Bitcoin Markets - A Profile of Leading Exchanges

In the last post, we explored the landscape of bitcoin markets - exchanges and the evolution of investment vehicles with bitcoin as the underlying asset.

In this article we profile a cross-section of bitcoin exchanges - volume leaders, peer to peer exchanges, derivatives exchanges and exchanges that have opted to be regulated under banking and investment laws. 

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Top Five Exchanges (by Volume)

The top five bitcoin exchanges handle around 85% of daily volumes. All of them have been also classified as “Big Four” at some time by various sources, though in the evolving world of bitcoin, this designation and definition is likely to have many candidates. 

Source: http://bitcoincharts.com/

BTCC 

BTCC is the largest exchange by volume handling between 40-50% of transactions and is the dominant exchange for BTC-CNY trading. Formerly known as BTC China and rebranded as BTCC, the exchange was launched in 2011. BTCC is headquartered in Shanghai, China and serves a global customer base.

BTCC is expanding the breadth and scale of their services on mining and trading. BTCC launched 100 nodes in December 2015 across five continents to address the issue of decreasing full nodes.  Their trading services now include ProExchange, a spot trading platform that provides 20x leverage and Block Priority, a service that expedites transaction confirmations for BTCC account holders.

Bitfinex

Owned and operated by iFinex (a British Virgin Island company), Hong Kong based Bitfinex, is the largest exchange by BTC-USD volume. Bitfinex’s platform was launched in 2014 and is in beta phase. 

Bitfinex’s trading platform is very popular and matches bitcoin lenders with margin traders allowing peer to peer margin liquidity. Bitfinex has become a “go to” source for bitcoin owners to earn passive income by lending to traders. Bitfinex also provides bank level security with over 100% reserves and securing coins in cold storage.

Bitstamp

Launched in 2011, the Bitstamp exchange operates from Slovenia and has offices in UK, USA and Luxembourg. Bitstamp supports trading in US dollars and Euros.   

Coinbase

Launched in 2013, US headquartered Coinbase is known for their full portfolio of offerings from wallet, exchange to payment processing. Coinbase launched their US based bitcoin exchange in 2015, becoming the regulated cryptocurrency exchange in the US. Within a year of operation the Coinbase exchange has expanded services to Canada, Europe and Asia. Coinbase US user deposits are FDIC insured and online wallets are insured.  

BTC-E

Also launched in 2011, Bulgaria based BTC-E supports trading in multiple currencies and crypto-currencies including the rouble and offshore yuan. BTC-E philosophy can be said to be diametrically opposite to Coinbase. BTC-E provides anonymous trading to users (the exchange does not ask for customer information to sign-up), operating as an online only business and the platform owners have remained anonymous. Although this has been flagged as a red flag, the volumes still signify the popularity of BTC-E.

Peer to Peer Marketplace

A P2P marketplace allows users to buy and sell bitcoins without the exchange acting as intermediary. 

LocalBitcoins.com

Finland based LocalBitcoins.com is the leading online peer to peer or (broker-less) OTC bitcoin marketplace. Launched in 2012, LocalBitcoins is among the top 10 exchanges. Its operation can be described as similar to Craigslist. Buyers and sellers use localbitcoins.com hosted wallet (or their own) to transact. Advertised listings are posted on the platform which include location and payment method information. Trades can be initiated and completed through an online only process or by making the exchange offline. The process on the platform offers buyer and seller protection through an escrow mechanism and dispute resolution process. Participants on the platform also rate sellers, a model similar to other peer to peer sharing businesses such as AirBnB. LocalBitcoins.com exchanges are available in 249 countries and over 13,000 cities. 

Derivatives Trading

Leveraged trading and investment products designed for capital market and institutional investments have started making frontlines in the bitcoin and cryptocurrency space and have received mixed feedback. 

BitMEX

Launched in 2014, Hong Kong based BitMEX (or Bitcoin Merchantile Exchange) is a bitcoin derivatives exchange that offers digital currency futures and options. BitMEX has a small user base primarily from Asia but daily trading volumes have reached $5 million within a year of operation. The latest offering is a leveraged China A50 stock index hybrid futures contract which gives bitcoin traders an option to take short or long positions on the Chinese stock exchange, with up to 25x leverage. 

Ledger X

LedgerX describe themselves as an institutional trading and clearing platform. New York headquartered Ledger X was founded in 2014 and aims to be the first US based bitcoin derivatives exchange, currently awaiting regulatory approval from the US Commodity and Futures Trading Commission (CFTC). Ledger X has received an order of temporary registration from the CFTC as a swap execution facility in September 2015. 

Coinut

Coinut exchange is owned by Singapore based Coinut and was launched in 2014. Coinut offers exchange traded bitcoin options (vanilla or binary) on the price of bitcoins. 

Licensed Exchanges

While different countries take different legal and regulatory approaches towards bitcoins, some exchange businesses have sought licenses applicable to banking and financial market operators. This arises from reasons such as ensuring business continuity in heavily regulated markets, serving legitimate customer interests, retaining access to capital markets and banking systems for investments and attracting institutional investors.  

While cryptocurrency specific licensing requirements such as the much debated BitLicense in US are one approach to compliance, these firms based in US have also opted to apply for licenses under the existing banking and financial services regime.

Genesis Trading

Genesis Trading, a subsidiary of the Digital Currency Group became the first fully licensed digital currency-centric broker-dealer in the US, in 2015. Genesis Trading was spun off from the bitcoin trading desk of Singapore based Second Market to become the first FINRA and SEC regulated broker to actively deal with bitcoins.  Genesis Trading offers derivatives and OTC trading for private and institutional investors. 

itBit

itBit, a bitcoin currency exchange operating in New York received a license to operate as a trust charter under New York Banking Law in May 2015. As a trust company, itBit is licensed to provide custodian services nationwide in the US, an overarching advantage over applying for state specific money transmittal licenses. itBit also has to ensure adequate capital reserves as per NYDFS requirements and client deposits  upto $250,000 are FDIC insured through itBit’s banking partner.

