This opinion editorial is by Michael Chapiro. Chapiro is a materials engineer and aerospace and defense executive, and founder of Caliber. One tweet claimed that there was a discrepancy of $1,600. However, they don’t provide a screenshot to confirm this. These problems continue to exist with screenshots showing price discrepancies ranging from $600-1200, which indicates spreads in excess of the maximum fees charged by major exchanges, even on their fee-boosted consumer interfaces. Link to embedded tweet. It quickly became clear that Prime Trust was the primary culprit due to the tight correlation between the deviations on Swan and Strike. Prime Trust facilitates bitcoin trading on a variety of platforms. The 700 other clients they self-report as being sh*tcoin casinos are not among them. Prime Trust mentions crypto.com, OKCoin and Bittrex as their flagship customers. However, not all of their self-reported 700 clients are bitcoin casinos. The logic is that Prime Trust has problems. Give me something that doesn’t meet the criteria of “not Prime Trust” to make me happy. Some people don’t learn from their mistakes and jump from one thing or the next without understanding the underlying principles. We call them sh*tcoiners. It might be prudent to understand why this is happening and what the underlying principles are. We call them sh*tcoiners. It’s like saying, “Well, FTX blew-up; guess I will leave my bitcoin on Coinbase now.” No, you fool! You fool! Monetary illiteracy — In the first few years, very few people understood the whole picture of Bitcoin. Moreover, many people didn’t understand the economic forces that made Bitcoin’s total absorbtion of 100% of the monetary premium inevitable. (note: I don’t mean complacency is warranted when I say “inevitable” but that it will always resurge even if it takes 10,000 year. Even if all but 6.15 Bitcoin are lost, the UTXO will not be reset. Fiat has an absorbent barrier, while Bitcoin doesn’t. 2. “Better than Bitcoin” really took off in 2017, as can be seen clearly in the bitcoin dominance charts. 3. The latest shitcoin wave’s catchphrase was “I like bitcoin, but also love my shitcoin.” The fourth and final epoch is “This is Bitcoin …”” — but it’s not bitcoin, even if your node says so. Stacks is probably the shitcoin platform that comes to mind. It’s the one that gives the “this bitcoin” impression. Many scammers are known to self-identify on Twitter by adding “.btc”, in the same way as mETH-heads. This is a scam that no serious person would fall for. No serious person will leave bitcoin on exchanges. If they don’t use multi-sig with at minimum two keys generated on different devices, no serious person will not generate their own entropy. It is actually tautological. So why would companies trust them merely because they are good actors? To be clear, despite my disagreements about certain methods, I see Strike and Swan, CashApp, River, and other companies as ethical companies run ethically by ethical people who all work to accelerate the great Bitcoin transition. I really enjoy a lot of the things all these companies do! As I write this, I am missing much of the second day at Pacific Bitcoin. This conference is being hosted by Swan Bitcoin. However, that is not enough for us to be satisfied. I prefer to find out what is happening under the hood and push for improvements. I won’t speculate on whether or not it might be “actually a good thing” for some KYC platforms to have problems. This could also affect non-KYC bitcoin purchases. It is worth noting that even though illiquidity may be a problem now, it can become a problem in the future if there is a hyperbolic (literal math term) crash to its upside. While growth in non-KYC infrastructure has been a major issue, it is not the focus of this article. However, many Bitcoiners will use the term “exchange” because the largest platforms for buying and selling bitcoins are exchanges. These entities are brokerages. In fact, brokerages are more common for retail customers to use. You almost always use a broker to trade stocks. These entities will process your orders and route them directly to the exchange for you. Although you may not be able to place an order to purchase a share of stock directly on the New York Stock Exchange (NYSE), you can place orders for bitcoin on a KYC or non-KYC exchange like Bisq. Sidenote: Why do you call every business that opens a brokerage account or bitcoin exchange an “institution?” That’s weird. It encourages fiat and implies that bitcoin is not suitable for all businesses. It is often more difficult to navigate exchanges, as they provide live data feeds of orders. People who just want to purchase or sell bitcoins usually don’t need this information. Although a brokerage may offer a more user-friendly interface, they cannot always do so with very thin margins. In large, more mature markets, the fees charged by brokers are razor thin, and even brokers such as Robinhood who came under fire for payment-for-order-flow, where they sell order info before they submit them, are not making that much money off their customers. This is on the order one basis point, which is one hundredth of percent. Even exchanges in bitcoin (and sh*tcoin) will offer a simplified interface that allows fees to jump from tens to two percent to 2-3%. One crucial feature is missing from any major exchange is bitcoin only. I