Why Bitcoin feels hard to hold. Bitcoin Tech Talk Issue #224

HODL! Or so goes the mantra for everyone during price dips. The meme is a tacit acknowledgement that there is a lot of volatility in Bitcoin and holding through the dips is difficult for most people. The idea of HODL is that iron tenacity and significant conviction is what is needed to weather the storm of the often violent downward spikes that are so common in Bitcoin.

For this newsletter, I want to flip that question around. Is it that Bitcoin is difficult to hold or is it that everything else is easy to hold? Is it possible that instead of Bitcoin being difficult, it’s other things that have been made too safe and convenient?

This idea occurred to me after talking to Preston Pysh about some of the things the Fed does to provide liquidity to illiquid markets. Their general playbook consists of offering loans using illiquid bonds as collateral to make it easy for those that hold the bonds to not be forced to sell them and create chaos.

They have many such programs that they’ve executed this past year, including one for municipal bonds and another for corporate bonds. In a sense, they’ve made holding bonds and not selling them artificially easy and have decreased the natural volatility of those markets, especially during times of crisis like what we’ve seen in the past year. They’ve funded this through more money printing and essentially allowing bondholders to sell at full value to the Fed in everything but name. Actually, a loan is better since a loan gives the bondholders a free option buying back the bonds later.

This is one small example, but the Fed does many things like this to reduce the natural downward volatility of the markets. By any measure, the past year has been a trying time economically and in a normally functioning market, we would have seen significant drops in all kinds of things. Yet everything keeps on chugging along and assets have increased in price significantly due to the Fed’s intervention.

In other words, the Fed has kept the status quo going at all cost and prevented downward trends reducing the volatility of the markets. What we see in Bitcoin might very well be the normal amount of volatility but we’ve all been spoiled by the artificial lack of volatility created by the Fed.

Bitcoin

Wladimir van der Laan has an excellent post on how he wants to make Bitcoin development more decentralized. His main points are that he wants to take out some less-than-ideal behaviors, like the fact that Bitcoin binaries are signed with his personal PGP key. This post came after the controversy surrounding the whitepaper this week and he understandably wanted to let others know what he was aiming for and why he’s not interested in non-coding things like fighting a ridiculous copyright claim.

Braiins has a great article on the economics of a 51% attack on Bitcoin. They describe the distinction between renting hash rate to attack versus getting physical machines to attack. There’s simply not enough rentable hash rate to execute a 51% attack so the only option is getting enough ASICs, which at this point in time would costs around $5B. They go through other economic scenarios and talk about the possibility of the CCP attacking Bitcoin (spoiler: they can’t and won’t). I appreciate that they put this much thought into the FUD that comes out about these types of attacks as they seem to be abundant lately.

Speaking of FUD, Deribit has an article on the double-spend last week. They explain in the article that the transaction which was “double-spent” was actually a replace-by-fee transaction that got caught just as the two competing blocks were mined at the same time. In other words, this was anything but malicious and the resolution was exactly as expected, that is, Nakamoto consensus didn’t resolve until the next block came in. In other words, the coins were spent once, not twice, so this technically wasn’t a double-spend.

BTC Times has an article on the state of the mempool. They compare the state of the mempool now compared to how it was back in 2017. They conclude that Bitcoin’s mempool is doing significantly better now despite the higher price due to optimizations that the community has taken up like batching and segwit. This is in stark contrast with ETH which is doing much worse than in 2017.

Unchained Capital has a nice article on their custody service and how to do multisig using their tools. In addition, they talk about the benefits of collaborative custody and the transparency that comes with it. This is a nice first step to upping your multisig game and any institutions or companies looking to custody their own coins should read this thoroughly.

Lightning

Jestopher has a nice article on a grief attack on Lightning. Essentially, channels can be locked up by unresolved HTLCs (hash time-locked contracts) and while this won’t necessarily benefit the attacker, it could pose some grief to the victim as they won’t be getting the benefits of opening large channels. Great explanation and a reason to not open wumbo channels expecting routing income.

c-lightning 0.9.3 is out! It has a lot of features including an intriguing one called onion messages. Essentially, this is a way to send messages via the lightning network in a way that’s encrypted end-to-end. As I’ve been saying, the Lightning has the potential to be a truly powerful decentralized web and this is a great example. They also have implemented the offers protocol allowing for static donations and recurring payments.

LNSync is a new service from Blockstream for bootstrapping a map of the lightning network without the expensive exploration of the network graph. They compare it to something like Google maps for the lightning network and I suspect this will be very useful for new nodes to the network. Again, this has applications beyond payments and I hope that this can be the beginning of something like a lightning domain name service.

Economics, Engineering, Etc.

Wizsec has an amazing summary of the complications behind the Mt. Gox rehabilitation. This drama has been going on for 6 years and if you’re wondering why it’s taking so long, this is a great place to find out. Among other things I found out from the article is that CoinLab has a settlement offer on their ridiculous lawsuit against Mt. Gox which has held this rehabilitation up for a large portion of this time. That makes my blood boil. I consider Peter Vessenes one of the true jerks of this space who has managed to benefit by filing a meritless, ridiculous lawsuit.

Ledger explains the extent of their data breach. Apparently, someone at Shopify managed to get their data. This shows the futility of trusting third parties. Not only are you trusting the third party, but you’re trusting everyone else that they’re trusting. Anyway, some good coming out of this is that they’re going to now start deleting their customer data. They also have a 10 BTC bounty to bring the data leaker to justice.

Something that’s becoming more popular is taking loans out against your bitcoin to avoid capital gains taxes. The interest payments on such loans are generally less than the capital gains tax rate and if the loan amount is a small amount of the BTC collateral, the loans can be rolled over at the end of the term giving a nice way to leverage Bitcoin to get needed cash. If on a long-term basis, the increasing price of BTC are able to offset the interest, the loans can be rolled over indefinitely and no taxes need be paid.

Valkyrie is trying another attempt Bitcoin ETF. Given Grayscale has bought 16244 BTC for its fund, much of it in Bitcoin, there will be an amazing demand if the ETF goes through. Perhaps this is why Grayscale’s GBTC has the lowest premium over BTC that it’s had in years.

A blog post by Chainalysis looks at BTC crime. They conclude that ransomware is growing really fast. The most interesting part for me was that BTC was used in less than 0.5% of all cryptocurrency activity, meaning it’s really a fringe thing.

Podcasts

My podcast this week was with cryptograffiti. We talked about art, activism and the fiat mindset.

I spoke on Preston Pysh’s The Investor Podcast about Bitcoin development and what the process is like. I also promoted the new book just a little bit.

My other books are here.

Fiat delenda est.