At last count there are 46 exchanges operating worldwide specializing in digital/crypto/blockchain currencies. Exchanges continue to launch, grow and fall but the marketplace for bitcoins continues to thrive around the world with investment options available for optimists and pessimists alike. 

An Overview of Bitcoin Exchanges and Trading

This article is part of the continuing series on Bitcoin and the Bitcoin Ecosystem.

Bitcoin exchanges provide platforms and services for the bitcoin marketplace enabling individuals and institutional investors to buy and sell bitcoins, trade in bitcoins as digital assets and exchange with fiat currencies (and other commodities such as gold and silver). 

An overview of bitcoin exchanges and trading marketplace around the $6 billion capitalization of bitcoin. Bitcoin exchanges worldwide support the large community of retail and institutional investors and have evolved different operating models. 

Note: Firms included in the illustration are representative examples in each category and may support more than one operating model.

Like the currency, bitcoin exchanges are de-centralized and many Bitcoin exchanges offer 24x7 trading.  A majority of exchanges are start-ups run as online businesses and support a multi-national client base. The largest exchanges are based in Europe, US and China which account for 90% of trading volume.

Source: http://bitcoincharts.com/charts/volumepie/

Influence of Exchanges

Exchanges play a key role in driving bitcoin supply and demand. Exchanges enable investors to trade bitcoin in currency or commodity of their choice. Today bitcoin exchanges allow bitcoins to be traded in more than 30 different fiat currencies, most cryptocurrencies and assets such as gold and silver. Bitcoins can be used in forex trading, CFDs and also as exchange traded notes. 

Because exchanges are decentralized and unregulated, many have been a source of risk for investors who have lost funds through online thefts, scams or poor mismanagement involving exchanges. 

Bitcoin’s exchange rate was established in 2009 at 1309 BTC equivalent to 1 USD (about half a million at today’s rate) and surpassed 100 USD in 2013 by which time, 40 web based exchanges were  operational. As many as 45% of shut down by April of that year, followed by the implosion of Mt Gox which had a virtual monopoly in bitcoin trading, in 2014 .While leading exchanges have since matured, exchanges failures still continue with around half of exchanges closed or inactive.

Exchange Service Offerings

Bitcoin exchanges compete on different fronts. Some offer full services around bitcoins from wallet hosting, trading and payments. Others offer trading and investment products structured around cryptocurrencies.  

As a peer to peer decentralized network, bitcoin traders can transact directly. Some exchanges offer online marketplace services, where buyers and sellers can contact one another and transact directly either online through the platform or offline.

Other exchanges work as intermediaries with providing automated trading platforms and/or broker services. Clients have to comply to KYC and AML requirements and generally link a fiat (usually client’s local currency) bank account to buy BTC or receive fiat currency from sales. The exchange platform accepts and matches buy and sell orders based on limit or ask pricing or through auctions. Exchanges may also support conversions to a limited basket of currencies. Exchanges charge transaction fees although BTC/BTC trades are usually free.

Different exchanges offer different fee structures, spread and trading options to leverage and short. Exchanges have also offering margin swaps and futures contracts representing an evolution of the marketplace. Because exchanges manage fiat transfers and hold customer funds, they are treated as money services businesses that have to comply with AML and KYC regulations.  

Over the Counter (OTC) trading marketplaces Bitcoin-OTC IRC channel are preferred for high value transactions, and major exchanges offer trading desks.

Evolution of the Bitcoin Trading Marketplace

Bitcoin exchanges have evolved in response to the growing adoption by mainstream users and institutional investors, as well as regulatory treatment and classification of bitcoins by different nations/jurisdictions. Again, some of these are arguably diametrically opposite to the peer to to peer version of the currency, but they underpin the growing maturity of bitcoin as an asset class.

These are some of the significant achievements in the short span of three years from 2013 to 2016.

Bitcoin Price Index

Bitcoin prices are generally indexed at BTC to USD, BTC to Euro and Yuan.

Bitcoin prices vary across exchanges across the world and arbitrage is possible. Services such as Bitcoin Average and CoinDesk introduced the concept of Bitcoin Price Index in 2013.  Bitcoin Price Indexes are based on averages from trading data from multiple exchanges across the world.

Coindesk’s XBP (Dollar and Yuan) is based on a simple average of prices from exchanges which meet pre-defined criteria such as an international client base, minimum transaction value and settlement time. Exchanges are added or removed depending on whether they meet the criteria.

In May 2015, NYSE introduced NYBXT its bitcoin pricing index using data from transactions on Coinbase, the leading US exchange.

Advanced Trading and Settlement Products

Exchanges and bitcoin broker dealers have offered financial products such as futures, short selling, margin trading, derivatives and other structured products. Derivative products and CFDs can bring in more liquidity and allow traders to speculate on bitcoin without holding the currency. Advanced products carry more than the usual risk as investors operate in a relatively limited market capitalization (of 6 billion USD). 

Bitcoin Backed Securities

Bitcoin backed securities are now available through XBT a bitcoin based exchange traded note (ETN) that was listed on Nasdaq Stockholm. The ETNs are 100% backed by bitcoin and are tradeable in USD and Euro. Bitcoin backed securities are another option to trade in bitcoins without buying the currency. 

Settlement Sidechain

Bitcoin node operator Blockstream announced their plan to launch an interoperable settlement sidechain (Liquid) which would allow consortium of participating exchanges and major institutional traders can make high volume trades and make instant settlements (a Ripple within bitcoin?). The stated goal of Liquid is to improve the liquidity and increase capital markets participation in bitcoin trading . 

Regulation

Exchanges providing fiat conversions or accepting funds in fiat have to comply to KYC and AML regulation in the countries they operate. In USA, different states and compliance bodies such as FINCEN have required registration from exchanges as money transmitting businesses.

