Coinbase Pulls Money From Customers’ Bank Accounts – Bitcoin / Crypto Risks – Bitcoin Investment Trust (OTCMKTS:GBTC)

February 20, 2018

It was recently reported that Coinbase has been over charging users, essentially draining funds from linked bank accounts. For those who thought only the money deposited into an exchange’s accounts were at risk, they were rudely awakened.

I had previously attempted to publish an article on Seeking Alpha about the risks of using crypto currency exchanges and how investing in miners was a safer alternative, but this article was rejected repeatedly as it was considered “scattered and irrelevant”. To the detriment of any Seeking Alpha readers who are also Coinbase customers who are now missing funds from their checking accounts! I did also warn about this in a recent TV interview, a replay of which can be found on Youtube.

It is frustrating to view the cryptocurrency world from the lense of a sober, rational value investor. Reports on standard venues tend not to understand it and struggle to present relevant research in a timely manner. Mainstream news sources have had trouble distinguishing between frauds and interesting business models (see the news on Riot Blockchain (RIOT) ) and some of the coverage of other sketchy businesses like Kodak (KODK) vs more legitimate businesses like Overstock (OSTK).

It will be interesting to see how the reputable venture capital firms that have backed Coinbase respond to this scandal, and to see if customers money is returned or if it disappears as has happened with Mt Gox and the other exchange “hacks” / thefts. And it certainly emphasizes the point that it is worth evaluating safer alternatives to crypto currency investing than using exchanges. Whether engaging in “otc” direct purchases, or investing in mining companies with solid financials, top tier auditors, and executives with sterling backgrounds, there are alternatives for exposure to this rapidly growing, dynamic space. And most importantly, caveat emptor.

Here are some of the thoughts I wrote after the last big exchange hack but before the Coinbase account issue:

Another crypto currency exchange “lost” $400 million of crypto currency recently, as reported by Bloomberg here. The exchange, called Coincheck, reported that 500 million NEM tokens (a currency similar to Bitcoin and Ethereum) were sent “illicitly” away from the exchange.

Numerous crypto currency exchanges and cloud mining operations have been hacked over the years. Mt Gox 4 years ago, Nice Hash, and others have seen losses of billions of dollars of crypto currencies over time. These thefts increase the risk to investors in already volatile crypto currencies, and raise serious questions about the viability of other exchanges.

While the returns from price appreciation have greatly exceeded the losses from theft so far, persistent security issues put a cloud over direct crypto currency investing. Money in a bank or in a brokerage account is insured, at least to some extent. Money lost in an exchange or a cloud hashing service so far has not been recoverable.

“Mining” these currencies is an alternative. It allows for cash flow, which is unavailable from buying and holding crypto currencies. And that cash flow rises and falls with the prices of the currencies, allowing some exposure to price movements, with less risk of permanent capital impairment. “Difficulty rates” do tend to rise over time, and input costs such as rent and electricity can be other important economic drivers.

Also, mining allows for exposure to cash flowing assets within the crypto space. Owning “coins” and “tokens” offers one to one upside if the price of they crypto currency owned goes up, and one to one downside if the price goes down. But no cash flow is generated through ownership of those coins, and coins held on exchanges can subject to theft. Mining equipment, or equity ownership in a miner, generates revenue, which when netted against expenses, nets cash flow. With competitively low costs, mining can generate a return even if the price of a crypto currency goes down. And large scale theft of physical miners, while not impossible, is more logistically challenging and hasn’t happened yet.

Exchange hacks and cloud mining hacks may be sending fund flows away from purchases of crypto currencies, and towards investment in miners and mining stocks. Below is a chart of Bitcoin (OTCQX:GBTC) from its recent high. While the recent hack was of NEM tokens and not Bitcoins, this may accelerate the flows towards mining.

Chart^NYB data by YCharts

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