Bitcoin Briefing

Bitcoin is set to notch up its biggest July price gain for 8 years – but what next? Our coin guru Greg looks at BTC and its next chapter.

Why should it be on my radar? Because while Covid-19 canceled the bull-running festival in Pamplona, Bitcoin has been rampaging through the alleyways of a global financial system terrified of getting trampled. And also because of the whole halving thing back in May. 

Okay, tell me more: Slowly going nowhere for what to a crypto bull must have felt like half of forever, Bitcoin in late July rallied toward the crucial $11,500 level last seen circa 2018. BTC was on track for a banner July, up 22% as of Friday, July 31 as it flirted with $11,500. The June 2019 high of $13,880 suddenly seems within reach, particularly when you consider the halving.

On May 11, Bitcoin, for the third time in its history, cut, from 12.5 to 6.25 BTC, the reward given to “miners” for the coin blocks they produced. Rigidly binding supply to a consensus-steeped inflation control policy, this was no bolt from the blue. 

The ledger-on-its-sleeve-wearing network, always, from the start (in 2009 when the miners’ bounty was 50 BTC), insisted that it would halve the reward every 210,000-blocks until all 21 million made it into circulation. Two prior supply constrictions, that, again, everyone knew were coming, eventually were followed by price booms, followed by busts, none of it ever neatly explained. But after subsequent post-cycle dust settlement phases, the long-view-taking holders who hung on could at least point to the fact that the post-halving price had gone higher. So BTC Halving Boom III hasn’t happened, not in the least. Not yet, anyway.

The first halving, in November 2012, following the completion of block 210,000, saw the mining reward halved to 25 BTC. Geek chic cocktail parties were held around the world. BTC was $11. Within a year, it was $1,150. By the fall of 2015, with its second halving less than one year off, BTC struggled to crack $300, which it did; and, by the second halving, in July 2016, the price had climbed to $650. As the leaves on the trees fell that following autumn, BTC flat-lined. But you probably know what happened next. By mid-December 2017, BTC was flirting with $20,000. Two years later, the price was back down to about $3,200, or 400% higher than the price before the second halving. 

Grown tired of this predictable boom/bust saga? How about the word “halving?” Or do we prefer “halvening?” Okay Bitcoin, now what? 

What the bulls may have seen:

1. It’s all relative: Gold and BTC are, with the USD devalued, that much more alluring at a time of extreme uncertainty, and the Fed pump switched to on for the foreseeable future.
2. Hash power, higher: One prediction that turned out to be true, at least momentarily, was that a reward cut would lead to a jettisoning of unprofitable miners, and indeed some 38% of hash (processing) power exited the network in late May, as evidenced by estimates of BTC-minting-related energy consumption, as measured in per-year terawatt-hours, which, post-reward-bifurcation, did drop below 60.

But the fleeting energy-use dip was followed by gradual growth, to back above 61 terawatt-hours per year, according to Digiconomist, as cited by Decrypt’s Andrew Hayward. Power-devouring mining activities will continue to be closely monitored with so much intense focus on an impending upward climb possibly within the next few months, and also as the BTC carbon footprint approaches “higher-than-Algeria” levels.

1. Excelsior, difficulty adjustment level: The (mining) difficulty adjustment is the other significant wrench in the network’s monetary toolkit: a measure of how hard it is for miners to compete for block rewards, it gets dialed up or down every 2,016 blocks (roughly every two weeks) in lockstep with hashrates or the speed at which a computer processes the BTC code.

Hashrates and difficulty levels fluctuate together, and they are ticking higher. Bitcoin’s mining difficulty, as of mid-June, had jumped 15% to 15.78 trillion, an expression of total hashrate (TH), or total estimated mining power. This uptick was reached after the network experienced consecutive downward adjustments since the May 11th divide-by-two. 15.78T marked at the time the fourth-hardest level ever, CoinJournal.net said. Then on July 13, there came an adjustment of +9.89%, a new all-time high of 17.3 trillion. This milestone was widely interpreted as a bullish price signal, although the last time the network experienced a difficulty level spike was in January 2018 not long after BTC’s well-publicized, short-lived all-time high.

1. Next-generation pickaxes: Coming soon to a Sichuan mining farm near Chengdu – newer, higher-efficiency hardware able to generate that much more processing power with which miners can record, or hash, new blocks on the chain. Primordially, the higher his or her hash, the higher the odds that a miner pulls out the next block (eating their kill having not been eaten).

Hashrate often gets expressed in terms of the amount of BTC that can be generated in a 24-hour period, per terawatt-hours of computing power. Right now, that figure is pegged at about eight cents’ worth. “The hashrate now coming onto the market will likely be driven by new-gen and high-efficiency machines,” said Ethan Vera, co-founder and CFO of the Luxor mining pool, speaking with CoinDesk’s Wolfie Zhao.

