Week of 5.10.20 - Issue #27
Hi friends,
Welcome to the 27th edition of the ₿it Economy! Feedback and suggestions are very welcome, especially from the new folks. Every week I write a blurb about something I learned that's broadly Bitcoin related. If you have thoughts, I'd love to hear from you. My goal is to shed a tidbit of info that I believe will get you thinking about the digital world around you. If you know anyone who would be interested in the topic, please do forward this along, send them to archive, or have them subscribe here.
-Rob
TLDR
The big news of this week was that of Bitcoin's third halving, on Monday, May 11 at 3:23 EST at block number 630,000. At this moment, Bitcoin's block subsidy dropped from 12.5 to 6.25 BTC. In the final block, China-based mining pool F2Pool immortalized the New York Times headline — "NYTimes 09/Apr/2020 With $2.3T Injection, Fed's Plan Far Exceeds 2008 Rescue”.
The coinbase transaction pays homage to a similar message inscribed in the first Bitcoin block by Satoshi Nakomoto amid the financial crisis of 2008.
In a move that surprised many, JPMorgan Chase announced the bank will offer its services to U.S. based exchanges Coinbase and Gemini. Though the firm will only process fiat-based transactions, the unprecedented move is a sign that traditional institutions are warming up to Bitcoin. I then provide some commentary on Ruben Somsen's Succinct Atomic Swap implementation and update y'all on the United States push for stateside microchip manufacturing.
For those who are new to Bitcoin, please direct your attention to Peter McCormack's recent podcast summarizing his Beginner's Guide to Bitcoin series. It provides an excellent base for those who are interested in learning more about Bitcoin. And finally, for those who love to shop online, check out the sub-one minute bio on Bitcoin rewards company Lolli.
The Long Play
Key Takeaways
JPMC announced it will take on Coinbase & Gemini as clients.
A Coinbase IPO would further validate Bitcoin as an asset class.
Silvergate Bank continues to onboard more digital asset companies.
JPMC wants a seat a the regulatory table for Bitcoin.
Traditional player involvement further spreads awareness of Bitcoin.
Earlier in the week, it came to my attention that JPMorgan Chase (JPMC) has extended banking services to bitcoin exchanges Coinbase and Gemini — the first time the nation's largest bank has accepted clients who interact with the retail digital asset market (Sorry TokenSoft). With 30+ million customers, Coinbase is the largest digital asset exchange in the U.S., while Gemini is run by the infamous Winklevoss Twins.
Before I explain, let's review a few quotes from JPMC's head honcho, Jamie Dimon on Bitcoin:
January 2014 — Calls Bitcoin a "terrible store of value" at the World Economic Forum in Davos.
November 2015 — "Virtual currency, where it's called a bitcoin vs a US dollar, that's going to be stopped".
October 2016 — JPMC launches Quorum, an enterprise blockchain, the technology that underpins bitcoin.
September 2017 — "You can’t have a business where people can invent a currency out of thin air and think the people buying it are really smart. It’s worse than tulip bulbs, OK?”
October 2017 — “If you're stupid enough to buy it, you’ll pay the price for it one day.”
October 2018 — “I didn’t want to be the spokesman against bitcoin. I don’t really give a shit — that’s the point, OK?”
In the past, most big banks have shied away from doing business with digital asset companies, be it because of the regulatory uncertainty, volatile nature of the market, or perhaps they see them as a threat to their lunch. So the question everyone is asking....why would JPMC open its doors?
Coinbase IPO?
Let's address the elephant in the room — the Coinbase IPO. Founded in 2012 by Brian Armstrong and Fred Ehrsam, the company has raised over $525 million in VC funding from a slew of investors — Andreessen Horowitz, USV, and Greylock to name a few. The white knight (in the eye of the regulators) was valued at $8 billion in late 2019 and could garner interest from the public markets as the first major digital asset company to IPO. Coinbase has two priorities: to be the most trusted digital currency platform and to be the easiest one to use. When compared to its peers, searches for Coinbase dwarf the competition.
Unlike bitcoin mining machine manufacturer's Canaan's IPO in November 2019, an IPO from either Coinbase and Gemini would likely see more interest since both exchanges emphasize KYC and AML regulations. Though the COVID-19 pandemic complicates plans, it appears this move and any future collaboration places JPMC in the driver’s seat for winning any future IPO.
