03/08/2024 0 Comments

1. Bitcoin halving euphoria masks an existential threat

Bitcoin mania is spreading. The cryptocurrency’s price has been buoyed by optimism surrounding the launch of new exchange-traded funds that have lured a wide swath of fresh investors.

Also helping the price: Anticipation for the so-called halving — an April event designed to reduce the creation of new Bitcoin and keep the asset scarce, and thus, in theory at least, more valuable.

But behind the euphoria, worries are brewing. The fourth halving, and the halvings after that, pose what Gryphon Digital Mining CEO Rob Chang describes as an existential threat. Bitcoin might lose, little by little, its decentralised make-up.

“The essence of Bitcoin lies in its decentralised nature, offering a bulwark against censorship and central control,” Chang told DL News.

Bitcoin, unlike, say, the US dollar, isn’t controlled by any single entity like a corporation, bank, or government, but rather by a vast network of computers.

The loss of that vital characteristic, a central tenet of pseudonymous creator Satoshi Nakamoto’s vision, “not only undermines this foundational principle,” Chang said, “but also exposes the network to heightened security risks… and erodes the trust and integrity that Bitcoin aims to establish.”

Weakened viability

It’s not just theoretical. When the halving happens, possibly on April 20, Bitcoin miners — which maintain the blockchain — will feel the squeeze.

Their rewards will drop to 3.125 Bitcoin from 6.25 Bitcoin each time they create a new block. On average, about 144 blocks are “mined” each day, translating to about 900 Bitcoin produced per day before the halving, and 450 Bitcoin afterward.

“The next halving will weaken the viability of independent, non-institutional miners from retaining profitability, which could further contribute to consolidation” of the industry, Coinbase analyst David Han argued in a late January report.

Miners are already talking about consolidating. Marathon Digital Holdings, the largest publicly traded Bitcoin miner in the US, has told DL News that it’s shopping for new sites.

The worry is this consolidation will kick off a Domino effect, potentially ending up in a scenario where Bitcoin is under full control of a few, or perhaps even one, mining outfit.

“In the long run, decreased mining revenue margins is a potential threat to decentralisation in Bitcoin mining operations,” Han wrote.

Then what?

Repercussions could be catastrophic for the world’s largest cryptocurrency. Chang noted that should the network fall under the control of a particular entity, Bitcoin would be exposed to “51% attacks” — an industry term to describe a majority takeover of the blockchain.

Among worst-case scenarios: The controlling firm could arbitrarily decide, for example, to spend more Bitcoin than it actually owns; it could also reverse Bitcoin transactions that it doesn’t approve of.

Or spooked investors could dump their Bitcoin holdings en masse, put off by the unreliability of the technology.

2. Bitcoin’s Test of All-Time Highs Means Old Miners Are Cashing Out

Bitcoin’s rapid price ascent during the last month, which culminated in a new all-time high and quick reversal on Tuesday, has meant that some early miners have started selling their old block rewards – putting pressure on bitcoin’s price.

On-chain data spotted by CryptoQuant shows that, just before bitcoin peaked at new highs around $69,000 and then plunged to $62,000 on Tuesday, 1,000 bitcoin worth roughly $69 million were moved to Coinbase by addresses more than a decade old and that the research firm says are linked to miners. (Shifting long-dormant tokens to Coinbase, a large crypto exchange, can be a prelude to selling.)

“Considering that the exchange order book shows 5-10 bitcoins of liquidity for every $100 price change, a sell-off of 1,000 bitcoins is highly likely to trigger a significant price drop,” Bradley Park, an analyst at CryptoQuant, told CoinDesk in an interview. “Especially when traders are waiting to enter a short against bitcoin’s all-time high like on Tuesday.”

Park said that the recent influx of bitcoin into exchanges reminds him of the sharp increase in BTC inflows that occurred before the 40% price drop on March 12, 2020, as Covid-19 began to rapidly escalate in severity, causing governments around the world to begin lockdowns, forcing a flight to safety for traders.

When that sell-off finally ended, bitcoin had bottomed out at $3,850.

3. Bitcoin Miners Show Muscle Pushing Back Against Warrantless ‘Emergency’ Order

Bitcoiners have struck a significant victory in their push to strike down the U.S. Department of Energy’s statistics unit’s “emergency” bitcoin mining order. According to court documents, the Energy Information Administration is dropping its mandatory survey sent to hundreds of miners in favor of the proper notice and comment period required by law. The EIA hastily announced the order in early February, calling the data request a matter of national importance.

This comes as a response to the lawsuit filed by the Texas Blockchain Council, Riot Platforms, New Civil Liberties Alliance and Chamber of Digital Commerce against the DOE, which in February won a temporary restraining order that limited the government’s ability to collect data. The court overseeing the case wrote that it’s “likely” the justification for the original emergency order request fell “short.”

For instance, in a CoinDesk op-ed, Lee Bratcher of the Texas Blockchain Council wrote that the data request could easily be politicized and inflame incomplete narratives about how the blockchain industry interacts with the national grid. The New Civil Liberties Alliance said the EIA’s report likely stemmed from “political pressure” rather than a desire to prevent “public harm.”

The EIA is now going to try to get the data — which could be genuinely useful — via means that do not trample on people’s constitutional rights. It will publish a notice in the Federal Register about its proposal and destroy any information already collected, according to court docs.

Notably, the original survey request lacked any information about how the government would protect potentially sensitive corporate information, or whether it would be anonymized if published publicly, which is standard practice for this type of data gathering, Bratcher, who worked in the DOE, said.

More to the point, as Riot and the other plaintiffs alleged in their suit, crypto miners would be “immediately and irreparably harmed by being forced to divulge confidential, sensitive and proprietary information to the EIA.” The survey presented the threat of criminal penalties if the miners failed to respond.

Bratcher said the information gathering could ultimately shine light on an increasingly important sector. But he wishes the EIA would work with the industry to design a more accurate and helpful survey. It should, for instance, ask not only how much energy miners draw and from what providers, but also how their flexible electricity consumption can benefit the grid and incentivize greener sources of energy production.

In Texas, miners work directly with the state grid operator to power down during periods of stress on the network — like during the winter storm in 2021 that left millions without access to power. Which makes it ironic that the justification for the EIA’s emergency order was in part to assess how mining could lead to “public harm.”

The EIA will now open a 60-day public comment period, beginning on the date of publication of the new Federal Register notice.

While the survey will likely come back in some form, this moment is a real victory for an industry that appears to be in the crosshairs of U.S. officials. Not only do figures like Securities and Exchange Commission Chair Gary Gensler, Treasury Secretary Janet Yellen and Senator Elizabeth Warren constantly equate crypto with fraud, but, arguably, they’re actively engaged in wiping it off the map.

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Harvey CHEN

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