China is no stranger to censorship and regulation.

Dubbed by most Western spectators as a ‘totalitarian regime’, the country’s government has been highly successful in their efforts to control the internet and digital economies – along with brick and mortar activities. This can be seen, for example, with government imposed obstructions preventing Chinese residents from accessing popular global social media networks such as Twitter and Facebook; replaced by Weibo (which, being based in China, has previously been subject to extreme government intervention).

It should come as no surprise then, that the government has decided to impose a blanket ban on the trading of cryptocurrencies by citizens and businesses within the country. This occurred last September, where government representatives additionally cited a need for the absolute centralization of all blockchain related activities.

When looking at some of the surrounding geographical areas, for example, countries within the South-East Asia region; we can see a great disparity in regulatory positions and implementations.

South Korea has been responsible for long-term FUD on the trading markets due to their inability to come to a consensus on how to regulate the crypto-economy, let alone how they would proceed in enforcing guidelines and legislation. Vietnam has, unsurprisingly, decided to go down the same road as China and has banned all cryptocurrencies as of the time of writing.

This has led many to question the hypothetical yet highly reasonable presumption that there could be a time in the future where heavy regulation and blanket crypto bans are commonplace across the globe. If this were to happen, could cryptocurrencies survive; and if so then what measures would have to be taken to ensure its survival as a legitimate, decentralized economy?

Crypto-flight and Crypto-havens

In China, the result has been a ‘crypto-flight’: where businesses and individuals who are heavily invested in the sector have relocated their businesses to Hong Kong avoid breaking the law. Examples of operational Hong Kong based crypto-companies include: OKEx, BTCC and Huobi-Pro.

Hong Kong is classed as a ‘Special Administrative Region’ which sits within the borders of the People’s Republic of China. This means that the area and its citizens enjoy special privileges such as political and economic autonomy.

One of the ways the region’s lawmakers have decided to use this power is to allow for decentralized cryptocurrency business, investment, and trading; whilst simultaneously seeking to regulate fraudulent blockchain activity / enterprise.

If there were to be a situation somehow (and it’s highly unlikely) where Hong Kong were to decide to implement similar rules to their mainland brothers, then the result would most likely be further flight away from the country by cryptos.

Singapore would be a likely candidate due to their liberal approach to cryptocurrencies, in addition to the geographical proximity to China / Hong Kong.

Furthermore, if this were to continue to spread across Asia or the West; then we would be likely to see a consolidation of the population of investors and crypto countries to a smaller number of countries which would subsequently be ‘Crypto Havens’. This could resemble the impact that extensive taxation on creating what are currently known as ‘tax havens’.

Will China Change its Tone?

No matter how frustrated the mainland Chinese Government might get from missing out on this huge economy, there is little they can do politically to pressure the Hong Kong government into implementing similar rules.

The area is simply one of the highest grossing financial areas in the entire country, and as such acts as a central trade hub for the nation. If its sovereignty were to be threatened, then many of the businesses and individuals who are contributing to this wealth are likely to leave themselves (crypto or otherwise).

Conversely, it is much more likely that China will eventually decide to repeal their overarching bans over time. Despite banning the tech, it is highly likely that the government is not ignorant to the added value it could bring to their country’s economy.

Once cryptocurrencies are better understood by governments and established general tech experts in general; don’t be surprised if you see them slowly retreat these laws in favor of regulations and taxes informed by a matured expertise.

Featured image courtesy of Shutterstock.

Important: Never invest (trade with) money you can't afford to comfortably lose. Always do your own research and due diligence before placing a trade. Read our Terms & Conditions here. Trade recommendations and analysis are written by our analysts which might have different opinions. Read my 6 Golden Steps to Financial Freedom here. Best regards, Jonas Borchgrevink.

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Daniel Mitchell

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McAfee said something I agree with for once, and that was the price of Ethereum is shocking. Less than $700 for a coin that was the beginning of all functional blockchain commerce is just telling me people aren’t actually doing much research at this point. Of course, there are third generation platforms that are highly scalable and transaction fee free. But there is value in being the incumbent.

