The Cryptocurrency Thread 2

[Markola]

One of the criticisms of Bitcoin is that it uses a lot of electricity. This recent informative Newsweek article explains how Bitcoin miners are incentivized to seek out the wasted energy that no one else wants, stabilizing grids in the process.

https://www.newsweek.com/bitcoin-mining-americas-most-misunderstood-industry-opinion-1669892

 

[MichaelB]

One of the criticisms of Bitcoin is that it uses a lot of electricity. This recent informative Newsweek article explains how Bitcoin miners are incentivized to seek out the wasted energy that no one else wants, stabilizing grids in the process.

https://www.newsweek.com/bitcoin-mining-americas-most-misunderstood-industry-opinion-1669892

It certainly is an attempt to counter the narrative that crypto mining is energy intensive and net harmful to the environment. Unfortunately, it is notably absent of both hard data and energy industry expertise, and is authored by someone with vested interest in propagating blockchain use.

 

[tothemoon]

my mining rig doubles as a furnace during the winter

 

[MichaelB]

Well, the US Fed made an announcement yesterday (1/20) on digital currency that should be of enormous interest to readers of this thread. It released a white paper laying out its view of a central bank digital currency (CBDC) and how it could be used in the US.

The press release is here, the Fed web page on this is here, and the paper is here.

It really can’t be summarized, and everyone interested in crypto should read it. However, two points are worth highlighting. One, the Fed position is CBDC has an important use in the payments system. Two, there would still be a need for intermediation.

The implications of this cannot be overstated. Digital payments are at the core of everything crypto, and a digital asset sponsored by the US Central Bank both questions and challenges the need for privately sponsored synthetic alternatives like Bitcoin and Ethereum. In addition, if adapted, this brings digital coins into the fold of monetary regulation, instead of out in the weeds where it is today.

This is not an announcement by the Fed of a digital coin. It is the first step, though. It now asks for public comments and, once received, will consider them as it prepares the next step, which will be more of a specific proposal.

 

[Markola]

It certainly is an attempt to counter the narrative that crypto mining is energy intensive and net harmful to the environment. Unfortunately, it is notably absent of both hard data and energy industry expertise, and is authored by someone with vested interest in propagating blockchain use.

It makes logical, economic sense. The primary costs to be a miner are equipment and electricity. To compete, miners have to invest in the latest generation mining rigs, which are increasingly expensive and sophisticated. The days of mining from a regular laptop are over. Rig supply is limited and the price is inelastic. That leaves electricity as the major variable to profitability.

Miners are flocking to the locations globally that have the cheapest electricity, such as Paraguay, which has 30% more hydropower capacity than is used, so it goes to waste. A former executive of Gateway computers (remember the cows?) is setting up mining rigs on old, unused hydro dams in closed New England factories, because - dirt cheap power.

Free electricity is even better than dirt cheap electricity, such as the west Texas miners periodically enjoy when wind and solar output exceeds supply. As the article describes, the grid operators are glad to have the miners switch on when there is excess electric supply, and switch off when it is more scarce and expensive, requiring the dirtier hydrocarbon plants to kick in to serve the usual customers. They have developed in west Texas a kind of symbiotic shock absorber that allows American miners to compete with the Paraguayans using free hydro and the El Salvadorans using free geothermal electricity.

 

[Markola]

.



Digital payments are at the core of everything crypto, and a digital asset sponsored by the US Central Bank both questions and challenges the need for privately sponsored synthetic alternatives like Bitcoin and Ethereum. In addition, if adapted, this brings digital coins into the fold of monetary regulation, instead of out in the weeds where it is today.

I read it last night. A few additional perspectives:

1) Institutional and other mainstream investors are begging for a clear US regulation regime, which would let them confidently move into digital assets, as many want to do to add to their asset mix

2) Other countries are setting up clear ground rules, such as Germany, Switzerland, Canada, even the Bahamas, and are enjoying the jobs and capital inflows of the new industry. Other countries, like Russia, China and possibly India, are trying to shut it down, and could become poorer as a result. The US is incentivized to retain its leadership in digital assets by not letting other advanced countries get ahead of it. Of course, it’s a difficult and delicate proposition for the world’s leading economy and reserve currency to get this right, so it is good that the Fed is not rushing to issue a centralized, regulated, official, dollar-denominated stable coin. Chair Powell has not promised a CBDC, but the US exists in a competitive globe, so it’s probably a matter of time.

