They have their online coins insured, so if they lose them, they can reimburse you.
That's a little irrelevant, because their hot storage wallet (their online coins) should be a small subset of their total coins. The whole point of a hot storage wallet is that if you lose them, it doesn't matter. So insuring those is pointless except as a marketing stunt to confuse people, which is why saying "We're insured" is bad faith.
This is a serious, professionally-run company backed by a lot of VCs we all recognize, plus banks and the NYSE.
Indeed, and if Coinbase loses all the coins, none of those people will step in to replace them, because nobody is going to put up hundreds of mullions or a billion dollars just to reimburse customers.
They have everything to gain by honesty and everything to lose by committing fraud, including prison (and that is the only reason they would become insolvent).
I disagree that technical problems can't make them insolvent. All it would take is an unhappy accident in their cold storage procedures.
But beyond tech problems, consider a thought experiment: If you're a gambling person, would you trade 20 years of your life in exchange for becoming a billionaire?
Banks are nice because if someone takes money, the money can be retrieved. Not the case for bitcoin. Someone is in charge of the cold storage procedures, so that person is in control over all the coins. If they decide to take all of them, there's nothing anyone can do about it except throw them into prison.
Obviously, bitcoin may be completely irrelevant by the time you're out of prison. In fact, emptying Coinbase's cold storage reserves might even cause that. But money does strange things to people, and this technology has changed the power dynamic. Some of those changes are good. But are you sure you want to trust a single person with your entire fortune? Worse, you're trusting multiple people where any single person can take your fortune. Even if they require several people to sign off, that's a very small number of people in complete control of your fate.
It probably sounds like I'm anti-Coinbase. I'm not. I'm pro-consumer. As soon as Coinbase insures all of their coins or offers true protection to consumers (by default!) then I'll be their biggest fan, because they'll have become an awesome bank.
"But are you sure you want to trust a single person with your entire fortune? Worse, you're trusting multiple people where any single person can take your fortune."
Coinbase is hopefully not entrusting individual employees with cold storage keys. Their security page suggests they're using Shamir's Secret Sharing or similar (https://www.coinbase.com/security), though multisig would be even better.
Shamir's Secret Sharing and multisig Bitcoin transactions support arbitrary n-of-m pieces/keys, e.x. a 3-of-6 scheme would require 3 of the 6 pieces to reconstitute the key/sign a transaction, so any 3 pieces could be lost.
2-of-3 is common for end-user multisig. Generally you'd have 1 key physically backed up on paper in a secure place, 1 key on one of your devices (phone or computer), and 1 key either on another device (hardware wallet or phone) or controlled by a 3rd party that does risk analysis/fraud detection on your transactions.
> So insuring those is pointless except as a marketing stunt to confuse people, which is why saying "We're insured" is bad faith.
I don't think it's in bad faith. Bitstamp just lost its hot wallet recently, and people were panicking, because they didn't know what the situation was. Now, with Coinbase, if that happens, we don't have to panic. It's hard to tell people something that is true and have it be "in bad faith."
> I disagree that technical problems can't make them insolvent.
I agree with you here, I just think the chance is so low that it's not worth mentioning. I don't have any insider info, but I seem to recall reading a post a long time ago where they explained having some kind of x-of-y system of paper wallets stored in bank safety deposit boxes all over the country with a lot of redundancy.
If you are willing to assume they have even a minimal level of common sense and competency, they have an offline storage system that is very robust.
> But beyond tech problems, consider a thought experiment: If you're a gambling person, would you trade 20 years of your life in exchange for becoming a billionaire?
I think this is an interesting thought experiment. I don't completely disagree, but I am still willing to trust coinbase with my money.
Well, Bitstamp was incompetent enough to keep $5M USD (almost 20k BTC) in their hot wallet. That's half their most recent funding round, so the panic is probably warranted.
I think we're at an impasse because you believe in Coinbase's competency. That's commendable, but I saw firsthand how incompetent an exchange can be without anybody noticing. If I'd researched Mt. Gox, I would have found a history of tech problems not dissimilar to Coinbase's, so the goal with my original comment was to remind people that this situation is very similar to Mt. Gox. They're based in the US, they have good investors, but still fundamentally similar to Mt. Gox.
Don't get me wrong, making an exchange is a hard problem, so it's pretty amazing that Coinbase has gotten this far with "only" four or five high-profile issues. Everyone loves a story of some small group of people surmounting a difficult problem. But when that problem puts people's livelihoods at risk, we need to make sure everybody is fully informed about the risks.
I also want to thank you for the interesting conversation. Much appreciated!
> They're based in the US, they have good investors, but still fundamentally similar to Mt. Gox.
I just don't agree with that. Those two things make them fundamentally different than Mt. Gox. The other fundamental difference is that they are not run by Mark Karpeles. I have to believe Karpeles is an exceptionally immoral/careless (or something, I'm not exactly sure) person, not anywhere close to the average.
But there is definitely some validity in what you are saying. I mean, nobody should trust to any bitcoin exchange more than they can afford to lose.
> I also want to thank you for the interesting conversation. Much appreciated!
I'm not sure I would call Bitstamp incompetent for keeping $5M USD worth of bitcoin in their hot wallet.
A hot wallet needs to contain enough to cover the largest reasonably-sized transaction which a user may want to withdraw (and then some), and a global exchange like Bitstamp would have many institutional customers who may withdraw that much on a weekly basis.
