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Bitcoin hashrate migrates to the US

Bitcoin hashrate migrates to the US with the share having doubled since April 2021 and reaching the #1 position globally. US share of bitcoin hashrate reached 34.5% in September, according to University of Cambridge because of China’s crypto mining ban. This geographic migration is important because US-based miners use far more renewable power than Chinese firms. The rising use of renewable energy should dent the “bitcoin is bad for the environment” attack vector. However, you should expect continued high energy prices to be a headwind for the bitcoin energy narrative. Governments continue to double down on their strategy to blame energy companies for spiking prices. It’ll be fascinating to watch the outcome of tightening investments further in carbon energy just as those prices head into unprecedented levels.

Bitcoin has rallied close to all-time highs due to speculation about the SEC approving a bitcoin ETF that is based on futures contracts. If true, will it be a genuinely positive catalyst or will it turn out to be over-hyped event signalling a market top? Will this speculation turn out to be accurate? Dispatch #33 has more thought below.

The full discussion subjects of The Dispatch #33 completed on October 15, 2021, follow:

  • US share of bitcoin hashpower reached #1, doubling to 34.5% from one quarter ago
  • Bitcoin ETF – genuine catalyst or macro-top indicator?
  • EU President doubles down to blame energy industry on high prices
  • “When you buy crypto you own nothing” + Jamie Dimon says bitcoin is worthless!
  • Former UK Finance Minister joins crypto firm
  • Property sales in China drop sharply in September

Bitcoin hashrate migrates to the US

The latest update by the respected Cambridge Bitcoin Electricity Consumption Index shows the US with #1 market share in bitcoin computing power (hashrate or hashpower). The share more than doubled from 16.8% in April to 34.5% in September 2021. Kazakhstan and Russia are the next largest share gainers, as bitcoin miners have left China (See Dispatch 21). This is a significant development, although wholly expected by The Dispatch, because it mitigates the  “bitcoin is bad for the environment” narrative. US-based bitcoin miners (who provide the hashpower) use a far higher percentage of renewable energy compared to China based miners.

To recap, over 60% of bitcoin hashpower (computing power securing the network) was previously located in China. This was a clear vulnerability for bitcoin because of China’s single party rule. Additionally, Chinese bitcoin miners used coal-based electricity during much of the dry season. The chart below shows the geographic evolution of hashrate until April 2021, which is when China stopped mining activity.  Since the last data points on the chart below, the US share has doubled. China’s share should be close to zero now.

Bitcoin hashrate migrates to the US – geographic hashrate share

Source: University of Cambridge

As The Dispatch has maintained, there’s no question that the bitcoin network uses energy. However, as the network moves increasingly to renewable sources of power that should dampen one of the key oppositions: that bitcoin harms the environment. The rate of change is startling as noted below.

Sustainable energy usage jumps as hashpower leaves China

The Bitcoin Mining Council, a forum of the largest bitcoin mining companies, published a 2Q survey that showed 67% of members’ power was from sustainable sources. The chart below from a Bitcoin Mining Council presentation shows the notable increase in sustainable energy use as China shutdown bitcoin mining, which was over 50% of bitcoin hashpower globally.

bitcoin network renewable energy use rises
Source: Bitcoin Mining Council

Source: Bitcoin Mining Council

The 10-slide presentation provides a positive spin on Bitcoin’s energy use, for anyone interested. This chart below is particularly provocative and not what’s highlighted by the media.

Source: Bitcoin Mining Council

The Dispatch looks forward to an independent entity like University of Cambridge publishing data on the Bitcoin network’s renewables usage.

“Sustainable” and “renewable” aren’t always what you might think they are

As this story about UK’s Drax wood pellet power plant illustrates, there’s plenty of wiggle room to become “renewable” and “sustainable.” The plant under discussion is a top-3 CO2 emitter in Europe and top-5 PM10 particulate matter emitter, but is deemed “sustainable” for burning wood pellets. This greenwashing risk is present in both national power grids and in bitcoin mining energy usage.

What does a bitcoin ETF launch mean?

Proshare bitcoin ETF launch

Bitcoin is experiencing renewed vigor as the market anticipates a bitcoin ETF launch as soon as next week. There are several ETF companies that have filed to launch futures-based bitcoin ETFs as discussed in this WSJ article. The more useful question is whether an ETF launch will signal a top or provide a positive catalyst. Close followers of crypto markets are aware that highly anticipated market events have turned out to be market-top signals. The CME futures launch in December 2017 and Coinbase IPO are two examples. Also, don’t forget that the SEC could object to these bitcoin ETFs next week.

What’s the difference between ETF approval vs. futures approval?

