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July 26, 2024
The drama in currencies continued this week, the Japanese Yen aggressively clawing its way back ahead of the BoJ’s interest rate decision next Wednesday. Too early to tell if the carry trade is finally beginning to unwind but this kind of strength has not been observed in a long time. The Australian Dollar on the other hand is getting obliterated, down almost 4% in the last two weeks alone. Gold sidelined for the time being, down 1.4% yesterday despite no real movement in the Greenback.
The past couple of sessions have been brutal for US indices, particularly technology stocks. Despite only slightly disappointing earnings reports from the likes of Tesla (TSLA) and Alphabet (GOOGL), the selling pressure has been strong and sustained. Predictably, the Nasdaq Composite bore the brunt of the sell-off, losing 3.64% on Wednesday, its worst day in well over a year, before a failed attempt at a rebound saw it close yesterday 0.9% in the red. Things weren’t much brighter for the S&P 500 either, falling 2.3% and 0.5% over the last two sessions.
Many traders are asking themselves if the hype surrounding artificial intelligence was really justified or if it was somewhat… artificial. The sudden rotation out of tech stocks is perhaps indicative of a crowded trade that is now unwinding. The selling pressure in the technology sector is at least somewhat contained, as testified by the Dow Jones, which actually rose 0.2% yesterday. Economic data releases have not helped orient markets this week, the manufacturing PMI publication yesterday revealing the sector in technical contraction at 49.5 as opposed to predictions of 51.7. Home sales likewise disappointed, but Q2 GDP came in unexpectedly high at 2.8% versus consensus of just 2%. The major event left on the economic calendar this week is the PCE price index; any significant deviation from predictions will most likely provide even more volatility.
Even to the most seasoned crypto users, sending a transaction over a blockchain can be a truly nerve-racking event. For good reason. Crypto transactions cannot be reversed once sent. Not necessarily a problem in itself, except for the fact that a successful transaction is dependent on entering the correct address, which is unfortunate because cryptocurrency addresses couldn’t be less user-friendly if they tried.
Each cryptocurrency employs its own address format. A brief glance at an address will often reveal the blockchain in question.
Bitcoin addresses are generally between 26 and 35 characters in length. The oldest addresses all start with a “1”, which are known as legacy addresses. These can still be created, but newer addresses typically start with a “3”, indicating their more elaborate functionality. These two formats both use a Base-58 character set, meaning they use numbers, upper and lower case letters, with the exception of “0”, “o”, “l” or “I” to avoid confusion. Then there are also Segwit addresses, which always start with “bc1” but do not use Base-58 because they are entirely lower case:
Legacy BTC address: 172YRdGzPqyXm9rm1EWKwPXTRsmcApoPq6
BTC Segwit address: bc1q4nf39uxlddgptrhrlrddad2rt83rnex0dymcx8
Ethereum addresses always start with “0x” followed by 40 hexadecimal characters. This address format also holds for all smart contract tokens on the Ethereum blockchain.
ETH address: 0x7Ea90AF38397575A372e36bDc0F5970fB512FC7f
Dogecoin addresses always start with a “D” followed by a number or upper case letter. They also use the Base-58 character set and are normally 34 characters in length.
DOGE Address: D7wbmbjBWG5HPkT6d4gh6SdQPp6z25vcF2
Solana addresses also use the Base-58 character set and are typically 43 or 44 characters in length but other than that follow no particular format. This structure likewise holds for all smart contract tokens within the Solana ecosystem.
Solana address: 5axVea5zhqy2MWCooibzJjkYMHz3cvhPdgP7pVG7Sxee
The above is far from exhaustive. The list of cryptocurrencies and their respective formats is a long and tedious one. The best thing a newer crypto user can do is to familiarise themselves with the blockchain they are interacting with.
When sending a transaction to a certain address, the user has to ensure that every single character is correct. Fortunately, there are a number of in-built mechanisms to check the destination address, thereby preventing typos. Different cryptocurrencies have different ways of doing this, some more comprehensive than others, but they rely on variations of something called a checksum.
