What is a maker-taker market?

After looking into how a bitcoin wallet works, I felt that it was time to take the exchanges apart. But I kept coming up against the phrase “maker-taker trading”. You probably know what it is, but I didn’t, so I hit the search bar and this is what I found:

Back when I worked in the financial markets, exchanges were places where traders bought at one price and sold at another and hopefully made money on the difference. The traders paid a fee for the privilege, but customer orders (end buyers such as private individuals or investment funds) didn’t, and jumped to the head of the queue.

fx trading

Things have changed. The advent of high frequency trading and the proliferation of illiquid securities and assets led to the need to increase trading liquidity in certain markets.

“Maker taker” trading was designed to incentivize market makers (those who post possible trades) to provide liquidity, so that market takers (those that accept those trades) would have an assurance that their orders would be met. Market makers are those who are willing to buy or sell at a certain price. They publish their willingness. Market takers are those who actively want to buy or sell. They go looking for a suitable published proposed trade, and accept it. Market makers provide the gasoline for the market. Market takers step on the pedal so that the gasoline is used up.

Not all bitcoin exchanges have adopted this trading system, but it seems that most of the large ones have, including Kraken, Coinbase, Coinfloor, and itBit. In fact, itBit charges no maker fees at all, and Gemini, Coincheck and BTCC offer to pay (= a net rebate) dealers for posting bids and offers.

In the securities industry, maker-taker trading is coming under fire for allegedly distorting market pricing, and for possibly creating conflicts of interest. Most stock exchanges require brokers to route their clients’ trades to the best available price. Under the maker-taker system, market “makers” are more likely to take their bids and offers to the exchange that gives the best rebate, rather than the best price. Plus, effectively “paying” people to trade goes against the free market philosophy underpinning most official trading forums. And the model can lead to different settling prices than on a fee-based exchange.

Yet it is unlikely that this unease will spill over into bitcoin exchanges just yet. At the moment, liquidity seems to be a priority, and the maker-taker system encourages liquidity by incentivizing the posting of trades. As liquidity increases, it’s likely that the maker-taker model will come under more scrutiny. But by then it’s likely that trading technology will have advanced to the point that exchanges and traders need to operate under different rules anyway.

What can I use bitcoins for?

So, you know how to get bitcoins. But why? What can I use them for? Payments, obviously. But let’s go into a bit more detail:


One of the most obvious reason is to send money across borders in a low-cost, fast and efficient manner. It’s often called “frictionless” because it doesn’t encounter barriers along the way, like a traditional money transfer which has to go through banks and clearing houses. True, you have to get the bitcoins to start with, that is a type of friction, but this article starts from the assumption that you already have them. Banks often charge between 4 and 10% for cross-border transactions, usually with a fixed component which can push the percentage even higher if the transfer is small. Using a money transfer business such as Western Union or MoneyGram would be more expensive, especially if the recipient or the sender doesn’t have a bank account. Furthermore, international transfers usually take a few days. Bitcoin transfers incur no or very low fees, irrespective of the amount, and can be in the receiver’s bitcoin wallet within minutes.

Total number of daily transactions over past two years, via blockchain.info
Total number of daily transactions over past two years, via blockchain.info

Buying things

Bitcoins can also be used to buy things. The number of businesses accepting bitcoin grew over 30% in 2015, having more than doubled in 2014. That year, Microsoft added bitcoin as a payment method for US-based customers. Dell also started accepting bitcoins last year, and in January 2014 Overstock became the first general retailer to accept the virtual currency from over 100 countries. In Europe, leading ecommerce company Showroomprive started accepting bitcoin in September of last year. Coinmap shows most of the online and offline stores that accept payment in bitcoin. Paying in bitcoin even in offline stores is so easy: the check-out tills usually have a QR code that you can scan, which makes the payment a question of just a few taps.


And if what you really want to buy with bitcoin is only available at an online store that doesn’t accept bitcoin, there are always bitcoin gift cards. Purse.io lets you exchange your bitcoins for others’ unwanted Amazon gift cards (apparently there is such a thing). Gyft lets you buy gift cards for a wide range of stores with bitcoin. Or, Xapo and Coinbase both have debit cards linked to a bitcoin wallet. You can pay with your “card”, which automatically deducts and converts the necessary amount from your stock of bitcoins.


