## Thursday, January 14, 2021

### The Bitcoin "Price"

Jemima Kelly writes No, bitcoin is not “the ninth-most-valuable asset in the world” and its a must-read. Below the fold, some commentary.

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The "price" of BTC in USD has quadrupuled in the last three months, and thus its "market cap" has sparked claims that it is the 9th most valuable asset in the world.

Kelly explains the math:
Just like you would calculate a company’s market capitalisation by multiplying its stock price by the number of shares outstanding, with bitcoin you just multiply its price by its total “supply” of coins (ie, the number of coins that have been mined since the first one was in January 2009). Simples!

If you do that sum, you’ll see that you get to a very large number — if you take the all-time-high of \$37,751 and multiply that by the bitcoin supply (roughly 18.6m) you get to just over \$665bn. And, if that were accurate and representative and if you could calculate bitcoin’s value in this way, that would place it just below Tesla and Alibaba in terms of its “market value”. (On Wednesday!)
Then Kelly starts her critique, which is quite different from mine in Stablecoins:
In the context of companies, the “market cap” can be thought of as loosely representing what someone would have to pay to buy out all the shareholders in order to own the company outright (though in practice the shares have often been over- or undervalued by the market, so shareholders are often offered a premium or a discount).

Companies, of course, have real-world assets with economic value. And there are ways to analyse them to work out whether they are over- or undervalued, such as price-to-earnings ratios, net profit margins, etc.

With bitcoin, the whole value proposition rests on the idea of the network. If you took away the coinholders there would be literally nothing there, and so bitcoin’s value would fall to nil. Trying to value it by talking about a “market cap” therefore makes no sense at all.
Secondly, she takes aim at the circulating BTC supply:
Another problem is that although 18.6m bitcoins have indeed been mined, far fewer can actually be said to be “in circulation” in any meaningful way.

For a start, it is estimated that about 20 per cent of bitcoins have been lost in various ways, never to be recovered. Then there are the so-called “whales” that hold most of the bitcoin, whose dominance of the market has risen in recent months. The top 2.8 per cent of bitcoin addresses now control 95 per cent of the supply (including many that haven’t moved any bitcoin for the past half-decade), and more than 63 per cent of the bitcoin supply hasn’t been moved for the past year, according to recent estimates.
The small circulating supply means that BTC liquidity is an illusion:
the idea that you can get out of your bitcoin position at any time and the market will stay intact is frankly a nonsense. And that’s why the bitcoin religion’s “HODL” mantra is so important to be upheld, of course.

Because if people start to sell, bad things might happen! And they sometimes do. The excellent crypto critic Trolly McTrollface (not his real name, if you’re curious) pointed out on Twitter that on Saturday a sale of just 150 bitcoin resulted in a 10 per cent drop in the price.
And there are a lot of "whales' HODL-ing. If one decides to cash out, everyone will get trampled in the rush for the exits:
More than 2,000 wallets contain over 1,000 bitcoin in them. What would happen to the price if just one of those tried to unload their coins on to the market at once? It wouldn’t be pretty, we would wager.

What we call the “bitcoin price” is in fact only the price of the very small number of bitcoins that wash around the retail market, and doesn’t represent the price that 18.6m bitcoins would actually be worth, even if they were all actually available.
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Note that Kelly's critique implictly assumes that BTC is priced in USD, not in the mysteriously inflatable USDT. The graph shows that the vast majority of the "very small number of bitcoins that wash around the retail market" are traded for, and thus priced in USDT. So the actual number of bitcoins being traded for real money is a small fraction of a very small number.

Bitfinex & Tether have agreed to comply with the New York Supreme Court and turn over their financial records to the New York Attorney General by 15th January. If they actually do, and the details of what is actually backing the current stock of nearly 24 billion USDT become known, things could get rather dynamic. As Tim Swanson explains in Parasitic Stablecoins, the 24B USD are notionally in a bank account, and the solvency of that account is not guaranteed by any government deposit insurance. So even if there were a bank account containing 24B USD, if there is a rush for the exits the bank holding that account could well go bankrupt.

To give a sense of scale, the 150 BTC sale that crashed the "price" by 10% represents ( 150 / 6.25 ) / 6 = 4 hours of mining reward. If miners were cashing out their rewards, they would be selling 900BTC or \$36M/day. In the long term, the lack of barriers to entry means that the margins on mining are small. But in the short term, mining capacity can't respond quickly to large changes in the "price". It certainly can't increase four times in three months.