Simply put, a checksum is a small piece of data derived from a larger piece of information that allows a system to check for errors, intentional or not. Their usage is ubiquitous even in traditional finance, for example with International Bank Account Numbers (IBAN).
Bitcoin has always had a built-in checksum function which checks to see if the destination address actually exists. The function is designed to check for typos. By design, changing one or two characters in a valid address is extremely unlikely to result in another valid address, to the order of one in a several billion chance. This makes it all but impossible to accidentally send bitcoin to an address that is valid, but not the intended one. Of course, the check does nothing to ensure the transaction is not sent to an address that was used previously for example.
Ethereum was not launched with such a tool. The reason being that the developers never intended for users to use raw hexadecimal address strings, but instead use unique domain names such as “DavesEtherWallet.eth”. The problem is that such domain names did not come into play until much later on, so the Ethereum foundation pushed an update to introduce a checksum function of its own in order to reduce mistakes. The difference between the two formats is readily apparent:
Checksum address: 0x7Ea90AF38397575A372e36bDc0F5970fB512FC7f
Non-checksum address: 0x7ea90af38397575a372e36bdc0f5970fb512fc7f
The addresses above are one and the same, but the first one has been checksummed. Checksummed addresses use both upper and lower case letters whereas non-checksum addresses do not. When transacting on the Ethereum blockchain, always use the former whenever available. As mentioned above, there are ongoing attempts to simplify the process of transacting Ethereum by using domain names as opposed to raw addresses. These work in the same way as a URL, that is to say a human readable location on a network.
Some cryptocurrencies, such as Solana, do not use a checksum function at all. Even when the cryptocurrency in question does use one, this does not necessarily mean that all wallet programmes take advantage of it. To avoid errors, users are encouraged to copy and paste instead of manually typing out addresses, starting with a test transaction first, and learning how to use blockchain explorers to check the validity of new addresses.
A worthwhile question at this point is what happens to crypto sent to the wrong address? The short answer is that it is most likely lost forever. There have been instances of people wrongly sending funds to a wallet under someone else’s control, realising their mistake and then begging the unintended recipient to send the money back. The user can do this by sending a second transaction with a message encoded within it. Depending on how charitable the recipient is feeling, they may or may not honour the request.
The other case is that the funds are sent to an address not currently under anyone’s control. It is important to understand that for a given cryptocurrency, the process of “creating” a new wallet is actually an exercise in generating a private key. The public address is merely a hash of that private key. If a user mistakenly sends money to an address to which there is no private key, the funds will simply sit there until the heat death of the universe. The number of total addresses is beyond astronomical. It is theoretically possible to generate a private key for a wallet that is already under someone else’s control, but the odds of doing so are infinitesimally small.
This particularity of blockchain technology does in fact have a function. If there are addresses that cannot be accessed, or are extremely unlikely to be, then these can essentially be used as a cryptographic dustbin. Such addresses are referred to as burn addresses, because sending the coins or tokens there is akin to destroying them. Cryptocurrencies commonly have a default burn address, or even several. The wallets below contain over $80 million worth of Ethereum, as well as several hundred million dollars’ worth of various tokens.
Ethereum burn addresses: 0x0000000000000000000000000000000000000000
0x000000000000000000000000000000000000dEaDThe ending string of characters on the second address is no coincidence. It is in fact possible to generate addresses with a certain string of characters that users may find amusing or meaningful. They are known as vanity addresses and it is possible to generate them with the appropriate software.
Sending crypto for the first time can be a daunting process and the esoteric nature of crypto addresses is a significant contributor to this. That being said, underneath the enigmatic outer shell lies a wealth of information that crypto enthusiasts have every reason to delve into.
