Preston Pysh this past week published a great interview with Michael Saylor. It’s a bit long, but is definitely worth a listen. If you don’t have time to listen to 3 hours of what Michael Saylor thinks will happen to Bitcoin and why, here’s a short summary: money in almost everything is suffering from some pretty terrible macro pressures and a lot of that money will find its way to Bitcoin.
One of the most interesting parts of that podcast was how many funds are restricted in what they can invest in and it takes bridges from Bitcoin to these funds for them to invest. It can be very profitable to build such bridges. Saylor explained that his $450M convertible note was really a way for bond investors to get exposure to Bitcoin. He could do that because his company has plenty of cash flow and assets to make this note very low risk. What was interesting is that he designed the note so that the investors could get some of the Bitcoin upside.
Bond investors can’t even buy equities, so Bitcoin is definitely out. But packaged this way, they can get Bitcoin exposure with very low risk but also lower upside. The convertible note, in other words, was MicroStrategy’s way of capturing a ton of value while providing bond investors an asset with the appropriate risk. Packaged this way, the note was oversubscribed to the tune of $650M, indicating a huge appetite for Bitcoin exposure in those investors. As Michael revealed, some had been waiting since 2013 for such an asset!
All this is to say that there are a lot of institutional investors at all different levels that want Bitcoin exposure, but don’t have the proper vehicles to get exposure. Futures and convertible notes are a start, but that’s really just the tip of the iceberg. The innovation in the coming year will be better and more interesting vehicles to create various levels of exposure to BTC. The GBTC trust and MSTR’s convertible note are just two of many different possibilities, and given just how much money each has made, there’s bound to be a lot of competition in this arena in the coming year.
The insane amount of money printing this past year along with the very low interest rates have created the near-perfect macro environment for Bitcoin exposure demand. In other words, there’s good reason to believe that this bull still has a long way to go. Companies like MicroStrategy that create these bridges will capture a ton of value.
OpTech has released a summary of what has gone on in Bitcoin this year. The main innovations this year are Taproot, various privacy technologies and Lightning. All of them have made a lot of progress and will create better user experiences in the coming years. Taproot, in particular, has a lot of potential for securing Bitcoins and I expect that to be the focus of most wallets in 2021. While the features it offers are powerful, the actual code and user interface to do them are things that need a lot of thought and testing. The same is true of various coinjoins and LN tech, they have a lot of potential, but need good user interfaces in the coming year to make them useful to the end user.
Bitcoin DevKit has a new release: 0.2.0. The Rust library has more support for descriptors, which I hope becomes more standard across wallets of all types. Libraries like this will hopefully abstract away some of the complicating things from what I just described above and allow better software to be written.
SuredBits has an interesting innovation using Lightning and Contracts-for-Difference (CFD). Essentially, they’ve made a Discrete Log Contract (which is a mechanism for settling contracts using an oracle on Bitcoin) which has in it an asset that follows USD price instead of Bitcoin. This can be done because the difference in value is what gets settled. This lessens the amount of third-party trust since it’s now the Oracle that requires trust and not the issuer. This is because the issuer has more of a moral hazard to navigate than the Oracle, though the Oracle is certainly not free from moral hazards. Basically, they’ve made stable-coins possible and if there’s any real use for them, DLCs will overtake the market given how Bitcoin is the better, harder asset than anything else.
River has published an article on their new feature which allows users to withdraw directly to hardware wallets. Essentially, they require registration of an xpub. This allows users to use River to generate PSBTs to spend later. I’m a bit ambivalent about this feature since so much data has to live on River’s servers. That said, this is much better than keeping your coins on Coinbase and I applaud their efforts to make things more secure for their users. As in the previous paragraph, River is more like the oracle and Coinbase more like the issuer.
Caravan now supports ColdCard. Multisig is critical for removing single points of failure and along with Specter, Caravan is leading the way in making this happen. Both continue to support more hardware wallets and because security is additive, this makes Bitcoins secured in such multisig wallets much more secure. 2021 will have even more hardware wallets, such as NGrave and Specter enterprise which will be add even better features.
Jameson Lopp has an article on recovering a Lightning Wallet. He goes through the different ways that a Lightning node may fail and goes through possible fixes for them. This sort of thing is critical for a more robust Lightning Network as having to tinker with broken setups is not what most users want to do.
Economics, Engineering, Etc.
I wrote an article about how Bitcoin is money consistent with Natural Law. This is my moral argument for Bitcoin, where I argue that positivism, as a law theory, is highly immoral and fiat money is its enabler. Unlike the book, this article makes the argument for Bitcoin from a strictly rational perspective, with Natural Law as the base.
Dan Held has argues that we’re in for a different experience than in 2013 or 2017 and that we’re about to experience a Bitcoin supercycle. The main argument is that we have a crazy macro environment with too much money printing and too many overpriced assets. Bitcoin is poised technologically to absorb much of the newly printed money as everyone looks for a place to store value. Which is related to the next story.
Stephan Livera argues that not being bullish enough on Bitcoin can lead to some really bad mistakes. Securing Bitcoins based on the price that you expect Bitcoin to be is the correct thing to do rather than securing them based on the current price. An attack at $100k/BTC is very different and has more resources than at $1k/BTC.
The SEC has charged XRP with conducting an unregistered securities offering. Not surprisingly, this has caused XRP to tank. This feels like a case where the SEC wants to make an example of somebody and I wouldn’t be surprised if they pursue this one with vigor. Many other altcoins also fell on the news as it’s not a big stretch to think the SEC would charge them, too.
Coinbase has filed for an IPO. This is what everyone’s been waiting for in the crypto space. The question about this IPO is how much their market cap will reflect Bitcoin’s price. I, for one, will be looking at their prospectus to see how much in Bitcoin they are keeping. If it’s a significant amount of their reserves, I suspect they’ll trade similar to MSTR and GBTC than the rest of the market.
HODLPac has an excellent summary of what’s going on with the proposed FinCen rule. This rule is not well thought out and it’s not entirely clear how and when the rule will go into effect, but suffice it to say that it’s treating “non-custodial” wallets as needing to comply with AML rules. I hope this rule gets killed off or significantly watered down.
Another week, another fund getting ready to buy BTC.
My podcast this week was with George Mekhail where we discussed listener questions about our new book.
I also did Tone’s show where we discussed the SEC suit against XRP, Coinbase’s IPO and Michael Saylor’s BTC buys, among other things.
Fiat delenda est.