Hello, Happy Father’s Day and welcome to The ₿it Economy! I’m Rob, and each 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, please do forward this along, send them to the archive, or have them subscribe here 👇
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Has It Been A Bad Year For Bitcoin?
Key Takeaways:
Bitcoin is a hedge against monetary inflation and loss of confidence in fiat.
If Bitcoin was going to die it would have occurred on the crash of March 12th.
Investors’ search for liquidity has contributed to the correlation between Bitcoin and traditional assets over the recent months.
The traditional markets are up based on nominal fiat terms not buying terms.
Earlier in the week, Joe Weisenthal of Bloomberg shared six reasons why he thinks 2020 has been a bad year for Bitcoin. As one would expect the post got a lot of flack across the Twittersphere. And so what I want to do today is go point by point and provide some thoughts to Joe’s post. So without any further adieu here is my response:
1. Despite the extraordinary market volatility, it hasn't surged to new heights. In fact, it continues to make a general trend of lower highs. This takes away the argument that an economic crisis creates a boom for Bitcoin.
Bitcoin is not a hedge against your typical recession. Rather Bitcoin is a hedge against monetary inflation and the loss of confidence in fiat currency. In times of crisis, whether it be war or unstable budget deficits, governments have turned to high levels of inflation in order to pay for emergency spending projects that would otherwise be unfeasible. These actions like the infamous "money printer go brrrr" have the side effects of diluting the money supply and reducing the value of people's (ie. you and me) savings.
Government spending has gotten out of control and there is a possibility that it can lead to the devaluation of the U.S dollar and other fiat currencies. Yet, against the backdrop of the COVID-19 pandemic, we have seen a dash for cash in order to pay for basic necessities. In terms of short-term price stability and paying for goods and services, there is no competition for USD.
The March selloff proved how resilient investors in this ecosystem are. As Unchained Capital explains in this post, the volatility came from UTXOs 6 months old or younger. On top of that — over 20% of the current supply has not moved in 5+ years.
2. Not only has it not soared, it's basically just gone in the same direction as the S&P throughout this volatility. Bitcoin rallied at the start of the year, then plunged during the crash, then rallied during the rebound, and it has been slumping over the last few days. This undermines the argument that Bitcoin has good portfolio diversification properties.
On March 12th, the price of Bitcoin fell from around $10,000 to sub $4,000 levels. Since then, Bitcoin has posted a swift recovery, rebounding over 100% while traditional markets are responding to their distress by printing more fiat currency with which to stimulate the economy.
As we can see, over the past few months bitcoin is correlated with stocks and the world economy. Stocks crash, bitcoin crash. Stocks up, bitcoin up. The short term is driven by the fear: the fear of corona spikes, the fear of government shutdowns and the fear for ones savings. All three and more cause investors to panic and seek out liquidity. For now, this is the case but we all know that in the future the paths will divert (See Right Chart).
3. Bitcoin has performed roughly in line this year with Ethereum, the next most valuable and liquid cryptocurrency. This undermines the argument that in has distinct "digital gold" characteristics that will separate it from other cryptocurrencies in a crisis.
Market sentiment is often influenced by various factors, such as forecasts or political events. Yet, if analyzing on a wider time frame, it turns out most digital assets follow Bitcoin. In an unstable market, no one can know what the correlation of digital assets will be in a year, month or even a week therefore it cannot be argued that there is a complete and direct correlation between the ETH and BTC process. Though most of the time ETH follows BTC, it will occasionally demonstrate independence and trend in the opposite.
This should not come as a surprise from an asset like Bitcoin who has controlled over 50% of the ecosystems market cap since July 2018. To some, it's a vessel for speculation and investment. For others, it is a censorship-resistant medium of exchange free of remittance controls. But at its core, Bitcoin is an alternative monetary system that offers individuals monetary independence.
4. The Bitcoin halving (a slowing of new supply) which many Bitcoiners championed as a likely catalyst for a move higher came and went without much impact.
The reason it’s so difficult to assess what will happen next is that, first, there are only two precedents in Bitcoin’s entire eleven-year history — hardly enough data points to be able to create a likely outcome that has any real credibility — and, second, Bitcoin’s awareness, use and adoption levels are far higher than then they were even for the most recent halving event in 2016.