I am the biggest loser at 4700+ BTC. Screenshot from a few days ago for the purposes of record keeping.http://imgur.com/IDbM0BP
This behavior isn't uncommon. Check out the rest of the thread. Everyone is expressing their faith in Coinbase's competence, so if that's your position, trusting your fortune to them wouldn't seem unreasonable. It's how I lost money on Mt. Gox.
A whopping third of people surveyed had more than 20-30% of their net worth in bitcoin. I wonder how many of those people are storing it themselves vs storing them with Coinbase or some other exchange?
You can hurt yourself with a powertool, even a kitchen knife or a kettle. Do more damage than you ever could with bitcoin. That doesn't mean the manufacturer should buy you healthcare insurance.
Storing 4700BTC with an exchange is far, far beyond intended use. My position is that you shouldn't be doing it.
I understand the pro-consumer position. Yes, maybe the exchange should push you into cashing out. But this is starting to turn into padding every room.
We allow people to speculate on forex. We allow them to play carpenter. I don't see why this shouldn't extend to bitcoin.
My intent wasn't to argue that Coinbase should be illegal. That would be silly. My goal was to show that regardless of how we feel consumers should act, those links show how they do act.
Consumers take risks far beyond what's reasonable. It's up to Coinbase to protect them, and for them to inform consumers if they can't. But Coinbase is doing just the opposite: they're advertising that they're insured while handwaving the fact that they only insure 2% of their coins. And so on.
I guess the question is, why are they making such a big deal about their insurance, if it's both unnecessary and not useful? It sounds like they're trying to run the exchange as you say (with the vast majority of assets not insured) but trying to convince people that it's a safe place to store any amount ("we are insured").
The insurance covers the riskiest part of their operation: hot wallets. And it's meant to convince people that it's a safe place to exchange money. Seems rather straight-forward to me.
If it matters, then you're keeping too much in your hot wallet. The definition of "hot wallet" is "we keep a small enough assets here to cover day-to-day operations, but not so much that we're in trouble if they disappear." There's no other reason to have a hot wallet.
Insuring their hot wallet might let Coinbase increase its size, but it offers no extra protection for consumers. None whatsoever.
You're crazy. How easily you can lose the funds in a hot wallet is not part of the definition.
Also, I feel safer using a business that can't lose 3% of its assets in seconds, no matter if it would be stable either way. I'm surprised that you don't. (And yes, safety is the same thing as protection.)
I agree that this definition of a hot wallet is wacky. The definition of a hot wallet is easy: it's a wallet that's online and can be accessed by automated systems without human intervention. How you use it is entirely up to you, and nothing says you can't put 100% of your assets in a hot wallet, it's just a really bad idea.
However, I still think it's really odd to only insure the hot wallet and to call so much attention to the fact that it's insured. Imagine if your bank called attention to the fact that they were insured with large, high-rated insurers for any conceivable loss... and then they mention at the end that the insurance only covers what's in the tellers' drawers, not what's in the vault. Personally I'd run far, far away if I saw something like that.
The analogy is tricky, because in many banks the vault is effectively the hot wallet. Most of the money is in the form of debts or loans, and the vault only holds enough cash for normal withdrawals.
It's bad that they have no insurance on the cold storage, but that's something you can't really get anywhere as far as I know. I take it more as a risk of bitcoin in general.
A whopping third of people surveyed had more than 20-30% of their net worth in bitcoin. I wonder how many of those people are storing it themselves vs storing them with Coinbase or some other exchange?
I imagine most of these people saw a medium sized investment increase in value significantly, which made it a larger part of their net worth as opposed to putting 25% of their net worth into bitcoin.
That's a little irrelevant, because their hot storage wallet (their online coins) should be a small subset of their total coins. The whole point of a hot storage wallet is that if you lose them, it doesn't matter. So insuring those is pointless except as a marketing stunt to confuse people, which is why saying "We're insured" is bad faith.
This is a serious, professionally-run company backed by a lot of VCs we all recognize, plus banks and the NYSE.
Indeed, and if Coinbase loses all the coins, none of those people will step in to replace them, because nobody is going to put up hundreds of mullions or a billion dollars just to reimburse customers.
They have everything to gain by honesty and everything to lose by committing fraud, including prison (and that is the only reason they would become insolvent).
I disagree that technical problems can't make them insolvent. All it would take is an unhappy accident in their cold storage procedures.
But beyond tech problems, consider a thought experiment: If you're a gambling person, would you trade 20 years of your life in exchange for becoming a billionaire?
Banks are nice because if someone takes money, the money can be retrieved. Not the case for bitcoin. Someone is in charge of the cold storage procedures, so that person is in control over all the coins. If they decide to take all of them, there's nothing anyone can do about it except throw them into prison.
Obviously, bitcoin may be completely irrelevant by the time you're out of prison. In fact, emptying Coinbase's cold storage reserves might even cause that. But money does strange things to people, and this technology has changed the power dynamic. Some of those changes are good. But are you sure you want to trust a single person with your entire fortune? Worse, you're trusting multiple people where any single person can take your fortune. Even if they require several people to sign off, that's a very small number of people in complete control of your fate.
It probably sounds like I'm anti-Coinbase. I'm not. I'm pro-consumer. As soon as Coinbase insures all of their coins or offers true protection to consumers (by default!) then I'll be their biggest fan, because they'll have become an awesome bank.