The first half of 2014 has been a wild roller-coaster ride for the Bitcoin industry. While in 2013 the price of Bitcoin soared until it reached a high of US$1,200 in December, 2014 brought Bitcoin back to Earth as it was wracked by developments like the collapse of popular Bitcoin exchange MTGox.

Antony Lewis, Business Developer at Itbit

Antony Lewis, Business Developer at Itbit

What lies in store for Bitcoin in the rest of 2014 and beyond, particularly with regard to the exchanges that translate Bitcoin to and from fiat currency? Here, in an exclusive interview with e27, Antony Lewis shares his thoughts and ideas about the future of Bitcoin exchanges.

Formerly a Forex trader at Barclays Bank and a systems builder at Credit Suisse, Lewis is currently doing Business Development at Itbit, a Singapore-based Bitcoin trading platform. He will be speaking at Echelon 2014’s Bitcoin panel.

What do you think are the factors precipitating MTGox’s fall, and how can exchanges avoid its fate?
To answer this question, we must look at the history of MTGox. It started off as a trading site for the card game Magic: The Gathering, and only went into Bitcoins later. Being started and maintained by enthusiasts, MTGox was okay when the price of Bitcoin was measured in cents. As the price of Bitcoin climbed to hundreds of dollars, they began managing millions in customers’ funds. However, their processes were wholly inadequate for this amount of money, and in addition they were slow to adopt more professional people and processes. As a result, the whole thing came to a head, and MTGox finally succumbed.

Post-MTGox, what changes do you see in the Bitcoin exchange scene?
In my opinion, the collapse of MTGox is a good thing for the Bitcoin scene, as it takes Bitcoin from enthusiasts to professionals. Increasingly, we are seeing accredited finance professionals entering the Bitcoin industry, bringing with them best practices from the finance industry. As an example, we at Itbit aim to bring credibility, robustness and professionalism to the Bitcoin industry by introducing established processes from the finance industry that professional clients are comfortable with. These include background and know-your-customer checks, as well as anti-money laundering and other industry standard practices.

Why are Bitcoin prices so different among different exchanges, unlike Forex?
One misconception that people have about Forex is that currencies have standard agreed-upon, albeit fluctuating, exchange rates. Unlike equities, Forex is not traded on a single, central exchange. What people consider the Forex price, as quoted on finance websites or Forex exchanges, is actually the blended average of the prices in various trading systems. That said, there is a greater difference in prices for Bitcoin among different exchanges as compared with most Forex currency pairs. This is because of the relative difficulty in doing arbitrage with Bitcoin as compared to Forex.

Put simply, arbitrage is the act of buying something at a lower price, and then selling it immediately at a higher price. Currently, the difficulty, also known as friction, of moving money between Bitcoin exchanges is rather high. For one, some Bitcoin exchanges are located in countries with strict laws on cross-border money transfer. Other Bitcoin exchanges may utilise fund transfer mechanisms that are either slow or have high transaction fees, such as wire transfers. All this contributes to the difficulty in arbitraging Bitcoin, with the result that prices across exchanges are not equalised.

What can Bitcoin users do to safeguard their money in exchanges?
There are few to no specific pieces of legislation regulating Bitcoin, so it is very easy for people to get scammed. We recommend both users and merchants do their due diligence on their Bitcoin partners, so they are not entrusting their money to the next MTGox. The versatility of Bitcoin means that users can store their money either by themselves in their computers, or entrust it to an exchange or bank.

The question Bitcoin users need to ask is which method they prefer. If they are okay with storing their money in an exchange, they should look at the compliance policy of the exchange, as well as whether it is subjected to frequent, extensive audits. If users would rather hold the Bitcoins themselves in their computers, however, they would need to keep their antivirus and antimalware software updated, running real-time scans so that they can detect any intrusion into their systems.

Like what you hear? Find out more when you attend Echelon 2014’s Bitcoin panel! Echelon 2014 is a two-day Startup, Technology and Business event where Asia’s most innovative startups, early-stage investors, tech industry leaders and tech media gather to celebrate and build Asia’s growing tech industry, as well as make valuable relationships. 

Enjoy 10 per cent off your Echelon 2014 tickets because you read this article! Use the code “e27Friend.