Markets

Lessons From The Failure Of Bitcoin Trader

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Shutterstock photo

Shutterstock photo

I guess it is a sign of maturity and acceptance that Bitcoin is now rumored to have its very own Ponzi scheme, but it isn’t a welcome one. According to this report on Coindesk.com, the Bitcoin arbitrage service Bitcoin Trader has folded, and done so in a way that will be all too familiar to a lot of investors in more conventional financial instruments; the owner has disappeared.

Of course, there is no evidence yet that the intent here was to defraud customers of the service, and we should be careful not to assume that there was. It could be just another business failure and an owner unable to cope with the pressure. The most likely reason for the failure is simply that true arbitrage, with simultaneous transactions, is hard to execute. If one side is missed then the middle man, in this case Bitcoin Trader, is left with a position that is, by definition, wrong from the start. Whether this particular saga was unlawful, unethical or simply inept, however, there are lessons that can be drawn from it.

Let’s start with what cannot be drawn from it. The fact that this arbitrage service focused on Bitcoin says nothing at all about the crypto-currency itself. Businesses focused on the U.S. Dollar and other fiat currencies go under every day, and trading and brokerage services are sometimes among them. When PFG Best went down in 2012 questions were rightly raised about the honesty and competence of management there, but nobody suggested that that collapse reflected on the U.S. Dollar or financial instruments that the company traded.

There is more volatility in Bitcoin at the moment than in many other things, so there may be a greater than average possibility of failure in businesses focused on that market, but to suggest that that somehow reflects on the integrity of Bitcoin itself is absurd. The only reason to do that is if you are searching for a hook to hang your hate on. Similarly, to suggest that Bitcoin as a digital currency is somehow particularly vulnerable to computerized theft is to ignore the fact that conventional banks are regularly the victims of computer crime.

In terms of lessons that can be learned, though, first and foremost for those who hold or trade in Bitcoin: be careful where you put your money, and if there is any sign of trouble, get out. This may seem like an obvious thing to say, but there had been some warning signs and complaints about problems withdrawing funds from Bitcoin Trader before all digital withdrawals started to fail earlier this month. The plethora of small, new businesses associated with Bitcoin means that many are undercapitalized, and with the aforementioned volatility and the lack of effective regulation any hint of trouble should be taken seriously.

It is that lack of regulation that, as I have said before, needs most urgently to be addressed. If the financial crisis showed us anything, it is that institutions and companies that hold the public’s money must be properly capitalized if they are taking on risk. The purists who see Bitcoin as somehow anti-government get upset at the prospect of regulation, but each time a business associated with the currency fails, it makes it more obvious that simply requiring the same level of financial transparency and capital reserves that are required of other trading businesses makes sense.

It is fine to say that we should all be responsible for our own actions and do our due diligence, but the fact remains that many people cannot (or will not) do research of the depth required. Even if you try, without proper reporting requirements, it is hard to verify the information that is volunteered.

The collapse of Bitcoin Trader is no doubt a tragedy for those that had money with the company, but it is another in the long line of reasons why the Bitcoin market should, in many ways, be treated just like any other. Of course, in order for that to happen the traditional banking system and governments around the world must accept Bitcoin as a legitimate currency. As the number of merchants accepting payment in the virtual currency and the number of users continue to increase that day gets closer. Unfortunately, for those who lost money on Bitcoin Trader’s collapse, it is already too late.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

Martin Tillier

Martin Tillier spent years working in the Foreign Exchange market, which required an in-depth understanding of both the world’s markets and psychology and techniques of traders. In 2002, Martin left the markets, moved to the U.S., and opened a successful wine store, but the lure of the financial world proved too strong, leading Martin to join a major firm as financial advisor.

Read Martin's Bio