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Lets assume that three months ago, when 1BTC≈10,000USDT, the BTC ecosystem was in equilibrium with the mining rewards plus fees slightly more than the cost of mining. While the BTC "price" has quadrupled, the hash rate and thus the cost of mining has oscillated between 110M and 150M TeraHash/s. It hasn't increased significantly, so miners only now need to sell about 225BTC or \$9M/day to cover their costs. With the price soaring, they have an incentive to HODL their rewards.

1. Alex Pickard was an early buyer of BTC, and became a miner in 2017. But the scales have fallen from his eyes, In Bitcoin: Magic Internet Money he explains that BTC is useless for anything except speculation:

"Essentially overnight it became “digital gold” with no use other than for people to buy and hodl ... and hope more people would buy and hodl, and increase the price of BTC until everyone on earth sells their fiat currency for BTC, and then…? Well, what exactly happens then, when BTC can only handle about 350,000 transactions per day and 7.8 billion people need to buy goods and services?"

And he is skeptical that Tether will survive:

"If Tether continues as a going concern, and if the rising price of BTC is linked to USDT issuance, then BTC will likely continue to mechanically build a castle to the sky. I have shown how BTC price increases usually follow USDT issuance. In late 2018, when roughly 1 billion USDT were redeemed, the price of BTC subsequently fell by over 50%. Now, imagine what would happen if Tether received a cease-and-desist order, and its bank accounts were seized. Today’s digital gold would definitely lose its luster."

2. The saga of someone trying to turn "crypto" into "fiat".

3. An anonymous Bitcoin HODL-er finally figured out the Tether scam and realized his winnings. His must-read account is The Bit Short: Inside Crypto’s Doomsday Machine:

"The legitimate crypto exchanges, like Coinbase and Bitstamp, clearly know to stay far away from Tether: neither supports Tether on their platforms. And the feeling is mutual! Because if Tether Ltd. were ever to allow a large, liquid market between Tethers and USD to develop, the fraud would instantly become obvious to everyone as the market-clearing price of Tether crashed far below \$1.

Kraken is the biggest USD-banked crypto exchange on which Tether and US dollars trade freely against each other. The market in that trading pair on Kraken is fairly modest — about \$16M worth of daily volume — and Tether Ltd. surely needs to keep a very close eye on its movements. In fact, whenever someone sells Tether for USD on Kraken, Tether Ltd. has no choice but to buy it — to do otherwise would risk letting the peg slip, and unmask the whole charade.

My guess is that maintaining the Tether peg on Kraken represents the single biggest ongoing capital expense of this entire fraud. If the crooks can’t scrape together enough USD to prop up the Tether peg on Kraken, then it’s game over, and the whole shambles collapses. And that makes it the fraud’s weak point."

4. Tether's bank is Deltec, in the Bahamas. The anonymous Bitcoin HODL-er points out that:

"Bahamas discloses how much foreign currency its domestic banks hold each month."

As of the end of September 2020, all Bahamian banks in total held about \$5.3B USD worth of foreign currency. At that time there were about 15.5B USDT in circulation. Even if we assume that Deltec held all of it, USDT was only 34% backed by actual money.

5. David Gerard's Tether printer go brrrrr — cryptocurrency’s substitute dollar problem collects a lot of nuggets about Tether, but also this:

"USDC loudly touts claims that it’s well-regulated, and implies that it’s audited. But USDC is not audited — accountants Grant Thornton sign a monthly attestation that Centre have told them particular things, and that the paperwork shows the right numbers. An audit would show for sure whether USDC’s reserve was real money, deposited by known actors — and not just a barrel of nails with a thin layer of gold and silver on top supplied by dubious entities. But, y’know, it’s probably fine and you shouldn’t worry."

6. In 270 addresses are responsible for 55% of all cryptocurrency money laundering, Catalin Cimpanu discusses a report from Chainalysis:

"1,867 addresses received 75% of all criminally-linked cryptocurrency funds in 2020, a sum estimated at around \$1.7 billion.
...
The company believes that the cryptocurrency-related money laundering field is now in a vulnerable position where a few well-orchestrated law enforcement actions against a few cryptocurrency operators could cripple the movement of illicit funds of many criminal groups at the same time.

Furthermore, additional analysis also revealed that many of the services that play a crucial role in money laundering operations are also second-tier services hosted at larger legitimate operators.

In this case, a law enforcement action wouldn't even be necessary, as convincing a larger company to enforce its anti-money-laundering policies would lead to the shutdown of many of today's cryptocurrency money laundering hotspots."

