10/20/2023 0 Comments

1. Bitcoin Is A Network And An Asset: Here’s The Difference

As U.S. markets brace for the inevitable bitcoin ETF approval, it is important to understand the difference between Bitcoin and bitcoin. The Bitcoin network is a distributed system of computers and nodes which process transactions and maintain the ledger. The asset bitcoin is the native token which lives on and is transferred through the Bitcoin network.

As investors look towards a possible investment in an ETF, they may be inadvertently opting out of important characteristics of the network and asset not accessible through an ETF wrapper.

Bitcoin’s Programmatic Supply

The asset is programmatically scarce and verifiable through its open-source nature. Time Chain Stats, an open-source Bitcoin network analytics tool, shows the current circulating supply of bitcoin at 19.52 million coins. The max supply of bitcoin will be 20,999,999.97 coins, reaching that limit through a series of programmatic supply issuance reductions.

Roughly every four years the supply of newly issued bitcoin is cut in half automatically. At the beginning, there were 50 bitcoin issued every ten minutes. Currently that number stands at 6.25, with the next halving expected in April 2024.

The supply issuance will continue to be cut in half every four years until the year 2140. These events are widely believed to precede the periods of extraordinary price acceleration in bitcoin the asset.

Bitcoin The Distributed Network

Price action aside, the Bitcoin network is a conglomeration of miners and nodes that process bitcoin transactions and maintain the ledger in a transparent way. Miners expend electricity in an effort to guess a random number, a consensus mechanism known as proof of work. The miner that guesses first is afforded the privilege of adding the next batch of transactions into a block of data.

That block of data is propagated out through the network, updating all of the nodes around the world. It is added in sequence to the chain of blocks prior, creating a complete history of all bitcoin transactions that have occurred over the Bitcoin network.

As more computers join the network to perform their proof of work, blocks are processed faster. Every two weeks however, the algorithm automatically adjusts the difficulty in order to keep the blocks coming in every ten minutes on average. This prevents the bitcoin supply from inflating too quickly. The difficulty can also adjust downwards if computers leave the network and blocks start coming in too slow.

Since bitcoin’s software is open source, the code can be changed at any time. The network of nodes distributed throughout the world however have to voluntarily opt into these changes to maintain network consensus. If malicious changes are accepted voluntarily by some of the nodes, those changes will not be recognized by the rest of the Bitcoin network, maintaining its integrity.

The system of distributed nodes and miners keeps the Bitcoin network decentralized. The decentralization is important for keeping bitcoin transactions resistant from censorship or attacks. In order to process a fraudulent or censored transaction, an attacker would need to attain an enormous amount of computing power and electricity in order to overpower the existing network participants.

This attack is commonly referred to as a 51% attack, however experts claim that attackers would need to achieve roughly two thirds of the mining power in order to conduct an attack lasting beyond a few minutes.

In doing so, they would need to acquire billions of dollars’ worth of scarce equipment and electricity. Conducting an attack would render this equipment worthless, incentivizing honest participation rather than network manipulation.

Bitcoin and Lightning: A Neutral, Global Payment Rail

In holding bitcoin, savers are able to leverage the Bitcoin network to make purchases in a permissionless and peer to peer fashion. With the growing strength of the Bitcoin’s Lightning Network, payments are becoming easier than ever.

The Lightning Network is a second layer payment rail built on top of the Bitcoin network. Lighting enables instant and cheap bitcoin payments with similar censorship resistance as the Bitcoin network. Bitcoin and Lightning are becoming increasingly popular in Latin America and Africa due to banking limitations and runaway inflation.

Lightning Labs, a Lightning Network developer recently released a statement announcing the ability to transfer other assets over the Lightning Network, like stablecoins. The announcement posits that the development will help transform the Bitcoin network into a globally accessible financial settlement layer for a multitude of different currencies.

ETF investors can only leverage price action in a traditional portfolio. People who choose to hold bitcoin using its native technology have access to spending and trading twenty-four hours a day, every day of the year. A beginner’s overview of bitcoin only exchanges and self-custody wallets can be found here.

Those who opt into the bitcoin ETF blindly may be making some significant tradeoffs that they do not fully understand. For those seeking a more diversified approach to their investments, it may be beneficial to dig into the intricacies of bitcoin the asset, as well as Bitcoin the network to get a better understanding of these tradeoffs.

2. ‘Crypto winter’ may be over as Bitcoin halving approaches – Morgan Stanley

2023 has been a volatile year for the cryptocurrency market. Bitcoin (BTC) got off to a hot start, surging from $16,200 to nearly $32,000 over the first few months on the back of several major developments including the largest banking crisis since 2008, but has since struggled to regain that momentum.