First, bitcoin is not at an all-time high and has not seen sharp price appreciation (by bitcoin standards) over the past several months. Instead, we’ve experienced volatility for sideways price movement. The price excitement in crypto assets has been in alt coins and not the more mature tokens. Second, an ETF is likely to increase consumer access to bitcoin. In contrast, CME futures started trading in 2017 when there was hardly any institutional participation. Futures are not a consumer offering, certainly not back in 2017. Here’s the WSJ’s take on what an ETF launch will mean for investors. Note, none of this is investment advice. Please speak to your advisor before investing.

For those enjoying the current price action, do keep in mind there are plenty of headwinds on the horizon. The White House is contemplating executive orders for crypto oversight, Bloomberg claims, which is most likely to target stablecoins. Updated FinCEN rules on crypto are expected before year end. Lastly, The Dispatch has repeatedly flagged the idiosyncratic risks posed by Tether reserve ambiguity. These are risks to the price short term. Taking a five-year view on this emerging asset should capture the upside provided by this highly volatile asset.   

EU doubles down on current policy despite price spike

European politicians are trying to spin the current energy price surge and blame producers. The tweet below from Ursula Van der Layen, the President of the EU Commission, is an excellent example. Economics 101 says that when you cut capital investment in a capital-intensive industry, supply will drop. When prices rise, it’ll take years for supply to rise, but even then, Van der Layen’s instinct is to vilify the industry and press on the renewables pedal cloaked behind “energy independence.” The transition will take decades because it takes time to deploy renewable generation and because renewable sources are less energy dense compared to fossil fuels. Her tweet feels somewhat like asking society that’s struggling to afford bread to eat cake!

Source: via Twitter

The tweet includes a 1-minute video clip that’s worth a listen but think critically of her words. Von der Leyen compares gas volumes not increasing to renewable prices not rising. Apples to oranges. The cost of producing gas hasn’t risen either. European energy companies have been coerced into not investing and now Europe is overly dependent on Russian gas. As for surging electricity prices, renewables will benefit from the same higher price if they are exposed to the spot market. It’s quite likely that much of the renewable energy is sold on long-term contracts where the price would not rise. This is just spin focused on fooling the population to cover up for policy decisions that led to the current energy price surge.

Political decisions are starting to shutdown energy funding

These political words carry over into the real world as this WSJ article lays out the scarce funding for energy projects now. The paragraph shown below highlights conditions.

Source: WSJ

Labor Department to change ERISA rule to comply with Biden executive order

For further evidence, this Department of Labor (DOL) action, illustrates how executive prose and action trickles into tangible actions. The DOL, which regulates employee retirement plans, proposed revisions to plan administrators to allow ESG factors in investing. The ERISA Act required a fiduciary duty from plan administration to focus on retirees’ financial wellbeing. On the surface, the DOL’s proposed changes appear sensible. Unfortunately, the politicization of these rules is well underway, having started during the Trump Administration, as this article explains. We are probably in the middle innings of this policy trend and prices will have to get much worse before there’s a change to the current thinking. They may well be decided at the ballot box with US mid-term elections thirteen months away.

Private equity flows into energy dry up

The chart below from the Private Equity Propels the Climate Crisis report by Private Equity Stakeholder Project illustrates the dramatic swing in energy deals. To be fair, the Kyoto Protocol was ratified in 2005, yet there was no change in capital allocation for many years, as the chart shows. However, the chart also shows how funding has tipped over in the past 2-3 years.

Source: Private Equity Propels the Climate Crisis

The chart also highlights how the same data can be used for different narratives. The Dispatch looks at the data and sees a worsening energy crisis. The report, on the other hand, is pushing the view that private equity is causing global warming. Both views have a point: private capital should have reallocated to renewable energy faster, but the aggressive shift today may cause higher prices in the future. This is just a simple view. In reality, solar and wind projects did not present attractive returns a decade ago due to higher costs and efficiency.

Falling capital flows into traditional energy is likely to lend momentum to sustained high energy prices. Yes, shutting off capital to carbon energy sources certainly slows the rate of increase in atmospheric carbon dioxide, but that may come with a growth slowdown as energy price impact everything we do.

Could political winds on energy flip quickly?

Despite all that’s highlighted above, the Politico headline shown below from a few days ago caught our attention.

Politicians are driven to stay in power. The view here remains that the headline is a set up to tell the voters that rising prices are the industry’s fault, Just as the EU tweet highlighted earlier. However, speech writing will only obfuscate voters for a short period of time and won’t overcome sustained high energy prices.

When you buy cryptocurrency you own nothing

This article was the top read last week on the wealth advisory industry site, Advisor Perspectives. This goes to show how many in the wealth advisory business dismiss digital assets. You’d expect a more nuanced and detailed presentation of facts by authors publishing on industry sites. Instead, you get this ending paragraph.  