There are solidity coding camps popping up all around the world, and that just isn’t the case with the meet-up group culture that we see with other coins. The coding community choices cannot be taken lightly. There are so few people who can do it at a high level, and I choose to watch their movements rather than charts. If the Github community is not strong, the pace of innovation and updates will be severely limited to just the project team themselves.

Vitalik Biturin just came up with a scaling solution called Plasma Cash, which is designed to limit the amount of data users have to track within the blockchain, while also providing a sub-layer of smart contracts that enable interaction first in “Plasma” to act as a barrier against hacking the truly valuable coins behind them. He noted after unveiling his new project: “Hopefully when the next multi-billion dollar exchange written by a totally incompetent developer gets hacked, no one will lose any money.”

The Ethereum Foundation just released a wave of funding to DAPP and smart contract start-ups on the network, and is continuing to encourage people to begin working in their environment. At $680, there is still a lot of financial leverage that Ethereum will continue to use over time to entice the best and brightest to work on its chain. Overall, the positives of Ethereum greatly outweigh its shortcomings. The wealthiest projects mean so much more to me than the best tech.

Investment Environment

Investing more fiat into cryptocurrency (except for Ethereum, perhaps) is risky right now. The SEC has a meeting on March 14th that I think will cover a lot more on regulation and ICOs. I don’t think this meeting will be as rosy as the last one. While I am waiting to see what this all means for the coins that I own, I turned my attention back to the dark side: the stock market.

While most blockchain start-ups choose to ICO, there are still some companies that have made the traditional model work for them. Hut 8 is a Canadian based cryptocurrency mining company that was just listed on TSX Venture Exchange, and was funded by former hedge fund manager Mike Novogratz. Novogratz established a Canadian merchant bank for cryptocurrency called Galaxy Digital Assets.

Just like medical marijuana, blockchain companies available to the public have made investors go wild. There are iced tea companies changing their names just to take part in it. There is usually a big pump, and then a big dump. Hut 8 dumped, and there has yet to be a pump. I wanted to take a look and see if this was a worthy investment from an equity perspective.

Bitfury

Hut 8 is a project that is being actively managed, co-owned and co-opted with a company called Bitfury. Mind you, Hut 8 is a publicly traded company in Canada, and there is no Wikipedia page. The only information that I could find aggregated was a Wikipedia page in Russian on Bitfury that I google translated poorly to English. So, I guess we start there?

Bitfury was founded in 2011 by Valery Vavilov, a Latvian born developer living in Kiev. Bitfury is a commercial bitcoin mining operation that has facilities and offices across the world. Vavilov was one of the first to begin using computer processors to mine bitcoin at a rapid rate.

Bitfury developed its own ASIC chips for the process of bitcoin mining that has since been updated and developed into one of the fastest and most energy efficient mining tools on the market. The technology was so new during its launch that Vavilov was unlucky with investors believing in the value of mining. He often paid out of his mined bitcoins to fund his operations. He is believed to have mined 800,000 over his career.

Bitfury’s Empire

With only $110,000 in funding, Bitfury flourished in 2013 when the price of bitcoin went from $30 to $1,200. Money was no longer an issue. In 2014, they built the first industrially designed bitcoin mining facilities in the following countries:

Finland: Their facility is in an abandoned steel plant in the southern island of Chimita. It was eventually shut down in 2015 when energy prices began making it unprofitable.

Iceland: They have three separate buildings on the southern tip of Iceland known for its active volcanoes. An Icelandic IT firm called Avandia developed the buildings, and houses the Bitfury ASIC chip processors that are producing bitcoins at an energy consumption rate that is still one of the lowest around.

Georgia: The facility in Gori was the first mining operation in which Vavilov received funding. The funding came from a Georgian co-investment fund. Headed by a Forbes 30 under 30 recipient, the  fund was responsible for investing for Georgian industrial development. The companies largest data center is in a “Special Technology Zone” near the capital. What’s even more interesting is Bitfury is helping Georgia putting its land ownership information on the blockchain for easier access and functionality. Government work is always a good thing.