find sh*tcoins viscerally unpalatable. I don’t like sh*tcoiners around me. I don’t like to hear about sh*tcoiners and sh*tcoins’ comings and goings (OK, maybe it is the goings when it is zero). I don’t want sh*tcoin ads on my screen when I need to purchase or spend bitcoin. I also don’t want sh*tcoin ads being emailed to me from Coinbase, Kraken, or any other email service. Friends and family will find it not only unpleasant but dangerous. Many Bitcoiners send their friends and family to bitcoin-only exchanges. They would struggle to match the liquidity depths and trading volumes of sh*tcoin platforms. So while bitcoin-only brokerages can be a good solution, they all have a fundamental flaw. Enter request-for-quotation (RFQ.) The process of requesting a quote (RFQ) is what you go through each time you buy bitcoin via one of these platforms. It also includes many other apps, some outside the U.S. You, the user, say that you want to purchase (or sell) a specific amount of bitcoin. The price is then given. You can accept it or not, but you cannot place an order. Instead, you exchange bitcoin for dollars at a fixed price. This is exchange, in that you are actually exchanging your dollars for bitcoin. This is probably why the incorrect use of the term “exchange”. The backend of this process is where you specify the amount you want to buy in bitcoin. An opaque set of OTC entities are granted the right to bid on your order. This is called RFQ and it’s a sham. The central limit order books (CLOB) is what mature markets use. It is what you get if you use any major exchanges. Limit orders are submitted. This is what “makes” the market, and not market orders that “take the markets”. What about you? Are you going to take it or will you refuse? (Since the order books aren’t too thin, there shouldn’t be much difference between limit at spot and market orders. Limit orders are a combination of buy and sold offers with a price. The spot price is the price at which someone is willing to sell bitcoin for the lowest price. No one will pay more than someone is willing to buy bitcoin. However, if a market order has been submitted, it receives one of the edges. If a limit results is a “negative gap”, it also gets an edge. Orders are filled sequentially according to price as the spot price changes. The spread is the bid-ask spread. If you look at spreads on real exchanges they are usually below ten basis points even though markets can be volatile. Link to embedded tweet. CLOB is more efficient than RFQ, which is why it’s used. CLOB is a free marketplace and RFQ will always cost more. This is why Strike worked properly with zero fees. However, Prime Trust charged a spread of 30 basis points. This spread was much higher than what many exchanges charge, even after adding their spreads. This difference in effective fees was ignored by most people because it seemed small. But the problem with RFQ is much deeper. CLOB allows every market participant to trade with any other market participant. Only a few entities can be on the counterparty side of all users through RFQ. This leads to the question: which side is the product and which side is customer? It is reminiscent to traditional infrastructure. Freedom is important. This means that you can participate in the market if bitcoin is being purchased at $17,000 and the spot price at $16,000. However, if Strike has a sell button or you call Swan to sell, you might get a $15,000 price. Arbitrage is not possible. Exchanges allow customers to match orders with other customers. In free markets, you could actually come in and do it, but then another person would come in at $16,800 and so on, until the huge gap disappeared. These OTCs were shitcoin speculators who lost their way in the FTX fallout. Prime Trust speculating on bitcoins, and now trying to recoup money? Is there a small group of OTCs that are still colluding on price to stop arbitrage? I don’t know, but I don’t care. The RFQ is what allows you to arbitrage the massive spread and illiquidity of a customer. This is all I need to know. You might wonder how someone can lose “their” Bitcoin because they have left it on an exchange. Was it an inside job or was there a vulnerability? None of these questions really matter. The problem is if you leave coins on an exchange. The details are noise. River and CashApp are doing fine for the moment, but is there anything fundamentally different? Well, somewhat. They are not opaque, with many OTC counterparties. Instead, they are transparent. You only get one counterparty, which is them, dear user. They are selling and buying directly from you, which is why CashApp reported close the billion dollar in quarterly revenue. That is the single point of failure I have ever seen. Do I trust CashApp or River more than Prime Trust? It is possible that their underlying infrastructure, which connects to every major exchange, is extremely robust. This means that they have as much liquidity worldwide as markets. They would be able to survive if bitcoin was at $1,000 or $1,000,000 next week. Many things are possible. But I don’t know the answer, nor do you. Trust can’t be completely eliminated when using services provided by a company, but transparency can help minimize trust. River’s terms and conditions state that they can buy or sell bitcoin at any price they choose. They could also offer an assurance of