7. In Bitcoin is now worth \$50,000 — and it's ruining the planet faster than ever, Eric Holthaus points out the inevitable result of the recent spike in BTC:

"The most recent data, current as of February 17 from the University of Cambridge shows that Bitcoin is drawing about 13.62 Gigawatts of electricity, an annualized consumption of 124 Terawatt-hours – about a half-percent of the entire world’s total – or about as much as the entire country of Pakistan. Since most electricity used to mine Bitcoin comes from fossil fuels, Bitcoin produces a whopping 37 million tons of carbon dioxide annually, about the same amount as Switzerland does by simply existing."

8. In Elon Musk wants clean power, but Tesla's dealing in environmentally dirty bitcoin notes that:

"Tesla boss Elon Musk is a poster child of low-carbon technology. Yet the electric carmaker's backing of bitcoin this week could turbocharge global use of a currency that's estimated to cause more pollution than a small country every year.

Tesla revealed on Monday it had bought \$1.5 billion of bitcoin and would soon accept it as payment for cars, sending the price of the cryptocurrency though the roof.
...
The digital currency is created via high-powered computers, an energy-intensive process that currently often relies on fossil fuels, particularly coal, the dirtiest of them all."

But Reuters fails to ask where the \$1.5B that spiked BTC's "price" came from. It wasn't Musk's money, it was the Tesla shareholder's money. And how did they get it? By selling carbon offsets. So Musk is taking subsidies intended to reduce carbon emissions and using them to generate carbon emissions.

9. One flaw in Eric Holthaus' Bitcoin is now worth \$50,000 — and it's ruining the planet faster than ever is that while he writes:

"There are decent alternatives to Bitcoin for people still convinced by the potential social benefits of cryptocurrencies. Ethereum, the world’s number two cryptocurrency, is currently in the process of converting its algorithm from one that’s fundamentally competitive (proof-of-work, like Bitcoin uses) to one that’s collaborative (proof-of-stake), a move that will conserve more than 99% of its electricity use."

He fails to point out that (a) Ethereum has been trying to move to proof-of-stake for many years without success, and (b) there are a huge number of other proof-of-work cryptocurrencies that, in aggregate, also generate vast carbon emissions.

10. Four posts worth reading inspired by Elon Musk's pump-and-HODL of Bitcoin.

First, Jamie Powell's Tesla and bitcoin: the accounting explains how \$1.5B of BTC will further obscure the underlying business model of Tesla. Of course, if investors actually understood Tesla's business model they might not be willing to support a PE of, currently, 1,220.78, so the obscurity may be the reason for the HODL.

Second, Izabella Kaminska's What does institutional bitcoin mean? looks at the investment strategies hedge funds like Blackrock will use as they "dabble in Bitcoin". It involves the BTC futures market being in contango and is too complex to extract but well worth reading.

Third, David Gerard's Number go up with Tether — Musk and Bitcoin set the world on fire points out that Musk's \$1.5B only covers 36 hours of USDT printing:

"Tether has given up caring about plausible appearances, and is now printing a billion tethers at a time. As I write this, Tether states its reserve as \$34,427,896,266.91 of book value. That’s \$34.4 billion — every single dollar of which is backed by … pinky-swears, maybe? Tether still won’t reveal what they’re claiming to constitute backing reserves."

In Bitcoin's 'Elon Musk pump' rally to \$48K was exclusively driven by whales, Joseph Young writes:

"n recent months, so-called “mega whales” sold large amounts of Bitcoin between \$33,000 and \$40,000.

Orders ranging from \$1 million to \$10 million rose significantly across major cryptocurrency exchanges, including Binance.

But as the price of Bitcoin began to consolidate above \$33,000 after the correction from \$40,000, the buyer demand from whales surged once again.

Analysts at “Material Scientist” said that whales have been showing unusually large volume, around \$150 million in 24 hours.

This metric shows that whales are consistently accumulating Bitcoin in the aftermath of the news that Tesla bought \$1.5 billion worth of BTC."

11. Ethereum consumes about 22.5TWh/yr - much less than Bitcoin's 124TWh/yr, but still significant. It will continue to waste power until the switch to proof-of-stake, underway for the past 7 years, finally concludes. Don't hold your breath.

12. The title of Jemima Kelly's Hey Citi, your bitcoin report is embarrassingly bad says all that needs to be said, but her whole post is a fun read.