Leading exchanges have tried to remain compliant with the local laws and regulations, applying and publicising licensing and registration information. itBit has secured a banking license in New York while Genesis Trading became the first licensed broker dealer in digital currencies, operating as a division of SecondMarkets, an SEC licensed broker-dealer regulated by FINRA and the SEC. Firms have also voluntarily adopted best practices (usually mandated in the financial services industry) for managing customer funds. Brokers such as UK based Coinfloor publish their methodology for storing client funds and publish a Provable Solvency Report on client funds. 

Risks and Challenges - An Uphill Battle for Bitcoin Markets

Bitcoin exchanges are diverging into blockchain and fintech, while others continue to support miners and daily conversions in bitcoins. Exchanges on the whole are still in start-up mode and the failure/burn rate still remains high. 

Volatility

Bitcoin prices fluctuate dramatically and so do transaction volumes. Between 2012 and 2016, the price has moved from $1 to $1200 at its peak and a $300-$400 average in 2016. Price spikes are triggered by developer announcements, legal status and judgements, geo-political events and exchange losses,thefts and closures. A security event can cause major run of exiting investors. While exchanges should maintain 100% of client bitcoins, this has often not been the case. In some case, fiat or bitcoin reserves have woefully underfunded. Exchanges have their bank funds frozen for suspect transactions, going into a death spiral. 

Regulation

Regulation around bitcoin is still evolving, especially at the intersection with fiat and other regulated financial products. Regulation is a double edged sword which can make or break exchange start-ups.

The costs of licensing and compliance can be a barrier to entry for smaller players. Further, the requirements for licensing, regulatory reporting and compliance are not clear as the treatment of bitcoin as a commodity or currency differs across countries. This has led to different countries or industries excluding or limiting bitcoin exchanges from access to existing banking system, as in the case of Australian banks freezing accounts of bitcoin companies.

Security

Exchanges have themselves become a risk factor in bitcoin pricing with many events such as thefts and closure shaking investor confidence and triggering sudden (and steep) declines or volatility in pricing. Many exchanges that closed have ultimately lost client funds through a combination of online security hacks, fraud and lax practices.

Bigger exchanges have matured since, and have taken up security practices such as offline cold storage of coins, maintaining reserves and insuring customer funds and replacing lost bitcoins. 

Complexity 

Bitcoin is currently undergoing through a major evolution and transformation phase as debates on blocksize, competing cryptocurrency and regulatory pushbacks create stress on over the top solutions. It may be too early to bring in structured financial products and create a trading and lending ecosystem using bitcoins with investors still coming to terms with the unique features of bitcoins.   

Bitcoin Exchange and Trading Trends

The evolution of Bitcoin exchanges and trading appears to be heading in different directions in different regions, and to an extent influenced by the state of financial markets there.

While transaction volumes are huge in China, where miner dominate, bitcoin exchanges in developed markets of US, Europe and Australia are headed towards inclusion of bitcoin in the existing capital and asset markets. Major exchanges are applying for regulatory permissions and licenses to operate as broker dealers or securities institutions to expand the reach and liquidity of bitcoins. Exchanges are also integrating other digital currencies and rebranding their offerings as block chain solutions than bitcoins.

In the next article, we cover a cross section of leading and innovative bitcoin exchanges.

Bitcoin Payments Landscape - Remittance Platforms

This two part article profiles some leading or well known providers in these two payment categories – Payment Service Processors (retail purchases and recurring payments) and Remittances. In this concluding section, we cover the remittances landscape and profile three remittance start-ups that use bitcoin and the blockchain as a payment rail.

Bitcoin remittance platforms use the blockchain as payment rail with over the top applications for payments, exchange and delivery.

The Global Remittances Landscape

Bitcoin remittance companies provide money transfer services to remote recipients. Remittance is a major opportunity area of disruption in the global remittance $600 billion remittance market. The existing remittance industry is dominated by two or three large players who set fees between 10-25% of the remittance value, a topic of much debate for a long time.

Remittances are an indicator of global migration patterns and tracked closely with global bodies such as the UN, World Bank and IMF. The World Bank tracks global remittance payments actively as they constitute a major source of income for some of the economically weakest sections especially in developing countries. Fees which can eat up a sizeable chunk of small payments are a major concern.

As per the World Bank Factbook, average worldwide cost for remittances is 8%. High fees are probably one of the reasons, that illicit and informal channels are believed to constitute an even large size of the remittance market. The World Bank's estimates that a saving of 5% points in fees can result in $16 billion savings for remitters. (Source: Migration And Remittances Factbook 2016 by World Bank Group, also available online.) 

A composite view from World Bank's online remittance prices database showing average transaction costs for money transfer between US and Philippines. The averages vary depending on source and destination. In this example a $200 USD transfer takes an average of 4-5 days. 

Technology is seen as the solution to address delays and high fees involved in cross-border, cross currency exchanges and an alternative like bitcoin may be part of the solution.

Despite this opportunity, Bitcoin remittance start-ups have had mixed success – partly due to licensing and regulatory barriers and also due to “last mile connectivity” – delivering in local currency to remote recipients which requires a brick and mortar set-up at the point of transfer.

In this post, we profile three remittance start-ups that have been in the news for their growth or innovative models that can disrupt the existing structure of the remittance industry.

Coins.ph

Philippines is the third largest market for inward remittances, after India and China. Philippines is considered bitcoin friendly due to a favourable public opinion of bitcoins, neither is the government attempting any active regulation to throttle out cryptocurrencies, which explains why bitcoin remittance start-ups choose Filipino peso remittances or operate from the country.

Coins.ph was founded in 2014 by Silicon Valley entrepreneurs Ron Hose and Runar Petursson. 