The low friction of bitcoin, and its divisibility, make it ideal for microtransactions (within sidechains or similar, to minimize transaction costs). Changetip and other platforms make it easy to leave small amounts to journalists, bloggers, commenters, artists, etc. This democratic form of monetization of content could well issue in a new era of creative business models.

by Jan Vašek
by Jan Vašek


Most of the bitcoins that have been mined, however, are held for investment. The price is volatile, but has been as high as just over $1000, and just a few years ago was as low as $10. At the time of writing, the market price is approximately $400. Bitcoin enthusiasts see use and acceptance increasing over the next few years as the advantages become more apparent, as more apps make use even easier and as regulation removes uncertainty.

As an investment, bitcoin carries some advantages. It is useful (you can use it for efficient and low-cost payments), and it has a limited supply. Thus, if demand goes up (because of its usefulness) and the supply remains controlled, the price of bitcoin relative to other currencies should also go up. And, your bitcoin investment is in your hands, especially if you keep it in an offline wallet. No political authority can confiscate it, no firm can wipe it off its books, and no hacker can reach it. No central bank can mess with its value by printing more, and no government can use a devaluation to make it worth less.

Bitcoin as an investment does come with significant risks. Its price is volatile, and it is still illiquid. Changes to the protocol, law and even technology can have a material effect on its value, and may even make it unprofitable as a global payments mechanism, so I am not endorsing it as an investment vehicle.


If you have nerves of steel, you can try to buy and sell bitcoin, making a profit (or not) on the difference. Coinbase estimates that 80% of its bitcoin movements are from speculators, who trade bitcoin as a commodity in search of profit. A long list of exchanges can handle bitcoin trading – some of the largest are Bitfinex, Kraken, and itBit. (Note: some estimates claim that 90% of bitcoin day traders lose money, so this is not an encouragement to take it up.)

Sending money abroad, buying things, micropayments, investment or speculation – which is the “killer app” of bitcoin, which will push it into the mainstream? There are advantages and obstacles to each use case – in which will the advantages win? Perhaps in all of them, as activity ebbs and flows, solutions are found and new business models emerge. Time will tell.

Is Bitcoin anonymous?

Much hype has been frothed about the anonymity of Bitcoin, and how that makes it ideal for illegal activities. (Let’s not even go into the illegal activities that the ever-so-anonymous cash is used for.) So it’s worth setting the record straight: Bitcoin is not anonymous. But it can be.

First, rather than anonymous, Bitcoin is pseudonymous. All your bitcoin transactions are linked to your bitcoin address (or addresses). In the Bitcoin transaction sphere, you are known by that address, no-one else can use it. It is your “pseudonym”. Totally anonymous transactions would have no attached pseudonym.

True, figuring out that that address belongs to you, specifically, is difficult. Difficult, but not impossible. How would one go about doing it? By combing through all other transactions to and from that address and looking for clues such as delivery destinations, transfers to private sidechains, links to other addresses that have been identified, donation requests in forums… Or, investigators could look for transactions that combine two Bitcoin addresses into one input. For instance, if you had 3 bitcoins in one address, 2 in another and wanted to buy something that cost 5, you’d combine your two bitcoin addresses into one transaction. If the identity behind one of the input addresses is known, then the other one is, too.

an example of bitcoin activity tracking, from An Analysis of Anonymity in the Bitcoin System
an example of bitcoin activity tracking, from An Analysis of Anonymity in the Bitcoin System

Another technique used for figuring out bitcoin ownership is patterns in activity. Parallels can be drawn between transaction activity and Twitter activity, for example. Periodic repeat purchases, even from different addresses, can be a giveaway.

And most of us get our first bitcoins on an exchange. In general, exchanges are regulated and have to comply with the local Know Your Client laws, which generally involve verifying your identity with authorised documents such as passports or ID cards. That address is linked to your real self (in theory), as are other addresses that that address transfers to. Even simple wallets (not related to exchanges) that don’t ask for your identity need to keep records of all transactions associated with your bitcoin address, in order to know how many bitcoins are rightfully yours. Records are hackable, and can be subpoenaed by the authorities.

The anonymity of Bitcoin has been one of the main barriers to banks’ willingness to work with Bitcoin-related businesses. Chainalysis (which recently signed a deal with British bank Barclays) intentionally combs through transaction data to de-anonymize the network and to provide banks with a compliance service. While this will no doubt bother many Bitcoin users who value the philosophical benefits of the freedom that anonymity brings, Chainalysis’ goal is to get banks more comfortable with working with Bitcoin users, which will help the digital currency’s spread and influence.