3) I don’t agree with your opinion that this means anything bad for fixed supply, proof of work-based Bitcoin. It is digital property, which is lightly-traded, and has global demand well beyond US control. It is really very different than the thousands of proof of stake, unlimited supply altcoins with specialized uses in games and what not, NFTs, unofficial stable coins and the rest of the digital asset space, much of which will and should be regulated out of existence in the US as “securities”. Bitcoin property can sit just fine right alongside the dollar, stocks, bonds, gold and whatever else. What Bitcoin threatens most at this stage is gold and also weak, hyper-inflating currencies around the world, entailing huge populations whose pesos, Bolivars and dinars are melting far faster than the dollar is melting. Those folks face inflation problems we cannot imagine, and Bitcoin provides them the possibility of a life raft. An official US stable coin would function the same, except we know the dollar is melting too, only slower than other currencies, while there will only ever be 21 million Bitcoin. Will one win out or will both thrive? My hunch is that Fed stable coins will someday be great for short term, high-velocity transactions globally, while Bitcoin will be popular for long-term, lower-velocity value storage.

 

[aja8888]

Interesting 40 page paper. It sounds like a Central Bank Digital Currency is described as an "additional" payment system to the current one, and totally controlled and regulated by the FED.

Should be interesting to see where this goes, but if one country develops a CBDC, then other countries will follow (my guess).

 

[Markola]

^^^^^^. +1. This passage from page 15 of the Fed paper (thanks for posting, Michael), indicates why it is inevitable:

Support the Dollar’s International Role

Another potential benefit of a U.S. issued CBDC could be to preserve the dominant international role of the U.S. dollar. The dollar is the world’s most widely used currency for payments and investments; it also serves as the world’s reserve currency. The dollar’s international role benefits the United States by, among other things, lowering transaction and borrowing costs for U.S. households, businesses, and government. The dollar’s international role also allows the United States to influence standards for the global monetary system.

Today, the dollar is widely used across the globe because of the depth and liquidity of U.S. financial markets, the size and openness of the U.S. economy, and international trust in U.S. institutions and rule of law. It is important, however, to consider the implications of a potential future state in which many foreign countries and currency unions may have introduced CBDCs. Some have suggested that, if these new CBDCs were more attractive than existing forms of the U.S. dollar, global use of the dollar could decrease—and a U.S. CBDC might help preserve the international role of the dollar.

 

[captain3d]

Yes interesting CBDC document.

Over all it sounds partly excited by the innovation of digital currency and partly panicking to catch up before they lose control.

----
The PWG report also notes, however, that the potential for the increased use of stablecoins as a means of payment raises a range of concerns related to the potential for destabilizing
runs, disruptions in the payment system, and concentration of economic power.
----

Also thought this was funny considering the worry about Bitcoin being backed by nothing etc...

----
As a liability of the Federal Reserve, however, a CBDC would
not require mechanisms like deposit insurance to maintain public confidence, nor would a CBDC
depend on backing by an underlying asset pool to maintain its value. A CBDC would be the safest
digital asset available to the general public, with no associated credit or liquidity risk.
----

And speaking of control obviously a CBDC allows much closer tracking compared to physical cash and opens up the possibility of controlling how it could be spent.

----
Identity-verified: Financial institutions in the United States are subject to robust rules that are
designed to combat money laundering and the financing of terrorism. A CBDC would need to be
designed to comply with these rules. In practice, this would mean that a CBDC intermediary would
need to verify the identity of a person accessing CBDC, just as banks and other financial institutions currently verify the identities of their customers.
----

How to crush those pesky other cryptos...

----
In our rapidly digitizing economy, the proliferation of private digital money could present risks to both individual users and the financial
system as a whole.
----

Over all most of the points raised as to why a CBDC is a good idea are the same points used to explain why Bitcoin etc is a better alternative to the current system. Where things differ is the ability to control the system and how individuals interact with their own money.

I wonder if familiarity with a digital 'crypto' $ would make people more or less likely to add some Bitcoin/Crypto to their iportfolio.

 

[joesxm3]

Crypto holders must be feeling weightless given the way the market is dropping.

It has been said that crypto is correlated to the Nasdaq. I wonder if this will bleed over to stocks on Monday.

