57 Varieties of Pyrite

3 minute read

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57 Varieties of Pyrite: Exchanges Are Now The Enemy of Bitcoin

By Rusty Russell

Posted May 27, 2020

TL;DR: exchanges are casinos and don’t want to onboard anyone into bitcoin. Avoid.

There’s a classic scam in the “crypto” space: advertize Bitcoin to get people in, then sell suckers something else entirely. Over the last few years, this bait-and-switch has become the core competency of “bitcoin” exchanges.

I recently visited the homepage of Australian exchange btcmarkets.net: what a mess. There was a list of dozens of identical-looking “cryptos”, with bitcoin second after something called “XRP”; seems like it was sorted by volume?

Incentives have driven exchanges to become casinos, and they’re doing exactly what you’d expect unregulated casinos to do. This is no place you ever want to send anyone.

Incentives For Exchanges

Exchanges make money on trading, not on buying and holding. Despite the fact that bitcoin is the only real attempt to create an open source money, scams with no future are given false equivalence, because more assets means more trading. Worse than that, they are paid directly to list new scams (the crappier, the more money they can charge!) and have recently taken the logical step of introducing and promoting their own crapcoins directly.

It’s like a gold dealer who also sells 57 varieties of pyrite, which give more margin than selling actual gold.

For a long time, I thought exchanges were merely incompetent. Most can’t even give out fresh addresses for deposits, batch their outgoing transactions, pay competent fee rates, perform RBF or use segwit.

But I misunderstood: they don’t want to sell bitcoin. They use bitcoin to get you in the door, but they want you to gamble. This matters: you’ll find subtle and not-so-subtle blockers to simply buying bitcoin on an exchange. If you send a friend off to buy their first bitcoin, they’re likely to come back with something else. That’s no accident.

Looking Deeper, It Gets Worse.

Regrettably, looking harder at specific exchanges makes the picture even bleaker.

Consider Binance: this mainland China backed exchange pretending to be a Hong Kong exchange appeared out of nowhere with fake volume and demonstrated the gullibility of the entire industry by being treated as if it were a respected member. They lost at least 40,000 bitcoin in a known hack, and they also lost all the personal information people sent them to KYC. They aggressively market their own coin. But basically, they’re just MtGox without Mark Karpales’ PHP skills or moral scruples and much better marketing.

Coinbase is more interesting: an MBA-run “bitcoin” company which really dislikes bitcoin. They got where they are by spending big on regulations compliance in the US so they could operate in (almost?) every US state. (They don’t do much to dispel the wide belief that this regulation protects their users, when in practice it seems only USD deposits have any guarantee). Their natural interest is in increasing regulation to maintain that moat, and their biggest problem is Bitcoin.

They have much more affinity for the centralized coins (Ethereum) where they can have influence and control. The anarchic nature of a genuine open source community (not to mention the developers’ oft-stated aim to improve privacy over time) is not culturally compatible with a top-down company run by the Big Dog. It’s a running joke that their CEO can’t say the word “Bitcoin”, but their recent “what will happen to cryptocurrencies in the 2020s” article is breathtaking in its boldness: innovation is mainly happening on altcoins, and they’re going to overtake bitcoin any day now. Those scaling problems which the Bitcoin developers say they don’t know how to solve? This non-technical CEO knows better.

So, don’t send anyone to an exchange, especially not a “market leading” one. Find some service that actually wants to sell them bitcoin, like CashApp or Swan Bitcoin.

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