However, with some extra effort, Bitcoin can be anonymous. It is possible to buy bitcoins anonymously using cash and local exchangers. Bitcoin users can employ a different address for each transaction to make ownership harder to trace. The heavily encrypted network Tor makes it much harder to track transactions (among other features, IPs are not recorded), but even just using Tor can alert authorities that you are hiding something.

These aren’t foolproof anonymity methods, but they do make it harder to follow a bitcoin through the network. Mixing services, which shuffle your bitcoins with those of other users, do provide a very high level of anonymity, but are much riskier than traditional wallets in that they are unregulated and often unaccountable. If Bitcoin anonymity is important to you, your best bet would be to use a mixing service and withdraw your funds immediately, and to use a different address for each transaction. Of course, the best way to avoid getting caught for illegal activity is to simply not do it.

(For more on how Bitcoin works, see Bitcoin Basics.)

How can I get bitcoins?

Once you have your wallet set up, you can buy bitcoins online (in some cases directly through the wallet provider) or offline, you can earn them, or you can create them by becoming a miner.

Online bitcoin exchanges will sell you bitcoins for any of a wide range of fiat currencies (dollars, euros, yuan, yen, etc.). Kraken, Bitfinex and Bitstamp are just some of the main ones, and several offer wallet services in which to store the bitcoins you buy.

In many cities, you can buy bitcoins physically. LocalBitcoins, for instance, will post bitcoin offers, and it’s up to you to arrange to physically meet the seller to exchange cash for a bitcoin transfer. Some cities have regular gathering spots where you can just show up and offer cash in exchange for digital currency. You hand your cash to the seller, and he or she transfers bitcoin to your electronic wallet with a few taps on his or her computer or phone. More and more cities have bitcoin ATMs, where you feed your cash into the machine and then hold your bitcoin address (in QR code form) in front of the scanner so that it knows where to transfer the equivalent amount of bitcoins to.

You can also earn bitcoins, just as you can earn any other type of currency, by working for them. Several companies prefer to pay their employees in bitcoins, especially if that’s the currency that the business operates in. And the subreddit Jobs4Bitcoin posts one-off tasks that will be paid in bitcoins.

gold mining

The most complicated way of earning bitcoins is by becoming a miner. You’ll need a very powerful processor (the current standard is ASICS) onto which you download the Bitcoin program. You then compete against other miners to solve a mathematical puzzle that at the same time validates a block of transactions and adds it onto the blockchain. If you get the right answer first (which depends mainly on guesses and very fast computing), you earn 25 bitcoins (this amount halves every 4 years, in approximately 2017 it will go down to 12.5).

These methods of acquisition may remind you of another currency from hundreds of years ago: gold. Back then you could get gold by mining it, by earning it or by buying it. Like gold, bitcoins are backed by no-one. Like gold, bitcoins are not in unlimited supply. I think that we can all agree that bitcoins are easier to carry.

(For more on how Bitcoin works, see Bitcoin Basics.)

Liquid sidechains and Bitcoin development

The Blockstream guys – the ones working on a commercial application of the Lightning Network I told you about the other day – have announced the upcoming launch of Liquid, the first commercial application of the sidechain concept. This is exciting, as sidechains have been talked about for a while now, but have yet to be put to practical use. And the use of Liquid is indeed practical: it will help bitcoin exchanges improve their service and reduce their risk, with faster settlement and lower costs. Before we go into why this is important, let’s take a look at the background.

by Andrew Welsh for Unsplash
by Andrew Welsh for Unsplash

First, what are sidechains?

Sidechains are effectively private blockchains, linked to the public Bitcoin system. They use the transmission and custodian power of Bitcoin – information stored in a tamper-proof block – while enjoying greater speed and lower cost. The idea is that an amount of bitcoin could enter a sidechain, the participants can trade that bitcoin amongst themselves as many times as necessary before sending the new distribution back to the Bitcoin blockchain for settlement. The transactions on the sidechain are governed by the sidechain’s rules, which can be anything the administrators want them to be. The only stipulation is that the same amount of bitcoin that goes in needs to come out, although obviously the ownership of those bitcoins will be different.

Second, what are bitcoin exchanges?

A bitcoin exchange will sell you bitcoin in exchange for a fiat currency, such as dollars or euros or whatever you use on a day-to-day basis. They will also buy your bitcoins in exchange for a fiat currency. One of the main frustrations of the exchanges has been the latency of bitcoin transactions, that is, the time they take to settle. It’s much faster than traditional transactions, but it is still not instantaneous, and an exchange’s business needs to be instantaneous.

