Stay up to date on Green Candle by subscribing to our newsletter and following us on Twitter and Instagram!
In our Friday series, we take a deep dive into different asset investments. The first asset we decided to cover was Bitcoin - after 9 weeks, we’re going to wrap this series up and move on to a different asset. We will continue to publish brief State of the Coin newsletters to keep subscribers up to date on BTC. For full disclosure, Brandon and Daniel are strong believers in Bitcoin and both have allocated portions of their portfolios to BTC (HODL baby).
Before we recap the last 9 weeks, let’s take a look at the State of the Coin
A look off chain:
Allied Payment Network incorporates Bitcoin.Allied Payment Network is a digital payment service for financial institutions announced a partnership with New York Digital Investment Group (NYDIG), a bitcoin technology and financial services firm. This is huge development in the BTC space as NYDIG is a subsidiary of Stone Ridge, a $10 billion alternative asset manager.
China continues its crackdown: China continues its crackdown on cryptocurrencies - they shuttered a software development company this week after accusing them of being “involved” with crypto. The communist party of China is doing everything they can to ensure that their citizens live under an authoritarian and anti-individualism regime. Despite the current news out of China, BTC remains strong and HODLers and jumping at every opportunity to buy cheap coins.
A look on chain:
We’re continuing to get our feet wet with Glassnode on chain data!
Price update: Price continues to track along the 30-35k range. At the time of this writing, BTC is priced at ~33k USD, well within the past month’s mean +/- standard deviation, shown by the green band in the chart below. Price volatility is narrowing as so-called “smart money” accumulates coins during small dips.
Hash time update: The major news over the last several weeks has been the most recent crackdown on BTC mining in China. Immediately following the ban, hash rate fell and hash time (time taken to produce new blocks) skyrocketed from the goal time of 600 seconds (10 minutes) to ~1400 seconds (> 23 minutes)! Hash time has since dropped back toward normal levels, but time will tell whether re-stabilization has been fully realized. The “Great Migration” is underway as the BTC mining network spreads from China to nation states more open to Bitcoin.
Hash rate and price: With the recent Chinese crackdown, many worry that volatility in BTC mining will lead to volatility in price. Last week we reported a relatively strong correlation between hash rate and price. Although this shows that the two metrics are associated with one another - unsurprisingly - it does not provide an indication of whether one metric drives the other. In other words, it does not tell us whether reduced hash rate is associated with concomitant drops in price. If hash rate were to drive price, we would expect that changes in hash rate would precede changes in price - that is, we expect to observe a time delay or “lag” in price movement. To determine whether adding a time lag results in stronger correlations between hash rate and price, we ran a cross correlation. We found strong correlations between the two signals at all time lags tested (-10:10), but no obvious change in the strength of their association with any amount of lag. This again suggests that, although the two signals are related, it is unclear whether one signal drives changes in the other in a specific sequential order.
Now, let’s recap the last 9 weeks!
What is Bitcoin? Bitcoin is a decentralized cryptocurrency. Bitcoin transactions are verified by a large and distributed network of nodes before settling on a public ledger known as the blockchain. Bitcoin is a programmatic cryptocurrency with several important built-in features, including a large and distributed proof-of-work mining network, a hard cap on the number of bitcoins that can be created (21 million), and set “halving” events in which the reward provided to miners for creating new coins is cut in half.
The price is too high (“I’ve missed the boat”): Bitcoin supply is hard capped and programmed to gradually reduce in supply, driving demand up and reducing potential for inflation. Bitcoin is now receiving institutional backing from large companies and even governments, which will only encourage further growth and adoption. New so-called second layer technologies are evolving quickly and will likely usher in an era of highly transactional BTC (shifting it away from a store of value into a fully transactional currency). Although the price of a single bitcoin is quite large, each coin itself is divided into 100,000 satoshis or “sats” as many in the Bitcoin community call them. This means that you can purchase as little as 1 satoshi at a time so you can get a part of a Bitcoin for less than $1!