Markets are still finding their feet this week in light of the uncertainty surrounding the democratic nominee and the upcoming US election. Rather than dwelling on politics, traders are turning their attention towards earnings season, which has already seen the likes of Tesla and Alphabet publish their quarterly reports after hours on Tuesday. Missed earnings estimates for the electric car manufacturer caused Tesla (TSLA) shares to decline in after-hours trading, although the company’s revenue came in higher than expected. Alphabet (GOOGL) also fell after the closing bell, despite beating earnings and revenue estimates.
The National Association of Realtors in the US revealed a surprising drop in home sales in June, with existing home sales falling 5.4% MoM compared to a consensus of a 3% rise. Median house prices on the other hand hit a new all-time high of $426,900.
Currencies have remained quite stable over the last two days, with the Dollar displaying a slight show of strength over most of its competitors. The Australian Dollar continued to perform poorly due to falling base metal prices, whereas the Japanese Yen has been showing strength versus the Dollar as expectations of a Bank of Japan rate hike rise ahead of next week’s decision.
Besides earnings reports from many large companies this week, the economic calendar still has a lot to offer. Services and manufacturing PMIs from the UK and the EU will be released in the next few hours, and those from the US later on in the day. Jobless claims, durable goods orders and Q2 GDP figures all follow on Thursday, before the core PCE price index, the Federal Reserve’s favourite, graces the newswires on Friday.
US electoral politics are once again setting up to be a major driving force behind market movements this week as presidential candidate Joe Biden drops out of the race. Only Asian markets have had a chance to react to the news and so far, the response has been a subdued one. Very little worth mentioning on the economic calendar today and tomorrow, all the more reason to keep an eye on the subsequent democratic nominee. Several figures have stepped forward to endorse VP Harris although no official selection has yet been made.
Drama last Friday as a software update from cybersecurity firm Crowdstrike caused a worldwide IT outage on Windows machines. The infamous blue screen of death affected everything from banks to airlines and everything in between, leaving many businesses with no other option than to shut down for the day. Crowdstrike Holdings (CRWD) fell 11% on Friday, as did all major US indices. The Dow Jones led the way, losing 0.93% by the closing bell. The Nasdaq Composite and S&P 500 were not far behind, falling 0.81% and 0.71% respectively. Microsoft (MSFT) fared relatively well in the grand scheme of things, only losing 0.74%.
After setting a new record breaking close last Tuesday, Gold has since undergone a significant correction. The precious metal fell 1.8% on Friday alone, closing the week at $2,400 an ounce. Gold rose around $10 in early trading this morning in Asia, but likely awaits the European and American opens before committing to a more defined trajectory.
A bank transfer can be a time consuming operation, particularly on the back-end. The process requires banks to communicate with one another using banking infrastructure that was designed decades ago, and involves a lot of back and forth before the transfer reaches final settlement. These banks are often totally distinct from each other, sometimes located in different countries. Although a purely electronic movement of funds, it is a movement nonetheless, with money leaving the sending account and entering the recipient account.
Crypto transactions can be viewed in another way. Let us imagine instead a network incorporating every single account from every single bank on the planet, forming an all-encompassing ledger that tracks every transaction ever made. A crypto transaction is not so much a movement of funds, but a modification of the entire network, updating it to a newer state.
A crypto transaction can be fully summarised by a transaction ID:
The above can be looked up, and the entire world can know the sender, the recipient, the amount, and a slew of other data.
Initiating a bank transfer requires entering information relating to the recipient’s account, including items such as an account number, bank code, branch code, bank address, etc. What about a crypto transaction? How do things work on a practical level?
In order to perform a transaction, the user needs three things:
This first item is fairly straightforward. The user needs to be in possession of some cryptocurrency, contained within a crypto wallet. There are two situations here.
The first situation is that the user operates a wallet to which they own the private key. This allows them to send crypto using the wallet software of their choice and requires signing the transaction. Signing a transaction is a cryptographically secure process that ensures that the funds cannot be moved without the user’s key.
The second situation is that the user is using a wallet under a third party, for example a Coinbase or Binance account. Here, the wallet is not under the user’s direct control. The specifics of initiating a transaction depend on the platform they are using, but typically require a one-time authentication code instead of the private key.
