Bitcoin was originally conceived as a decentralized form of currency and a way to reduce the need for trust in transactions. However, as Haseeb Qureshi eloquently said, “The key innovation of cryptocurrencies is that they decentralize trust. They do not eliminate it.” 

Trust extends well past the coin itself, and the young cryptocurrency environment is fraught with many challenges that complicate the issue.  Foremost amongst these thorny issues is the role that exchanges play in the process. For those who are actively buying, selling, and speculating in cryptocurrency, trust is paramount. However, high-profile hacks and frequent exchange outages make this a difficult task, so much so that some of the biggest names in crypto face a huge credibility problem.

Coinbase, one of the largest wallet and exchange platforms for cryptocurrency, currently finds itself in the eye of storm. Recent events combined with the relative infancy of this new trading paradigm have quickly soured sentiment amongst many bitcoin loyalists. 

Although a popular destination for newer entrants and investors, the more tightly knit community of active traders is spurning the brand after several notable debacles. Apart from a recently opened investigation into insider trading, many loyal bitcoiners believe the exchange has been involved in outright manipulation and fraud alongside a host of other accusations of wrongdoing.

Transition from Pipeline to Impediment

Coinbase finds itself at the center of a raging debate despite popularity that has seen over 10 million users sign up for the platform, sometimes signing up more than 100,000 new entrants in a single day. Although it has strong name and brand recognition thanks to its early entrance and ability to accept dollars, it now faces an onslaught of criticism over its handling of recent events.

Despite its ease of use and access, Coinbase has been decried for apparently gating outflows from its platform. Its wallet solution is used by millions, but sending the supported coins from one location to another is routinely blasted for its sluggishness, often taking hours to move coins from a Coinbase wallet to another external wallet service. This alone has irked many users, who have come to expect more efficiency and dependability from the companies storing and handling their cryptocurrencies.

“Coinbase will always keep its status as one of the first and easiest platforms to buy and sell bitcoins, but it acts in a similar way to a bank. Bitcoin’s nature by design was to be its own bank, therefore providing security and privacy baked into the core of its DNA," noted Daria Arefieva, CEO and founder at CryptoFriends. "There is a place for Coinbase, as with any other centralized exchanges, but until standards and regulatory frameworks are put into place, it's best to keep control of your own coins."

More problematic, though, are the frequent issues associated with its sister exchange platform GDAX. During periods of high volatility, which are not uncommon in bitcoin and its peers, frequent “outages” highlight the relative instability of the platform. A prominent user complaint has been the downtime the exchange suffers during major declines in cryptocurrency prices listed on its platform, leading to accusations that the exchange is intentionally halting traffic to prevent a steeper price deterioration. While the company has repeatedly blamed the outages on heavy traffic, it highlights a poorly designed infrastructure that is largely incapable of properly executing during periods of high volatility and heavy order flow. 

Execution Problems Abound

While part of this exchange “breaking” problem could be pinned on low liquidity, it is also indicative of an inefficient order book structure which sometimes sees bidders all disappear. The order book issue was most prominently displayed during the recent introduction of Bitcoin Cash trading on the platform. 

Even starting from the hard fork last summer, Coinbase has been forced to contend with the issue of account holders who held bitcoin before the fork, entitling them to an equivalent amount of Bitcoin Cash after the event. Until the unveiling of Bitcoin Cash trading in December, Coinbase members were unable to move the cryptocurrency out of their wallets until the activity was recently supported by the platform. 

After a surprise introduction of the product just days following the introduction of CME Group’s bitcoin futures product, a high level of volatility found Coinbase users locked out of the platform, unable to trade any of the exchange’s products. 

Before beginning market-making activities in Bitcoin Cash, GDAX kept BCH trading in “post-only” mode for an hour to allow an order book to fill up, helping the exchange fulfill its role in matching orders. However, instead of limiting volatility by matching orders beforehand, it actually generated more after the fact, with demand greatly outstripping supply. This briefly led to prices spiking as high as $9,500 per coin and exceeding comparable prices on other exchanges by a wide margin. Complicating matters further was that the exchange breakdown temporarily impacted all charting.

This high-profile debacle also highlighted the other main critique of the exchange, namely that its unregulated nature paves the way for behaviors that are outlawed by major financial exchanges outside the crypto space. 

Already, Coinbase is investigating claims that insider trading occurred in the lead up to the rollout of Bitcoin Cash. This meant that certain employees or contractors privy to the launch announcement likely front-ran the market by picking up Bitcoin Cash on other exchanges to turn around and sell on GDAX despite Coinbase’s pledge to prevent this very type of sordid behavior. 

Ultimately, these individuals attempted to benefit from the price spike that was expected to accompany the addition of BCH on one of the largest exchange platforms, opening the product to a much wider audience thanks to Coinbase’s substantial number of users. However, this is just the tip of the iceberg when it comes to suspicious and malicious conduct. Other users have also noted the prevalence of strategies like “painting the tape” and spoofing as further proof that the exchange is permitting fraudulent behavior to proliferate on its network.

Lining Up With the Old Cartel

Apart from the infrastructure issues and mistrust being bred by the permissiveness of certain behaviors which have not outright been condoned by Coinbase, its close relationship to Wall Street has also been a source of contention for bitcoin purists. Some of the funding for this platform has been sourced from banking institutions like BBVA, adding to insinuations that the exchange may not be free from the very institutions bitcoin purists are trying to avoid vis-à-vis decentralized currency instruments. 

Even amongst the industry’s most respected infrastructure, users will have to reconcile their feelings if they want to continue participating in the near future. However, for the purists, the writing is on the wall, and they are likely to vote with their feet, moving towards other exchange platforms with better infrastructure, liquidity, and operational support. 

Furthermore, Coinbase has prominently displayed the need for a more equitable architecture that eschews the institutional stranglehold at the center of the existing financial market framework. Without significant changes or more transparency, bitcoiners are likely to flee in droves. (See also: Bitcoin Government Regulations Around the World.)

Investing in cryptocurrencies and other Initial Coin Offerings (“ICOs”) is highly risky and speculative, and this article is not a recommendation by Investopedia or the writer to invest in cryptocurrencies or other ICOs. Since each individual's situation is unique, a qualified professional should always be consulted before making any financial decisions. Investopedia makes no representations or warranties as to the accuracy or timeliness of the information contained herein.

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