Worldwide:  As of 2017, the data centers in all three countries have been ongoing, and accounting for 11% of all bitcoin network activity. The company’s next innovation is where Hut 8 eventually comes into the picture. They developed a bitcoin mining operation inside a typical shipping container that you would see in a dockyard. Designed for its mobility, the data center can be moved/shipped/operated with ease. The hardware and software within the container are almost all products developed by Bitfury , and with a price tag of over $1,000,000. Once connected to power, these mobile operations will be immediately connected to Bitfury’s mining pool and begin making money. This is truly a one of a kind investment.

Bitfury’s Investors

Bill Tai

Having helped build the now ever-powerful Taiwan semi-conductor company in 1987, Bill Tai has used his profits wisely and resides in Menlo Park. He has invested in almost all of Bitfury’s funding rounds, and clearly has an eye for talent within his other portfolio of investments. There was an article written in 2013 outlining that out of the companies he has invested in: 20 were acquired, 19 went public in their respective countries and only 5-6 failed. This is a good track record. One of his most notable investments is Zoom, which is a video chat software that is gaining traction among crypto meet-up groups.

Lars Rassmussen

Lars co-founded Where2 Technologies in 2003, a software company that was bought and re-branded as Google Maps. It was bought for an unknown price, and Lars was retained by Google for its Australia office. He joined Facebook’s GPS systems group in 2010, where he left in 2015 to work on a music start-up with a friend. Since then, he has been an active investor within Silicon Valley and global circles.

Georgian Co-Investment Company 

The Georgian Co-Investment Company is $6 billion private equity firm that is focused on investing in Georgia’s infrastructure. It has been an investor in every series of funding since May 2014.

iTech Capital

iTech is a Russian-based private equity fund founded by two serial entrepreneurs. Their investment in the third round of funding in Bitfury in 2015 was the first Russian private equity investment into a cryptocurrency company.

Hut 8

Hut 8 is a bitcoin blockchain mining and education company. A consortium of Bitfury and private equity investors bought Oriana Resources, a capital markets firm listed on the Canadian stock exchange in a reverse takeover. A reverse takeover is often described as a shell that another company can move into. Hut 8 moved right in, and has begun trading after a recent series of 8 figure funding.

The purpose of Hut 8 is to own and operate data centers that its partner, Bitfury, will be providing to them. In total, the partnership calls for Hut 8 to buy and control roughly 55 mining centers. The size of the mining centers is unknown, but the processing power is certainly substantial.

Hut 8 “reserves the right” to buy more mining centers from Bitfury in the future. The relationship seems to be very close, as Hut 8 will be exclusively using Bitfury’s equipment holistically. The idea is that the tight partnership with a mining producer of Bitfury’s caliber would be necessary for putting Canada’s blockchain prowess on the map. The overall goal is for bitcoin’s mining network to be dominated by volume from Canada through it’s various mining centers. This means jobs.

Hut 8 is also planning on investing in the next generation with a business plan that includes education. They will be installing “Centers of Excellence” throughout Canada to teach the necessary skills to become a blockchain technologist, and incubate the ideas that come from them.

Team 

Sean Clark

A serial entrepreneur, Sean has many different blockchain businesses. He is founding partner of BlockOne Capital, an investment firm that is launching a bitcoin trust within Canada that could give regular investors access to the coin through a traditional channel. He was formerly a consultant at Deloitte.

Kyle Appelby 

The CFO seems to be an accountant for many people, and may not be full time on the project. He has plenty of experience in accounting.

That is it in terms of employment. The rest of those listed on the website as advisers are also investors within the company.

Market

According to their whitepaper, total bitcoin revenue mined is $29,000,000 per day . That’s 144 blocks mined, yielding 12.5 BTC per block. There is roughly $25 billion left in bitcoin’s hash (equations/un-mined coins), until the reward goes from 12.5 BTC per block to 6.25 BTC per block in June of 2020. They claim they control 11% of the volume, which would be over 190 bitcoins per day under this assumption. There is no way to verify this number, and I am not going to rely on it.