Coins.ph provides bitcoin and other crypto-currency wallets and payments platform services for retail merchants in Philippines. Coins.ph has built a payment layer using banks and existing payment services. They also address last mile connectivity by allow their existing merchant networks such as convenience stores and partner pawnshops (an on the ground pervasive local network in the Philippines that provide money transfer services for the unbanked) to act as a peer to peer network using their “Teller” app. Senders can buy and sell bitcoins and convert to pesos using their coins.ph wallet. Pesos can be transferred via a bank deposit, ATM withdrawals, through tellers, mobile payments or doorstep delivery. 

Abra

Abra (A Better Remittance Alternative) Android mobile remittance app went live in February 2016 but it has been in the news a long time before. Abra has attracted widespread media coverage, recognition (an award at San Francisco Launch Festival 2015) and funding from high profile investors such as American Express. 

Abra was founded in 2014 by another Silicon Valley serial entrepreneur Bill Barhydt, a former director at Netscape.

Abra aims to disrupt the global remittance industry dominated by Western Union and Money Gram on the price front. It uses Bitcoin’s blockchain as their platform rail to move fiat remittances between end users, using an Uber like peer to peer Teller model. Users can load their Abra app using bank debit cards and send money to anyone in the world. Recipients do not need an Abra app or bank account. Human tellers who can be local businesses or individuals make cash payments to the recipients for a fee. 

Abra manages the bitcoin to fiat exchange using “smart” hedging to cover exchange risks. Neither Abra nor the teller network act as custodians for customer funds. 

BitPesa

Another region under served by the global banking and remittance system is sub Saharan Africa where remittance fees are the highest in the world, although recipients are among the economically poorest and many depend on remittances to survive. Countries like Kenya, Nairobi and Tanzania also have poor banking connectivity. M-Pesa the revolutionary mobile payments platform has already innovated the digital payments ecosystem in Africa bypassing plastic payments. 

BitPesa, a bitcoin based remittance  start-up was launched in 2013 by Elizabeth Rossiello and Duncan Goldie-Scot. BitPesa initially supported remittances from UK to Kenya. A sender could buy bitcoins using the BitPesa wallet. Recipients could receive the equivalent of Kenyan shillings on their m-pesa accounts. 

BitPesa is currently facing hurdles with bitcoin acceptance. Its contenders include banks and mobile operators in Kenya, all fighting for a share in the mobile payments industry where M-Pesa is the dominant platform. The Kenyan Central Bank does not recognize bitcoin as legal tender. BitPesa has been offloaded from the largest mobile network and operator of m-pesa, safaricom on grounds of not being licensed as a currency exchanger.

BitPesa in the meantime, continues to grow. Its services are now available in Kenya, Nigeria, Uganda, and Tanzania.

Summary

The remittance industry is ripe for disruption through digital payments and the blockchain. Despite challenges to bitcoins, the economic value for the financially excluded and small payments segments is undeniable. The advantage of Bitcoin in supporting low value transactions and lowering costs of transactions is directly applicable to the remittances industry. 

Having recognized this, the landscape of bitcoin based remittance solutions continues to grow. 

In the next series, we profile bitcoin exchanges and the blockchain vs bitcoin debate.

Bitcoin Payments Landscape - Payment Service Providers

In the previous post in this series, we covered bitcoin payment processes. 

This two part article profiles some leading or well known providers in these two payment categories – Payment Service Processors (retail purchases and recurring payments) and Remittances.

Leading Payment Service Providers - Growth Opportunities & Challenges

The Payment Service Processor (PSP) segment is facing a conflicting situation – adoption is growing as businesses sign-up daily. But transaction turnover lags in terms of value, forcing payment solution providers to scale down or diversify.

Map Source: https://coinmap.org by Satoshi Labs

Merchant payments are one and perhaps the smaller of bitcoin daily payment volume (source: blockchain.info) which has averaged between 100-150 million USD in 2016 till date. In comparison, Paypal, global payments leader which also accepts bitcoins, processed 1.4 billion payment transactions worth $82 billion in fourth quarter of 2015.

The bitcoin payment service processor segment is not too crowded. Merchant transaction values are still a smaller component of the daily bitcoin turnover and a fraction of fiat retail trade. Start-ups are also running into regulatory headwinds requiring them to be registered as money service businesses, regardless of whether their payment network remains custodians of client money or not.

US based BitPay and CoinBase are the largest bitcoin payment processors as of 2016. Other leading providers include Singapore based GoCoin and Denmark based Coinify.

We start with BitPay, leader in the PSP space and profile them in some detail. All PSP's offer capabilities similar to BitPay for the payments segment, with each competing on merchants or retail segments, offering their variation of wallets and provided services related to other products in their portfolio (exchanges for example).

BitPay 

Among the numerous bitcoin payment start-ups, four-year-old BitPay is becoming synonymous with bitcoin payment processing, and is sometimes called the PayPal for bitcoin. BitPay was founded in June 2011 by Stephen Pair and Antonio Gallippi. The company is headquartered in Atlanta, USA and has operations in Netherlands and Argentina.

BitPay has created a full service payment product portfolio. Their solutions include POS terminals, supporting pricing in 150 currencies, settlement in local currency and option to split payments between bitcoins and fiat. BitPay integrates with 14 ecommerce platforms including Shopify and PayPal and offers plugins for popular shopping cart applications such as WooCommerce. 

BitPay’s flagship offering is their global payment services platform. BitPay’s website and blog tracks and publishes payment adoption rates and major partnerships regularly. Their article “Understanding Bitcoin’s growth in 2015”,   mentions that 60,000 merchants had signed up their services by February 2015 and about 100,000 invoices were being processed monthly through BitPay by November 2015. 

BitPay offers merchant services in three tiers from a starter plan with zero transaction fees up to a $1000 daily threshold and upto 30 transactions monthly for new merchants. There are increasing transaction fees for two more tiers with increasing level of service including account management offered for Enterprise customers.

