Week of 5.24.20 - Issue #29
Hi friends,
Welcome to the 29th 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
As the race for digital asset prime brokerage heats up, Russia made headlines that it intends to further restrict access to bitcoin from its citizens. However, as the week progressed the price reversed trends and current sits above $9,600. In other news, Goldman Sachs had an investor call on Wednesday that resulted in an uproar from the Bitcoin community. More on that and many more below.
Banning Bitcoin
Key Takeaways
Russia intends to place strict controls over Bitcoin payment transactions.
Bitcoin is decentralized, the network as such cannot be shut down by one government.
Governments can restrict the use of Bitcoin through regulation or taxes.
Strict regulation can lead to a brain drain, thus stifling innovation.
About a week ago, the State Duma — the lower house of the Federal Assembly of Russia, proposed a number of bills governing the circulation of digital assets. Some notable uncoverings include:
Up to seven years in jail and fines of as much as $7,000 USD for utilizing bitcoin in monetary transactions. This penalty applies to those purchasing bitcoin with cash or transferring to account opened with Russian banks.
Individuals who hold digital assets will be forced to register them with the Russian tax agency and explain how they acquired them.
Corporations purchasing bitcoin without approval from the Russian central bank will face fines as much as $28,000 USD.
One proposal is to completely outlaw the use of digital assets from being used at all.
This proposed legislation aims to prohibit the use of digital assets like Bitcoin on transactions made in the Russian market. Though it is not likely that all these laws pass, it does raise a question that I often get from friends and family… "What if the United States government shuts down bitcoin?”. Yet, the question itself needs to be reevaluated. It is not whether the government will or will not shut down bitcoin, it is a question of can it shut down bitcoin? The short answer... no, as bitcoin is a form of digital money that is unaffected by the desires of politicians and regulators around the world. As Parker Lewis of Unchained Capital explains:
Is bitcoin functional as money? If not, governments have nothing to ban. If yes, then governments will attempt to ban bitcoin. So the anchor point for this line of criticism assumes that bitcoin is functional as money. And then, the question becomes whether or not government intervention could successfully cause an otherwise functioning bitcoin to fail. — Parker Lewis
Invalid Address
Bitcoin has no CEO or employees, it has no marketing team, no owners, instead Bitcoin has thousands of global volunteers and millions of computers from individuals and companies alike cooperating together all over the globe to ensure the security of the network and that there is no single point of failure. By design, Bitcoin is not linked to any territory or financial institution. It's decentralized and global nature allows anyone to access the permissionless network.
Unlike the culture wars which saw both Starbucks and Chick-Fil-A bend the knee in the name of social status, the war on Bitcoin is a bit more complicated. It draws a stark comparison to the ever-extending war's on drugs, terror and alcohol. And we all know how that turned out — the "illicit" drug market is a ~$400 billion industry, the U.S. (among others) are still in the Middle East, and the 18th Amendment was replaced by the 21st.
Which leads many to ask what could the U.S. do to abolish Bitcoin from the face of the earth? Nothing. If governments could effectively stop a peer-to-peer network, they would've shut down the illegal practices of torrent websites over a decade ago. The lack of a central location to shut down is a beautiful feature. Any meaningful crackdown would have to see the coordination of global proportions. Even if a country was to achieve this lofty feat and prevent bitcoin transactions from taking place within its borders, a simple VPN would circumnavigate the restrictions.
Taxation Without (True) Representation
Yet, like our friends in Russia, governments can (and will) go after the fiat-on ramps to the Bitcoin network. The use of regulation and taxation all to deter both you and me from holding onto this scarce asset.
Don't believe me? Well, the IRS released a new Schedule 1 for the 2019 tax season that included an extra question — “At any time during 2019, did you receive, sell, send, exchange or otherwise acquire any financial interest in any virtual currency?”.