The same can be said for a Picasso or a gold bar. All monetary assets rests on societal acceptance: it doesn’t matter if it’s real or digital. In fact, digital monetary assets have superior divisibility, portability & fungibility properties to gold. Also, what about the finance applications being built on blockchains like Ethereum or Polkadot? Isn’t that real value? The prevalence of these bearish views from mainstream finance illustrates that we are still early in the adoption of digital assets.  

Jamie Dimon thinks bitcoin is worthless

Staying on the subject of worthless bitcoin….JP Morgan CEO Jamie Dimon on Monday said, to paraphase “I personally think bitcoin is worthless… but if clients want access we’ll provide it”. Here’s a 21 second video of Dimon at the Institute of International Finance conference.

Crypto lobbying boost

Former UK Finance Minister – Chancellor of the Exchequer for any British readers here – has joined Custody firm Copper as an advisor. The Dispatch likes to flag this steady rise in the crypto industry’s lobbying capacity. This Decrypto article provides more details.

China property sales drop sharply in September

Source: WSJ

The sharp slowdown is worth following as it could have global implications down the road. President Xi is clearly working on changing the heavy reliance property to generate growth (See Dispatch 31), but it’s a tricky balancing act.

Once confidence is dented, it won’t be easy to recover. The Dispatch anticipates Chinese property prices staying soft in the coming months, increasing the chances of the government resorting to monetary stimulus to re-inject confidence into the sector. However, a notable easing is likely to lead to Chinese currency weakness, which won’t be accepted by Western trading partners in the current environment. This should be a slowly evolving stream of events worth following for its global implications.

Stay safe, enjoy fall and do reach out if you have any questions or comments about the material in this Dispatch.

Asi

Important Disclosures

This is not an offer or solicitation for the purchase or sale of any security or asset. While the information presented herein is believed to be reliable, no representation or warranty is made concerning its accuracy. The views expressed are those of RockDen Advisors LLC and are subject to change at any time based on market and other conditions. Past performance may not be indicative of future results.

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Fed start talking about thinking about tapering!

Dispatch #20 -2021

June 18th, 2021

This week, the Fed disclosed that their rate expectations have risen to 0.60% by the end of 2023 from near zero previously. This caught some markets by surprise and could well be a dress rehearsal of market action if the Fed brings forward rate hikes. In the short-term, bonds and the Dollar are likely to rally as overly bearish positions are unwound. However, longer risks from the friction between continued government deficit spending, Fed’s promise to taper QE and rising debt service remains a risk. In the Bitcoin world, we had a slew of mainstream financial institutions announcing crypto services, and we look at the leading US States that are forging ahead with crypto regulations despite a frostier Federal Government position. Both stories point to how digital assets are becoming mainstream. Here’s a list of all of the subjects in this Dispatch.   

  • Fed started talking QE taper and raised rate expectations
  • State Street Bank launches crypto division
  • The most crypto-friendly States in the US
  • Traditional banks’ crypto announcements
  • SEC delays Van Eck bitcoin ETF approval once again
  • What’s the fuss about lumber?
  • BITCOIN SCHOOL – bitcoin technical analysis  

Fed starts talking taper and rate hikes

The Fed finally adjusted to the months of strong economic data by announcing this week that they anticipate higher rates than previously expected. This is still a distant event as the Fed only expects the funds rates to be 0.60% by the end of 2023 from near zero prior expectation. The chart below from this WSJ article provides a good summary of the June Fed meeting and how rate projections have changed. The price action on Wednesday, when both stocks and bonds sold off together, is a warning of how the two largest asset classes might react when the Fed finally takes the QE punch bowl away. For the moment, the Fed has just started talking about thinking about tapering, but will continue to pump $120bn of QE each month for the foreseeable future. However, before the Fed can move off zero interest rates, it will first need to stop QE purchases that have kept bond yields ultra low.  

Fed Dot plot changes

The chart below from this Bloomberg article shows what this “dot plot” is all about. It’s essentially each individual FOMC Member’s future rate projection. When the Dispatch says the new Fed forecast for rates is 0.60% by end 2023, it is the median projection of FOMC members. And the “rate” in question here is the Fed Fund Rate, which the Fed sets and is currently hovering near zero.

Professional investors have been positioned bearishly against both the dollar and treasuries, resulting in both assets rallying this week. This is likely to reverse some of the reflation/value vs. growth stock market positioning. However, it’s unclear to the Dispatch if this reversal will be anything other than a trade for a few months. The inflation vs. deflation debate will be impacted by many external factors, including passage of an infrastructure bill and subsequent stimulus package via reconciliation. The US will need to issue debt to fund these spending programs. This tweet below from Real Vision’s Raoul Pal shows the technical set-up and provides color on positioning on the USD.  