The second item is where things start to get a little more complex. The user obviously needs enough money in their wallet to cover the amount they wish to send, but they also need enough to cover the transaction fee. The transaction fee can vary greatly from one transaction to the next, even when using the same cryptocurrency. This is because fees are dependent on network congestion. The more people using the network, the busier it becomes, meaning people are willing to pay more to get their transactions finalised. On the Ethereum blockchain, transaction costs are known as gas fees, a naming convention that has since spread to other cryptocurrencies as well.
When sending funds from a third-party account, such as Coinbase or other platforms, the user will not typically have a say in choosing the transaction fee they are willing to pay. The rate is set by the platform and is included in a more general processing fee. However, if the user is sending funds from their own wallet, then they have the freedom to set whatever gas fee they please. Gas fees can be checked beforehand on various websites in order to estimate the cost of completing a transaction. The user may opt for a lower or higher fee depending on how urgent their transaction is.
The third and final item is the one that can really cause problems. Unlike the case of a wire transfer, there are very few safeguards in place when making a crypto transaction. Self-custody is one of the defining aspects of the crypto industry. There is no one in the background to check all the details, no one to reverse the transaction if the information is incorrect. Once the funds have been sent, they are gone forever. Crypto transactions are completely irreversible. All this to say the user better get the address right.
This presents a problem, because crypto addresses are almost comically obtuse. Using the transaction ID above, we get the following address for the sender:
0x974CaA59e49682CdA0AD2bbe82983419A2ECC400
One wrong letter, one wrong number, one missing character and the funds are irretrievably lost.
In some ways, sending crypto from one user to another is much simpler than doing so between bank accounts. In others, it is much more complicated. Those new to the crypto sphere would do well to stick to some general good practices. Copy-paste the recipient’s address instead of typing it out; use QR codes whenever possible; start with a small test transaction first; check the destination address on a block explorer.
That last point is worth developing. Acquainting oneself with blockchain explorers is crucial to becoming a savvier crypto user. Returning once more to the transaction above, a block explorer unveils a lot of information:
Tx: 0xefa7ccd7798b6893a3643c1b52dce8ec41f2eb0104db596227bd7e32d56edcdf
Date: 2024-07-18 05:36:59 (GMT+1)
Block: 20331065 (confirmations: 159)
From: 0x974CaA59e49682CdA0AD2bbe82983419A2ECC400
To: 0xfaCe3ba8E7064d6a2E8216601D305020926DF924
Gas Limit: 1,050,000
Gas Used: 46,097
Gas Price: 0.000000004935933289 ETH (4.936 Gwei)
Tx Cost: 0.000227531716823033 ETH ($ 0.78)
The transaction ID, or hash, is not merely a unique identifier. It is generated by hashing transaction data and therefore encodes the information relevant to the transaction within it. The above is only a fraction of the information available.
A block explorer will reveal all the transactions of the wallets above, all the transactions of the wallets they have ever interacted with, and so on. As we mentioned at the start of this article, a cryptocurrency is not simply a unit of transaction but instead an entire network. Blockchain explorers are therefore analogous to browsers, and they excel as such.
One may notice that both the addresses above begin with “0x”. This identifies them as Ethereum addresses. Bitcoin addresses always start with “1”, “3” or “bc1”. Other blockchains have their own standards. Becoming familiar with the different prefixes will undoubtedly help users navigate the crypto landscape. There are ongoing attempts to simplify the process of transacting cryptocurrencies, particularly with regards to addresses and making them more human-readable. Even should such tools become commonplace, being able to interact with the underlying technology in a more fundamental way is a noble goal that should be encouraged.
The double-edged sword of cryptocurrencies is that when people have full autonomy over their assets, they become solely responsible for them. One acquires more freedom, but more accountability along with it. To quote Spider-Man: with great power comes great responsibility.
Double-check that address.
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