This is a way to fight back against the P2P nature of the Bitcoin network and is only the beginning of the desensitization of government confiscation. To be clear, I am not saying they will confiscate your bitcoin, but they sure will record who and how much. Though this is not a big concern for me at the moment, there is a scenario with precedent. In 1933, President Franklin D. Roosevelt by means of Executive Order 6102 required all persons to deliver on or before May 1, 1933, all but a small amount of gold coin, gold bullion, gold, and gold certificates owned by them to the Federal Reserve, in exchange for $20.67 per troy ounce.
Innovation Competition
Over the years, there have been attempts to neutralize bitcoin through regulation. The unprecedented increase in bitcoin's value has expedited the process as it gains a foothold in society.
Any similar confiscation to Executive Order 6102 would benefit any green country on the above map. Why? Because banning bitcoin would result in a brain drain while simultaneously handing over the advantage to other countries that are more welcoming to new, innovative technologies. And more importantly, those forced to uproot their families and leave their friends will develop a chip on their shoulder. The motivation to innovate and break down capital controls for the greater good is a core component of Bitcoin. An act similar to the above bans will only lead to further creativity and foster a culture of workarounds.
Banning bitcoin would be an affront to the most basic freedoms it is designed to provide and preserve.
News 📰
S1: CoinSwap Implementation
What is it? - A week ago, Chris Belcher shared his latest design for a CoinSwap implementation. Like a CoinJoin, a CoinSwap focuses on protecting Bitcoin user's privacy and fungibility by muddying the transactional data to prevent chain analysis companies (e.g., Chainalysis & Elliptic) from connecting the dots. The implementation is related to an Atomic Swap where a user trades one coin for another coin in a non-custodial way, thereby breaking the UTXO connection that surveillance companies often analyze user activity.
Why it Matters? - To me, it appears CoinSwap is a better privacy implementation than your typical CoinJoin and much easier to use for the everyday user.
Imagine a future where a user Alice has bitcoins and wants to send them with maximal privacy, so she creates a special kind of transaction. For anyone looking at the blockchain her transaction appears completely normal with her coins seemingly going from address A to address B. But in reality her coins end up in address Z which is entirely unconnected to either A or B.
Now imagine another user, Carol, who isn't too bothered by privacy and sends her bitcoin using a regular wallet which exists today. But because Carol's transaction looks exactly the same as Alice's, anybody analyzing the blockchain must now deal with the possibility that Carol's transaction actually sent her coins to a totally unconnected address. So Carol's privacy is improved even though she didn't change her behaviour, and perhaps had never even heard of this software.
In a world where advertisers, social media and other companies want to collect all of Alice's and Carol's data, such privacy improvement would be incredibly valuable. And also the doubt added to every transaction would greatly boost the fungibility of bitcoin and so make it a better form of money.
This undetectable privacy can be developed today by implementing CoinSwap, although by itself that isn't enough. There must be many building blocks which together make a good system. The software could be standalone as a kind of bitcoin mixing app, but it could also be a library that existing wallets can implement allowing their users to send Bitcoin transactions with much greater privacy. — Chris Belcher
Users do not need to prepare their wallet in advance, therefore they would not have to manage coins. The process involves engaging with the CoinSwap market to make a spend disconnected from your wallet. Belcher notes that the software could be a standalone 'mixing' application like Wasabi or rather a library that existing (and future) wallet users can implement to improve Bitcoin's privacy.
Final Take - A variety of privacy solutions is imperative for Bitcoin's long-term health.
S2: Goldman Sachs Blasts Bitcoin
What is it? - Goldman Sachs held an investor call Wednesday to discuss current policies for bitcoin, gold and inflation in the context of the COVID-19 crisis. Jason Furman of Harvard and Jan Hatzius, Chief Economist and Head of Global Investment Research at Goldman had many words to say about bitcoin — declaring it not an asset class. You can check out the slideshow here.
