uploads/2017/09/Final-Tether-Consulting-Report-9-15-17_Redacted.pdf Campbell R. Harvey 2018