1. Institutionalized: After an intensely volatile first-half-of-2020 for stocks, large, sophisticated, well-resourced investors, such as mutual funds, ETFs, endowments, family offices and hedge funds, are now noticeably looking to BTC, alongside gold, as a new form of non-correlating safe haven capable of mitigating major S&P 500 meltdowns, as evidenced by the rising open interest in CME BTC futures, according to Cointelegraph.com.

BTC seemed to trade in tandem with stocks during the pandemic-bred economic shockwave phase in the spring but now BTC champions are dismissing that as a short-term anomaly, while drawing comparisons to gold which (as of mid-July) had been behaving in a weirdly correlating way to stocks, in terms of not zagging down relative to up-zigging stocks, signaling a chance for the granddaddy of crypto to provide hedge fund founding fathers like Paul Tudor Jones a new form of digital insurance against a stock market crash. In May, the SEC gave the $10 billion Renaissance Technologies’ Medallion Fund approval to trade CME Bitcoin futures.

1. Blowin’ in the wind: With central banks once again throwing open the floodgates and using unmoored, New Dark Age magical-thinking-based rationales to commit what some crypto community members see as nothing short of monetary malfeasance, the winds of change have begun to howl.

The moment, or at least a moment, for BTC may be close at hand, as prophesized in early 2009 by Satoshi Nakamoto. Mining the first block, Satoshi (he or she or they) left behind, in a useless text field, a media reference to looming bank bailouts, a breadcrumb stuck inside an Easter egg underscoring the grand digital money experiment’s main motive.

Satoshi stated his ideological bent less cryptically in his white paper: “The root problem with conventional currencies is all the trust that’s required to make it work. The central bank must be trusted not to debase the currency.” That’s quite a leap, it would now seem. And so “here we are, trillions of unbound dollars later…,” financial essayist Allen Farrington wrote of the third-ever BTC mining-reward-slash-in-half thing, describing May 11 as ushering in a spiritual sea change.

“Bitcoin has elevated the importance of the word consensus. It is a non-violent revolution against financial tyranny led by nobody and everybody.” Here’s a highest-form-of-praise reference value BTC believers increasingly are latching on to these days: “1 BTC: BTC.”

Risk Factors:

1. Sellers. Much of the rally in July was enjoyed by holders who now that they are in the black are bound to do some rewards harvesting for themselves.
2. Third time might not be a charm. Maturity comes with a price; a long, glorious summer day isn’t as seemingly endless as we become hormonally unbalanced teenagers. In four years – when next it does the reward reduction thing – BTC will just be starting high school. The last time Bitcoin divided its reward by two, the world looked different. Trump was trailing Clinton in the polls and CME Bitcoin futures and options didn’t yet exist. The existence of a major, institutional-level market for hedging and speculating BTC exposure – beyond the spot market and upstart digital futures – may explain why, unlike the prior two supply inflation capping strategy implementations, BTC did not rally too much ahead of time. The supply reduction everyone knew was coming came but without any sustained price run-up; could this be a reflection of a more efficient market abetted by spot-market-transcendent CME derivatives. CME would have us believe this: “Given the reward, change has been known since Bitcoin’s inception in 2009, and having already seen two such events, investors may have already incorporated the supply adjustment into their models and taken positions accordingly,” said Payal Lakhani, writing in the CME’s OpenMarkets website. The impact of tighter supply could still be felt, logistically would only be felt – months from now – so short-term disappointment is a risk in that it could create down-cascading negative reinforcement. 
3. Stagnating open interest. CME’s products have had some major trading days but daily averages are not moving higher when you examine the total amount of BTC futures contracts including those on BitMEX, Binance Futures, Bybit and other futures exchanges. Open interest struggling to increase is something a BTC bear would point out prominently.
4. Lightning strikes (not once but twice) or rather, conceivably, soon, ubiquitously: It’s a four-year-old “off-chain” concept called the Lightning Network, aimed at helping BTC overcome its notorious scalability limitations through the use of faster, less costly secondary payment-channel layers on top of the network, allowing two parties to micro-transact in Satoshis via their own unique channel without hashing to the blockchain, until the channel is closed.

You could think about it as (warning! dangerously fraught attempt at a clever metaphor ahead) kind of an off-ramp that leads to a self-contained little speedway along the highway that state troopers only check in on after all drag races have concluded. Mainstream adoption of lightning network channels has been slow but a new BTC wallet product, Strike, launched in early July, now allows “anyone in the world to interact with the Bitcoin and Lightning Network protocols using only a bank account and/or debit card.” But, and here’s where the rubber meets the road, acceleration of the Lightning Network could ultimately lead to wider adoption of BTC fork, Litecoin.