Conclusion 

This is a brand new company with a lot of money getting a shot in the big leagues. Hut 8 has very little information, and I am most certainly on a list for the amount foreign translated websites that I visited throughout my research. I would tell you that if you understand mining and believe bitcoin will continue to appreciate, this is a leveraged way of doing so. Hut 8 is in the business of raising money to buy mining facilities from Bitfury.

Bitfury’s technology is continuously getting better, and they have proven over time that their designer Valery Vavilov can make energy efficient miners. This is a rare opportunity to invest in something that is almost more “cryptocurrency-like” than cryptocurrency. Million dollar storage containers and gigantic data centers in the middle of Scandinavia are a large bet on bitcoin.

If there are holes in this story, there is a reason. There is limited information on this listed company. Their purpose is North American blockchain mining and education. Bitfury has plenty of information on them clearly, and that is what I relied on to understand the purpose of Hut 8. Bitcoin mining is never going to be something that is similar to its other publicly listed counterparts. There is going to be a lot of land, energy, hardware and it is working toward a coin whose price bounces like a pin ball if someone says centralization. I think it will be a bumpy ride, but this is the first bitcoin REIT.

This is NOT a recommendation to buy or sell cryptocurrency… or stocks. My research had very few means of sources, and the information was limited to websites outside of my language.  Please do your research. I can promise you it is something that you haven’t seen before.

Featured image courtesy of Shutterstock.

Important: Never invest (trade with) money you can't afford to comfortably lose. Always do your own research and due diligence before placing a trade. Read our Terms & Conditions here. Trade recommendations and analysis are written by our analysts which might have different opinions. Read my 6 Golden Steps to Financial Freedom here. Best regards, Jonas Borchgrevink.

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Raiden

4.4 stars on average, based on 25 rated postsMythological God of Lightning. Cryptocurrency/Blockchain writer, evangelist, and friend. May the odds be ever in our favor.

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There are a lot of weak hands in the market right now. We are below $10,000 BTC, and a lot of people are playing with short term money. The SEC has announced exchange registrations and Japan has started suspending exchange activity for regulatory reasons. Both things will make weak hands dump. However, the fundamentals of each coin that you and I like have not changed. Ripple has come out with more news in the past two weeks than Kim Kardashian, and we have only seen negative performance. This is a waiting game. I feel like a broken record, but I cheer for low prices in events like these. Who cares what happens in March? You are going to be holding until December anyway. My only theory behind all this volatility is immaturity.

I have a lot of millennial friends who invested in cryptocurrency and complain about its drop, and say they should have never have gotten into it in the first place. This is the first time they have lost money, and they don’t know how to handle it. They want their money back, so they listen to YouTube videos, sell their large-cap coins for ICOs and dog coins, and eventually lose more money. I don’t know how to help these people, and I just wish they would leave. The U.S. stock market doesn’t act like this. They have mature people who hold onto strong businesses, and don’t have stop limits on every single thing they own.

Immaturity doesn’t stop on the buy side. Exchanges have been victims to hacking, fraud, and manipulation. What other industries can run a modest website where millions (billions) of dollars are transacted? No one is prepared for the type of security issues that can arise with this type of volume and complexity. This is purely a reactive environment on the exchange side, as the true geniuses of blockchain are constantly testing new holes in their offerings. Mt. Gox was the poster child of cryptocurrency immaturity. Not only was security lax, the ownership was constantly confronted with temptation for financial gain through an array of fraudulent channels.

I wanted to go through the timeline again, and see if this type of behavior is truly going to be extinct moving forward. Almost all pundits within the cryptocurrency community complain about regulations and centralization, while also wanting mainstream adoption. If there are no guard rails to prevent another Mt. Gox, then thinking someone would bring their retirement savings on to the blockchain is naive. Disclosure: I have taken 95% my coins off of all exchanges, and I instruct you to do the same.