When the software executed its programmed action at block height 630,000, the inflation rate of Bitcoin fell from 3.65% to 1.8%, in stark contrast to the annual global inflation rate in 2019 of 3.56% and an estimated 2.99% so far this year.
Not only does this make Bitcoin even more appealing to those looking for an easily accessible store-of-value vehicle from a deflationary point of view, but it also has a direct effect on the supply and demand equation that, on paper, makes perfect sense. Historically, the halving has been a key catalyst in propelling Bitcoin into a new bull market. But it is many months after the event that this new ATH in Bitcoin’s price is set.
As I wrote back in May...
It is important to note that after each quantitative hardening event came with ups and downs, but the broad trend has always been up and to the right. Bitcoin’s rapid price volatility has often baffled even the most experienced economists – it is brutal, smiting those who are looking to get rich quick. Yet, despite all the price fluctuation, Bitcoin proves its resilience again and again.
5. The Fed has engaged in extraordinary balance sheet expansion, and governments around the world are running major deficits, and it hasn't led to the kind of inflation or currency collapse that many Bitcoiners would have predicted. So that undermines some of the popular stories about what would catalyze a Bitcoin boom.
The economic crisis that is currently hitting the world has wreaked havoc on all asset classes. Lockdowns imposed around the globe have had catastrophic effects on consumption, but even more employment.
With at its peak over 37 million people out of work in less than six weeks, retail spending the lowest on record, factory output the lowest since WWII and the economy near ATHs it’s safe to say something has to break. In the meantime, the Fed has shifted towards printing money and with that comes big risks of debt far outpacing growth of the economy. Meaning the U.S. is taking on a massive debt that if the economy doesn't recovery quickly it may not be able to afford it.
Inflation happens when there are too many dollars floating around, chasing too few goods. So the goods become worth a lot more and the dollars a lot less. Prior to the reopening of states, there was not a lot of user demand for goods. But as lockdowns are lifted there is no guarantee it’ll stay that way.
To some who look at Bitcoin narratives, they expect the price to be soaring at the sound of the printing press "BRRRR". However, when evaluating the price, most do it incorrectly. As Preston Pysh pointed out the other day, most people want to believe the market is up so they price the market in nominal fiat terms rather than in buying power terms. He went on to say this in a thread on Ray Dalio and his opinion on reserve currencies:
"Buying equities is a mixed bag: investing in the stock market becomes a losing proposition as inflation transitions to hyperinflation. Instead of there being a high correlation between the exchange rate and the price of shares, there is an increasing divergence share prices and the exchange rate. So during this time gold becomes the preferred asset to hold (my words - due to it's scarcity), shares are a disaster even though they rise in local currency terms, and bonds are WIPED OUT."— Ray Dalio
Though some narratives have come and gone, one thing continues to happen — a Bitcoin block is mined every ~10 minutes. It is an unstoppable emergent phenomenon that can only be slowed by government, not destroyed. And since our government is more worried about purchasing bonds of zombie companies Bitcoin is a great tool to protect the millions of people who are seeking the best possible stores of value.
6. Young people are discovering the stock market via platforms like Robinhood. So to the degree that people were putting money into Bitcoin because they liked volatility and action, there's a new competitor on the block for those dollars.
I personally struggle to see the negative long term impact of Robinhood on Bitcoin. No matter what platform you use for trading traditional assets you are at the mercy of platform and must comply with egregious AML/KYC policies. If someone wants to get tendies going long on zombified-Hertz be my guest. However, in doing so, one forfeits their security and personal privacy. For all we know this could be a fad — the stock market has been the place to play while we’re all stuck at home staring at the four walls. You would be a fool not to bet those fair-weather day traders would jump ship and take a stab with Bitcoin if it were to approach its ATH in the coming months.
So What's Next?
Everyone wants to label Bitcoin or write it off. They look for a pattern to figure out Bitcoin but it does not need patterns to deliver what it has to deliver. Bitcoin did not promise you that the price would go up post halving. It never claimed to diversify your portfolio. And it never said it was going to do well during a global pandemic. But what it does do appeals to the likes of Paul Tudor Jones and the Wall Street Bets crowds — and that sure as hell is interesting. For whether they like Bitcoin or not does not change the fact that it is the fastest horse in the race.