The Sleeper Pick
Since the launch of its digital asset business seven years ago, San Diego headquartered Silvergate Bank has established itself as one of the few U.S. banks that is readily providing services to the budding ecosystem. The digital asset-friendly lender counts major exchanges Bitstamp and Kraken as clients, earned $4.4 million in Q1 2020, according to its latest filing with the U.S. Securities and Exchange Commission (SEC). Since the turn of the year, its crypto-related clients grew to 850, from 617 a year prior.
“The increase in total deposits from the prior quarter was driven by an increase in deposit levels from our digital currency customers who maintained excess capital with Silvergate as a result of the dislocation taking place in the digital currency markets during March. The increase in total deposits from March 31, 2019 includes a net increase of $141.3 million in callable brokered certificates of deposit associated with the hedging strategy, as well as changes in deposit levels related to our digital currency customers.”
The commercial bank's lending product, Silvergate Exchange Network (SEN) is a payment system designed for digital asset exchanges and their clients to transfer funds in the network. The SEN handled $17.4 billion of USD transfers in Q1, compared to $9.6 in Q4.
David vs. Goliath
Silvergate has carved out a niche part of the banking sector after pivoting to servicing digital assets in 2013. Due to its first-mover advantage, the firm is arguably the leading bank for digital asset startups in the U.S. With over $1.7 billion AUM, the firm is poised to bank the more crypto startups in the second half of 2020. In simple terms, Silvergate is the heart of the digital asset economy. It provides a crucial service that has been neglected by the industry’s titans. Since it's IPO in early November 2019, the bank has consistently outperformed its larger counterpart, as well as the S&P 500 over the past two quarters.
However, as JPMC begins to dip its toe into the digital asset space, it brings along its ~$2.87 trillion AUM and a prestige brand recognized around the world. This may prove enough to lure startups who plan to go public away from their smaller counterparts. The move is a signal that big banks are getting more comfortable with the industry and subsequent regulation. Prized as much for the reputational halo it offers as the hundreds of millions of dollars at stake in big mandates, the business of taking tech companies public has been highly lucrative over the years. With the title of lead advisor for the first major digital asset IPO comes bragging rights in the high-stakes world of investment banking. Expect the battle to heat up over the coming months as more unregulated businesses take the necessary steps towards regulation for public markets.
Regulatory Angle
But more importantly, it comes with the ability to shape the regulatory environment. If you are the bank for the largest and most used exchanges in digital assets, you have all the necessary information to flex your muscles when developing policy. It is well known that the U.S. has dragged its feet when it comes to regulation, with conflicting guidance among both the state and federal levels. This regulatory uncertainty makes for a great opportunity for big banks to protect their lunch.
Impact on Bitcoin
So what we're all here for — what does this mean for Bitcoin? As we approach the midpoint of 2020, a year marred by the coronavirus, the price of Bitcoin sits just below $10,000, one thing is for certain — big banks cannot ignore Bitcoin anymore. An IPO could be an injection of confidence and stability in a sector that has often been tossed to the wayside by traditional markets. The hype surrounding the potential event could spark interest from the mainstream, thus exposing millions to Bitcoin.
Yet, Bitcoin holders do need to be wary of the interest taken in Bitcoin. Throughout history, banks have played an important role in global capitalism. They have been the gatekeepers of national currencies flowing between central banks and the general public. However, since the introduction of Bitcoin in 2008, the cracks in the financial system (e.g. remittances, data leaks, censorship) have begun to show. Though I do not expect and IPO or any significant regulatory action to happen for at least another year, the move by JPMC to extend services raises eyebrows.
As central banks around the world attempt to solve the current issues by continuing to print fiat, the mainstream's awareness of a "non-sovereign, hardcapped supply, global. immutable, decentralized, digital store of value" is getting closer by the day.
News 📰
S1: Succinct Atomic Swamps
What is it? - Ruben Somsen, host of the Unhashed Podcast and Organizer of the Seoul Bitcoin Meetup proposed a new development in atomic swaps — the succinct atomic swap. First introduced by Tier Nolan in 2013, atomic swaps take place between blockchains of differing currencies. A regular atomic swap creates an automated, self-enforcing contract that executes specific actions once predetermined rules are met with fee-free trading. Check out the summary below:
ASYMMETRY — The first part involves only one chain. We ask Alice to lock up her coins in such a way that she has to reveal a secret if she wants to abort. This gives Bob the confidence to lock up his coins in such a way that he gets them back if he learns the secret.