Background

Mt. Gox (Magic the Gathering Online Exchange) was started to trade Magic the Gathering Cards. Jed McCaleb (Ripple, Stellar) designed the exchange in 2006 in the belief that this would be an easy way to trade Magic Cards like stocks, instead of the traditional meet-up trades. Eventually Jed moved on from this project, only to return for a different reason in July 2010. He had read about bitcoin, and launched an exchange and price quotation system on the same domain as his former exchange: Mt. Gox.

2011

March: Having it less than a year, McCaleb wanted out. He wanted to focus on other projects, and lacked the capital  tomake it what it could eventually be. I believe this was an emotional decision for Jed. Clearly, this business could have made him wealthy beyond his wildest dreams with funding I’m sure he could have gotten. I think he wanted to build something instead of run something, and I am an investor in Stellar because of actions like this throughout Jed’s timeline.

McCaleb sold to a French developer living in Japan named Mark Karpeles. Before Mt. Gox, there is limited information other than he was a PHP developer who founded his own tech company in 2009. Jed received 12% of the newly incorporated company, and went on his way.

June: The first hack. Through an auditor’s computer, the hacker was able to change the value of bitcoin to a nominal value $.01, in which he sold them all to himself and transferred out. After the hack, there were first responders who had a financial interest in keeping this exchange up and running. The most notable two were Roger Ver (bitcoin cash) and Jesse Powell (Kraken exchange), who tried to work tirelessly to get the Tokyo-based exchange up and running again. Karpeles took time off the weekend following the hack, and even worked on non-relevant projects while people were trying to help his business succeed. These were the warning signs.

2013

Winter/Spring: After the hack in June, Mt. Gox seemingly began to flourish. The price of bitcoin began to rise, and there were only two owners of the exchange – Karpeles at 88% and McCaleb at 12%. This manifested itself lavish spending in Mt.Gox’s Shibuya neighborhood office space, and egos that were growing a little too large. Mt.Gox controlled 80% of bitcoin trading volume, and were getting mainstream attention.

The tech problems were beginning to show, however. The website was bare bones for the amount of volume that it was handling. It just recently launched a test environment for the first time, when before the untested code was immediately launched live (a hacker’s paradise, I am sure). The source code could also only be changed by one person, Mark Karpeles. For even simple fixes, all of it had to go through him first, which would make lag time on security/operational projects grow exponentially.

Fall: This was the first time that Mt. Gox met the SEC. After a sour business deal with an American business partner CoinLab led to a $75 million lawsuit, the SEC began looking into what exactly Mt. Gox was. This will sound eerily similar to today- The SEC said it was an unlicensed money transmitter. A $5 million American-based company bank account was seized, and this was the end of anyone wanting to play in  the American’s sandbox. We still see the remnants now. ICOs and exchanges try to limit their exposure to U.S. jurisdiction, as they watch Coinbase, Kraken, Gemini and the like deal with far more scrutiny than their neighbors. With U.S. investors complaining of delays and red tape, the darling of bitcoin exchanges fell to no. 3 from no. 1.

2014

Karpeles has been focused on a solution to his problems. That solution was a bitcoin cafe. While his company was in major disarray from all fronts, he spent an estimated $1 million on a cafe in the Mt. Gox offices that would use a cash register that he “hacked” to accept bitcoins. It was rumored that he spent all of his time on things not related to the major problems, as a 29 year-old with little to no experience was running a failing multi-million dollar enterprise with too many problems to solve for one owner.

February: The exchange stopped paying out customers in bitcoin, citing flaws in the digital currency. This set off the usual suspicions that the company had become insolvent. On Feb. 24, 2014, the exchange went offline, and a document was leaked that outlined a years-long $450 million (Approx. 850,000 coins) hack of bitcoins that went completely undetected. By Feb. 28, the company had filed for bankruptcy protection in Tokyo and the United States.