13. Jemima Kelley takes Citi's embarrassing "bitcoin report" to the woodshed again in The many chart crimes of *that* Citi bitcoin report:

"Not only was this “report” actually just a massive bitcoin-shilling exercise, it also contained some really quite embarrassing errors from what is meant to be one of the top banks in the world (and their “premier thought leadership” division at that).

The error that was probably most shocking was the apparent failure of the six Citi analysts who authored the report to grasp the difference between basis points and percentage points."

"To paraphrase Gramsci, crypto is the morbid symptom of an interregnum, an interregnum in which the gold standard is dead but a fully political money that dares to speak its name has not yet been born. Crypto is the libertarian spawn of neoliberalism’s ultimately doomed effort to depoliticize money."

Tooze quotes Izabella Kaminska contrasting the backing of "fiat" by the requirement to pay tax with Bitcoin:

"Private “hackers” routinely raise revenue from stealing private information and then demanding cryptocurrency in return. The process is known as a ransom attack. It might not be legal. It might even be classified as extortion or theft. But to the mindset of those who oppose “big government” or claim that “tax is theft”, it doesn’t appear all that different. A more important consideration is which of these entities — the hacker or a government — is more effective at enforcing their form of “tax collection” upon the system. The government, naturally, has force, imprisonment and the law on its side. And yet, in recent decades, that hasn’t been quite enough to guarantee effective tax collection from many types of individuals or corporations. Hackers, at a minimum, seem at least comparably effective at extracting funds from rich individuals or multinational organisations. In many cases, they also appear less willing to negotiate or to cut deals."

15. IBM Blockchain Is a Shell of Its Former Self After Revenue Misses, Job Cuts: Sources by Ian Allison is the semi-official death-knell for IBM's Hyperledger:

"IBM has cut its blockchain team down to almost nothing, according to four people familiar with the situation.

Job losses at IBM (NYSE: IBM) escalated as the company failed to meet its revenue targets for the once-fêted technology by 90% this year, according to one of the sources."

"Hyperledger was a perfect IBM project — a Potemkin village open source project, where all the work was done in an IBM office somewhere."

16. Ketan Joshi's Bitcoin is a mouth hungry for fossil fuels is a righteous rant about cryptocurrencies' energy usage:

"I think the story of Bitcoin isn’t a sideshow to climate; it’s actually a very significant and central force that will play a major role in dragging down the accelerating pace of positive change. This is because it has an energy consumption problem, it has a fossil fuel industry problem, and it has a deep cultural / ideological problem.

All three, in symbiotic concert, position Bitcoin to stamp out the hard-fought wins of the past two decades, in climate. Years of blood, sweat and tears – in activism, in technological development, in policy and regulation – extinguished by a bunch of bros with laser-eye profile pictures."

17. The externalities of cryptocurrencies, and bitcoin in particular, don't just include ruining the climate, but also ruining the lives of vulnerable elderly who have nothing to do with "crypto". Mark Rober's fascinating video Glitterbomb Trap Catches Phone Scammer (who gets arrested) reveals that Indian phone scammers transfer their ill-gotten gains from stealing the life savings of elderly victims from the US to India using Bitcoin.

18. The subhead of Noah Smith's Bitcoin Miners Are on a Path to Self-Destruction is:

"Producing the cryptocurrency is a massive drain on global power and computer chip supplies. Another way is needed before countries balk."

19. In Before Bitfinex and Tether, Bennett Tomlin pulls together the "interesting" backgrounds of the "trustworthy" people behind Bitfinex & Tether.

20. David Gerard reports that:

"Coinbase has had to pay a \$6.5 million fine to the CFTC for allowing an unnamed employee to wash-trade Litecoin on the platform. On some days, the employee’s wash-trading was 99% of the Litecoin/Bitcoin trading pair’s volume. Coinbase also operated two trading bots, “Hedger and Replicator,” which often matched each others’ orders, and reported these matches to the market."

As he says:

"If Coinbase — one of the more regulated exchanges — did this, just think what the unregulated exchanges get up to."

Especially with the "trustworthy" characters running the unregulated exchanges.

21. Martin C. W. Walker and Winnie Mosioma's Regulated cryptocurrency exchanges: sign of a maturing market or oxymoron? examines the (mostly lack of) regulation of exchanges and concludes;

"In general, cryptocurrencies lack anyone that is genuinely accountable for core processes such as transfers of ownership, trade validation and creation of cryptocurrencies. A concern that can ultimately only be dealt with by acceptance of the situation or outright bans. However, the almost complete lack of regulation of the highly centralised cryptocurrency exchanges should be an easier-to-fill gap. Regulated entities relying on prices from “exchanges” for accounting or calculation of the value of futures contracts are clearly putting themselves at significant risk."

