Where did the recent sell-off come from? Bitcoin Tech Talk Issue #180
The last couple of weeks have been turbulent for every market around the world, not the least because of the disruption to commerce caused by the current crisis. In a sense, Bitcoin is a tiny fish in a very big pond at this point as the volatility seen in other markets are higher or on par with Bitcoin these days. That said, the current Bitcoin volatility and where it comes from is definitely of interest as it can tell us something about the makeup of the current holders.
Coinmetrics has an article on where the sell-off came from. According to their analysis, most of the sell off came from short-term holders. These are likely leveraged traders on platforms like BitMex that were forcibly liquidated. Hedge fund Adaptive Capital likely liquidated as well. Leverage is debt and despite the large upside, there’s significant risk when the market goes against you. Leveraged positions are more fragile and thus, the moves the past couple of weeks crushed them. The long-term holders have not sold and are not getting wrecked by leveraged debt.
The big winners in the crash are stable coins which have increased in market cap. These are clearly being used as a flight to safety or liquidity. They’ve collectively been increasing in market cap, meaning more fiat money is backing them, presumably to buy.
Bitcoin
Giacomo Zucco has come out with a two part series on privacy and Bitcoin. The first looks at all the properties that are important for privacy starting from the whitepaper, including fungibility, deniability and liquidity. The second gives a critical look at the different false assumptions around privacy and how it’s fundamental to Bitcoin itself. He argues that the real privacy concern is around incentives. Good incentives for privacy will make it more prominent. Overall, this is an excellent overview of the privacy landscape in Bitcoin and what we should work towards.
Pieter Wuille has summed up the various ways in which a private key can be compromised without the user knowing. The attacks fall into various categories and protecting against some means a tradeoff as it weakens protection against others. Tim Ruffing argues that key generation is something to be concerned with as well, though Russell O’Conner argues that using unhardened child derivations can mitigate against this attack and Marco Bencun argues that most hardware wallets allow installing seeds, so this attack can be avoided for a bit of up-front inconvenience. The discussion of the security tradeoffs was framed very well by Pieter and understanding these tradeoffs will hopefully create better hardware wallets.
Lightning
If you need help with your lightning node, there’s an interesting forum for discussion here. It’s a place to ask questions about lightning using your lightning node. No registration required. Instead of using an email address as an identity, you can essentially run a lightning node. It’s an idea which makes running a LN node more useful, much like encrypted messaging. As each node has to be connected, there’s some money locked up making Sybil attacks on a platform like this difficult. Could lightning be the path to real decentralized identity?
In some sad news, SparkSwap is shutting down. This was a company that tried to make an exchange where you kept custody of your coins and used lightning to transfer Bitcoins. Unfortunately, they couldn’t find a market as the demand on the trader side is more for leverage than better custody.
Economics
The federal reserve continues to be aggressive in all sectors of the market. They are guaranteeing dollar liquidity corporate bonds, mortgage-backed securities, municipal bonds and more. They’re also guaranteeing the money market funds to make sure it doesn’t break the buck. Finally, they’re providing dollar liquidity to a bunch of other central banks. The markets are fleeing to the dollar and the Fed is making sure there' are enough dollars for everyone. The current state of affairs is captured in this amusing meme and website.
The story of the Venezuelan Petro and the futility of a political cryptocurrency can be seen in this article. While it’s easy to see how much of a disaster the currency was, the story behind it and the manipulation of young, impressionable coders is sadly all too common. This has been the story of nearly every ICO and altcoin, but with more danger and consequences.
MakerDAO continues to have some trouble, with their newest struggle pegging the DAI to the dollar. DAI is trading at a premium as their users wants safety, but it’s also making paying off previous loans more expensive. The mechanism that’s supposed to correct the premium is not working as that would require locking up more ETH. As we saw last week, this may not be a great idea as getting liquidated can cost a lot.
Speaking of ETH, Vitalik Buterin has published his “roadmap” for ETH 2.0. The diagram as seen above is insanely complex and the roadmap apparently puts ETH 2.0 completion at 5-10 years. As I’ve been saying for the last 5 years, this is a project that creates a new narrative every few months with just enough tantalizing details to make the ETH holders think there will be a real use case just around the corner. As the previous story shows, these are almost always artificial and those that don’t have significant hidden risks.
It looks like Justin Sun may have to write off his acquisition of Steem, as the entire platform is forking away from the Steem he controls. Hive is a fork of Steem that will airdrop to existing holders of Steem and looks to have the support of the community. As with what happened with BCH, I suspect this new community will split again over some other issue and dilute this thing to oblivion.
Podcasts, Etc.
I did a show covering the last two newsletters, especially the stuff the Fed has been doing and Erlay. I also read through the first part of the Satoshi whitepaper. Finally, I was on Tone Vays’s channel talking about the Fed and DeFi among other things.
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Fiat delenda est.