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BitConnect, a cryptocurrency exchange with a dubious reputation, announced on Tuesday that it was closing down its lending and trading platform.
Citing bad press, two cease-and-desist letters from the Texas and North Carolina securities authorities on the basis that it lacks the proper registration, and perpetual DDoS (distributed denial-of-service) attacks, the anonymous managers of the exchange wrote on their website, “We are closing some of the services on the website platform and we will continue offering other cryptocurrency services in the future.”
BitConnect has longfacedallegations that it was, essentially, a Ponzi scheme. While Bitcoin and other cryptocurrencies have faced similar accusations, BitConnect was particularly notorious for its multilevel-marketing structure. New users received a loan from BitConnect in the form of BCC, a cryptocurrency that the exchange issued, and could net a commission of more BCC if they were able to convince other people to also get a loan from the service.
Even with these shaky foundations, BitConnect had been running somewhat smoothly up until the recent downturn in cryptocurrencies, with many dropping 30 to 40 percent in value over the past week. BCC, which was once one of the 20 most successful cryptocurrencies in 2017, according to Bloomberg, has been hit particularly hard, plummeting by 65 percent in price since Jan. 3 in response to the crackdown from state securities authorities. Although BCC is worth well under $30, down from $425 a little over a week ago, it still has a market cap of close to $1 billion.
Those who bought into BCC will have a few options after the BitConnect exchange shuts down. The platform announced that it will be transferring users’ lending wallet balances to their BitConnect wallet balances at a rate of $363.62 per token, based on the price average of the past 15 days. BitConnect also notes that it is working to make BCC trading available on other exchanges, and to build another platform that can host the cryptocurrency.
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Bitcoin and cryptocurrency prices deepened their weeks-long rout Wednesday as a spate of hacks and scam warnings compounded fears that regulators would crack down on the nascent digital assets. The price of Bitcoin crashed to well below $10,000, plunging to as little as about $9,200, down more than 50% from its highs a month ago.
Spooking investors was an announcement late Tuesday by Bitconnect, a popular but controversial site for trading and lending cryptocurrency, that it was closing down operations. Bitconnect had recently been accused of running a Ponzi scheme—the financial fraud most famously perpetrated by Bernie Madoff—by several influential investors, including Ethereum co-founder Vitalik Buterin and billionaire cryptocurrency investor Mike Novogratz. (The company didn’t respond to the accusations.)
Some Bitconnect clients interpreted the abrupt shutdown as confirmation of those suspicions, and worried they would not be able to withdraw their money if the exchange, whose management team remains anonymous, became insolvent. While Bitconnect, whose own digital token had risen to more than $2 billion in market value as recently as last week, promised that investors would be able to withdraw their funds at an average of the cryptocurrency’s recent exchange rate, doubts persisted. Bitconnect’s own cryptocurrency quickly lost as much as 90% of its value.
For several days this week, Bitconnect said it had come under a “continuous” cyberattack known as a denial-of-service, depriving customers of their ability to withdraw money. Following the shutdown announcement, some users continued to report problems when they tried to sell their positions. Now some Bitconnect investors, fearing they won’t be able to collect, are lamenting on social media that they’ve lost anywhere from a few thousand dollars to their entire “family’s savings.”
Indeed, the sudden halt of Bitconnect drew parallels to Mt. Gox, a major cryptocurrency exchange that shuttered in 2014 after losing virtually all its Bitcoins—largely through a massive hack, but also through the alleged embezzlement and mismanagement of its CEO. The Mt. Gox collapse precipitated a Bitcoin price crash of more than 70%, shaking investors’ confidence in the cryptocurrency for so long that it took Bitcoin more than two years to recover.
While many cryptocurrencies have been in bear market territory since a correction that began in late December, this week has been especially bloody for investors, with the Bitcoin and Ethereum prices down nearly 40% in the past two days, and Ripple shedding nearly half its value over the same period. By late Wednesday afternoon, the Bitcoin price had bounced back above $10,000 but still remained far below its peak of $20,000 a month ago.
Adding to the Bitconnect concerns was a crop of attempts by apparent scammers to take advantage of the confusion to trick users into handing over the contents of their cryptocurrency wallets. On Twitter, accounts that presented themselves as Bitconnect customer support but appeared to have been set up only after the service shut down, such as @BitconnectStaff and @BitConnectExch, seemed to prey on users desperate to get their money off the platform by suggesting they send all their cryptocurrency to a separate digital wallet address. Because such a transaction would be irreversible and difficult, if not impossible, to trace, observers quickly recognized the hallmark of a scam in which the senders would likely be diverting their funds to the criminals, never to see them again.
In explaining its reasons for closing shop, Bitconnect cited the relentless cyberattacks it was experiencing along with “bad press” and “cease and desist” letters it received from two U.S. securities regulators. The threat of governments cracking down on cryptocurrency trading has been a major driver behind the ongoing market selloff, with prices taking a dive after reports this week that regulators in China and South Korea were looking to ban cryptocurrency exchanges.