Why It Matters? - Why It Matters? - Rather than shout from the rooftops and cry heresy, let's try to understand some of the major comments made at Wednesday's presentations:
"Do Not Generate Cash Flow Like Bond".
Bitcoin in a way is similar to Amazon where neither pays a dividend. Investors earn cash flows as the price rises with growth in the digital asset ecosystem. As the traditional economy remains overleveraged, it becomes increasingly important to rely on the network effects of Bitcoin and its wealth preservation qualities.
"Do Not Dampen Volatility Given Historical Volatility of 76%".
Allow me to introduce you to the $86-trillion oil and gas industry which less than two months ago saw prices quoted in the negatives. The commodity's volatility hit over 325% in April. In a time of global distress across many asset classes, it appears as if GS abandoned reason with this specific argument.
"Do Not Show Evidence of Hedging Inflation.”
Bitcoin is already a hedge against inflation in Venezuela, Argentina, Chile and other countries that have had their fiat currency fall due to capital controls. Which poses the question — If an asset has appreciated thousands of percentage points over the past decade does not hedge against inflation, what does?
"Though individual cryptocurrencies have limited supplies, cryptocurrencies as a whole are not a scarce resource. For example, three of the largest six cryptocurrencies are forks—i.e., nearly identical clones—of Bitcoin (Bitcoin, Bitcoin Cash, and Bitcoin SV).
"Though individual cryptocurrencies have limited supplies, cryptocurrencies as a whole are not a scarce resource. For example, three of the largest six cryptocurrencies are forks—i.e., nearly identical clones—of Bitcoin (Bitcoin, Bitcoin Cash, and Bitcoin SV).
“We believe that a security whose appreciation is primarily dependent on whether someone else is willing to pay a higher price for it is not a suitable investment for our clients,”
Pretty sure that is how the market currently works. The definition of an investment is the action or process of investing money for a profit or material result. Thus, commodities and securities are bought for what one is willing to pay.
The Bitcoin community as well as the digital asset ecosystem as a whole cannot just sit around being keyboard warriors. Though I do not think the institutions are the final frontier, I do believe their inclusion acts as a validation to many who remain on the sideline. If everyone wants the "number go up" then it is imperative to educate why bitcoin is a great investment for banks and other financial institutions. The fact that this call occurred is a sign that GS is fielding interest from its clients — a step in the right direction.
Bonus - Jill Carson's take on the call.
Final Take - Bitcoin does not need Goldman Sachs, but Goldman Sachs is going to need Bitcoin.
Market Watch 💸
What I'm Reading 📕
What I'm Listening To 🔊
The Pomp Podcast #301 - Travis Kling on the Future of Bitcoin
The Pomp Podcast #299 - Dave Collum Explores Big, Dangerous Ideas
Mike Maples on Navigating the Idea Maze and Building Breakthrough Companies
The Bull and the Bear Case for the American Economy with Dan Mcmurtrie
Warren Buffet & the 2020 Berkshire Hathaway Shareholders Meeting Part 1
Warren Buffet & the 2020 Berkshire Hathaway Shareholders Meeting Part 2
What I'm Watching 📺
Project Announcements 📢
Project Spotlight 🔦
Hodl Hodl
Stage of Funding:
Hodl Hodl announced the closure of a seed round led by digital asset trader and investor WhalePanda. Other investors include traders Ambroid, Marsmensch and two more private investors.
Business Model:
Business model: we take trading commission from every successful (completed) trade on Hodl Hodl. Trading fee varies from 0.4% to 0.6% (depends on reputation of trader).
Audience:
The privacy-focused bitcoin users who do not wish to verify their identities. In an ever-growing surveillance world, many individuals prefer to use a decentralized exchange and forgo the KYC/AML process. Unlike a centralized exchange, the buyer pays the seller directly with any form of payment — bank wire, online payment, digital asset, etc.
Media:
Bonus: Check out their recent integration with BlueWallet.
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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