2Q Fed QE far above Treasury issuance matter to bond yields

Furthermore, as this tweet from Robin Brooks of the Institute of International Finance illustrates, the Fed purchased meaningfully more Treasuries in 2Q than the amount issued by the government. This alone should have raised bond prices, which lowers the yield. This balance could well change in the coming quarters, just as the Fed might be forced to taper QE, as additional Government stimulus requires rising debt issuance. This could be a particularly difficult time for markets to digest, and an event that the Dispatch is watching closely.

State Street launches cryptocurrency division

State Street, a custody bank that oversees more than $40tn, is setting up this new division following in the footsteps of industry leader Bank of NY Mellon (BNY). BNY’s entry into crypto back in February was covered in Dispatch #4. As these CNBC and Blockworks articles explain, State Street is responding to rapid growth in customer demand for digital assets. For example, Van Eck picked State Street as the custodian for its Bitcoin ETF that is awaiting SEC approval.  

Permissionless blockchains can verify and settle transactions instantaneously, and at almost zero cost, which poses an existential threat to custody banks. It is, therefore, no surprise that these banks are rapidly embracing digital assets as blockchains could make obsolete the trust function provided by custodians like State Street and BNY Mellon.

The most crypto-friendly US States

In the US, it is States that are taking the lead in creating crypto friendly legislation with Federal authorities being less accommodative. This week, Texas affirmed that state registered banks could offer crypto services to clients. This Bitcoin Magazine article provides a good summary of the news and the Texas Department of Banking notice is available here.

A comprehensive look at the leading States and how they are addressing digital assets is provided by the Coinbase article that the Dispatch has copied below. It has extensive links to the many states that are advancing crypto legislation if you’d like to dig further. Most crypto observers will agree that Wyoming is taking the lead in crypto legislation.

The Coinbase article is italicized below

After multiple U.S. regulatory and financial agencies announced initiatives to review crypto, Michael Hsu — new head of the Office of the Comptroller — called for inter agency coordination on Monday. While crypto regulation remains a patchwork effort at the federal level, 31 states are proceeding with their own legal blueprints. Who’s leading the charge?

  • Wyoming, whose elected officials own crypto, has attracted crypto-focused firms for years. In April, Wyoming became the first state to recognize decentralized autonomous organizations (DAOs) as LLCs, paving the way for online collectives governed by blockchain-based smart contracts to have the same legal status as companies.
  • Nebraska approved a regulatory framework for digital assets in May, providing two main ways for institutions to manage crypto. Existing state-chartered banks can create digital asset divisions, and digital asset firms can seek charters to become digital currency banks.
  • A pending bill in South Carolina would make the state an “incubator” for blockchain innovators. The bill would also enable companies to issue “certificate tokens” instead of traditional stock certificates.
  • Arizona formalized a crypto “study committee” in early May, and last week, Democratic Arizona senator Krysten Sinema and GOP Wyoming senator Cynthia Lummis announced the Financial Innovation Caucus, which aims to “highlight responsible innovation in the United States financial system.”

Why it matters… A majority of U.S. states have passed or proposed digital asset legislation — from allowing banks to hold crypto for customers to simply defining “digital assets.” As states make progress with laws that have federal implications, the pressure is on for regulatory clarity from Washington.

Traditional Banks entering Crypto

There are too many weekly announcements by banks either wading into crypto, launching additional services or vocalizing opposition to the asset class for the Dispatch to discuss in length. Therefore, this is a collection of the announcements this week, with links for additional reading. What is becoming obvious is that crypto is no longer a fringe financial asset. It is now entered mainstream finance, in the Dispatches view.

  1. Goldman to offer Ether futures trading, following previously announced bitcoin trading for clients. This Decrypt story has the details. Give credit to the large global banks who poo pooed (yes, it’s a technical term!) crypto for years. Their crypto-embrace has been impressively smooth and fast.
  2. Goldman partners with Galaxy Digital to offer crypto liquidity services. Goldman is really partnering with Bitgo, which is the custodian that Galaxy is acquiring. This Blockworks article provides more details.
  3. Spain’s BBVA is opening bitcoin trading to wealth management clients out of Switzerland. This Coindesk article has more details.
  4. Danske Bank in Denmark says it will not offer crypto access, despite a sharp rise in client demand. More details in the Bloomberg article.

SEC has again delayed Van Eck bitcoin ETF approval

This is no surprise to the Dispatch, as SEC Commissioner Gensler has repeatedly said that crypto markets lack investor protection. We should expect oversight of crypto trading venues before ETFs are approved. This Coindesk article provides background on the latest delay.

What’s all the fuss about lumber?

This chart shows you why this usually barely noticed commodity is a hot subject. Prices doubled in a few months in 2021 and still remain well above normal levels. This one asset where the price hike is likely to be transitory in the Dispatch’s view.

