Today I want to talk about code.
I know this newsletter is aimed at professional investors, not developers. Why don't we talk about the price? Don't worry, we'll be further down. However, with Bitcoin technology, things are evolving that are worth keeping an eye on. While these changes have little to do with short-term price movements, they are likely to play an important role in Bitcoin's long-term value proposition.
Two things happened this week to bring this to the fore: a new source of funding for development has been announced, and progress is being made on a particularly ambitious protocol upgrade.
Before we get into why these matter, let's take a look at why bitcoin evolution matters.
The idea of changing the Bitcoin protocol will come as a surprise to many. I mean, doesn't it just work? Isn't one of his strengths that you can't change the code? These illustrate two misconceptions about the technology and its potential.
Bitcoin's code has been chugging along for over 10 years, but has seen a few changes. In the early days there were common bugs that Bitcoin's pseudonymous creator Satoshi Nakamoto and his staff fixed. And vintage cars will remember the 2017 “civil war” which was about various scaling options that formed the core of what the community wanted from Bitcoin. The result was a change in the Bitcoin code to increase block capacity while dissenting opinions branched out into a "new" Bitcoin blockchain, Bitcoin Cash.
There is also constant work to improve functionality, e.g. B. on the activation of sidechains or on the smoothing of the information exchange. Compatibility issues and other minor bugs require constant attention. As with all technologies, Bitcoin will wither if not maintained and updated regularly.
How changes are made can be changed by anyone in the Bitcoin code – it is open source. However, network consensus is required to implement the changes and this is extremely difficult to achieve. Imagine trying to get 20 people with different philosophies, political beliefs, economic incentives, and life goals to agree on a simple change. Now multiply this by hundreds, if not thousands, and make the changes complicated, and you'll get an idea of how difficult it would be to make a meaningful change. This protects the network from changes other than those that the majority believe will be beneficial to the entire ecosystem.
Incentives are important
An important question is who pays the developers who work on bitcoin code.
In the early days of the Bitcoin network, almost all developer funding came from one source, the Bitcoin Foundation. Since then, other financiers have entered the scene, including several companies dedicated to the bitcoin work like Blockstream, Chaincode Labs, and Lightning Labs. Well-known crypto companies such as Square Crypto, Coinbase, OKCoin, BitMEX and others are also involved, as well as non-profit organizations such as MIT's Digital Currency Initiative and the Human Rights Foundation. In addition, many developers are passionate about working on Bitcoin for free.
The diversity of supporters of Bitcoin development is important as it ensures that the network cannot be influenced by a number of priorities. For this reason, the Brink initiative announced this week is important: It drives the diversity of Bitcoin development even further.
Brink introduces a fascinating financing model. The aim is to channel donations to developers from a variety of sources, including individuals, businesses, and nonprofits. The initial funding comes from donations from investor John Pfeffer and crypto administrator Xapo founder Wences Casares as well as the Human Rights Foundation and the crypto platforms Kraken, Gemini and Square Crypto.
This form of sponsorship could appeal to individuals and companies who want to support Bitcoin development but don't need to select specific people for funding. The organization has applied for a 501 (c) (3) charitable designation in the United States to make donations tax-free.
Another big step is Brink's focus on training new developers in order to ensure a steady stream of qualified and diverse employees in the future. This bodes well for the network's long-term resilience and growth.
The second major news of the week that highlights the importance of the underlying technology is the Taproot upgrade, which improves the smart contract functionality of the network and introduces some privacy features. Bitcoin mining pools, which account for over 54% of the network's current hashrate, have signaled support. This is a strong step towards implementation (although there is still a long way to go – no change to the network is uncontroversial, no matter how popular the actual change is.)
This is not only important because of the specific changes Taproot will be introducing. It also shows that Bitcoin's use cases are constantly evolving and that this is a value proposition in itself. In other words, if you think Bitcoin is a powerful technology right now, just wait.
As an example, let's look at how Taproot can affect the value of Bitcoin, which is what smart contract functionality means. Bitcoin's program is relatively simple. It can do few things, but it does them well. Ethereum, on the other hand, is complex, but can support the execution of a wide variety of “smart contracts” or decentralized applications.
While Bitcoin can never (and does not want to – the more complex the program, the larger the potential attack surface) compete with Ethereum in its flexibility, some modest improvements could improve its usefulness as a store of value. For example, imagine that ownership accountability could be programmed so that Bitcoin can be used more effectively as security.
They could also improve its use as a medium of exchange. A proposed new type of verification signature could make Layer 2 transactions easier and cheaper. Taproot also introduces some features that could encourage higher usage by masking the type of transaction (not the send / receive addresses) which would provide more privacy.