BitPay also reports new use cases for their platform - for example professional service providers who accept international payments, use the platform as a cheaper, faster and safer alternative to accepting international credit cards or bank transfers. 

Apart from purchases, BitPay also provides solutions for recurring payments including a payroll API. BitPay has also partnered with Libra tax to provide accounting and tax support for bitcoins. 

BitPay has also expanded the reach for bitcoin payments by partnering with other payment platforms such as Ayden and Ingenico. Ayden is a global payments company that counts Uber, AirBnB and Spotify as clients. Jagex, a mobile gaming provider has started accepted bitcoins through Bitpay’s integration with Ayden. Ingenico is a French payments processor and worldwide leader in POS terminal. BitPay’s integration with Ingenico extends their reach to over 27 million retailers who use their POS solution.

Despite the reach and breadth of payment solutions offered, as well as an impressive customer sign-up rate, BitPay has faced problems and is changing/expanding their strategy towards mainstream bank tech.  

However, BitPay does not stop at payment processing alone. 

Bitcore a full node with Javascript development environment was released as an open source project in 2014. Bitcore is available for developers to build their own apps for the Bitcoin network. 

BitPay’s bitcoin wallet Copay, one of the projects built on Bitcore debuted in 2015 and is the only wallet on windows mobile. Starting January 2016 Bitcore is also available on Microsoft’s blockchain as a service platform on Azure.

 

Coinbase

CoinBase, the dominant US start-up in all things bitcoin, is BitPay’s competitor in payment processing. Coinbase also offers a wide variety of merchant tools and API integration. Coinbase does not charge fees for bitcoin payments and the first 1 million USD also has zero fees. Higher values or volume attract upto a 1% transaction fee. 

Coinbase’s clients include Expedia, Dell, Overstock and Intuit.

GoCoin

Singapore based GoCoin is the third largest payments processor behind BitPay and Coinbase. GoCoin provides international payment gateway and merchant solutions for bitcoins, litecoins and dogecoins. 

While BitPay diversifies into other products and into banking tech, GoCoin has adopted a different strategy – to incentivize more credit card users to switch to crypto payments and increase mainstream adoption. 

GoCoin made news recently by merging with Ziftr, an ecommerce solutions provider with its own brand of alt-coin. As per their blog, the merged entity will bring to market ziftrCOIN digital coupons with GoCoin platforms, offering an incentive for mainstream users to make purchases with cryptocurrency instead of credit cards.

Coinify

Denmark based Coinify is one of Europe’s largest bitcoin payment processing platform with services available in 34 EU countries and most recently, South East Asia as well. Coinify supports 17 different blockchain currencies.

Coinify has funding including a multi-million dollar capital injection from SEED Capital (the Danish Government). Coinzone acquired Bitcoin Nordic, a bitcoin exchange, in 2012 and Copenhagen based BIPS (Bitcoin Internet Payments) in 2014. BIPs included an international payment gateway protocol and merchant services which moved to Coinify. Coinify acquired another Europe based payments processor Coinzone last year, a reflection of its strategy to scale through existing payment networks.

In the next article, we cover bitcoin based remittance platforms.

Bitcoin Payment Processors: A Bridge Connecting Two Worlds

Platforms built around the Bitcoin payments infrastructure are growing rapidly and, in some respects evolving similar to payment systems used in the financial system today. This has advantages as well as disadvantages as we will see later.

Bitcoins and Payments Systems: The Basics

Bitcoin is a payments network and wallets are the required payments interface. So what do payment platforms do? In order to understand, a recap of some basic concepts may be helpful.

Bitcoin was designed as a peer to peer payment network for digital cash. Bitcoin payment platforms provide extended capabilities to support other payment processes as well. 

Across the world, people can make payments in four different ways -

• Recurring payments – Salaries, utility bills and services transferred via scheduled bank debits.
• Cashless Purchases – Using credit/debit/mobile wallets to authorize purchases at point of sale such as online or in-store transactions.
• Cash – Generally for petty, low value expenditures; sometimes the only form of payment depending on where you are in the world.
• Remittances – Sending one time or recurring payments usually cross border transactions via an intermediary such as Western Union.

The world is not equal as far as payment systems are concerned. Developed nations have a well-connected although legacy payments infrastructure. Cashless payments are well integrated into all transactions.

Developing countries on the other hand, may not have well connected systems. Large parts of the population may not have bank accounts and remain outside the financial system (migrant daily wage laborers example). Cash is the lifeblood in such economies more so for daily essentials such as food and clothing. 

Enter Bitcoin. Bitcoin introduced a fifth form of payment which was not possible through any of the four methods – electronic peer to peer cash payments. 

Naturally, for transactions or economies where cash prevails, there has been a growth of platforms and institutions for this innovative form of money transfer, and developing cash centric countries remain a key use case for bitcoin payments.

In cashless payment economies, experiencing long transaction times and high fees thanks to a complex, legacy and highly regulated infrastructure, bitcoin payments offer a faster and cheaper alternative. Over the top bitcoin payment platforms have been developed to scale up adoption and compete with other forms of digital payment. 

BitPay, Coinbase and BitPesa are examples of payment platforms. These allow users to adopt and treat bitcoin as another form of fiat currency in the form they are used to.

Payment platforms for bitcoin work like existing payment processors and provide the same capabilities, except that they settle transactions against the blockchain.

 

Solutions for Cashless Payments

Bitcoin payment processors provide applications designed to support bitcoin payments for goods and services sold online or in store. Merchant solutions for Bitcoin include retail point of sale terminals, invoicing, bitcoin acceptance and conversion, settlements and escrows.

Like wallets, some platforms are exclusive to bitcoins while others support different crypto-currencies. Payment processors such as BitPay provide a wide range of capabilities from point-of-sale solutions to working as gateways to match solutions and processes in existing digital payments. 