BITCOIN SCHOOL – Bitcoin Technical Analysis  

Technical analysis = using price charts to make predictions

The Dispatch does not attempt technical analysis, but respects it. To provide a peek into bitcoin technicals, we go back to Fidelity’s Jurrien Timmer’s thought. The charts below are from these two Twitter threads from June 1st and June 8th. Timmer quite fluidly moves from pure technical analysis to blockchain analysis data from Glassnode, which the Dispatch values.

That’s it for this week. If you made it all the way to the end, not that the Dispatch will be off next week but always keeping an eye on markets. Stay safe and do reach out if you have any questions or comments about the material in this Dispatch.

Asi

Important Disclosures

This is not an offer or solicitation for the purchase or sale of any security or asset. While the information presented herein is believed to be reliable, no representation or warranty is made concerning its accuracy. The views expressed are those of RockDen Advisors LLC and are subject to change at any time based on market and other conditions. Past performance may not be indicative of future results.

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SEC delays Bitcoin ETF but Bitcoin adoption momentum accelerates

Dispatch #14 -2021

May 7th, 2021

The Dispatch starts with SEC delaying the Bitcoin ETF application by Van Eck. Then, we will delve into the accelerating momentum on Bitcoin adoption. Perhaps the most important story is the possibility of multiple banks offering their customers access to Bitcoin with the help of NYDIG. The FT story on Citibank supporting crypto services also ranks high. The full list of discussion items includes:  

  • NYDIG solution to allow banks to offer clients access to Bitcoin
  • Private sector Digital Dollar projects coming
  • Citi weighs offering crypto services
  • JP Morgan to offer Bitcoin fund to wealth management clients
  • NFL’s #1 draft pick (Trevor Lawrence) to invest in crypto
  • Insurer Metromile to accept premiums and pays claim in Bitcoin
  • Latam e-commerce giant MercadoLibre reports Bitcoin purchase
  • IRS wins court case to access Kraken’s customer data
  • Debt to GDP doesn’t matter!
  • BITCOIN SCHOOL goes Ethereum: What’s driving Ether outperformance?

For a PDF of the Dispatch click here.

SEC delays Bitcoin ETF approval decision

The SEC has pushed back a decision on the Van Eck Bitcoin ETF application to June, 2021, extending the 45-day window that expired on May 3rd. This CNBC article has more details. Part of the official SEC release is captured below.

The market is expecting a favorable ruling because the new SEC commissioner – Gary Gensler – was previously the head of the Commodity Futures Trading Commission, which approved the CME listed Bitcoin future back in December 2017.  However, the CFTC regulates venues and instruments that are mostly geared towards sophisticated institutions, while the SEC deals with products aimed at retail investors.

This CNBC article/interview of Gary Gensler from May 7th provides the most recent view from the SEC Chairman. In the interview, has say that there’s a gap in Bitcoin/crypto regulation in the US, which lead to lack of investor protection.

The lack of easy access to crypto, I would argue, leads to this next story illustrating the almost unstoppable network effect of the larger digital assets.

NYDIG to facilitate Bitcoin access for bank customers

NY Digital Asset Group (NYDIG) via a partnership with bank software provider FIS will offer a solution that would allow commercial banks to offer Bitcoin to their end customers. NYDIG is not a household name, but well respected within bitcoin circles. Insurance company Mass Mutual invested in NYDIG earlier this year and made their high profile Bitcoin purchase through NYDIG. Additionally, the CEO of NY Life is on the board of NYDIG.

Read more about this potentially transformative deal in this CNBC story. It is a Bitcoin-only effort as the CEO of NYDIG explains in this Coindesk podcast this week. If you are an advanced consumer of Bitocin/crypto, the podcast is highly recommended because it provides a glimpse into the leading edge of institutional discussion on the asset class.  “Banks are asking for bitcoin because they can see their customers sending dollars to Coinbase and other crypto exchanges”, said the President of NYDIG.   

Private sector Digital Dollar pilot projects coming

The non-profit Digital Dollar Project announced that it will launch five pilot projects over the coming 12 months. The Digital Dollar Project is a partnership between Accenture and Digital Dollar Foundation established to explore a US central bank digital currency (CBDC). There are more details about the pilot in this Reuters article, and the project’s mission statement is below. This effort comes as the Federal Reserve (Fed) has said they are in no hurry to launch a CBDC.

  • The Dispatch’s view remains that central bank digital currencies are merely an extension of the fiat money system. They pose little risk to the ongoing adoption of digital currencies like Bitcoin. Adoption is taking place because of the verifiable scarcity, payment mechanism and network effect. Fiat currency, in contrast, is losing relative purchasing power as more of it is created to support spending, and even more will be needed for pension obligations, social security and Medicare in the coming decades.

