The wrong chart

Quite the week. No need for another reminder of how frequently we have these steep pull backs, since we’ve just had one. The situation is adequately described below.

For those that don’t know. The term HODL originated in 2013 after bitcoin’s price had crashed 40% to $450. A highly medicated trader typed HODL instead of HOLD in the bitcointalk.org forum and the term stuck.

This week’s drama began, again, with Elon Musk and Tesla. He’s out, he’s in, who knows? Then China’s central bank reminded everyone of something that has been official policy since 2017. Next, Coinbase went down (which always seems to happen) and then Binance went down (which almost never happens).

We’re on the front page of every paper, because bad news makes the news and it’s all pretty deafening. All told though, it’s been a nice reset. The price is simply back to where it was before Tesla bought bitcoin in February and detaching Bitcoin from Tesla is a very good thing longer term in my view.

Bitcoin is still +30% this year, versus the NASDAQ +3% and the ASX 200 +4% but you’ll be hard pressed to dig that fact out in the papers.

The noise is drowning out some rather exciting developments too. So, putting price to one side, a much more important chart is developing nicely. 94% of all miner hash rate is signalling for the Taproot upgrade (90% required to activate). I thought it was extremely unlikely we would reach this level of consensus this quickly, or at all.

With Taproot we can construct massive smart contracts between multiple counterparties using detailed scripts and they will appear in the blockchain like any other transaction, small, cheap and durable. In some ways it’s like being able to have a 500-page legal document between multiple parties compressed into a one page summary. All the participants can expand the 500 pages if they wish using their private key, but nobody else will see anything on the blockchain other than a normal looking (and small) transaction.

Almost nobody will notice the significance of this, even fewer people will understand the change and all the while they will focus on this week’s drama, whatever it might be, and there will be many more to come.

I think the significance of Taproot is underestimated. At the moment there is a limit to what can be constructed if it makes transactions or contracts too large and therefore too expensive. That upper limit to possibilities is about to be removed.

Watch the price chart if you want to, but you’re looking at the wrong thing.

I insist!

If you do insist on price charts, I will relent and we can have a look at some.

Both are rather helpful mapping the two prior halving cycles. The first one ending 2013, was complete with its savage drops and strong overall performance.

Same story for the 2016-2018 cycle.

Charts don’t mean that much though, other than to say we’ve been here before on a number of occasions.

Full chart time disclosure: both scales are log (left and right) and yes, I know, dual scaling is a chart crime and these charts have dual scales.

Nobody uses it

We are commonly asked by new investors who actually uses bitcoin or cryptocurrency? It’s a good question, particularly for people unfamiliar with the space so perhaps worth a tour of some of the more interesting businesses that do.

First up, Strike. Strike is a micropayments site that allows people to transfer bitcoin over the lightning network, anywhere in the world for zero cost. It supports multiple currencies so you can transfer value in bitcoin but can pay in USD and it lands in Euros, if you wish. Nice clean, site, good app. Lot’s of VC support for this one too.

Next Sphinx. Sphinx is a social media app powered by bitcoin. It is an attempt to enable people to monetise their content and their podcasts. Users listening effectively stream micro-payments while they are viewing or listening to something of interest. For example, a one-hour podcast might cost you a few cents. You cannot do this with fiat money because the processing and infrastructure costs are just too high. It does work with peer-to-peer payments which can be fractionalised into micro cents, as bitcoin can.

There are many examples now of social media platforms looking to integrate cryptocurrency. The theme is really to decentralise and democratise social media so that they remain open platforms, rather than morph into state-controlled media machines. This space will be big and we follow it closely. Big prize for the winner here, not sure it will be Sphinx though.

Next Tether. You might have heard of this one. Tether is a digital asset pegged to the USD. It has over $50 billion in circulation and is growing very quickly. Tether has a long history of controversies as many people did not believe the company operating Tether actually possessed the USD that backed it. So much so, that the New York Attorney General decided to sue Tether last year.

Unfortunately for the NYAG they picked the wrong fight. It turned out that Tether was fully backed and there are indeed $50 billion dollars of cash and treasuries (and some corporate paper) backing Tether. They also happen to be extremely profitable as an enterprise and unleashed half of New York’s best lawyers on the case. The AG backed down and Tether agreed not to operate in New York. They now produce a quarterly audit report verifying their asset backing.

Finally, I should mention video games. We are going to see cryptocurrency integrated into many games soon. The video game sector, huge as it is, deserves a piece on its own so we will return to it later.

Aside from all that, general turnover in Tether or bitcoin alone dwarfs what we see on the Australian stock exchange every day. In fact, most Sundays, bitcoin turnover is higher than a busy week day on the ASX, same for Tether.

That can only be happening because…….nobody uses them.

Attention families!!

Grandpa Joe’s American Rescue Plan is swinging into action. With great fanfare the United States Treasury announced that if you file your taxes TODAY you can claim your new tax credits.

The whole thing was backed by an odd marketing campaign about “get your piece of the pie”. This involved people in yellow t-shirts standing in front of the United States Treasury, holding large pieces of pie. I’m inclined to think this overstates the generosity of the Child Tax Credit which amounts to $1,600 for one year only. This would secure some large pies, but not much else.

No sense of irony then about ‘send us your money, and we’ll send you slightly less right back. It’s a gift, from us to you.’ Not that I necessarily object to the collection of taxes but it does seem wildly inefficient.

I had planned to show you how the IRS was steadily growing over time with an ever-growing army of tax collectors. However, it appears the IRS has had falling headcount for a decade, roughly one collector per 5,000 Americans.  Attention, families then. Send us your tax return and you might get your pie sometime in the next decade.

Is it possible that the new method of government financing, which is simply to borrow increasing amounts forever, might actually be cheaper than bothering collecting taxes at all? The vertical spike in US M2 money stock (which is now having an impact on prices) may be the right, least cost answer.  The trick will be simply to be short fiat currency and long something else.

Euro-Trash

In this week’s Euro-Trash Agent Lagarde takes a well-deserved break, so we head north to one of the great bastions of modern society, Wales.

It’s been a big week in post-Brexit Britain with local elections giving Boris a boost but indicating more power will eventually be devolved to the Scottish and Welsh parliaments and perhaps even full independence. Next time the borders open, you might have the pleasure of needing a Welsh visa; if they can afford to issue them of course.

Nearly half of the Welsh Senedd (parliament) are signed up to the pledge and plenty of others are unlikely to oppose it. The Welsh first minister did not hesitate to push forward his new agenda.

The proposal (which is only a pilot) will give everyone, regardless of wealth or income, a fixed payment each month.

It’s pretty obvious what will happen here, because the income is not ‘universal’ and is being dispersed only to a small test group it will be a resounding success. Everyone, of course, will love the free money and it will have absolutely zero impact on the general price level.

Once UBI is more widely rolled out of course, the price level of goods simply adjusts for the additional income that everyone has and it becomes completely useless, other than raising prices and debasing the currency. That matters not though, glowing from election success we can watch this get pushed through and watch as the resoundingly positive results come back.

For the record, Wales itself has no money. It could not raise the income for UBI from its citizens to distribute back to them. Either the Bank of England prints it and gives it to them, or taxes go up in England to transfer across the border. I imagine that might not be that popular. None of these petty little details matter though and The Future Generations Commissioner for Wales (yes, really), Sophie Howe put it best.