Coinbase just filed for a \$65B direct listing despite just having been fine \$6.5M forwash-tradding Litecoin.

22. Izabella Kaminska outlines the the risks underlying Coinbase's IPO in Why Coinbase’s stellar earnings are not what they seem. The sub-head is:

"It’s easy to be profitable if your real unique selling point is being a beneficiary of regulatory arbitrage."

And she concludes:

"Coinbase may be a hugely profitable business, but it may also be a uniquely risky one relative to regulated trading venues such as the CME or ICE, neither of which are allowed to take principal positions to facilitate liquidity on their platforms. Instead, they rely on third party liquidity providers.

Coinbase, however, is not only known to match client transactions on an internalised “offchain” basis (that is, not via the primary blockchain) but also to square-off residual unmatched positions via bilateral relationships in crypto over-the-counter markets, where it happens to have established itself as a prominent market maker. It’s an ironic state of affairs because the netting processes that are at the heart of this system expose Coinbase to the very same risks that real-time gross settlement systems (such as bitcoin) were meant to vanquish."

23. Nathan J. Robinson hits the nail on the head with Why Cryptocurrency Is A Giant Fraud:

"You may have ignored Bitcoin because the evangelists for it are some of the most insufferable people on the planet—and you may also have kicked yourself because if you had listened to the first guy you met who told you about Bitcoin way back, you’d be a millionaire today. But now it’s time to understand: is this, as its proponents say, the future of money?"

and:

"But as is generally the case when someone is trying to sell you something, the whole thing should seem extremely fishy. In fact, much of the cryptocurrency pitch is worse than fishy. It’s downright fraudulent, promising people benefits that they will not get and trying to trick them into believing in and spreading something that will not do them any good. When you examine the actual arguments made for using cryptocurrencies as currency, rather than just being wowed by the complex underlying system and words like “autonomy,” “global,” and “seamless,” the case for their use by most people collapses utterly. Many believe in it because they have swallowed libertarian dogmas that do not reflect how the world actually works."

Robinson carefully dismantles the idea that cryptocurrencies offer "security", "privacy", "convenience", and many of the other arguments for them. TGhe whole article is well worth reading.

24. Rob Beschizza reports on the effects of Elon Musk's cryptocurrency dump:

"After Elon Musk turned on Bitcoin, so goes the market. Bitcoin lost about 20% of its value in a few hours before recovering to rest about 12% down, reports CNN Business. Julia Horowitz writes that it's bad news for Crypto in general, with similar falls for Ethereum, Dogecoin and the rest"

25. More evidence of pumping and dumping of cryptocurrencies comes in John Griffin's Were ETH and EOS Repeatedly Recycled during the EOS Initial Coin Offering?:

"These suspicious accounts accounted for almost a quarter of EOS purchases by the end of the crowdsale. A strategy of quickly buying then selling EOS was generally not profitable during the crowdsale period, which indicates that these suspicious accounts were not operating independently. Also, the recycling of Ether into EOS and EOS back to the exchanges and to Ether, is shown to be unlike any other activity by other traders in the EOS crowdsale. In addition, the accounts appear almost solely created for this purpose, unlike other accounts that are widely used for other purposes."

26. David Gerard writes about a rumor:

"that Goldman Sachs and JP Morgan are looking at lending actual money, using Bitcoin as collateral.

Goldman Sachs correctly considers Bitcoin trash. So they’re trying to construct a backing made of synthetic products — i.e., bets on the price, such as CME Bitcoin futures, which are bought in dollars and paid out in dollars — so that they do not, at any stage, risk touching a bitcoin. Squiddy* wants some slight protection if Bitcoin goes bad — say, if BTC/USD drops 20% in a few minutes, as it did last night — and the collateral is worthless. The regulators also have to go along with the specific product they come up with.

The real story is that the whales — “large institutional trading firms,” per the article — want (or need) to realise the face value of their bitcoins, and they can’t, because there just aren’t enough actual dollars in the market. This is the same reason miners are keeping a “stockpile” of unsaleable bitcoins, as I’ve noted previously.

So the whales are going to Goldman Sachs to ask for a loan backed by their unsaleable bitcoins, even though the collateral can’t possibly cover for the value of the loan even if Bitcoin doesn’t crash. It’s a way for the whales to cash out, and leave Squiddy holding the bag. I expect Squiddy is fully cognisant of this, and this is the scenario they’re trying to construct a buffer against."