JP Morgan to offer Bitcoin fund, following Morgan Stanley’s footsteps

There has been no official release by the bank but these articles by Blockworks and Bloomberg provides some insights. As Dispatch #9 predicted, other large  banks will scramble to offer bitcoin access to wealth management clients, following Morgan Stanley’s lead. Bitcoin is a scarce asset, and we highly recommend owning actual coins directly at lower cost rather than owning shares in a fund and then paying two sets of fees. Access to the bitcoin payment system is the core value proposition.

Citibank weighs offering crypto services

The Financial Times broke this story on Thursday, and you can read the FT article here. Read this Reuters article about the FT story if you can’t get past the FT paywall. The FT headline below captures the essence of why Citi is considering this move.  

These are NOT rash moves as banks witness the rising adoption firsthand. On the retail side they see deposits leave via ACH and wire transfer to crypto exchanges. On the institutional side, clients just flat out say they are moving capital to invest in crypto. With these insights, you should not be surprised that Citi published a bullish 108-page report on Bitcoin, as Dispatch #7  highlighted back in March. Now they float a more forceful adoption story via the FT. The following three stories in the Bitcoin adoption corner validates their aspirations!

Bitcoin Adoption Corner!

#1 NFL draft pick Trevor Lawrence to invest in digital assets,

Trevor Lawrence’s tweet below promotes a crypto asset trading app. There’s probably an endorsement/sponsorship angle here, but he has skin in the game too: This Forbes article says Lawrence is investing his signing bonus (estimated at $22m) in digital assets.

  • Auto insurer Metromile will accept premiums, and payout claims in Bitcoin. Metromile is an insurance provider that offers pay-per-mile auto insurance, and IPOed via a SPAC last year. Mark Cuban and Chamath Palihapitya of Social Capital – both crypto adoptors – are investors in Metromile.  The company also announced that it would buy $10m worth of Bitcoin in 2nd quarter of 2021. More details on the plans in this Forbes article and the company release. The Dispatch continues to question the practicality of using Bitcoin for monthly payments when you have to track and report the capital gain/loss on each payment. However, we can see the benefits of receiving a claim in Bitcoin.  
  • Latin American e-commerce giant MercadoLibre disclosed $7.8m Bitcoin purchase. NY Stock exchange listed MercadoLibre (ticker MELI) is the Amazon of Latin American, and is a sizable company with a $72bn market capitalization. The Bitcoin investment was reported during the 1Q21 earnings report is small compared to $862bn cash on the balance sheet as of March 31st. The MELI has adopted Bitcoin as part of it’s treasury management is notable.

IRS wins court case to access Kraken’s (crypto exchange) client records

This particular summons is to obtain records of customers who have conducted at least $20,000 in transactions between 2016 and 2020. More details are in this The Block article and the official DoJ release. The snippet below from the DOJ release provides insights into the Government’s goals.

The IRS is increasing crypto tax compliance efforts. This Reuters article from last month flags a similar summons to another crypto platform. The dispatch continues to highlight the need for US tax residents to keep accurate records of crypto transactions to calculate capital gains. You are responsible for tracking the cost basis because exchanges are unable to do so as coins can be moved from one venue to another (pseudo anonymously).

Debt to GDP no longer meaningful!

This WSJ article headline caught my attention because the more we hear “this time is different” rhetoric, it’s a warning sign that we are pushing the limits. If the Fed weren’t buying a large share of US treasury debt each month, rates would be meaningfully higher. Watch the credit default spread and currency markets for pricing signals as the Fed has snuffed out signals in the treasury bond market.

BITCOIN SCHOOL Goes Ethereum!

Ethereum is handily outperforming Bitcoin at present

What follows is a summary of the narrative on Ethereum’s strong performance and a simplified explanation of some core features. Ether, often referred via the ticker ETH, is the token of the Ethereum protocol.

The Ethereum protocol dominates the market for powering the blockchain economy.

Most decentralized services, which are also called decentralized apps (dapps) are built on that protocol. The bulk of Stablecoins in circulation operates on the protocol; NFTs  are built on Ethereum, too. The biggest dapps are all decentralized Finance (Defi) services like exchange Uniswap and lending/borrowing dapps Compound or Aave. All of these dapps are built on the Ethereum network, which require locking up Ether to operate the service. The chart below illustrates the increasing Ether (ETH) locked up in dapps smart contracts and the consequent drop of ETH on exchanges like Coinbase.

Ethereum inflation set to fall

Furthermore, the protocol is set to implement revised rules in July 2021 that will reduce the new issuance of ETH. This has gotten ETH bulls excited as it’s set to reduce the inflation rate, as the chart below from coinmetric shows. If you would like to read more about the coming change, this Coinmetrics report has more details.