1. Watch out for the watchmen. Government regulators, warning of schemes, scams, laundering and dark web activities – but no doubt increasingly wary of a rival currency – have already imposed restrictions and/or bans on BTC transactions with China’s ban most noteworthy.

The U.S., in a Trump second term, possible given all we know about the electorate, still could bring a heavier hand, which actually could bode well for the revolution’s cache. Now there does seem to be an apparent push to make stablecoins a fiat-friendly emissary of BTC, a thickening plot which seems to be unfurling in broad daylight implying thus that the risk of a Bitcoin ban in the U.S. has faded, said Barry Silbert, head of Digital Currency Group, speaking on Grayscale’s recent second-quarter investor call, according to Forbes.com’s Billy Bambrough. The U.S. looked into possibly scuttling BTC back in 2012 and only last month, Trump reportedly told Treasury Secretary Steve Mnuchin to get working on a crypto clampdown whilst negotiating a China trade deal. But the risk of a “catastrophic” U.S. Bitcoin ban is a thing of the past, Silbert said.

1. Still largely experimental: Asked why he was not yet taking BTC seriously as an investment-worthy asset class, one cutting-edge family office investor (who is not afraid of esoteric, niche investments, such as whiskey barrels) insisted that he wanted to wait until BTC has had a true early adolescent blow-up, viewing the whole digital currency ecosystem with ample respect but as one would a child prodigy footballer not yet able to shave, i.e. not ready for insertion into a champion’s league lineup.

Experimental phase risk can’t be easily shrugged away, said Finextra’s Urvish Macwan: “There are no historical data and experience that allow you to assess how much you can trust it,” he said. “Something completely unexpected could happen to it, which invariably happens at the development stage not only with economic objects but also with experimental technologies.”

Team and record: Bitcoin.org, while not BTC’s official website, as no one owns or runs the network nor can anyone speak or advocate for it with any authority, does at least trace back to the first two developers, Satoshi Nakamoto and Martti Malmi. They handed off the domain name to some additional people, separate from themselves, so as to spread responsibility to help prevent any one person or group from easily gaining control over the Bitcoin project. From 2011 to 2013, the site was primarily used for releasing new versions of the software now called Bitcoin Core.  

In 2013, the site was redesigned, adding numerous pages, listing additional Bitcoin software, and creating the translation system. Today the site is an independent open source project with contributors from around the world. Large players do wield influence to the extent any one influencer can impact a decentralized operation. Bitmain is the world’s largest computer chip company for bitcoin mining. Its supposedly game-changing S19 ASIC series was expected to ship starting in June. Bitmain’s founder Jihan Wu ranked as the second most influential person in crypto, according to Cryptoweekly. Also leading the way forward is Twitter co-founder Jack Dorsey (No. 3 on the power list) with plans to promote mass adoption of BTC in Africa. Early BTC evangelist Roger Ver, AKA “Bitcoin Jesus,” was one of the five founders of the Bitcoin Foundation. In 2017, concerned about scalability limitations en route to Visa-like transaction speed, Ver helped create Bitcoin Cash, a hard fork that led to yet another hard fork, Bitcoin SV.

Institutional Adoption: In 2018, HSBC made the world’s first commercial trade-finance transaction using blockchain, transacting a deal involving a shipment of soybeans from Cargill, and two financial institutions, HSBC and ING, performed within 24 hours on the R3 blockchain platform, saving as many as nine days of costly lag time. After calling BTC a “fraud” a few years back, JP Morgan Chase CEO Jamie Dimon appears to be warming to crypto generally if not BTC specifically, forming a division called Quorum to develop blockchain products, potentially representing the beginning of the end of the big bank crypto blackballing era, Forbes.com said. But while institutional take-up could inevitably be the kiss-of-death for an anti-establishment movement – like when “Combat Rock” became a pop music smash in ’82, soiling The Clash – most experts say that the positives of institutional adoption far outweigh the downside of iconoclastic credibility erosion. Former hedge fund pioneer turned BTC venture capitalist Mike Novogratz has touted the trading platform Bakkt (backed by the ICE which owns the NYSE) as having the potential to boost BTC, not snuff it out in its flowering. Legend Tudor Jones, in revealing he’s long BTC, stated plainly he’s nervous about unprecedented central bank money printing. BitGo, a leader in digital asset financial services, in May, announced institutional trading services through its new entity BitGo Prime following a beta test involving institutional investors.

Recent Partnerships: Not so much a partnership as it is a curious case of natural selection, BTC is now closely associated with stablecoins, particularly Tether.  Analysts claim the existence of a relationship between the price of BTC and the market capitalization of gorilla gateway coin USDT is undeniable, according to OKEx’s Adam James. USDT is being used by the Chinese market seeking exposure to BTC:  “Approximately 65 percent of total hashrate comes from China — a fact which should not be divorced from a conversation about Chinese demand for tethers,” James said. 