Although hacks and scams have plagued cryptocurrency exchanges worldwide, even afflicting leading platform Coinbase, the San Francisco-based exchange that has been likened to the industry’s “Goldman Sachs,” a new report this week also shone a light on the acute threat facing South Korea. Recorded Future, a cybersecurity firm, published an analysis Tuesday laying out evidence that North Korean hackers—the same group, known as Lazarus, blamed for the infamous hack of Sony Pictures Entertainment in 2014—were systematically targeting and plundering South Korean cryptocurrency exchanges.
Meanwhile, hackers used a different method of attack last weekend to steal $400,000 worth of the cryptocurrency Lumens, used on the Stellar digital payment system, from an online wallet service called BlackWallet. The wallet service has been offline ever since.
“How much is bitcoin?”
“Well, that’s too expensive. I can’t afford that.”
It’s a conversation that has surely happened thousands of times over the past several months as a new swarm of people find themselves enchanted by the cryptocurrency space and its tremendous gains.
And it reveals not only a misunderstanding, but also a psychological barrier that many face stepping into the scene for their first time.
Since so much emphasis is placed on how much “one” bitcoin is worth across the industry, new users often come in thinking that if they want to participate, they’ll have to fork over tens of thousands of dollars to buy a whole bitcoin.
But actually, that isn’t the case – it’s possible to buy a half of a bitcoin, a quarter of a bitcoin or even a fraction of a percent of a bitcoin.
Yet, that’s not always clear to new people entering the market, and many believe that’s why a handful of altcoins – including dogecoin and dentacoin, both of which recently reached market caps of more than $1 billion – are seeing a pump in their price, as they offer an affordable way to get into the cryptocurrency markets in whole units.
And this confusion is (partly) why developer Jimmy Song argues some standardization should occur in what the industry calls smaller units of bitcoin.
Toward this goal, Song released a standards proposal that seeks to express one one-millionth of a bitcoin (about one cent at today’s prices) as a “bit.” And he’s nudging wallet providers, exchanges and other bitcoin businesses to support the proposal.
If widely adopted, he hopes it will put an end to this confusion, and make new crypto users more apt to purchase bitcoin, if even in tiny amounts, instead of cryptocurrencies that he thinks might come back to bite them, since many of the cheap altcoins don’t have much technical merit to back them up.
The problem now is that more traditional dollar units, such as $5, when converted to bitcoin look daunting and messy – at 0.000345 bitcoin.
But with Song’s proposal – which he’s released in the form of a bitcoin improvement proposal, or BIP – that dollar value would instead be 345 bits, still a mental juggle, but arguably less confusing, since it’s in whole numbers and not decimals.
“For whatever psychological reason, normal people have trouble understanding decimals and fractions. $0.002 is weirder than $200.00,” said Erik Voorhees, co-founder and CEO of ShapeShift, which supports Song’s proposal, adding:
“For bitcoin to be a global, commonly used currency, it would certainly be helpful to have a denomination that allows people to express prices in integers (2,000 bits for a coffee) rather than a decimal.”
Adding to the mental benefits, Song also said the standardizing “bit” would remove what he calls “unit bias.”
According to Song, people don’t like having what looks like such a small amount of bitcoin, or money in general for that matter. Bitcoin’s price rise at the end of 2017, only exacerbated that problem, adding even more zeros in between the positive numbers and the decimal.
Poking fun at all the recent bitcoin forks, Song said, a group of people could have success enticinga new wave of crypto buyers by splitting off bitcoin with the goal of moving bitcoin’s decimal system six positions.
While others have proposed similar unit changes in the past, Song’s proposal seems to be gaining transaction with exchanges and other companies, which is all the proposal needs to succeed – getting businesses to use the unit to display not only how much bitcoin is in an individual’s wallet but also, within merchants stores, how much things cost.
And even though, Song’s proposal is targeted at bitcoin, it could serve as an outline for how other cryptocurrencies, such as ethereum, could update their units to be more user-friendly.
Although the idea of the proposal is to limit confusion, it’s garnered its fair share of criticism, with those against claiming it could add to the confusion instead.
The critics say, for instance, that if not all companies roll out the standard at the same time – and ShapeShift uses “bits,” while Coinbase sticks with “bitcoin” – when sending bitcoin from one wallet to another, they could either think they somehow earned money or lost money.
Voorhees, for one, even agreed this was a concern, but argued that it shouldn’t stop bitcoin companies from eventually adopting the standard.
“There will undoubtedly be some mistakes and friction as the new term gains usage, but for the purpose of language and mathematical simplification, the net result should be beneficial to bitcoin’s adoption,” he said.
Meanwhile, Song stressed that even though he thinks it would be a move in the right direction, like most things in the cryptocurrency world, it’s up to the community to decide if they want to adopt the system or not.
Still, many more exchanges and businesses would need to adopt the change to get the ball rolling. Song has been tweeting at various exchanges and companies – including CoinMarketCap, one of the most popular sites for checking cryptocurrency prices – suggesting they move to “bits.”
“This is meant to be a community-driven initiative and the benefits will hopefully be obvious to businesses.”
Disclosure: CoinDesk is a subsidiary of Digital Currency Group, which has an ownership stake in Coinbase and Shapeshift.
Broken bitcoin image via Shutterstock
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