While the drop in new supply of Ether projected in the above chart is notable, it’s nothing like the exponential new supply decline (-50% every four years) built into the bitcoin protocol.

Ethereum bulls also make the case that ETH can appreciate more vs. Bitcoin. As the Dispatch is fond of saying, everything is going up in value vs USD. Therefore, the chart below shows ETH in BTC terms, which has been a volatile pair. The anecdotal observation from the chart below is that ETH strengthens against Bitcoin during bull markets and underperforms BTC in the bear market.

Source: Coinmetrics

CME futures launched in February 2021 have brought institutional flows into the protocol.  We have seen steadily increasing volumes.

Source: Coinmetrics

Additional points to note.

  • The Ethereum protocol is set to undergoing a drastic change as it goes from a Proof-of-Work(PoW) to Proof-of-Stake (PoS) transaction processing mechanism.
  • PoW is seen as more secure, but is energy intensive and has limited transaction processing capacity. PoS improves the latter two issues while trading off security.
  • This Blockgeeks post is a good primer on the difference.
  • Ethereum network needs to continually innovate as it provides a functional utility to the dapp community. Transaction processing speed/capacity and fees are some of the keys areas of focus.
  • Upstart protocols are nipping at Ethereum’s heels, offering many of the features of the Ethereum protocol but with faster and cheaper transaction processing.

While Bitcoin has greater verifiable scarcity base on deflationary supply built into the protocol, on the Ethereum protocol rapid growth of dapps could drive Ether scarcity. Just note that Defi volumes are highest during the bull market and could see sharp declines during a bear market (yet to be experienced by the Defi services). This alone should make Ether more cyclical than Bitcoin, in the Dispatches view. That should be taken into account when sizing the two assets in a digital asset portfolio.

Stay safe and do reach out if you have any questions or comments about the material in this Dispatch.

Asi

Important Disclosures

This is not an offer or solicitation for the purchase or sale of any security or asset. While the information presented herein is believed to be reliable, no representation or warranty is made concerning its accuracy. The views expressed are those of RockDen Advisors LLC and are subject to change at any time based on market and other conditions. Past performance may not be indicative of future results.

By

Multiple Bitcoin ETFs, Visa & Paypal start crypto payments, Bitcoin for transactions & salary, digital yuan

Dispatch #10 -2021

April 9th, 2021

A slew of Bitcoin ETF filings with the SEC takes top billing in Dispatch 10. The filers are industry powerhouses like Fidelity Investments, Goldman Sachs, Van Eck and Wisdom Tree. Bitcoin also continues to make subtle progress as a medium of exchange. Examples are Tesla accepting Bitcoin for car purchases and the Sacramento Kings offered to pay wages in Bitcoin. Also watch out for the Coinbase IPO next week that will be a high-profile event for the crypto ecosystem, as Coinbase will be valued above many US banks. Other items discussed in this week’s Dispatch include:

  • Visa & Paypal to accept digital currencies to settle payments
  • NBA’s Sacramento Kings offer player salary in Bitcoin
  • Tesla accepts payment in Bitcoin
  • China launches digital Yuan
  • Strong March jobs report
  • Bitcoin School: Comparing today’s price action to past cycles.

For a PDF of this Dispatch click here

Slew of companies files to launch Bitcoin ETFs

While the Dispatch was on spring break in South Carolina, Fidelity, Wisdom Tree, Van Eck, NYDIG and Goldman Sach announced plans to launch bitcoin ETFs. The bottom of this article in The Block provides links to stories on each company that has filed with the SEC to launch a bitcoin ETF. Van Eck was the first to file and the SEC will likely have to announce a decision within 45 days as this Coindesk story mentions. Low-cost ETF access should accelerate Bitcoin adoption and possibly lead to a price reaction too.

This WSJ article provides specific details on the Fidelity plan. Fidelity is already well entrenched in the bitcoin echo system with Fidelity Digital Assets, one of the premier institutional Bitcoin custody providers in the market. RockDen advocates owning actual Bitcoin rather than a paper obligation via an ETF or some other fund structure.  

Visa & Paypal introduce crypto settlement

Visa will allow settlement using stablecoin USDC as this Reuters article explains. With Paypal, US users can use Bitcoin, Ethereum and Litecoin to settle payments as this article explains.  These measures are somewhat academic because the US tax code makes payment from anything other than stablecoins ill advised. That is because each transaction will lead to a taxable event based on the difference in value between when you acquired the digital currency and when you dispose of it. This article has more details on the tax implications and how Paypal may report transactions to the IRS.

However, the ability to use digital assets for payments does remove a layer (banks) from the equation.