2015

Karpeles was arrested in August 2015 for embezzlement and manual manipulation of his own exchange. The trial of Mark Karpeles led to many new developments.

BTC-E: M0st of the stolen coins from the Mt. Gox exchange landed on a Russian-owned, Tokyo-based exchanged called BTC-E. The arrest of the exchange’s suspected owner was made by the FBI in Greece, and for the first time ever the U.S. had seized a foreign domiciled exchange. An investigative firm comprised of developers and Mt. Gox creditors released a report outlining that BTC-E acted as an exchange to launder the stolen Mt. Gox coins. The connections that the suspected BTC-E mastermind may have on his laundering clients, and the ones he’s willing to disclose, still remain unknown.

Willy Bot: During his trial, Karpeles admitted the existence of a “Willy Bot”, which was a trading bot that he said was built to stabilize the market. As it turned out, the Willy Bot may have been responsible for artificially increasing the bitcoin price, as it’s trading limits were beyond the scope of normal transaction volume in Bitcoin at the time.

2017/18

The trial of Mark Karpeles goes on. Mt. Gox’s assets in bankruptcy were mainly focused on a”found” number of 200,000 bitcoins that were on a cold storage device. Under Japanese law, bitcoin is not a tangible thing to give to creditors in the event of a liquidation. After Japanese courts ruled against providing a former Mt. Gox customer his/her bitcoins instead of the cash value at the time insolvency, that meant that the customers would not receive the exponentially more valuable bitcoins at current market prices.

The trustee of the bankruptcy liquidation, Nobuaki Kobayashi was in charge of selling the bitcoins at current market prices to pay off creditors. The litigation was still ongoing, so Kobayashi was tasked with the challenge of when to sell the coins to protect creditors from losing their full principal, while also giving them a chance to fight for the rightful ownership of the coins rather than cash at bankruptcy valuations.

It was found the trustee “Panic-sold” $352,000,000 in BTC and $45,000,000 in BCH over December 2017 through February of 2018, with most sales being at the bottom. With only 17,000,000 in supply, selling such large portions during volatile periods hurt everyone.

Conclusion

The true benefactor of the entire Mt. Gox saga may end up being Mark Karpeles. Being the 88% owner of Mt. Gox, the sale of the 200,000 bitcoins would be more than enough to pay back all creditors and investors at current prices, and leave a substantial sum for himself.

I can’t seem to find a reason why this exact scenario couldn’t happen again. The SEC has just begun watching, and government watchdogs aren’t equipped to handle the deep technological behavior happening on decentralized exchanges. ICO regulation is the easy part. They can find a website and shut it down. But when most of the volume from coins is coming from exchanges that have unregulated owners, there is no telling what can happen. This is a product of decentralization. A completely free market will come with bad actors who have the means to harm others. We’ve seen it with Mt. Gox, Coincheck/NEM, countless ICOs, and the list will go on. This is the first time a truly free market exists for the entire internet. I don’t think there is much people can do about enforcing rules, especially right now.

My response to this research is instructing everyone to buy Ledger/Trezor, and go offline. Why did you buy all these coins? Was it for profit in two months? If so, I am the wrong person to be listening to. I own very few coins, and they are under my complete control (knock on wood). Mt. Gox will not be an isolated issue, and there are plenty of scams taking place that we will all find out about over time. There is a (99%) solution, so please use it.

This is not a recommendation to buy or sell cryptocurrencies, but is certainly a recommendation for cold storage. Be careful, and trade safe. Best of luck.

Important: Never invest (trade with) money you can't afford to comfortably lose. Always do your own research and due diligence before placing a trade. Read our Terms & Conditions here. Trade recommendations and analysis are written by our analysts which might have different opinions. Read my 6 Golden Steps to Financial Freedom here. Best regards, Jonas Borchgrevink.

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Raiden

4.4 stars on average, based on 25 rated postsMythological God of Lightning. Cryptocurrency/Blockchain writer, evangelist, and friend. May the odds be ever in our favor.

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