While it's handy to think of Bitcoin as an eternal machine that just keeps running, we shouldn't lose sight of the work involved. The more developers work to keep Bitcoin clean and efficient, the more resilient the protocol is and the more likely it is that important improvements can be carefully implemented.
And the more diverse these developers are in terms of backgrounds and incentives, the less likely it becomes that Bitcoin will fall into the same trap as many of today's technology networks: built by a few for some.
It is also moving to see that so many contributors are involved in upholding a “common good” even when a direct route to profit is not clear. This is about more than open source tinkering. It's about building a new system that everyone involved believes is an answer to fundamental questions the world is waking up to.
Time to serve
This week, US President-elect Joe Biden announced his intention to appoint former Federal Reserve Chair Janet Yellen as head of the US Treasury and, according to reports, could appoint former Commodity Futures Trading Commission Chair Gary Gensler, appoint deputy finance minister.
Treasury appointments are significant to the crypto industry in that the department could influence the way some of the top U.S. financial regulators handle crypto assets.
Yellen has said in the past that she is not a fan of Bitcoin (my colleague Nik De has summarized her views here) but instead supports blockchain and cryptocurrency innovations.
Gensler has shown deeper expertise and enthusiasm. He testified several times before Congress about cryptocurrency and blockchain, declined comparisons with Ponzi schemes and stated that the Libra token, which had not yet been started, met the requirements of security under US law. He even wrote a comment for CoinDesk late last year.
Gensler currently leads Biden's transition team for financial oversight, which also includes four other cryptocurrency and blockchain experts:
Chris Brummer is Professor of Law and Faculty Director of the Institute of International Business Law at Georgetown University, author / editor of a seminal book on cryptoassets, and host of the excellent Fintech Beat podcast. He also testified before the U.S. Congress regarding the Scales Project and was nominated as commissioner for the CFTC under President Obama, although the nomination was reversed after the 2016 election.
Simon Johnson is an economist and professor at the MIT Sloan School of Management, where he supervised blockchain research and taught a course on the subject. From April 2009 to April 2015 he was a member of the Board of Economic Advisers of the Congressional Budget Office. Johnson also co-authored a paper on the far-reaching impact of blockchain technology on the financial world and served on CoinDesk-ed's advisory board in 2018.
Mehrsa Baradaran, a professor at the University of California at the Irvine School of Law, specializes in banking law and served as an expert witness at a Senate Banking Committee hearing on the impact of digital currencies on financial inclusion and a House Financial Services Committee hearing on stated regulatory framework.
Lev Menand, one of the original creators of the digital dollar concept, is a senior graduate and law professor at Columbia University. He served as senior advisor to the Assistant Secretary of the Treasury from 2015 to 2016, also worked as an economist in the banking oversight group of the Federal Reserve Bank of New York, and helped with a provision listing the digital dollar in emergency relief bills that the House of Representatives was drafted back in March.
It is encouraging to have U.S. currency regulation stewards knowledgeable about cryptocurrency and blockchain as it reduces the likelihood of regulation that kills innovation. In addition, official support for research into new solutions to financial obstacles, including blockchain-based assets, should fuel both advances in regulatory clarity and further investment in the crypto industry as a whole.
However, a statement by current US Treasury Secretary Steve Mnuchin offset the resulting market optimism and sparked concerns that onerous rules could be enforced from his office before the end of the year. The recent book by former National Security Advisor John Bolton revealed that President Trump had instructed Mnuchin to "seek out" Bitcoin. And earlier this year, Mnuchin said that FinCEN, the country's financial crimes watchdog, was preparing to introduce some "significant new requirements" related to cryptocurrencies.
Therefore, before the transition, there may be regulation that kills innovation. Brian Armstrong, CEO of Crypto Exchange Coinbase, tweeted this week that he had heard rumors that the Treasury Department intended to speed up regulation on the use of self-hosted cryptocurrency wallets.
This would be bad news for crypto-asset use cases such as decentralized finance and merchant applications, and would place US cryptocurrency users in a "walled garden," effectively negating the core value of resisting censorship and seizure. It would also force many users to go “offshore” for such services, weakening both the protective oversight of US regulators and the US's role as a financial innovation hub.
Does anyone know what's still going on?
The S&P 500, Nasdaq, and even the FTSE 100 saw further gains this week that I still find confusing.
It looks like I'm not the only one: the ECB, IMF and Federal Reserve have all warned of market shocks this month if the coronavirus situation worsens. And it looks like it is doing just that, given the latest confirmed case statistics. The latest news on vaccination progress is hopeful, but logistical complications and revised efficacy estimates are likely to disappoint, and markets appear to be expecting a strong economic recovery in the near term. A lot can happen to delay this recovery, and not just when Thanksgiving and Christmas throw us together and winter temperatures push us inside. There is also a threat of a hard Brexit that will hit both Britain and Europe.
