The ECB’s announcement arrived too late for a full analysis so we’ll cover it in full next week. The short version is:
QE is back. $20bn per month (so not much at this stage)
Deposit interest rate cut to -0.5%
Amazingly though, the ECB has introduced a tiered system that will exempt European bank’s reserves deposited with the ECB from the negative rate. So, banks don’t have to pay the negative rate but their customers do. This was done to “relieve pressure on bank profitability”. They are literally making this up as they go now.
These days, pretty much everyone knows it’s really hard to beat an equity index fund. The result being, particularly in the US, most retail investors use index funds to access the market, with considerable success. The question is this though; how successful can you be long term by doing what everyone else is doing?
The answer is, very successful. For exactly as long as everyone else keeps doing it too.
The proof is in the analysis below, US equities have done incredibly well for the last 10 years. The chart shows the risk adjusted returns for different asset classes since 2014, based on four year hold periods. It includes stocks, real estate, bonds, bitcoin and gold, among others. Importantly, these are risk adjusted returns, so the fact that bitcoin has been wildly volatile is taken into account here, with its performance heavily discounted.
Historically, bitcoin has outperformed everything, every time. Why? Perhaps because everybody knows only what everybody knows and that is that index funds outperform everything and that bitcoin is a volatile failure. Well now you know, that isn’t true, and one day everyone else will know it too. Just get there first.
Bitcoin mining is now a big industry. Still, we don’t hear as much about it as perhaps we do Rio Tinto or BHP. It’s likely over time that will change because in 2019 alone the amount of computational power being used to mine bitcoin has trebled. The measure of mining power is known as the “hash rate”. It simply means the number of calculations per second the network is performing to mine bitcoin blocks.
On 1st January 2019 the hash rate was 40 million trillion hashes (calculations) per second, so 40 x1018. This week, that went through 100 million trillion hashes. So, an additional 60 million trillion, in the last 9 months.
For context, a fast bitcoin mining machine can compute 14 trillion hashes per second, they cost about US$500 (this is quite a cheap machine too, equivalent machines can cost $2k).
Roughly then, the equivalent of 4.2 million of these machines have been added to the network since January this year (the increase in hash, 60 million trillion, divided by the hash of a decent piece of mining kit, 14 trillion). That’s US$2 billion of mining equipment. $2 billion before they are housed in warehouses, networked, air-conditioned, monitored. How many staff are there? Where is the electricity being sourced? Anyway, $2 billion is the bare minimum.
It is mind boggling. I suspect there are bitcoin mining machines out there now that far exceed the power of those that are publicly acknowledged. Try and find 60 million trillion in hash power in 9 months. It would not be thought possible but it has happened and almost nobody has noticed.
The battle for the Fed
The mining power above secures the independence of the bitcoin network. If you want to attack bitcoin, say by “printing some more of them”, you need to co-ordinate more power than the network has. Suffice to say it’s hard to do, has never been done and gets harder to do with each block that is mined.
Contrast that with the Federal Reserve, their monetary policy is ‘independent’ too.
Here is a perfect illustration of my point last week about corporate blockchains. Hedera are sponsoring tweets about their launch because they have a marketing budget. They have a CEO, they process transactions faster than Visa etc.etc. They are a company with a database and they have totally missed the point.
40 years of development
The technological foundations of cryptocurrency have been long in the making. This graphic from economist Ansel Lindner lays out some of the key developments since 1970. Personally, I think the history goes back much further, including some properties of number theory used in encryption and discovered by Gauss in the 1800s.
The short story is that this isn’t trivial technology. I have yet to meet anyone who has done their own homework on bitcoin, read a bit about its history and attempted to understand how it works who continues to believe “it’s a fad”.