A brief review of the technology: once a bitcoin transaction is validated by the network, it is included in a block of other transactions, processed by the miners, and added to the blockchain. A block is processed and added to the chain every 10 minutes or so. This is actually an artificial amount of time, chosen to limit the amount of new bitcoin entering the system. Every time a block is processed and added to the chain, the miner who does so gets rewarded with new bitcoins. Processing each block involves computing a cryptographic hash, which is set at a level of difficulty that takes about 10 minutes to calculate. That was deemed enough time to keep the system efficient while restricting the entry of new bitcoins to a trickle instead of a flood.

Each block contains a coded reference to the previous block. If the previous block is tampered with, that coded reference is no longer valid, which makes the whole block invalid. So, to tamper with a block, you would also have to change the coded reference in the block that comes next. That is very difficult to do. And if there are not just one but six blocks that come after, it’s virtually impossible, as you would have to re-configure and validate all the posterior blocks, which would take an unimaginable amount of computing power. So, the standard is that, to be absolutely sure of a transaction’s validity, you should wait until it has 6 blocks on top of it. Given that each block takes about 10 minutes to process, that is a settlement time of about 1 hour.

Because exchange customers don’t want to wait an hour for confirmation of their trade, the exchanges need to keep on hand a pretty big balance of bitcoin and fiat currencies to cover the trade until it is technically secure. Part of the cost of the necessary capital requirement, as well as the risk the exchanges incur in trusting that the trade will settle correctly, can be seen in the exchanges’ commissions and/or spreads. If the capital requirement is reduced, trades can become cheaper.


image via Blockstream

How will Liquid help?

Each participant of Liquid will maintain a node, that is, it will be responsible for verifying the cryptography on the trades on its exchange. Because no new bitcoins will be entering the system, the artificial 10 minute lag time is unnecessary. Transactions will still be grouped into blocks, which will still be added onto previous blocks, but it will happen almost instantaneously. This way, bitcoins and other currencies can flow between accounts of the participating exchanges much faster than at present, which will reduce the capital requirements and the operating costs. Several of the big exchanges – Bitfinex, BTCC, Kraken, Unocoin, and Xapo – have already signed up, and it’s likely that more will follow.

Why is this important?

This development looks like it will remove some of the Bitcoin inefficiencies (speed, energy cost) while maintaining the advantages (decentralization, security), and should enhance the attractiveness and liquidity of the digital currency. That will have ripple effects throughout the sector and beyond, as the pool of participants and users grows.

Also important is the innovation that this is likely to encourage. Several of the founders of Blockstream authored, along with other collaborators, a white paper back in October 2014, discussing the sidechain concept and its potential uses. The paper is open-source, and the authors encourage other developers to experiment with the idea. The development of sidechains allows Bitcoin experimentation, such as the inclusion of new features, the use case for new assets, even new cryptography. Previously, this kind of experimenting had to be done with altcoins, which are Bitcoin alternatives, separate currencies using the same or a similar technology. A system that only allows experimentation through competition is weaker than one that encourages it “in house”.

Sidechain implementation will require a soft fork (a change in the Bitcoin protocol which will not affect trades using the old protocol), which takes time. This is probably why the launch of Liquid was announced yesterday, but will not be implemented until the first quarter of 2016. Apparently a white paper is forthcoming which will explain in detail how Liquid works. This is likely to breed a flurry of other use cases, which will further increase Bitcoin’s usefulness and applicability. These are interesting times, with change happening fast. And with Liquid, it could be time to pour another cup.

Gemini exchange and Bitcoin mainstream

The struggle and the patience paid off. This morning the Gemini bitcoin exchange opens for business, after a year-long process of getting regulatory approval from the New York State Department of Financial Services (NYSDFS). This authorisation is pretty big, much broader than the infamous BitLicense that the state requires of bitcoin operators. And Gemini is only the second exchange to get this approval. All of which is interesting, but not as interesting as the big picture behind it: this is the biggest step so far that Bitcoin has had towards going mainstream.

gemini front page

Let’s rewind a bit. First, the regulatory approval. A NYSDFS license, which grants permission to operate as a chartered limited liability trust company, is more rigorous and tougher to get (and I imagine a lot more expensive) than the BitLicense that New York requires of bitcoin operators. So why did the founders, Cameron and Tyler Winklevoss, choose this more complicated route? Because their main target market is institutional investors, to whom they would not be able to offer a complete service with just a BitLicense. The trust charter license that they now have allows them to 1) hold deposits, 2) operate a bitcoin exchange, and 3) offer other corporate trust services such as escrow (holding funds pending contract resolution). A BitLicense wouldn’t allow Gemini to do that. More importantly, the charter obliges the firm to act as a fiduciary, which means that it has to always put its customers’ interests before its own. That that even needs putting into law is sad, but this is the new frontier of financial services, and we’ve all seen the worrying headlines. For the Winklevoss twins, winning the trust of the large institutional investors is key. They felt that a BitLicense just wasn’t enough.