The market has been trapped in what’s been called a “crypto winter” since prices peaked in November 2021, as multiple high-profile bankruptcies and a regulatory clampdown on the industry by the Securities and Exchange Commission (SEC) have pushed many investors out of the market and seen token prices fall 50-95%.

The outlook began to improve in June after BlackRock filed a spot BTC exchange-traded fund (ETF) application, which sparked a flurry of similar filings from other asset managers, and analysts across the ecosystem are growing increasingly bullish that the approval of the first spot BTC ETF is only a matter of time.

According to a recent report by Morgan Stanley, signs have now emerged indicating “that ‘crypto winter’ – Bitcoin’s cyclical bear-market decline – may be in the past,” citing recent developments and the upcoming Bitcoin halving.

“Bitcoin is the leading cryptocurrency, accounting for about 50% of total digital assets by market capitalization, and, in many ways, acts as a proxy for the overall crypto market,” Morgan Stanley analyst Denny Galindo said. “One unique aspect of Bitcoin is that it is designed to go through a process called ‘halving’ that creates scarcity, so that Bitcoins can maintain their value.”

Roughly every four years, the Bitcoin code is designed to cut the new supply of BTC released with every new block in half – known as the halving – which serves as a deflationary force for the token. It is estimated that by 2140, all 21 million BTC will have been created, and no more Bitcoins will be mined.

“By intentionally limiting the supply of new Bitcoin, the shortage caused by the halving can affect the price of Bitcoin to potentially spur a bull run,” Galindo said. “There have been three such runs on Bitcoin since its inception in 2011, each lasting 12 to 18 months after the halving.”

Due to this four-year cycle, the cryptocurrency market goes through various phases that correspond to the four seasons of the year.

During a crypto summer, “Historically, most of Bitcoin’s gains come directly after the halving,” Galindo said. “This bull-run period starts with the halving event and ends once the price of Bitcoin hits its prior peak.”

Once BTC price surpasses the old high, crypto fall sets in. “It tends to attract interest from the media, new investors, and businesses, which can then drive prices even higher,” he said. “This period represents the time between when Bitcoin passes the old high and reaches a new one, which signals that the bull market has run its course.”

Then comes the crypto winter. “In previous cycles, the bear-market decline has come when investors decided to lock in their gains and sell Bitcoin, causing prices to drop while scaring off new investment,” Galindo said. “This period takes place between the new peak and the next trough. There have been three winters since 2011, lasting about 13 months each.”

After investor pain has been maximized, crypto spring starts to emerge. “During this period preceding each halving, the price of Bitcoin generally recovers from the cycle’s low point, but investor interest tends to be weak,” he said.

This leads to the current question for crypto investors: Is crypto spring here?

“Just as a farmer avoids planting seedlings in the winter or too late in the spring, crypto investors want to know when crypto spring has arrived to maximize their investment ‘growing season,’” he said.

Galindo outlined several points to consider “when trying to determine whether crypto spring is truly here, or if the market is still in the midst of crypto winter.”

The first thing to consider is the amount of time since the last peak. “The trough of Bitcoin in previous crypto winters has historically occurred 12 to 14 months after the peak,” he said.

The magnitude of the Bitcoin drawdown is also important, as previous troughs were roughly 83% off their respective highs.

“When Bitcoin has neared the trough of past cycles, many Bitcoin miners shut down their operations because they were losing money,” he said. This is what is known as miner capitulation. “When a miner shuts down, it makes it a little easier for the remaining miners. A statistic called ‘Bitcoin difficulty’ measures how easy or hard it is to mine Bitcoin. When difficulty decreases, it is a sign the trough may be near.”

Galindo said that one technical analysis tool that is helpful in determining the crypto season is the Bitcoin price-to-thermocap multiple. “‘Thermocap’ measures how much money has been invested in Bitcoin since its inception,” he said. “A lower Bitcoin price-to-thermocap multiple indicates a trough, while a higher multiple indicates a peak.”

Other signs of an impending crypto spring include exchange problems and notable tells in Bitcoin’s price action.

“When the price of crypto drops, it tends to impact the viability of some crypto exchanges. Bankruptcies, bad news, or new regulations may all indicate a trough,” he said. “A 50% increase in price from Bitcoin’s low is typically a good sign that the trough has been achieved, although there have been examples of such a gain being followed by significant declines.”

Current estimates indicate that the next halving will occur sometime between April 12 and April 24, 2024.

“Based on current data, signs indicate that crypto winter may be in the past and that crypto spring is likely on the horizon,” Galindo said. “However, keep in mind that there have only been three crypto springs to date. In other words, there is still a lot to learn.”