However, that does not mean that the markets will not stick to laughing gas. When the news is bad, the belief seems to be that governments will support the markets. Of course, if there is good news it is not discounted. Obviously.
Gold also defied expectations this week, falling to its lowest level since July as investors (analysts say) decided now is a good time to get into risky assets and double the bet on economic recovery. Yes, you read that right.
Bitcoin, which is traded in gold at times and as risk-weighted assets at times, continued to rise, hitting an annual high of almost $ 19,375 and robbing an expectant crypto community of a new all-time high (ATH) celebration. (According to CoinDesk's Bitcoin Price Index, the ATH is $ 19,783. Here's a good explanation of why there is confusion about what the ATH actually is.)
Bitcoin price began correcting itself early Wednesday, and when U.S. markets closed for the Thanksgiving holiday, the correction turned into a router that could take profits for the past 10 days (at the time of writing – at this rate) things have changed radically by the time you read this).
When searching for the reasons for the recent Bitcoin attempt (before this week's slump), many fingers pointed at the institutions. While we have heard for years about the fabled institutional "wall of money" poised to push BTC prices to stratospheric levels, there are some signs that institutional interest is growing.
- The CIO for Fixed Income Securities of Blackrock, the world's largest investment manager, said last week on CNBC that bitcoin could largely take the place of gold because crypto is "so much more functional than passing a bullion around".
- After two Form-D filings, Galaxy DigitalThe Bitcoin funds raised $ 58.7 million in the first year, with $ 55 million going to an institutional fund.
- Analysts indicated that most of the trading volume was in US hours.
- The last three 8K registrations for Grayscale investment (owned by DCG, also the parent company of CoinDesk) reported new accredited investor inflows of over $ 823 million. (Source: FactSet)
- In a recently published investment note JP Morgan Speculates that Bitcoin's failure to return to average price in recent weeks is a sign that momentum traders such as commodity trading advisors (CTAs) have played a declining role in the market when compared to institutions.
- Zerohedge shared a diagram showing this Deutsche Bank includes Bitcoin in the asset groups followed by the Investor Research Team.
The growth in demand does not only come from institutions:
- According to Marcus Swanepoel, CEO of Crypto Exchange Luno (owned by DCG, also parent company of CoinDesk), retail volumes from South Africa, Malaysia, Nigeria and Indonesia have tripled in the last month.
- Dan Morehead, CEO and founder of fund manager Pantera Capital, believes PayPal is behind the rally and is buying nearly 70% of the new Bitcoin offering on behalf of its retail clients.
In an interview on CNBC, PayPal CEO Dan Schulman said he believes Bitcoin's usefulness as a currency will ultimately outweigh the buy-and-hold ethos. BRING AWAY: He has invested his company's money in these beliefs and promised PayPal users the opportunity to start using cryptocurrencies in around 28 million companies by early next year. While many of us stutter and say, "But who wants to spend a store of value ?!", we should remember that some regions do not have access to convenient payment routes. For many, cryptocurrencies may be a more convenient online payment method than fiat. And the applications that could build on public blockchains to improve this could ultimately support both the innovation and the overall value of cryptocurrencies.
Crypto exchanges in the US Coinbase no longer allows margin trading in response to recent regulations from the Commodity Futures Trading Commission. BRING AWAY: This is a setback for institutional involvement in Coinbase – institutions want leverage and will pull where they can get it.
In this compelling article, my colleague Ian Allison looks at how a strong can be made Mining industry in North America, supported by access to the capital markets, regulatory stability and relatively low energy and hosting costs. BRING AWAY: This is important for two main reasons: 1) The diversification of the mining base strengthens the protocol's resilience to political interference, and 2) improved access to capital markets should encourage even more investment in network maintenance. The more miners who work on maintaining the network, the more secure it is.
New York based investment management firm VanEck has launched an exchange-traded Bitcoin note on the German stock exchange Xetra. BRING AWAY: This is the third ETP that is listed on Xetra, one of the largest electronic trading platforms in Europe, with a broad international reach (around 50% of trading participants come from abroad). The variety of choices is good for both investors and market maturity.
Canada-based investment firm Cypherpunk Holdings (listed on the Canadian Stock Exchange with the Cypherpunk symbol "HODL") has sold its positions in Monero and Ether and increased its Bitcoin stake by almost 280%. BRING AWAY: I have no insight into their reasoning; I am sharing this news with you because the strong Bitcoin belief shown by this change is interesting along with the notice in their ticker symbol.