fair pricing. If global markets become ineligible, as it will happen when there is no buyer for bitcoin, then trading will cease. Link to embedded tweet. Any decent lawyer can provide guidance on how to make an assurance to the effect that the company makes “best, *reasonable* attempts” that are not burdensome or risky. While I don’t mean to be harsh on Bitcoin companies, the rest are far more serious and deserve no discussion. Prime Trust has 700 customers and has raised over $100 million from VCs. ZeroHash is a similar business model and has raised approximately the same capital. They also count Interactive Brokers among their customers. Coinbase announced a zero-fee trading service that charges a monthly fee and allows for debit card spending. This includes just-in time selling of bitcoin. You will find 2% spreads in the small print. Fidelity announced that they will add “bitcoin” trading at a 1% spread. NYDIG facilitates the purchase and sale of “bitcoin” within bank accounts using an RFQ model and an unverified spread. Since neither bank supports withdrawals or deposits, you must use quotation marks. I will be completely clear: these companies are lying to customers when charging 1% or even 2% spreads. These are fees. I don’t believe companies will come to me. I speak the truth, and as an American, am free to tell it. In fact, I believe that the Consumer Financial Protection Bureau or other agencies will come after the FTX disaster. As sh*tcoiners love to reply, we must not forget that regulation, like taxation is, is enforced at gunpoint. People who are not serious about their profession might be tempted to take a liking to the “regulatory forces” that they run into in a truly free market without any protection from the law. If it is short, you should go with the simplest thing possible. It is easier to cut yourself using a dull knife than with a sharp one. If the ethical companies aren’t aligned with the most performant, be aware that you might be using a dull knife by using the ethical company. It is best to have at least one knife on hand, and be able to change at will. This includes being able to use non-KYC channels. There isn’t much of a price drop right now. Bitcoin is all about efficiency. It is mathematically certain that any civilization’s first difficulty adjusted proof-of-work Blockchain is the only way to operate efficiently. This provides an information transfer system with thermodynamically proven minimal information losses. It is a coordination system (“money” and “currency” are terms used as metaphors. This allows people to misunderstand the terms while increasing their attack surface. Bitcoin is just Bitcoin. a=a cannot even be disputed. Contrary to others who use metaphors about energy, I understand this literal meaning. However, it is beyond the scope this article. Bitcoin values correctness and good work. Bitcoin values doing the right thing. Bitcoin punishes anyone who does the wrong thing. These statements are not meant to be moralizing or religious. They are simply technical statements. People forget that absolute truths exist in the fiat world. A ball is a surface that has the minimum surface required to enclose a volume. There is no room to entertain opinions or for honest businesses to explore other shapes with a smaller surface area. We are done. All of life, including all that is subjective, exists within the window of intractability that quickly emerges when considering more complex problems with many variables. The curse of dimensionity doesoming any possibility of ever having absolute certainty about what the future holds. We are not without the ability to reason, deduce and make intelligent predictions. Bitcoin will see if they agree. Update: This article was originally published on Friday, November 11, 2022. Shortly thereafter, spreads began to normalize on Swan and Strike. Strike posted a thread acknowledging the situation, and their commitment towards doing right by their users. Multiple tweets confirmed that Strike users were credited for “incontinence,” as Strike stated. However, it is not clear if credit amounts were equal or greater to the actual losses each user suffered. Strike also wrote a thread acknowledging the situation and their commitment to doing right by their users. This is a flawed comparison, as it would be more like a winter storm closing down one state that sees a price rise. Other OTC platforms didn’t see any of the same jumps in spreads. Swan Bitcoin has been silent on the matter sofar, except for mentioning when prices had normalized. Swan prides itself in providing white-glove support for high net worth individuals. It is hard to imagine someone who would buy a million dollars, but end up with three or four more bitcoin than they would have bought elsewhere. They will just be happy to accept this as normal. One Bitcoin OG said that it was their turn. They might smash buy a million dollars and end up with three to four less bitcoin than they would have had buying elsewhere. He also mentioned that he believes that if all of the OTC desks go under, then it would be impossible to fulfill orders. “Conflict-of-interest disclosure: Michael Chapiro, the CEO and founder @runCaliber. This is a guest post from Michael Chapiro. Opinions expressed by the authors are their own and may not reflect those of BTC Inc., Bitcoin Magazine, or any other publication.