Payment platforms  allow merchants to sign-up for hosted merchant accounts. They provide interfaces for in-store solutions such as POS terminals, mobile card readers,  NFC interfaces for one touch payments and QR readers. For ecommerce sites, payment systems can integrate with ecommerce platforms such as Shopify or WooCommerce.

Other payment processing facilities for merchant adoption are also provided. Merchants can generate and settle invoices in bitcoin. The payment systems convert and encash bitcoin payments into fiat currency and can provide daily settlements (a much faster transaction time compared  traditional plastic or digital payments).

Payment platforms also implement Bitcoin payment protocols such as BIP70 to support a more user friendly and familiar payment experience with features such as refunds. For example, instead of copying addresses in a purchase, a name URI (e.g. payme.com) can be used by merchants.

Some payment processors allow conversion into multiple currencies. Because the exchange rate of bitcoins can fluctuate widely, payment processors also allow invoices to expire within a set time (10-20 minutes).

Payment processing solutions generally provide transaction confirmation in the same time that blockchain is updated i.e. after six confirmations (or approximately an hour). Settlements can be usually made on a daily basis.

Recurring Payments

Salaries, utilities and subscriptions are examples of recurring billing and payments which means they have to be settled on a recurring basis. 

Recurring payments are generally equated with automatic scheduled transfers although that may not be true in all cases. Recurring payment solutions can be as simple as scheduled reminders and user making the payment. Bitcoin payments are push type payments which means senders/payors have to unlock bitcoins from their wallet. 

Payment processors such as Coinbase and BitPay provide an over the top “pull” layer to make recurring payments from user wallets. BitPay have also developed a payroll API for US employees to make part or full salary payments in bitcoins,  a system which their own employees use. 

While options are available, challenges abound though to be fair, an digital cash network is not the best place for sign-once, pay automatically type of scenario. Issues such as insufficient funds, changing wallets or handling transaction changes will also require user intervention, diluting advantages of automated debits. There is also the disadvantage of giving control/authorization to a third party to spend from a user wallet which is still a risk as the world learns to adopt bitcoins.  

Remittances

Bitcoin remittances (sometime called "rebittances") are services offered for international remittances using Bitcoins. The remittance platform enables bitcoin payments which can be converted at a local bitcoin exchange. The speed of bitcoin transfers is faster than any other cross border fiat transfers and fees are lower. The risks with bitcoin remittances are related more to the volatility in bitcoin rates and dependency on unregulated exchanges to liquidate into fiat. 

However rebittances a preferred alternative for many bitcoin users and are a growing threat to the expensive and time consuming model of fiat transfers and start-ups such as Abra and BitPesa continue to attract users.

Bitcoin as Digital Cash

This is Bitcoin’s raison d'être and has been already covered in several times in this series starting from the overview and in wallet platforms. Wallets are the only requirement in the transaction and users can be located anywhere in the world. Physical cash once handed over is difficult to get back, if not impossible and the same applies for bitcoin. Exchanges and ATMs allow bitcoin to cash conversions. 

Taxes and Conversions

Tax treatment of bitcoin payment transactions is a new and emerging topic of its own. In general, invoicing systems can calculate tax components. However, tax deductions or withholdings are managed separately outside the payment platforms. 

The chief reason for this hinges on continuing debate on financial definition of bitcoins. Various countries and tax jurisdictions are still working on tax treatment for bitcoins. In some places, bitcoins are not recognized as currency and hence transactions on good or services may not attract local taxes. Taxation is applied when bitcoins are converted to fiat and treated as payee income. The bitcoin transaction may still be subject to GST, and create a double potential taxation issue for merchant (as in this example from Australia). 

Till the currency argument settles down, current processes for tax deduction at source or withholdings is not a showstopper for bitcoins.  For example, BitPay’s payroll API excludes tax withholding (as it is not a direct payroll deduction in any case).

 Accounting and taxation platforms such as Libra  have been rolled out in the marketplace to help calculate Bitcoin tax liabilities for coin owners. BitPay has tied up with Libra  to help merchants with tax and accounting on payments received in bitcoins. 

In the next article, we profile popular payment platforms.

A Comparison of Popular Bitcoin Wallets

In this post we profile a few popular and widely covered wallets for Bitcoin. The previous post on bitcoin wallets explained wallet features and terminology which will not be repeated here unless necessary.

Apart from the original Bitcoin-qt, wallet solutions for bitcoins are about five years old and in a state of continuous evolution. Google search brings up maybe a hundred or more wallet options, many of them open source projects and start-ups less than a year old. 

There is limited information on the wallet landscape, wallet user statistics or providers market share. Also, while some wallets are designed exclusively for bitcoins, others support multiple crypto-currencies.

Wallet Users and Use Cases

Because wallets hold private keys, all wallets are heavily focused on the security use case, followed by storage (hot vs cold) and choice of platform (mobile, desktop, hardware). Other competitive features include ease of use and speed of transactions.

Leading wallets routinely highlight (or are known) for following specific design philosophies than a target market demographic or user segment. For example, some wallets remain aligned to the broader objectives of Bitcoin (anonymity, peer to peer transactions) while others focus on bringing in mainstream users or institutions (cross platform mobile interfaces, bank like security and compliance). 

From a bitcoin user perspective, there is not really one perfect wallet out there and the choice of wallet is determined by their use for bitcoins. 

For example, merchants who accept bitcoins may treat them as pass through and convert to fiat on settlement. This group would be focused on transaction security and ease of settlement and not be concerned about long term storage such as a padlocked, multi-sig, cold storage vault.

The larger group of bitcoin owners/investors/speculators do use it for transactions and remittances, as well as an asset class. Serious investors who are want preserve their bitcoins when fiat doomsday occurs will require offline wallets in deep cold storage vaults that use the security methods employed at Gringotts.