Some have said that crypto was being sold to cover stock margin requirements. I wonder if we might see equities being so!d to cover crypto margin.

Maybe the only saving thought is that most of the heavy margin on crypto is outside the USA.

 

[target2019]

So it is a great opportunity, or the beginning of total collapse?

It's been mentioned before that cryptocurrency has increasing correlation to the US stock market.

I don't think it's discussion-worthy to lump all crypto holders into one class. For example, the 40-year old is never off Discord, always looking for opportuntiy. The corporate executives who've plowed into the crypto field with company holdings are probably having a very bad weekend.

 

[matjung]

I was once something similar to an insider at TokenValley. Not a coin. Something that watched and monitored, Coins, Tokens, Offerings and similar stuff of others.
In my perception. Nothing innovative came out of Cryptos yet.
It redistributes money. That is the only function.

My view: After dot com bubble plenty of people did not find jobs in the old economy. Some found jobs in the new economy. Those who failed in finding jobs in new economy contributed to the crypto economy.

Weather it really creates value or not, is still unknown.
A lot of graduates still struggle in finding proper roles.

So they work for startups where HR is less proficient and the CIO is happy to have a candidate who can work 50 to 60 hours a week.

The money of the investor is not lost.

The IT folks are having it on their bank and crypto accounts.
Digital Money and Crypto is not the same thing.
The number of Cryptos around became uncountable.
As with hard currencies. The number of hard cryptos with some demand is limited to few. With the bulk being weak crypto currencies issued by unknown entities.
Just a few years ago, it was a kind of sports among graduates to launch their own initial coin offering.

I like to be a member of a team that issues currencies and tokens rather then someone who turns dollars into a digital something that may vanish tomorrow.

 

[Markola]

It helps to adopt a 10 year forward view. I’m watching the prices dive and am thinking about the “PoW and PoS” article in post #33 above. Scroll down to the section on the Gartner Hype Cycle. Same as it ever was?

 

[aja8888]

I was once something similar to an insider at TokenValley. Not a coin. Something that watched and monitored, Coins, Tokens, Offerings and similar stuff of others.
In my perception. Nothing innovative came out of Cryptos yet.
It redistributes money. That is the only function.

My view: After dot com bubble plenty of people did not find jobs in the old economy. Some found jobs in the new economy. Those who failed in finding jobs in new economy contributed to the crypto economy.

Weather it really creates value or not, is still unknown.
A lot of graduates still struggle in finding proper roles.

So they work for startups where HR is less proficient and the CIO is happy to have a candidate who can work 50 to 60 hours a week.

The money of the investor is not lost.

The IT folks are having it on their bank and crypto accounts.
Digital Money and Crypto is not the same thing.
The number of Cryptos around became uncountable.
As with hard currencies. The number of hard cryptos with some demand is limited to few. With the bulk being weak crypto currencies issued by unknown entities.
Just a few years ago, it was a kind of sports among graduates to launch their own initial coin offering.

I like to be a member of a team that issues currencies and tokens rather then someone who turns dollars into a digital something that may vanish tomorrow.

Nice summary.

 

[captain3d]

I have estimated in my own tracking if stocks drop 50% crypto will drop 85%. Considering crypto is already down 60% and it’s correlation with stocks remain. Could this be a leading indicator for where stocks are heading.

Already small cap growth stocks are well down. Maybe the big ones are rolling over the edge a little later.

 

[MichaelB]

The narrative around crypto continues to evolve as it struggles to find a role and fit more easily into the financial universe. Perhaps this is a good moment to revisit the idea of crypto. As defined early in this (and one other) thread, it has three primary purposes.

One is an alternative synthetic currency, with a fixed supply, to offset the ever increasing stock of US$ currency and maintain steady value over time. Another is as a digital instrument to facilitate quick, easy and low cost payments and transfers. The third is a store of value to protect against inflation.

Would anyone care to assess how well it is performing these tasks? How should we assess the high volatility it is suffering, especially in light of the constant drumbeat of “store of value”. Does the potential as a mechanism for digital payments remain as strong now that central banks around the world are starting to define their own economy wide digital financial infrastructure?

 

[Markola]

Any economically-literate person who is witnessing the vast increases in U.S. money supply since the Great Recession, today’s 7% U.S. inflation, and thinking , “This…not…good…,” might be attracted to read the following article in Bitcoin Magazine, the first of a series. It’s a concise, fact-based history of global leaders’ perfectly understandable attempts over the last century to bolster, then abandon for good, the gold standard favoring, instead, “the full faith and credit of the U.S. government.”