BTC uses too much energy: Unlike our current financial systems, BTC produces currency via a decentralized, global network of miners who are rewarded for spending computational power. As more transactions occur and more miners join the network, the computational power needed to successfully mine new coinage (in other words, to win the computation race) will increase. The relationship between cost of mining and value of bitcoin is such that miners are incentivized to continue mining if the value of bitcoin increases and the cost of mining decreases. Thus, miners in the BTC network are incentivized to reduce the energy cost of producing new coins!
BTC is too volatile: A common argument from BTC skeptics is that the digital asset is too volatile - its price swings too rapidly for it to be considered a solid/stable store of value. There’s no way around it: BTC is undoubtedly volatile over short time horizons. This volatility is driven largely by FUD (e.g., Elon tweeting about energy costs), regulatory uncertainty (Chinese mining bans), and slow mainstream adoption. Despite short-term volatility, BTC continues to increase in value over longer timescales.
BTC is not physically backed by anything: Many worry that BTC - and other cryptocurrencies - are not physically backed by anything. In fact, BTC has a stronger and more transparent backing than most currencies used by first world countries. Whereas many so-called fiat currencies are completely controlled by unelected officials working in central banking systems, BTC is backed by open source code with set rules and features. Many of these features aim to provide the “backing” that other physical assets have provided for investors seeking a stable store of value. For example, BTC has a hard cap on the number of coins that will ever be produced (21 million) and relies on a proof-of-work mining system, both of which are similar (at least in theory) to features of gold and other precious metals. All transactions that occur on the BTC network are stored on a public ledger known as the blockchain. What other monetary system provides this level of transparency?
BTC is used for illegal activity: Politicians are particularly fond of spreading the (false) narrative that Bitcoin is predominately used for illegal transactions. This is far from the truth. According to multiple on-chain forensic analyses, less than 0.5% of all cryptocurrency transactions were considered illicit. Additionally, as discussed above, all transactions that occur on the BTC network are recorded and stored on a public ledger - making forensic analyses relatively easy. You want to know what’s harder to track? Cold, hard cash.
BTC is not a transactional currency (cannot be used to buy everyday items): Bitcoin is now legal tender in El Salvador and it’s popularity appears to be growing, particularly in countries with historically poor economic track records. Although on-chain transactions can be slow and cumbersome, off-chain, Layer 2 transactions can be conducted much faster. Currently, Bitcoin is being used for everyday transactions around the world, and many are happening off-chain on the Lightning Network. It’s also important to keep in mind that some of the world’s best and brightest programmers are committed to working on BTC and its Layer 2 technologies.
Governments will not allow it or will heavily regulate it: While governments can attempt to regulate BTC, it is a globally distributed digital network. Unless a government causes a worldwide internet outage, people will have access to the BTC network. And if the network cannot be shut down entirely, countries/states will have to compete for the top crypto investors/companies by creating environments conducive to the technology and those who understand it. Failure to compete - as appears to be the case currently for China - will be considered a massive geopolitical mistake by historians in the future.
It’s easy to lose access to BTC wallet: You can lose your Bitcoin if you keep a hardware wallet and lose it or place your Bitcoin into cold storage and lose the private keys, but in a sense that is the beauty of Bitcoin. You are in full control of your money, not a bank, not a government, but each individual has the ability to control their own wealth. As the saying goes: “with great power comes great responsibility.” Well, if you want power of control over your wealth, you will need to take responsibility for it as well. The key to protecting yourself from losing your BTC is to keep redundant backups (in safe, unhackable locations) so that if one is lost or destroyed, you have a backup (or multiple) in place.
Going forward
As we said in our introduction, we plan to begin diving into a new asset class in the near future. We will continue to publish State of the Coin newsletters to keep you up to date on BTC!
Stay up to date on Green Candle news by subscribing to our newsletter and following us on Twitter and Instagram!
Happy Friday everyone - get after it this weekend!
Brandon and Dan
Disclosure: The authors of this writing hold positions in cryptocurrency mentioned in this article. That cryptocurrency is Bitcoin. The article was written by Daniel Kuhman and Brandon Keys, and it expresses the author's own opinions. They are not receiving compensation for it. The information presented in this article is for informational purposes only and in no way should be construed as financial advice or recommendation to buy or sell any stock or cryptocurrency. Brandon and Daniel are not financial advisors. We encourage all readers to do further research and do your own due diligence before making any investments.