The perception of Bitcoin as a vehicle closely associated with nefarious and illegal activity was enhanced this week as allegations of insider trading against Coinbase Inc., one of the most popular cryptocurrency exchanges in the U.S., surfaced and caused a substantial drop in the value of Bitcoin. 1 2 So, what really happened and why should precious metals investors care?
Coinbase Inc.
Coinbase is a digital currency exchange headquartered in San Francisco, California. The company claims to have serviced sales of more than $50 billion in digital currencies for more than 10 million customers in 32 countries. Coinbase was founded in 2012 and allows transactions in Bitcoin, Ethereum, and Litecoin, as well as many other cryptocurrencies. Coinbase also claims to be the largest cryptocurrency exchange in the world.
Insider Trading Accusations
On Tuesday, Coinbase halted trading in Bitcoin Cash, a Bitcoin spinoff cryptocurrency, amid concerns that prices for Bitcoin Cash more than doubled in advance of the announcement that Coinbase would add Bitcoin Cash trading to its exchange. CEO Brian Armstrong announced Wednesday that the company is conducting an internal investigation into whether the highly confidential information regarding the announcement was leaked to cause the spike in prices. Given the timing and magnitude of the spike in prices, it is a logical assumption that the information was most likely leaked in a clear violation of insider trading regulations. 3
Other Bitcoin Scandals
The Coinbase affair is just another example of the murky dealings surrounding cryptocurrencies in general and Bitcoin in particular:
- In the Silk Road scandal 4, Bitcoin was used as the main currency in an illicit ‘dark web’ market to fund illegal narcotic, weapons, and other criminal transactions, including murder for hire.
- The theft of 850,000 Bitcoin, $460 million at the time, from the Mt. Gox exchange contributed to the company’s subsequent bankruptcy. 5
- In 2015, additional thefts of $72 million from the Bitfinex exchange in Hong Kong and $5 million from the Bitstamp exchange were also reported. 6 7
These, and the many other scandals that have rocked Bitcoin in recent years, have been a constant reminder of the lack of security associated with the cryptocurrency.
Precious Metals: The Preferred Alternative Investment
For a currency built specifically on the premise of improved security over the existing financial system, the constant flow of scandals is truly problematic and another indication that the vaunted prices for Bitcoin are unfounded.
Savvy investors will ignore the claims by Bitcoin cultists to the throne of the preferred alternative investment and instead will stick with the time-tested safe haven of precious metals.