Legacy:              Consumer –> Bank —> Visa/Paypal –> Merchant

New:                   Consumer/crypto —> Visa/paypal —> Merchant

  • Note that in the Visa case, they are using Crypto.com as the only issuing agent, so essentially Crypto.com replaces the bank in the legacy scenario. One centralized entity, replacing another.
  • The Paypal case is more powerful because it is cutting out the banks, although it’s unclear how they convert from cyrpto to USD, which I believe will ultimately require access to Fedwire system.

Could this drive demand for changes to the tax code over the long term as adoption increases? That seems highly unlikely from where we sit today as the government needs revenue to paydown an all-time high debt to GDP. Under current rules, since Bitcoin is considered an asset, using digital currencies for everyday purchases is very cumbersome. However, the next two stories highlights how Bitcoin is gaining traction for large value transactions.

Sacramento Kings offers to pay organization salary in Bitcoin

This announcement may have far reaching consequences although it hasn’t garnered much attention. This follows Russell Okung of the NFL structuring his contract to be paid half in bitcoin. The Kings are offering all employees to be paid in Bitcoin as this Forbes article elaborates. Stay aware of this gradual proliferation of high-value usage.

Tesla will accept Bitcoin for auto purchases

Tesla is accepting Bitcoins for car purchases, as the tweet below announced.

Source: Twitter

Read more about how you can make payment with bitcoin on Tesla’s customer support page. And to drive home the above point about disintermediating banks, Tesla is running its own bitcoin node (essentially their own bitcoin bank), which means that your Bitcoin will go directly to tesla with no intermediary. To the extent Tesla just holds the Bitcoin received as payment, they don’t need access to a bank.

China launches digital Yuan

China launched the digital Yuan last week and it will circulate alongside normal paper/electronic cash. Each digital Yuan issued will remove a regularly Yuan from circulation, so the money supply won’t increase. The paragraph from the WSJ shown below should immediately raise question about using a digital Yuan as a store of value. Do you trust the Chinese Communist Party to control your wealth? Ignore the end about bitcoin because bitcoin protocol is NOT anonymous.

The view here remains that the digital Yuan and other central bank digital currencies (CBDC) are NOT alternatives to digital assets like Bitcoin that are valued for scarcity and trust. If at all, CBDCs should make moving your fiat currencies into digital assets easier vs. the friction today.

Strong March Jobs report

The US added 916K jobs on a seasonally adjusted basis in March, which was better than the 660K that economists predicted. Part of this increase was driven by teachers returning to work, which illustrates some of the quirks of the labor department statistics. This WSJ article provides more details and the chart below illustrates the jobs market today vs pre-Covid.

Evidence of surging demand and the need to hire was made clear by Delta Airlines cancelling flights on Easter Sunday due to staff shortage. Delta is also going to stop blocking middle seats starting May 2021, one month earlier than previously anticipated. If you are dying to travel post pandemic, you better book tickets now!

The strong jobs data is adding to the inflation debate. Inflation hawks say that substantial stimulus provided by government checks and Fed money printing will lead to sustained inflation. The opposing view is that we are merely re-employing furloughed workers and the pickup in inflation will be temporary. The Dispatch sees rising risks of sustainably higher inflation as demand recovers to pre-Covid levels and favorable base effects of large city rents dissipate later in 2021. Rents are the single largest component of the core PCE (personal consumption expenditure) used by the Fed to gauge inflation.

Bitcoin School

Price action today and prior price pullbacks

I’ve recently been asked when the last two cycles peaked in value, in relation to the halving cycle. The log scale chart below provides a graphical look at the prior two halving cycles, shown by the top and the bottom of the blue shaded area. There is NO reason that the current 3rd cycle needs to track between the range of the prior cycles, although it has thus far. I would ignore the thin blue line, which is merely the average of the last two cycles. Definitely ignore the price points illustrated on the blue line.

  • The entry of institutional investors will substantially change the shape of the current cycle compared to the last two, I believe.

Source: @ecoinometrics

Note: The Dispatc uses Bitcoin to denote the token of the bitcoin protocol.

People interested in Bitcoin are mostly aware of the large, roughly 80% peak-to-trough drawdown of Bitcoin price in the prior cycles. They are less aware of the more numerous smaller price declines on the way up in the prior cycles. The chart below shows the many price drawdowns (aka price pullbacks) of the current 3rd cycle and how these compare to pullbacks in the past cycles.  

Source: Glassnode

Stay safe and do reach out if you have any questions or comments about the material in this Dispatch.

Asi

Important Disclosures

This is not an offer or solicitation for the purchase or sale of any security or asset. While the information presented herein is believed to be reliable, no representation or warranty is made concerning its accuracy. The views expressed are those of RockDen Advisors LLC and are subject to change at any time based on market and other conditions. Past performance may not be indicative of future results.