A Little Background
In August 2017, bitcoin cash (BCH) was born as a fork of the bitcoin (BTC) blockchain. While BTC has a 1 megabyte block size limit, BCH has an 8 megabyte block size limit. The politics of the matter are complex, but generally speaking, arguments about the digital coins center on the issue of scalability (BCH) versus purists (BTC).
By analogy, think of the centuries-long debate about the Constitution as a living document versus original intent. There is ongoing discussion in the cryptocurrency community about how to contend with long block confirmation times and transaction capacity.
When BCH forked, everyone who owned bitcoin suddenly had an equivalent amount of bitcoin cash. But, many exchanges did not offer support for BCH, so it was difficult for cryptocurrency holders to trade their digital assets. In fact, Coinbase – which is part of the same overall organization as GDAX – initially announced that it would not support BCH.
As one of the most popular exchanges for cryptocurrency traders, Coinbase recently reached the top of the charts on Apple's App Store. So, obviously, when the company changed its tune to support BCH, this was a big deal – for both cryptocurrency markets and politics.
The BCH Launch
At 4:00 p.m. PT on December 19, 2017, GDAX opened three BCH order books in "post-only mode," allowing customers to place open orders and establish liquidity in the markets.
Just over an hour later, at 5:20 p.m. PT, GDAX enabled trading on the BCH/USD book (BCH/EUR and BCH/BTC remained in post-only mode). But, only two minutes later, the exchange paused BCH/USD trading "due to significant volatility."
"Once paused, we cancelled resting orders and cleared all BCH order books," explained GDAX. "We made this decision to ensure a fair and orderly market."
At 8:15 p.m. PT, Coinbase announced, "Bitcoin Cash sends and receives are functional. Buys and sells on the Coinbase website and in our mobile apps will be available to all customers once there is sufficient liquidity on GDAX. We anticipate that this will happen tomorrow."
Accordingly, per the GDAX blog, BCH order books were scheduled to reopen this morning, December 20, 2017, at 9:00 a.m. PT.
Allegations Of Insider Trading
In the lead up to Coinbase announcing support for BCH, it appears that the price of BCH increased substantially on other exchanges. Take, for instance, this chart from Bithumb, one of the largest BCH exchanges by volume (16.48 percent of global volume at the time of writing). The data covers December 14, 2017, until December 20, 2017.
Shortly before midday on December 18, 2017, BCH/KRW began trading higher on Bithumb. The uptick in volume that day is certainly worth noticing as an aberration. Obviously, it's difficult to parse whether this is normal volatility in the South Korean BCH market or traders acting on leaked information. It certainly raises suspicions.
Here's another example. At the time of writing, Bitfinex accounts for 18.36 percent of global BCH trading volume. It offers three trading pairs: BCH/USD, BCH/BTC, and BCH/ETH. Below, I'm only presenting the BCH/USD chart from December 14, 2017, until December 20, 2017.
Note the increased volume on December 18, 2017, and the price increase in the BCH/USD trading pair (again, ahead of the Coinbase/GDAX announcement). It's interesting, to say the least.
On Twitter, cryptocurrency personalities chimed in about the strange activity. An account for Whalepool, which describes itself as a community of day traders focused mainly on bitcoin and other cryptocurrencies, commented, "Very strange accumulation and pump on Bcash in the hours leading up to the @Coinbase BCH add. If I didn't know better, I'd think that was potential insider trading activity. @GDAX 'ed? #bitcoin #bcash #bch."
Whalepool later added, "The problem is not that @coinbase employees did insider trading. The problem is that @brian_armstrong decided to launch Bitcoin Cash secretly and abruptly giving their employees a huge incentive to do so."
While it's unclear whether any Coinbase or GDAX employees actually acted on this information, the company explained via Twitter, "Coinbase maintains a strict trading policy and internal guidelines for employees. Coinbase employees have been prohibited from trading in Bitcoin Cash for several weeks."
Additionally, Coinbase CEO Brian Armstrong posted on Medium about the employee trading policy:
"We've had a trading policy in place for some time at Coinbase. The policy prohibits employees and contractors from trading on 'material non-public information', such as when a new asset will be added to our platform. In addition to trading restrictions, it prohibits communication of material non-public information outside the company. This includes to friends and family."
He added, "Our launch of Bitcoin Cash today is no exception to this. All Coinbase employees and contractors were explicitly prohibited from trading Bitcoin Cash and from disclosing our launch plans over a month ago."
Armstrong further explains that these prohibitions were communicated through "multiple channels," including emails and Q&A sessions. Because of the curious price increase for BCH ahead of Coinbase's announced support, the company has determined to undertake an investigation into the matter.
However, because of the notorious lack of KYC protocols on some exchanges and the possibility of hiding trades through other accounts or cryptocurrencies, this investigation may prove difficult.