Bitcoin winter has been long and pretty stressful. Getting to the heights that we did back in December 2017 will do that. We’ve endured two drops into the $3000’s and multiple teases like the jump to $13,000 last summer. But is the bull market really starting?
When I started this newsletter back in 2017, the stock-to-flow analysis didn’t exist. Market movements seemed to be based on media coverage, Bitcoin evangelism and fiat excess. We knew back then that bull markets do indeed happen, but why or when it happened eluded us.
PlanB’s seminal article based on the stock-to-flow ratio popularized by Saifedean Ammous’s book changed all that. We finally had an explanation for why the bull markets seemed to happen when they did. The supply shock caused by the halvening forces the price upward.
What we’re seeing in the markets seem to be confirming this. As seen above, Square sold $850M worth of Bitcoin in the past quarter. At $10,000/BTC, that’s more Bitcoin than there is mining award in the same period going forward. The fact that this is just one exchange is extremely bullish.
At the same time Grayscale continues to buy Bitcoin in large quantities (10,000 BTC+/week some weeks) with their current total ownership being around 400,000 BTC. Who knows how much more Bitcoin is being bought at other exchanges, at OTC desks and in peer-to-peer transactions?
It’s possible the stock-to-flow model is wrong, but if it’s right, the supply-shock making its way through the Bitcoin economy is exactly the sort of thing we should expect to see. The process we’re currently witnessing is very much the inverse of the money-printing/inflation process we’ve observed in any fiat economy. At first, the newly printed money takes some time to be absorbed into the economy before prices rise. In our case, the supply shock takes some time to be absorbed into the Bitcoin economy before the prices in terms of Bitcoin fall.
Hyperbitcoinization, then, is really the inverse of hyperinflation in that the economy starts to anticipate these events and front-runs the expected supply shock. If the s2f model is true, how soon will people start anticipating the market? How soon will hyperbitcoinization arrive? By the next halving? The one after? The one after that? I wait eagerly to find out.
Slush has published a review of what happened during the block size wars of 2017. They go through the debate, the activation methods and the various Bitcoin Improvement Proposals like BIP141, BIP148 and BIP91 that all affected what happened 3 years ago. If you’re not familiar with what happened back then, or if you don’t feel like you sufficiently appreciate the power that users have in Bitcoin, this is a great read.
Ledger has a security bulletin on a possible exploit. The exploit involves altcoin apps on Ledger being able to sign transactions that are valid on other coins. This is an excellent example of why supporting so many altcoins is a bad idea. The attack surface for Ledger is much larger, than, say ColdCard. As many of the altcoins that it supports are slowly dying, Ledger should consider retiring those apps and instead focusing on Bitcoin features like better multisig support and the upcoming Taproot soft fork.
OP_RETURN use has drastically slowed. OP_RETURN is generally used by people that want to put raw data in the Bitcoin blockchain for whatever reason. Among other uses were chains that ride on top of Bitcoin like CounterParty (XCP) and Omni. There were also VeriBlock and Factom which used that space to record some data. As most of these projects are dying, the fees that they’ve been paying are no longer affordable, hence the drop. In a sense, these projects have subsidized Bitcoin miners at the cost of eternal Bitcoin data on every full node. I’m glad to be rid of these projects and fees going up, for this reason, helps to reduce the negative externalities.
LiT is a lightning terminal that can be run in the browser! Lightning Labs has a blog post with the details. Essentially, the terminal is a control panel for managing all the payment channels connected to your lightning node. The ostensible reason for building it seems to be to manage Lightning Loops, which are BTC on/off ramps to lightning. The project is very welcome and I suspect that this sort of UI is what will be used for more interesting LN applications to come in the future.
Rusty Russell has a blog post to describe all the enhancements in c-lightning 0.9.0. Included is support for multi-path payments (MPP), ability to send without an invoice, support for watchtowers and native PSBT. Lightning continues to mature as the network provides consistent feedback to all the developers working on it. The level of activity on the Lightning network seems to be at the right level compared to the innovations happening.
Economics, Engineering, Etc.
A new version of BTCPay server is out! The main feature is that it allows going Bitcoin-only versus altcoin enabled. As most people running BTCPayServer only ever receive Bitcoin, this hopefully will lead to the entire product becoming BTC-only. The developer time going into maintaining altcoins is better spent on Bitcoin features and security.
BitQuery has released a report on the Ethereum Classic’s 51% attack. The attacker managed to double-spend more than 800k ETC in the attack worth $5.6M and paid only 17.5 BTC or less than $200k in order to pull the attack off. The attacker seems to have gotten away with a lot of money, probably from OKEx. What’s more surprising is that this seems to have not affected the price of ETC very much, which indicates the market doesn’t seem to care. As the ETC that got returned can now be sold again more or less at the previous price, this makes the attack more profitable than it would have been if the price went down. This suggests that more such attacks should be coming. Coinbase has reacted by not crediting deposits for 2 weeks! Of course, given that Coinbase lost a ton of money on the original split that created ETC in the first place, their caution is warranted.
DeFi project Opyn was exploited for $370,000 this week. The details of the exploit are that the same ETH can be used multiple times. I purposefully don’t call this a hack as the smart contract was just really badly written. DeFi is something that’s getting hyped all out of proportion right now, but it’s pretty clear that these contracts are not well written and are essentially zero-sum games that rely on new money coming in. I don’t know when the money coming into DeFi stops, but it won’t be pretty when it does.
A lot more developer grants have gone out recently. Square is sponsoring Lloyd Fournier for a bunch of projects. HRF is sponsoring Evan Kaloudis for the lightning project Zeus and Openoms for privacy project JoinInbox and Fontain for FullyNoded. OKCoin is sponsoring Bitcoin core maintainer Marco Falke.
Finally, BCH looks like it’s forking again. This time, it’s the ViaBTC mining pool who’s leading the charge with the name BitcoinCat and symbol BCC. The main reason for the fork seems to be the ill-received developer funding program which was essentially scuttled after community outrage. BCC will have a BCC foundation which will fund their developers. They’re promising larger blocks, shorter block times, new Proof-of-Work algorithm, more OP codes and other things that are ubiquitous with Bitcoin forks. November 15th is the date they seemed to have decided on and we’ll see if they follow through. Lastly, it’s revealed in the blog post that the name BitcoinCat was chosen because Dogecoin was successful with a dog as a mascot and there’s no coin with a cat as a mascot. Seriously, read it. I’m not joking.
My podcast this week was with the Bitcoin Rabbi on primary education. I did two shows with Tone, one on XRP and blockchain voting, another on the DeFi exploit and ETC double-spend. My videos from Bitcoin Magazine’s Bitcoin Independence Day are up. I talked with my co-authors about how Bitcoin is doing in the Philippines, Eastern Europe and more.
Fiat delenda est.