Cointelegraph: “The positive relationship between Tether’s USDT issuance and Bitcoin’s price continues to present a pleasant outlook for the short and medium-term.” USDT’s market capitalization is rapidly approaching $10 billion so this is a seductive tango requiring two.

Meanwhile, while not formal partnerships, fintech players are hitching up their wagons and heading into the vast prairie-like adventuresome characters in a James Fennimore Cooper tale. Bitcoin payments startup Zap just announced a coveted partnership with Visa; Galaxy Digital (Novogratz’s firm) did a deal with CAIS to make the process of buying and holding Bitcoin more secure.

What May Unlock Value: What ICE owners of the NYSE and backers of Bakkt would tell you is this: Small shifts can lead to wholesale change. In a letter to the public, Bakkt’s co-founders articulated a master plan to create a trusted infrastructure based on a conviction that “by driving more integration and efficiency across digital wallets, transaction processing and payment acceptance, there are meaningful opportunities for merchants and consumers to seamlessly interact using digital assets in ways that have not been previously considered.” It is often said, by Bakkt, that digital assets will be successful when consumers don’t have to think about the technology underlying them. Here’s your latte. Thanks, do you take bitcoin? Of course. 

In the race for the Covid-19 cure, many (21 teams around the world at least) will seek the great prize and the fate of the world hangs in the balance. In the digital currency revolution, Bitcoin has size and recognition. The gorilla in the game. Tether has Uncle Sam behind it. (Of course, Uncle Sam has been spotted wandering around the neighborhood in just his underwear and there is no cure for dementia); Litecoin has speed, and altcoins have versatility, so ladies and gentlemen, place your bets. Some see BTC as gold and LTC as silver. Community Consensus: Reddit users can be nasty to one another so deep dives are brutal and hit or miss but then once lowered into the bottomless pit there does lie a consensus that – with the pandemic, money printing, recessionary times ahead, a financial system on the verge of being pushed to the brink – hard times bode well for BTC. And the halving impact is too tricky/amorphous to predict but definitely give this time and don’t think in terms of getting rich, rather just in terms of making it less of a cakewalk for certain segments of society to hoard all the cake. 

The number of Bitcoin-related tweets, meanwhile, reached 82,000 on the day of the halving, Cointelegraph said, which is a record value since February 2018. The month before the halving, correlation between the number of tweets mentioning Bitcoin and BTC’s trading volume was 74.3%, reinforcing the strong relationship between social media activity and the asset’s trading volume.

Notable endorsements: File under wildly optimistic but in November 2019, Binance founder Changpeng Zhao, AKA “CZ,” predicted BTC would hit $16K “soonish.” Putting a less ambiguous time-stamp on his forecast, Fundstrat senior analyst Tom Lee this past February suggested that with halving as a catalyst BTC would surge 200% essentially by August. “Plan B,” creator of the stock-to-flow (S2F) model, which measures the issuance of each new BTC against existing supply, has said in a make or break concession that if BTC is not at $30,000 by the end of 2020 then S2F might have to be mothballed. Former Google engineer Vijay Boyapati authored “The Bullish Case for Bitcoin,” a Medium.com article from early 2018 – at a time when BTC was likened to tulip mania – but that didn’t stop him from declaring that in fifty years BTC would be the world’s monetary base, like someone watching an early Wright Brothers plane fly briefly and then crash into smithereens but still boldly assert that men would fly to the moon in 1969. Boyapati has called BTC the best store of value that has ever existed. “It’s gold, except it has teleportation built-in,” he has often said, of gold nuggets were they able to bend space and time, and as he did this past June on Tom Woods’ podcast. Another podcaster, Anthony Pompliano, interviewed “high conviction BYC maximalist” Murad Mahmudov in Nov. 2018 – and crypto enthusiasts have been sharing the 90-minute video ever since. Mahmudov unemotionally, mathematically, delves into the battle between fiat currency, expanding at six times the rate of BTC’s 1% annual inflation rate, assuring listeners that in time an unrelenting feedback loop of financial change was bound to kick in. “Bitcoin will be a black hole that will absorb a tremendous amount of value.”

Bitcoin, post third halving, a black hole of value or just a black hole – should I stay or should I go – we’ll be watching these next few months because, per Reddit consensus, the rest of this year indeed could be a break out period. More likely, five to ten years will tell a more swashbuckling story. Being unbound to political machinations and star chambers but rather bound for glory, if meant to be, could come at the expense of a lot of misery in the world, but there would at least have been BTC to cushion the blow of ATMs no longer working, leading the way forward.