“Replacing the U.S. Dollar with Bitcoin: Leaving the Gold Standard.”

https://bitcoinmagazine.com/culture/bitcoin-lessons-from-leaving-gold-standard

Part 1 is standard economic history, and inflation-adjusted gold prices over time bear out that history, showing that gold is worth the same as a half century ago:

 

[joesxm3]

Well, at the current beaten down price of $35,000, BTC is still up about 4.8% for the year. Based on the treasury department numbers it would seem that the purchasing power of USD is down about 7% for the similar period. And aren't treasuries yielding 1% or 2%?

 

[Markola]

^^^^ and Michael, it helped me to dissect Bitcoin’s unique qualities and the strength of its moat from 100% of the other altcoins. It’s really a different beast to contend with.

 

[corn18]

Well, at the current beaten down price of $35,000, BTC is still up about 4.8% for the year. Based on the treasury department numbers it would seem that the purchasing power of USD is down about 7% for the similar period. And aren't treasuries yielding 1% or 2%?

I’ll bet the folks that bought @ $67k aren’t thinking that.

 

[Markola]

Specifically, the ones who sell when there is blood in the streets.

 

[jim584672]

^^^^ and Michael, it helped me to dissect Bitcoin’s unique qualities and the strength of its moat from 100% of the other altcoins. It’s really a different beast to contend with.

All the cryptos are basically the same in concept so I don't see how Bitcoin is much different from any of the alts, besides being around longer and having a higher price.

 

[captain3d]

Crypto is a speculation that it will become an alternate monetary system, inflation hedge etc.

The intention is clear. The speculation is if it happens (or not).

Think of all the dotcoms who’s intentions were clear and speculation ran on those intentions. 95%+ did not make it and crypto will be the same.

CBDC’s do not change any of this I think. They still represent ‘the problem’ that some crypto intends to ‘solve’

Bitcoin represents the ideological side of crypto standing in opposition to government systems.

All the other cryptos are business ideas which intend to be more efficient than existing systems, as a gross simplification.

With that in mind I consider them to be more like extreme tech stocks. Bitcoin is both extreme tech and a gold replacement to me.

 

[joesxm3]

The reactions today are interesting.

I guess the consensus is that BTC is speculation or a very risky tech asset class.

What struck me today though, is the timeframe for making an assessment. This seems to be a forum where people pick an asset allocation almost for life and evaluate the results on a decade by decade basis. Yet after a few weeks of poor performance by the crypto market we are attempting to pass judgement.

I can buy into the idea that 99% of the crypto projects are going to go to zero. They are just another way to obtain venture capitalist funding. Raoul Pal has claimed that this is a good thing because it opens up the opportunity previously held only by accredited investors to the average person. It seems that the venture capitalists who take huge risks make a tidy profit on the few companies that succeed because they were in so early at such a low price.

If we were not talking about crypto, but instead about the accepted asset classes, how would the forum react? What was the narrative after the 2008 crash?

It seems to me that the standard thinking would be that we have our asset allocation and we are looking forward for twenty or thirty years. Timing the market is bad. When one portion of the portfolio goes bad, it just means it is time to rebalance the allocations and go back to sleep.

So, what has changed about bitcoin in the past month, aside from the price going down?

We know it is a volatile asset class. It has gone down before and then gone back up.

Past performance is no guarantee of future gains, so, flip a coin or wait and see.

I am more concerned what might be happening Monday when the stock market opens.

p.s.

Take a look at the posts on this thread discussing what to do if the S&P 500 corrects by 20%.
https://www.early-retirement.org/forums/f44/buying-the-dip-or-112635-3.html

 

[MichaelB]

Just to be clear, a crypto, such as bitcoin, cannot be both synthetic alternative currency and risk asset. It can only be one of these two things.

As for comparing bitcoin to the tech calamity back in 2000, there is one critical difference. A tech company can have no revenue or profit, yet still justify a high market value, if it meets one of 2 conditions. One, it will produce revenue and profit in the future. Or two, it has proprietary technology that is of high value to another business. Bitcoin does not meet either of these two conditions, so a comparison is a narrative without foundation.