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

2. 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

3. 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

4. Cryptocurrencies: Trading
Campbell R. Harvey 2018

5. 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

6. 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

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

8. 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
Campbell R. Harvey 2018

9. Cryptocurrencies: Trading
Beware of exchanges: Bitfinex
Supply of tether has increased dramatically
Campbell R. Harvey 2018

10. 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?
Campbell R. Harvey 2018

11. Cryptocurrencies: Trading
Beware of exchanges: Bitfinex
First, Bitfinex was not transparent about its relationship with Tether
Second, read the fine print for tether
Campbell R. Harvey 2018

12. 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.”
Campbell R. Harvey 2018