A common strategy for users is to use more than one wallet (not unlike having wallets and safes for cash) with a mobile wallet for shopping and store transactions, a web wallet (linked to an exchange) for conversions and trading and cold storage vaults or hardware wallets for high value/long term secure storage.

This list profiles some of the more widely known/discussed wallets in these categories and some strategic innovations that have attracted attention.

Electrum (A lightweight desktop wallet) 

Desktop wallets serve as client interfaces to the blockchain are designed to give users complete control (and responsibility) of their wallets. Electrum is a client server wallet of this category; the desktop client is a lightweight wallet interfaces that connects directly to a blockchain server node. 

Electrum is one of the earliest bitcoin wallets, and is available under GPL open source license. Thomas Voegtlin released Electrum in November 2011 and founded Electrum Technologies in 2013, which continues to offer Electrum for free and provides services around it. 

Above: Electrum's website featuring SPV.

Electrum is a lightweight desktop client for novice and experienced users. Electrum wallet offers features such as encryption, offline signing and support for hardware wallets such as Trezor. Sending and receiving bitcoins is a straightforward process as explained in this thorough walkthrough of Electrum set-up and user interface.

Multibit and Hive are other examples of lightweight desktop wallets. Electrum’s more heavyweight counterparts are Armory and Bitcoin Core, resource intensive, but allowing users full control of their wallets and verification against the full blockchain. Armory is one of the most secure desktop clients offering strong features such as encryption, online watching wallets and offline wallet to sign transaction. Armory requires technical skills and careful set-up and is for bitcoin users prepared to invest time and care to achieve results without losing bitcoins in the process.  

Note: Armory’s website was not accessible throughout the time of writing this article.

For users who want to wet their feet and start with fewer bitcoins than pocket change, a hosted or web wallet may be a better option.

Blockchain (Hosted Hybrid Wallet)

Blockchain.info is well known block explorer service also runs one of the most popular hosted bitcoin wallets today (their published stats at the time of writing show a staggering 6 million users). Blockchain.info was founded in August 2011 and is headquartered in Luxembourg.

Block.info's MyWallet can be downloaded from their website (above). Users can try a demo account as well.

Blockchain wallet users can sign-up for the free service and can carry out transactions through a web browser or mobile app. Blockchain’s wallet is known as hybrid wallet – the host provides the wallet service but only users can access their bitcoins. Wallet addresses are encrypted in user browser and stored in blockchain cloud in encrypted form. Users can access their wallet balances with blockchain APIs without having to download the blockchain, explained quite simply on their website.

Blockchain wallet piles on other security features such as two factor authentication, ability to generate offline transactions and multiple backup options. Blockchain also offers hidden wallet service over the TOR anonymity network. 

Coinbase is another well known provider of hosted wallets which link to the Coinbase exchange. Coinbase's dominant focus is on their exchange platform and becoming the first regulated bitcoin exchange.

Trezor – Zero Trust Hardware Wallet

Trezor calls themselves the Bitcoin safe, which is an apt description of a hardware wallet function – to serve as an offline cache of bitcoins safe from hackers without having to rely on third party custody. Trezor was launched in late 2013 by Prague based Satoshi Labs and is one of the most popular hardware wallets today. 

Trezor, the first hardware wallet, featured on the website.

Users can authorize send transactions via an online wallet only by entering a confirmation through the Trezor device.  A Trezor device has a display for confirming transaction address and value, while PIN and other information is configured through a computer keypad interface for security from key loggers. Trezor’s makers have built the platform on zero trust principle. To minimize device compromising, the hardware wallet does not support any other installation, nor an internal battery (it is charged through a micro USB port when connected).

Trezor wallet devices are secured with a user generated PIN and support passphrase encryption. A recovery seed is generated at set-up to recover and transfer wallet contents if the device is lost or stolen. Trezor’s website has a nice comparison page highlighting security advantages of their hardware wallet over using software or paper wallets alone.

Ledger Nano and Keep Key are other options in the hardware wallet category.

Xapo – Bitcoin Fort Knox

Although this post has light hearted reference to Gringotts security, Xapo appears to personify it. 

Xapo was founded in 2014 by an Argentine entrepreneur, Wenses Casares and the company operates in Zurich, Switzerland. 

Xapo website describes it as a Bitcoin wallet and vault. Xapo wallets can be used on mobile device or with the Xapo debit card as featured on their website.

Xapo’s philosophy is based on security and they take security to new heights (low orbiting satellites) and lengths (globally distributed servers). 

Xapo wallets are available in mobile app, online and debit card form. Xapo has introduced a debit card similar to the banking card debit card model most people are familiar with. The debit card usage creates a seamless and familiar transaction experience, although it comes with the even more familiar fees. 

As described on their website, Xapo offers deep cold storage vault services. User bitcoins are stored offline on encrypted physically secure servers across the globe. Xapo’s physical vault facility is located on a military bunker in the Swiss alps and vault deposits are insured.  

Of course maintaining all this is very expensive, and the company is relatively new but it highlights the magnitude of serious investments in the future of Bitcoin.

CoinBase also have an insured vault offering for their wallet service. 

Note: While insurance is an additional layer of managing bitcoin security risks, bitcoin insurance is an emerging field and comprehensive insurance coverages are yet to emerge. However that is the subject of another article.

MyCelium - Mobile Wallet and Payment Ecosystem

As bitcoin payments become mainstream, mobile wallets are becoming increasingly important. Most of the wallet solutions are now available as apps on different mobile platform.

MyCelium, one of the first in this category is a popular mobile wallet and has won awards as well. The wallet was launched by Vienna, Austria based Megion Research and Development in 2013. 

Above: From MyCelium website. MyCelium's mobile app includes an integrated decentralized exchange. 

MyCelium was launched as an android app but is now supported on other platforms as well.

The MyCelium wallet offers users complete control and provides a wide range of payment features such as NFC, QR reader, BIPS 70 payment protocol support and integration with exchange services. MyCelium also includes an integrated in-person decentralized exchange Local Trader, a solution from Megion, that is designed to support peer to peer transactions without a third party. 