Gemini has competition. In May itBit was granted the same permission, and also offers OTC (over-the-counter) trading. And Coinbase classifies itself as a US-based bitcoin exchange, although it does not yet have the necessary regulatory approval.

But how will Gemini help Bitcoin to go mainstream? First, security. Safety has been the main priority, which is smart given the fears over Bitcoin’s lack of security and the “unregulated” nature of most exchanges. The founders have apparently been thorough in their dealings with the regulators, insisting on approval before trading. They are currently authorised to trade in 26 states and Washington DC, and are working on getting approval in the remaining areas. Customer deposits are held in FDIC-insured US banks, which means that the deposits are protected by federal insurance up to $250,000. And bitcoins are held in “cold storage”, which means offline devices such as pen drives, kept in vaults. (I’m not implying that itBit doesn’t make security a priority, the FDIC also insures itBit-held funds, and they also use cold storage for bitcoins… but read on…)

Another priority seems to be the visualization of information, also smart given that Bitcoin is quite hard to get your head around, and buying on online exchanges is confusing for first timers. Simplicity inspires confidence. The Gemini interface lets users visualize a graph showing the effect that their trade is likely to have on the market, even if it’s a small one. Get people familiar and comfortable with the idea of buying bitcoins for their investment portfolio, and you’ve gone a long way towards bringing Bitcoin into the mainstream.

image via Coinbase
image via Coindesk

Which will tie in very nicely with the upcoming launch of the Winklevii’s Bitcoin ETF (Exchange Traded Fund), the first publicly traded bitcoin-based investment trust. The twins are counting on more and more funds and private investors deciding to hold modest bitcoin positions, but without actually buying bitcoins (because either they don’t want to, or they can’t for regulatory reasons). These investors will be able to buy a NASDAQ-listed investment trust that will reflect the currency’s movements, but without direct exposure. The trust is awaiting regulatory approval.

At the moment the only alternative currency traded on Gemini is Bitcoin, although they haven’t ruled out changing that (notice that they didn’t put “bit” in the exchange’s name). In a Reddit AMA last night, there was some interest expressed in the trading of Dogecoin and Ether (the Ethereum currency). Tyler’s response was along the lines of “first Bitcoin, lots to do there, and then we’ll see”, so it’s unlikely that the portfolio of possible trades will spread much beyond BTC/$ in the short term. They are looking at opening up to other currencies, especially the Euro, but that will involve a lot of regulatory work, and the potential volume may make it not worthwhile.

So, what’s that about mainstream? Well, the Winklevoss twins are famous, not just because of their Facebook history. They’re media-friendly very wealthy ex-Olympic athletes. To give you an idea of their lifestyle, they came across Bitcoin for the first time while on holiday on glamorous Spanish island Ibiza. They’re New York elite, championing an alternative currency, and assuring their influential friends that institutional bitcoin investments will be safe and will do well. itBit is a reputable firm with a stellar management team and undoubtedly a good product, but without Gemini’s star power. This guarantees a certain amount of media attention. As a rudimentary metric, the number of entries that come up when you type “Gemini + bitcoin” into the Google search bar is over 480,000. Type in “itBit + bitcoin” and you get just over 87,000. So, the photogenic and well-connected Winklevoss twins are more likely to get Bitcoin into the mainstream press than equally able competitors.

And, there’s the emphasis on institutional funds. While their first customers are more likely to be early-adopter individuals, they plan on building up enough liquidity to attact the larger funds and Wall Street players. Until now, most Wall Street and bank activity in the sector has been through blockchain applications. Few have actually waded into bitcoin investment or trading. When that happens, the currency and the concept will get a credibility boost.

Which brings up the underlying existentialist dilemma. Bitcoin going mainstream would be good for the currency, increasing both liquidity and value, making some early purchasers wealthy, and attracting even more traders and investors. But, Bitcoin was not built on mainstream foundations. It started out as a decentralized, anti-institution concept, in part as a reaction to the financial crisis and the institutions that made it worse. So if those very same institutions start investing and trading in bitcoins, what happens to its reason for being? Does that even matter, when its use and value could significantly increase? Is Bitcoin embracing the institutions and the government, or is it the other way around?