Week of 2.16.20 - Issue #15
Welcome to the 15th edition of the ₿it Economy! Each week, I break down the top stories in Bitcoin in a simple in clear format. Enjoy!
Topics: Exchange Insolvency & Mining in the USA
The Brief:
A relatively slow week for news in the world of Bitcoin. The week began with a technical indicator hinting that the bull market is on the horizon. However, soon after this event, the Chinese cryptocurrency exchange Fcoin announced that it was insolvent and do not have the necessary funds to repay its users. These bad actor events have many calling for more transparency of cryptocurrency exchanges. Bitcoin mining startup Layer1 announced that its own power sub-station and facility has went live. The company aims to make Texas the global hub for Bitcoin mining this decade. Though the focus is not on Bitcoin, I highly recommend giving the Off the Chain Podcast with Brian Norgard, the former Chief Product Owner at Tinder. Host Anthony Pompliano and Norgard delve into the depths of what it takes to build great products. It is a great listen for anyone who wants to understand the product development process. And finally, I recently stumbled upon the Blockchain & Morty Series, a spoof on the adult sitcom for intellectuals. Below is one of my favorite episodes and you can find the entire series here.
S1: Fcoin Insolvent
What is it? - Fcoin, a cryptocurrency exchange based out of Asia, released a statement admitting to having made losses and consequently will not be able to pay out over tens of millions worth of Bitcoin. Zhang Jian, the former Huobi CTO, and current CEO of Fcoin detailed on Reddit that the exchange is unable to process users' withdrawal demands as its asset reserve has failed short of its liability. It is expected that the scale of non-payment is between 7,000-13,000 BTC, or $70M-$130M. The announcement came just days after the company suspended its entire platform after discovering a risk-control issue.
Why it Matters? - Before you ask, no this insolvency is not the fault of the Bitcoin protocol. And no it does not mean the experiment has failed. As Nic Carter of Castle Island Ventures reminds you above, this scandal is another reason for Proof of Reserves (PoR). In his post "How to scale Bitcoin (without changing a thing)", he provides a table that details the different layers of Bitcoin under an IOU or fractional reserves methodology.
The proposal for Proof of Reserves was submitted in January of 2019 and was assigned the number BIP 127. It would allow any given party to publicly prove that their UTXOs were spendable, as could be demonstrated by moving them to another wallet. One of the trade-offs you make when you relinquish control over your coins is the loss of your ability to verify the existence and ownership of the Unspent Transaction Outputs (UTXO). PoR asks exchanges to:
Publish the wallet public keys so people can see that funds are fully backed.
Publish a hash tree to let each customer validate that their balance is included in the total.
This prevents the exchange owner from concealing or spending funds of active customers. Asset and industry agnostic, aggressive lending practices have wronged more people than not. Third party custodians will always exist: it's more convenient for traders, the non-technical, and the lazy to have their money held on their behalf. On the other hand, this does not prevent the following:
If funds are not secured in proper multi-sig wallet or multiple exchanges operators are corrupt, the funds could still be taken, up to what's stored.
The balances of customers who never check the hash tree could be excluded by a dishonest exchange, which wouldn't be noticed until one of those customers decided to check.
A dishonest exchange could still dispute the balance of a customer or arbitrarily prevent withdrawals. In this case, the customer and exchange would have to sort that out.
A dishonest exchange could pretend to own wallets it does not.
Prominent Bitcoin startup Blockstream open sourced development of a tool which allows exchanges to prove their liquidity. Named 'Proof of Reserves', the tool began on the company's Liquid Network only to be subsequently released for all Bitcoin users early last year.
"Put in as simple terms as possible, Proof of Reserves allows an exchange to prove how many bitcoin they could spend, without needing to generate a ‘live’ transaction or exposing themselves to the risks of moving funds."
Final Take - PoR ensures hidden inflation is not introduced into bitcoin.
