Which Altcoin Exchange will Flop?
Providing security against bitcoin hacks is one thing - what about when you list 150 different coins for trading?
The Story of Cryptsy
Lucky7Coin was an altcoin offered on the exchange Cryptsy. Like most of the 150+ coins that were available for trade, Lucky7 offered nothing unique that would justify its existence, and was run by anonymous developers. It was integrated on Cryptsy because two demographics would buy and sell this coin and generate fees for the exchange: 1) the pumper/dumpers who, as if according to template, would built up a BS story on bitcointalk drumming up support and 2) the suckers who would fall for it.
It is a familiar story to which anyone who has dealt with these exchanges can attest; periodic email from Bittrex, Cryptsy or Poloniex notifying of discontinued support from 10, 20 even 50 different coins, each one representing a very similar pattern of pump, dump, and loss, often from those that cannot afford such losses. Far from working to limit this phenomenon, the exchanges themselves enable scam coins that prey on their clientele, with Bittrex for example going so far as to sponsor them for a fee. They provide themselves moral cover using the libertarian argument - resonating well in a market of libertarians - that the market demands choice of altcoins and they are only giving the market what they want. It is necessary for the market itself to be vigilant against fraud. Of dubious ethics at best.
The difference with Lucky7Coin was that the coin client contained a so-called IRC backdoor that infected Cryptsy's systems with a Trojan horse, thereby gaining access to their "cold wallets" and proceeding to steal $5.7 million of customer litecoin and bitcoin. This occurred in 2014 but the exchange continued to run as a ponzi for the next year and a half, operating as a fractional reserve, paying out withdrawals with other customers funds until, as is always the case with ponzis, changing market conditions led to a run on funds and Cryptsy collapsed. To add insult to injury, Paul Vernon and his wife made an all-cash purchase of a Florida mansion, most likely with Cryptsy funds, for 1.4 million in March of 2015, well after his customer wallets had been looted, and he is now in China opening another exchange.
Not a question of if but when (Or, who comes first, Poloniex or Bittrex)
So what makes Cryptsy different than Poloniex or Bittrex, the two biggest altcoin exchanges now operating?
Not a whole lot on the face of it. The fact of the matter is, it would make sense that the security resource required for running a safe exchange increases in tandem with the number of coins offered. Large exchanges such as coinbase invest heavily in securing just bitcoin (and now Ethereum). Not only don't these altcoin exchanges have the finances or human resources to invest nearly as much, they offer 100s more coins, each one potentially representing a unique Lucky7Coin challenge. All it takes is one security slip and that's the ballgame. For a discussion on this check out episode 39 of bitcoin uncensored, about 1:14 in.
So who is next? Poloniex is the obvious target as they have a much larger exchange by volume. However, Bittrex seems to have an even less exacting criteria for coins to join - and they fail the "eye-test" (they were previously second in dodginess to Cryptsy, but have now taken the crown) so perhaps they are an easier target than the comparatively lucrative Poloniex.
Neither offers proof of reserves, so for all we know these exchanges have been hacked a year and a half ago and are currently in ponzi beast mode. And while I don't mean to spread FUD, I would simply like to emphatically make the argument that anyone holding funds in one of these exchanges entrust their savings to operators with dubious security standards, dubious ethics (at least based on their willingness to list obvious scamcoins), no proof of funds, and in an extremely challenging security environment rife with smart bad guys.
While holding funds at these exchanges is both easy and convenient, we highly recommend researching alternative wallets to hold your savings. If you must trade at these exchanges (and for those interested in the top non-bitcoin cryptos like ethereum, litecoin and the like, there are better exchanges to frequent) transfer coin in to make your trades, and then transfer your new coins out immediately. For altcoin daytraders, hold your funds elsewhere overnight and, as always, trade only with what you can afford losing.
Check out our guide to the best bitcoin exchanges in the market for alternatives.
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