Wednesday, April 17, 2013

Is Bitcoin's Largest Exchange Betting Against It?

J.P. Hicks
Activist Post

MtGox.com is the largest Bitcoin exchange on the Internet handling roughly 80% of all trades. The recent wild fluctuations in the price of the decentralized currency have been blamed in part on Mt Gox's market dominance and technological inadequacies.

Max Keiser, a virtual currency pioneer and Bitcoin supporter, explains in the video below that Mt. Gox is running on old inadequate software and is "missing the vital market making function."



Clearly the exchange mechanism of digital currencies needs to be fixed to provide proper price discovery and prevent manipulation. But this much needed upgrade may not come from Mt. Gox, as its founder, Jed McCaleb, appears to be betting against the success of Bitcoin.

A recent article on Bloomberg revealed that McCaleb is throwing his weight behind a new centrally-controlled digital currency called Ripple. McCaleb and Ripple co-founder Chris Larsen claim "Bitcoin’s volatility underscores the need for Ripple."


The article, which read as much like a hit piece against Bitcoin as it did a sponsored post for Ripple, pointed out that part of the problem with the volatile price of Bitcoin is Mt.Gox's inability to handle the volume of trades.

"One reason the value of Bitcoins fell by $100 yesterday, according to reports, is that its largest marketplace, Mt.Gox, was under a denial-of-service attack and couldn’t satisfy orders fast enough."

Ripple, Larsen says, is not susceptible to such fluctuations because it "doesn’t require such centralized servers; it is completely decentralized."

While it is true that Mt. Gox's market dominance for exchanging bitcoins presents obvious challenges to the decentralized currency, this statement appears to be opposite of reality.

Ripple (XRP) is centrally issued and maintained, while the issuance of bitcoins (mining) is a decentralized process. Bitcoin is traded on multiple exchanges where buyers and sellers settle on the value, while the value of Ripple is partially managed by arbitrary release of them into the market so it can be better "controlled".

In what way is that "completely decentralized"?

Ripple's website says it's decentralized because "a distributed collection of servers around the globe runs Ripple", but on a "unified system". Well, a collection of distributed servers runs Google, too, but that doesn't mean it's a decentralized company.

Significantly, Ripples differ from Bitcoins in that they are created out of thin air and given away or sold into existence by Ripple instead of mined by tens of thousands of individual computers like bitcoins are.

Only 100 billion Ripples will be created, where 50 billion will be given away or sold into existence while the other 50 billion will be held onto by the managers.

"Starting today, OpenCoin will begin to seed a broader market by putting 100 billion Ripples in circulation: It will gradually distribute 50 billion to users who sign up on the site; it will hold the other 50 billion. (The company hopes its Ripple reserves will appreciate.)," Stone writes.

In other words, the founders are looking to get rich by withholding half of the supply while they work to drive prices up, which makes one wonder if McCaleb at Mt. Gox has a vested interest in seeing Bitcoin fail and Ripple succeed.

It currently takes about 1000 XRP to buy $1 on the second largest Bitcoin exchange, BitStamp.com. Although Ripples "trade" on this independent exchange, the founders hope to provide a one-stop shop for transactions and exchanges.

Brad Stone writes "On its website, people will be able to register for a Ripple account, monitor their balances, and send and receive payments. They can also exchange their Ripples for other currencies, including dollars and—yep—Bitcoin."

Ripple encourages users to stay in-house by stating "Ripple avoids the costs, delays, and inconveniences of system-hopping by keeping everything within Ripple."  In this respect they can more easily control the value of XRPs as well.  But it's decentralized?

Decentralization of crypto currencies is a huge aspect of why people support them. This doesn't mean the decentralization of servers that run the cryptography for transactions, although that's important as well. The decentralization that's valuable to users is the fact that no central authority can manipulate the supply and value of said currency. In that respect, Ripple appears very centralized.

Yes, crypto-currency exchanges face challenges in providing platforms that offer sound and transparent price discovery relative to central bank currencies.  But trying to solve that by tightly controlling its value relative to dollars, for instance, for the sake of easier transactions for merchants takes away all of the independence sought by crypto-currency enthusiasts.

Interestingly, nowhere in the Bloomberg article or on Ripple's website does it explain how the value of XRPs are determined.  It just says it will be less susceptible to volatile fluctuations because it is decentralized. Well, now that that's clearly false, we can only speculate.

Finally, the ripple (pardon the pun) this creates between Mt. Gox founder and the future stability of Bitcoin values cannot be ignored. Why would McCaleb invest in improving his Bitcoin trading mechanism when it must fail in order for his other venture to succeed?

I leave you with a short video by Adam Kokesh, a libertarian commentator, who more thoroughly examines Bloomberg's sponsored post about Ripple:



J.P. Hicks is an entrepreneur, info-activist, pro blogger, editor of BlogTips.com and author of Secrets to Making Money with a Free Blog. Follow @ Twitter, or like on Facebook.


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3 comments:

Blogger said...

If you need a market maker fraud is programmed.
If you have a market maker either!

Anonymous said...

Check out:- KhanAcademy RSA Encryption: step 1  for a lay explanation of RSA Public Key encryption. Follow up with Wikipedia. A slight word of warning though, Government have a universal key that unlocks all RSA Encryption that does not deploy 'Spoilers'.

Mark said...

XRP (ripples) are not the same as Ripple - you need 300xrp to get started and with those 300 you can make hundreds of thousands of transactions in any currency (including Bitcoin).
You don't need $100 of xrp to send $100, so you can ignore the value of xrp.

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