Copay from Bitpay is another example of a mobile wallet that includes several add on features (compared to other wallet categories) to facilitate payment processing. 

Dark Wallet – Anonymity Anywhere

Bitcoin transactions are pseudonymous which means user addresses are used instead of personal identification. Dark Wallet and its up and coming challengers such as Samourai have made it their mission to uphold the anonymity of bitcoin transactions. Dark Wallet is open source project which has received wide coverage but still is in alpha version. Available as a Chrome browser extension with a symbolic black on grey interface , Dark Wallet provides transaction anonymity using CoinJoin for coin mixing.

The Future of Bitcoin Wallets

This article is a glimpse of the broad and still evolving bitcoin wallet landscape. 

Players from individual developers, crowdfunded projects to institutional investments are all involved in shaping the future of wallets.

Wallet offerings continue to evolve with the growing adoption of bitcoins and technologies. As increasing numbers of users sign up for wallets, makers are trying to balance security and ease of use in their offerings.

For those getting into the world of bitcoins, Bitcoin Wiki, Bitcoin Talk , product websites and bitcoin publications continue to provide a wealth of user education/information on the underlying technology, user interface and management of bitcoins. 

Transactions in Bitcoin: Wallets

In this series, we are covering the different solution platforms built for Bitcoin. In this post, we look at wallets.

Note: The post assumes that you are familiar with the concept of Bitcoin network, bitcoin transactions and the purpose of wallets. If you are just starting here, I recommend going over the earlier posts on Introduction to Bitcoin, Bitcoins payments ecosystem and Bitcoin platform ecosystem which precede this article.

Bitcoin wallets are more than a data file of users private keys. Wallets are the user interface to spend and receive bitcoins. Bitcoin transactions take place when users send payments using their wallets. 

Bitcoin Core, the original wallet

The original Bitcoin release included Bitcoin-Qt a thick desktop client wallet interface and it was the first wallet available. This wallet runs on a full node that and relays transactions directly on the Bitcoin network.  It offers high levels of security, privacy, and stability. However, it has fewer features. For example, only one wallet allowed per node, it takes a lot of space and memory, and is slow to download. Bitcoin wallet allows setting up Tor as a proxy providing anonymity over the network. 

A mobile version of Bitcoin wallet is also available for Android and Blackberry devices. This wallet uses special payment verification or SPV which means it downloads and verifies against block headers. It does not support Tor as a proxy.

What Bitcoin Wallets Offer

A number of third party wallets  solutions are available in the market providing new features such as mobile and web applications, enhanced security and cold storage, among others.

Multiple Platform Support

Bitcoin wallets today are available on a wide variety of platforms such as mobile, desktop, web and hardware wallets. Wallet providers usually offer cross-platform solutions. 

Wallets are available as standalone solutions or hosted applications.

Standalone wallets such as desktop thick client wallets and mobile apps with storage give users full control of their wallets, however users are responsible for securing wallets from malware and taking backups. Hosted wallets are web applications, desktop apps or mobile applications where the wallet interface is a thin client while the data is hosted elsewhere. The wallet provider offers backup and security features. Hosted and shared control wallets offer lesser control as  users are required to trust providers (these wallet can solutions require both provider and user to sign transactions and/or may make use of a centralized service/specific servers to verify transactions).

Hardware wallets are similar to hardware password token devices and provide a secure offline environment for private key generation and storage. A hardware wallet works with a wallet software during transactions, providing features such as private key generation, signing and transaction confirmation from user and storage. Hardware wallets are secure from virus and malware attacks to which desktop wallets are vulnerable.

Security

Bitcoin wallets usually offer additional security such as encryption, multi-signature transactions and spending limit rules to protect user data in insecure environments (such as an open wi-fi, theft or hacking). Multi-signature wallets require a transaction to be authorized by more than one party such as multiple designated users or in some cases, a trusted intermediary or the hosted wallet provider. This prevents unauthorized transactions if wallets are lost or stolen. Two factor authentication requires verification from more than one device to authorize a transaction. Web wallet transactions are usually secured over SSL encryption as well. 

Multisig Example. Multi-signature set-up for a Coinkite wallet as illustrated on their website. The full range of multi-signature capabilities includes up to 15 signatories as described on their FAQ page.

Some wallets allow user to specify rules such as spending limits on transactions. It is a good practice to backup wallets complete, using encrypted backups, and encrypting devices that wallets reside on, in addition to strong password protection. 

Storage

Hot and cold wallet features allow users to secure bitcoins similar to the way cash wallets work - only limited, small sums are available for transaction at a point in time, while the balance is stored elsewhere (or offline). Wallet balances are secured by features such as vaults and offline cold storage, thus user private keys are secured from online hacking and used only when spending bitcoins. Cold storage or vaults offered by providers are are wallet backups saved in a secure environment such as a bank safety deposit box. Some wallets offer offline transaction signing where the transaction is signed in an offline device and relayed via an online wallet.

Hardbit, a bitcoin hardware cum offline cold storage wallet

Transaction Speed

Wallet providers such as Coinbase create user accounts and allow instantaneous transfer between account holders through off the chain transactions. This means that transactions are maintained within the wallet provider's accounting and will be reflected on the blockchain as either a) a) a different transaction aggregated from multiple users and flowing through a provider wallet or b) updated in blockchain when the receiver spends bitcoins. Off-chain transactions are increasingly used to keep transactions fast and handle micro-payments. This is an example of diluting the peer to peer transactions and public ledger advantages of blockchain.

In addition to these common capabilities, there are wallet variations that offer enhanced privacy (or rather anonymity), through mixing services. These are more related to transaction anonymity and can expose users to money laundering, so care should be taken when using these services. 

In the next post, we compare some of the popular Bitcoin wallets.