News 📰
S1: Casa Unveils User-Friendly Bitcoin Wallet
What is it? - Bitcoin custody startup Casa has released a new wallet for Bitcoin beginners and long-term investors.
It’s a secure, private, and easy self-custody wallet that’s great for first-time Bitcoiners (and longtime Bitcoiners!). The Casa Wallet is a key part of our mission in 2020 to offer the perfect personal security system for every level of Bitcoiner. — Michael Haley
Learn more about Casa and the Casa Wallet in their blog post.
Why it Matters? - When I ask some of my friends about Bitcoin they often blame ease of use as the predominant issue. But at the end of the day, it doesn't matter how easy something is to use if no one understands why they would use it at all. There has always been a learning curve but the team at Casa aims to lower the barrier with some perks:
Pro-Beginners — Seedless by default
Pro-Security — Built with their proprietary Keymaster technology that includes musig.
Pro-Privacy — Users can access their wallet without any personal information.
There are tradeoffs in using this wallet over say an open-sourced Bitcoin wallet. Yet, keep in mind that this wallet is focused on the new users and as such it is a closed source hot wallet that provides exposure to an intuitive wallet.
Final Take - To get more users exposed to Bitcoin companies must focus on Security, Privacy and Simplicity (SPS).
S2: Bitcoin's Difficulty Adjustment
What is it? - On Tuesday, Bitcoin posted its largest difficulty adjustment since January 2018 and 7th largest positive adjustment in the past three years. The higher the hash rate becomes, the higher the mining difficulty. This is because there is more competition.
Why It Matters? - It’s only been a few weeks since we last discussed the hash rate. With the difficulty adjustment, there is now ~15% more hash power dedicated to secure Bitcoin than 2 weeks ago. Since the May 11 halving block times have been volatile as a result of miners frantically work around clock to stay profitable. Yet, with the price still predominantly below $9,500 we are still unsure if more miners need to unplug which would result in sell pressure in the coming weeks.
Final Take - Bitcoin's difficulty adjustment is beautiful.
Market Watch 💸
What I'm Reading 📕
The Genesis Files: How David Chaum's ECash Spawned a Cypherpunk Dream
The Genesis Files: Hashcash or How Adam Back Designed Bitcoin's Motor Block
The Genesis Files: If Bitcoin Had a First Draft, Wei Dai's B-Money Was It
The Genesis Files: With Bit Gold, Szabo Was Inches Away From Inventing Bitcoin
One Man's Mission to Deploy Solar-Powered Bitcoin Nodes Across Africa
What I'm Listening To 🔊
What I'm Watching 📺
Project Announcements 📢
Project Spotlight🔦
Satoshi’s Games
Satoshi’s Games is on a mission to build a better gaming industry where user experience and access is free and equal for everyone. Their most recent development, Lightnite, is a multiplayer battle royale game that is integrated with Bitcoin's lightning network in a good-looking, low-poly and cartoonish design.
Business Model:
Typical gaming platforms don't give users the right to have the full game, instead, they grant them with a license to use the game under "specific" conditions which gamers must comply with. Satoshi Games sets out to be a fully open-source platform built on top of the Bitcoin Lightning Network to enable a P2P microtransaction ecosystem.
To do so they solve the three following problems that affect gamers' experience:
Unsecure currency — games use economic systems based on fictitious coins which are vulnerable to exploits.
Lack of economic incentives — players spend money and time without being able to extract valuable items from the games (e.g. Non-Fungible Tokens as game skins or earning bitcoin by playing games).
Interoperability — currently, every game has its own specific token, which is valuable only within the game and cannot be used in other games or services. Users who earn Bitcoin by playing games and spend them on any other game that integrates bitcoin.
In March the team partnered with the Liquid Network to issue non-fungible tokens (NFTs) for their in-game items. This gives gamers the ability to export and freely trade their assets.
Audience:
Satoshi’s Games designs games for those who want to earn bitcoin every day. Not everyone enjoys the intricacies of finance but a large majority of everyone enjoys games. So why not earn real money while doing it? In Lightnite specifically, gamers have the opportunity to earn bitcoin and tradable items every time you pick up supplies, kill an opponent or win a game. Gamers do not often see games like this on Bitcoin, but Lightnite from seems to be one of the first games suitable for microtransactions.
Bonus —Issue #12 Writeup
Media:
Final Quote
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Have a great week! See you next Sunday.
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