S2: Layer1 Begins Mining in West Texas
What is it? - Layer1, the Bitcoin mining startup backed by Peter Thiel has begun mining operations at its West Texas facility. In October of last year, it was reported that the firm raised a $50 million dollar Series A to build a mining facility enhanced with liquid cooling technology to combat high temperatures in the region. The 30 acres of land contains equipment where each mining container is reported to have an energy draw of 2.5MW and the startup has indicated that it plans to scale up to a capacity of 10MW over the coming months.
Why It Matters? - Miner geographic location has always been a controversial topic in Bitcoin. For a quick refresher, refer to Issue #6. With the announcement, Layer1 is entering into a market that is currently dominated by Chinese miners, which benefit from low electricity costs and less logistical headaches. The chart below details the market share of the most popular bitcoin mining pools. None of the top-five known pools are located outside of China.
Mining is no easy feat, especially in the United States. Like the early pioneers, mining companies are turning to the New World, where they seek cheap electricity and relaxed government scrutiny. This New World, is Texas. The "Lone Star State" has shown over time that its electricity rate tends to fall in the middle of the pact when compared to all 50 states. Electricity is cheap in the region because of the natural gas being produced through fracking and market deregulation.
At the time of writing, the Bitcoin network energy draw is estimated to be roughly 8.84 GW. Bitcoin mining involves pouring millions into the high-power processors to secure and track transactions on the bitcoin network. Most mining players in the industry have begun to hedge their operations in China and migrate their respective supply chains to other countries to minimize the impact of regulations from the Chinese government. This is a win for decentralization as the shift away from China will lead to a more competitive global mining market. By distributing the infrastructure across numerous countries, it makes the Bitcoin network more resilient to government scrutiny. With bitcoin mining operations taking root in locations across north America, it is rapidly becoming an epicenter for the entire bitcoin sector.
Final Take - Cheap energy is a bottom line for mining companies as they look to gain a foothold in the United States.
Market Watch
- High: $10,183.34
- Low: $9,597.32
- ATTOW: $9,896.54
On Tuesday, Bitcoin's 50-day average crossed above the 200-day average, confirming a golden crossover for the first time since April 2019, when the price of the asset was $5,400. A golden crossover is a candlestick pattern that is a bullish signal in which a relatively short-term moving average crosses above a long-term moving average. The golden cross is a lagging indicator of a bull market is on the horizon and is reinforced by high trading margins. However, it also can be a sign that the market is overbought and a correction is soon to follow. Historically, longing this event has not been kind to short-term traders as the market reacted in the opposite manner.
Bitcoin's market capitalization is above $176 billion, which accounts for 63.23% of the total digital assets market. The asset failed to close above the $10,500 mark, signaling the market has been overbought. Wednesday marked Bitcoin's fifth largest hourly price in price history. The over $1,000 drop in one hour squeezed weak hands out of the market. Since then the price has settled in the range between $9,600 and $9,750. A quick recover would continue to support the bullish narrative. If $10,500 can be broken, there is not much resistance till $11,000. However, staying below $10,000 too long could indicate that Bitcoin has hit a local top and could drop to the $9,100-$9,200 support area. Expect volatility to continue as the asset looks to trade anywhere between $9,500 and $10,400 for the next week.
Announcements
- c-lightning v0.8.1 released - Link
- ColdCard Firmware Update v3.1.0 released - Link
- US Marshals auction 4040.54 BTC - Link
- OpenNode partners with Wyre - Link
Interesting Reads
- Coin Metrics State of the Network #38 - Link
- No Concentration Among Miners Isn't Going to Break Bitcoin - Link
- For Square Crypto, the Way to Bitcoin Mass Adoption is Open Source - Link
- A Model for Bitcoin's Security and the Declining Block Subsidy - Link
Great Listens
- Off the Chain Podcast with Brian Norgard - Link
- Stephan Livera Podcast #151: Obi Nwosu - Link
- Citizen Bitcoin Podcast: Adam Back on Bitcoin's Past & Future - Link
- Coinist Podcast: Sam Bankman-Fried - Link
Final Quote
- Hasu, a pseudonymous independent crypto researcher on Bitcoin's security model
Have a great week! See you next Sunday.
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