It’s also important to note that, as with all investments, past performance doesn’t indicate future results, he said. “Potential risks such as encryption breaking, software bugs, recession, or coordinated government action could emerge before the expected halving and disrupt the cycle.”

“While no one can tell you if now is the right time to buy or sell cryptocurrency, today is the right time to learn more about the crypto market’s cyclical tendencies so that you can ask questions, monitor trends, and determine for yourself if the cycle will repeat a fourth time and whether to invest,” Galindo concluded.

3. Bringing global vision to the management of crypto data centers

Cryptomining is a prolific and technologically advanced domain that attracts thousands of entrepreneurs and solo miners from around the world — but how much do we know about the underlying infrastructure?

Denis, a luminary in the crypto mining arena with global accolades, adeptly steers the ship as the CEO of New Mining Company. Under his leadership, the company excels in architecting turn-key cryptocurrency mining data centers, setting a gold standard in the industry.

Denis, how did your career path lead you into the crypto data center industry?

I initially began my career as an engineer at Hewlett-Packard, and throughout my professional journey, I have always been involved with computers, hardware, and their maintenance in some capacity. When blockchain technology started gaining significance in the industry, I naturally gravitated towards it from the hardware perspective, focusing on creating efficient data centers for miners.

Perhaps it was partly accidental, thanks to the connections and acquaintances I had, but it was largely influenced by my prior experience in hardware procurement, distribution, and maintenance. Our clientele consisted of system integrators, data centers, state companies, and other consumers of such equipment.

I had the fortunate opportunity to meet the team from Bitfury and visit their data center in Georgia, where I learned about their setup and their work with immersion cooling. Inspired by this experience, I returned home and embarked on building my own data center. We found a suitable location on a former factory site and within six months, our first mining farm was up and running. That was my first encounter with the crypto industry.

Given your versatile experience in the field, could you tell us a bit more about some of your international projects?

Well, I had been running a company focused on international hardware distribution for a considerable period of time. When I made the transition to the crypto mining industry, our first venture was establishing a data center in Abkhazia.

During that time, we embarked on a significant project in Norway that began towards the end of 2017 and concluded in 2018. The decision to choose Norway as our location was primarily based on the fact that the country predominantly relies on renewable energy sources such as hydro and wind power for electricity generation.

If I recall correctly, Norway had just one coal-fired power plant at that time, which resulted in relatively low electricity prices compared to the global average. Additionally, Norway has consistently ranked among the top three countries for ease of doing business over the past decade, which was another appealing aspect.

We extensively explored numerous areas throughout the country in search of a suitable site to establish our data center. Given the increasing interest in opening data centers at that time, finding an appropriate location was no easy task. However, after much effort, we eventually discovered a site within a region that had excess capacity. We negotiated with the municipality to secure the opportunity to launch our data center.

This particular site was part of a technology park, but it required us to undertake all the construction work ourselves. Essentially, it was a brownfield site with no existing structures, situated adjacent to a forest. We took on the responsibility of planning the area, clearing the forest, leveling the site, and making it ready for the installation of mobile data centers. Subsequently, we manufactured the data centers in accordance with Norwegian standards, transported them to the site, and successfully launched operations.

The experience I gained from my involvement in real estate development, particularly in constructing apartment complexes, proved invaluable in this endeavor. It allowed us to effectively plan the area, carry out necessary site preparations, and ultimately bring our mobile data centers to life within the technology park.

How would you describe your experience doing business in different countries?

My initial exposure to the Nordic countries was through Denmark. Well, technically, the first foreign partnership my company entered into was with a French company, but later on, the French company was acquired by the Danes.

In terms of mindset, it was somewhat easier and more straightforward for me to reach an agreement with the French partners. However, when the Danes came into the picture, things became a bit more complex. I mean, there weren’t any major issues, but there was a period of adjustment required.

Based on my experience, our perception of information and business culture is closer to the French. On the other hand, with our Nordic partners, we encountered some differences that took time to resolve.

It’s evident that there are varying mentalities and approaches to conducting business. Each country around the world has its own distinct characteristics. The way business is conducted in China differs greatly from how it is done in Norway, but it’s still possible to establish successful business relationships in both countries.

For instance, the Norwegians are known for being open and organized. One aspect that fascinated me in Norway is that the entire country is uniformly developed. If you visit the Norwegian countryside, you’ll find a well-established infrastructure with numerous facilities, equipment, contractors, and highly skilled professionals who can assist you with various tasks.

I’ve also had the opportunity to learn about German manufacturing facilities, and I must say that the Germans are among the best when it comes to engineering technology. Their production processes are impressively well-structured and organized. I’ve visited several factories and was truly amazed.

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Harvey CHEN

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