SWAP — Now we turn things around. We create another transaction in which Alice allows Bob to claim her coins if instead he reveals HIS secret to Alice. Timelocks ensure that this event takes place before Alice gets a chance to abort the protocol.
OFF-CHAIN — At this point Bob could go on-chain to complete the swap in 3 transactions (already better than what we have today!), but instead he simply gives Alice his secret. In return, Alice gives her key to Bob. They now changed ownership without publishing any transactions.
WATCHTOWER — One last issue: Alice still has a copy of a transaction that allows her to claim a refund. This is solved by requiring Bob (or a watchtower) to be online. The timelocks are constructed in such a way that Bob always has time to respond if Alice tries anything funny.
Why it Matters? - For starts, unlike the original development, Somsen's protocol halves the necessary transaction count into two. But more importantly, the scriptless protocol can be used for efficient privacy swaps like Payswap — a privacy solution that essentially replaces the payment from Alice to Bob with two payments: one from Alice to Bob, and one from Bob to Alice.
Bonus - Check out Ruben's for the detailed description.
Final Take - The development continues to lower the barrier for users to exchange their assets into Bitcoin.
S2: Trump Seeks Semiconductor Self-Sufficiency
What is it? - The COVID-19 pandemic has likely worsened tensions between the United States and China, which could linger after the virus is contained. Earlier in the week, the WSJ reported that the White House, in order to reduce dependency on Asia for processors, is in talks with Intel and TSMC about setting up US chip factories. As of Thursday evening, Bloomberg reported that TSMC is planning to build a multibillion-dollar chip plant in Arizona.
Why It Matters? - The Trump administration has not been shy about wanting to reduce its dependence on Asia for technology. As talks appear to be heating up, the initiative could welcome more decentralization and competition to a sector notoriously dominated by that corner of the world. Thus, this development has the potential to give the U.S. the ability to manufacture the highest quality and best performing ASIC chips on the market. If built, this will have a profound impact on the nation's Bitcoin mining ecosystem.
Bonus — Below is the average monthly share for Bitcoin miners. For more on mining check out previous issues #6 & #15.
Final Take - The impact of the coronavirus has left many nations looking to reevaluate their supply chains.
Market Watch 💸
What I'm Reading 📕
Mapping the Institutional Digital Asset Infrastructure Space
Statement of Hester M. Peirce in Response to Government Surveillance
What I'm Listening To 🔊
Howard Marks on the US Dollar, Three Ways to Add Defense & Good Questions
COVID, Financial Markets, and Bitcoin with Gabe Bassin & Taylor Pearson
Funding the Future with Alex Danco
What I'm Watching 📺
Project Announcements 📢
Blockstream Partners with Lightnite for Liquid-Powered Gaming NFTs
Bitcoin Hasrate Futures Go Live on FTX
Project Spotlight 🔦
Lolli
Lolli is a rewards platform that offers users Bitcoin when they shop at participating online retailers. The company, based in both New York, New York, and Durham, North Carolina recently raised $3 million from Founders Fund, Pathfinder, Michelle Phan, Ashton Kutcher's Sound Ventures, and Michelle Phan. Lolli has partnered with over 750 merchants such as Postmates, Adidas, and many more below.
Audience
The everyday online shopper. Whether you are new to bitcoin or a frequent sat stacker, this product appeals to all consumers, especially those who may want to dabble in bitcoin but do not want the hassle of directly investing their own money. Lolli has created a product with no cost of entry that incentivizes users to earn bitcoin when they buy products online.
Tech
To earn rewards, users install a browser extension or start from Lolli's website to discover retailers offering bitcoin rewards. Creating a profile is quick and simple — all you need is an email address — no first name, last name, phone number or address. When you visit a participating retailers site, the browser extension will prompt the user to activate the deal.
Media
Final Quote
Thanks for reading. Send me tips, stories I’ve missed, or comment below. And if you liked this piece, you can sign up here for more issues of the Bit Economy, a newsletter on something bitcoin related.
Have a great week! See you next Sunday.
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