The impact of Bitcoin "Halving"

I believe you have made this point more than once.
That digital assets (to include bitcoin) are a new asset class? Damn, first challenge I've ever heard to the notion.
You wan't to call them an 'old asset class', have at it. I mean, it would be inaccurate - but whatever makes you happy.

Bitcoin is on the go for about 9-10 years.
11 actually.

It received widespread coverage 18 months ago in relation to its value.
Indeed it did Firefly -although it existed before that 'widespread coverage' and after that widespread coverage. What of it?

Would you mind telling us when you think it will no longer be "new"? An approximate year would suffice.
And as much as I have (and will continue to...) refer to it as a new asset class, you've presented before with the notion that a technology and its supporting eco-system - just unpacks itself out of a box - all complete and ready to go. Write it off today. Ignore that a volume of work is being done in the space - I don't care! Here's the timeline for the development of the internet. Had you even known what it was in the mid 70s it seems you would have thrown up your hands and told everyone to pack up their stuff and go work on something else. You may not even have gotten to the stage of Dukey's friend, fax machine guy. That takes some beating!

The answer to your question though is when everyone else in crypto circles and fintech stops calling it a new asset class and when everyone else refers to the technology as being a mature technology. How long has AI and IoT been around? Years - and we're only beginning to see their real value around now.

In the picture above Bitcoin scores an A for "Censorship Resistant". Doesn't seem right to me given what you are saying below..
I think you're getting a tad confused. What you reference relates to Fungibility - not Censorship Resistance. Fungibility implicates anonymity and traceparency. However, as I mentioned, for those savvy with the technology, those issues can be overcome. For everyone else there are software updates waiting in the wings. They won't be applied any day soon but they will be applied in time.
Censorship Resistance refers to the ability of the user to custody bitcoin themselves and to send and receive bitcoin on a peer to peer basis. No third party can interfere in that process. Nobody can stop you from sending or receiving and so long as the user self custodies their bitcoin competently, nobody can confiscate your bitcoin.
 
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I'm sure its with greater difficulty. I have not checked it out more recently but my understanding is that interest (and use) amongst Chinese is still decent. That article I linked to on stablecoin use is indicative of that. But we're talking about use to move bigger amounts around. It was a couple of years back that the Chinese really clamped down on ALL means of citizens in getting money out of the country. Crypto got caught up in that. But my point is that the starting point was with that type of money movement. Not the purchase of goods and services.
You're aware that the bitcoin project has gone down the road of a store of value/digital gold/uncorrelated asset in the first instance. There's a lot of work to be done before it becomes palatable at point of sale - that comes much later.
Again, you have greater concerns on retrieving money from the crypto eco-system. Every day that goes by, I get happier with the notion of leaving them within that eco-system - with the ability to utilise stablecoins, diversify into other tokenised assets. Tokenised equities and real estate offerings are already out there in the case of the latter and imminent in the case of the former.

Like you say, VPN can get round that. It's also possible to transact bitcoin without internet - via the infrastructure blockstream have put in place via satellite. In the near future, there will also be mesh networking. In Venezuela, its also possible to transact bitcoin via text message (not something that would be useful in the Chinese context but an interesting alternate approach).

Well, lets wait and see what they come out with. There's no doubt it will have totalitarian hands all over it. But it doesn't necessarily mean that they can snuff it out. Like I mentioned before, I'd sooner hope that there are folks working on the user experience - that's far more important. Bitcoin has already achieved a level of success and can continue to do so in the digital gold/uncorrelated asset use case. However, for further down the road and mass use as a transactional means of exchange, intuitive UI is key.

Very true, perhaps China might leverage it's position over developing nations to force them on-board. I wouldn't be jumping on board with those, but people will always take risks where they believe there might be money to be made.
Absolutely. I've heard commentors speak to that. It makes sense. They've locked horns with the yanks and they want to get out from under the US dollar as the world reserve currency. They're going to pimp this digital renminbi and force trading partners to use it as per their rules (with all the nasty elements of that - that you were referring to above).
 
Duke of Marmalade said:
You think that is a useful contribution to the debate?
That cash is riddled with Covid? Yes, I do. Less cash is being used in recent months and the whole covid saga is going to speed up the digitisation process for sure.
Duke of Marmalade said:
Maybe Vijay when he revises his graphic will include Covid resistant.
His 'store of value' graphic isn't in need of editing due to any discussion which has taken place here.

On the halving, a milestone in Quantitative Tightening - built in via tamper-proof programmable money. An improvement on the magic money syndrome of the FIAT system subject to the ongoing tinkering of Central Banks and the influence of governments. Bitcoin's latest convert -> Paul Tudor Jones: "The digitization of the world benefits bitcoin". . . "We're watching the birthing of a store of value". PTJ has a net worth of $5 billion with his fund estimated to have $40 billion AUM.

In his last week, he stated that bitcoin is a hedge against the 'great monetary inflation'.
 
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So nothing much happened last night?

It fell about 10% in the immediate run-up to the halving but it had risen by more than that in the previous few weeks. Just its normal volatility.

 
So nothing much happened last night?
I'm not sure what you were expecting yesterday Brendan - fireworks? The mining reward decreased by 50% at the halving (block 630,000). We're now at block 630,085 as I write this - the network goes onwards but with the emission of half the supply of newly minted coins onto the market.

It fell about 10% in the immediate run-up to the halving but it had risen by more than that in the previous few weeks. Just its normal volatility.
You can see its performance over the past month/quarter/year to date in the graphic below. It's the best performing *asset of 2020 (thus far), 2019 and the last decade.
The volatility of the bitcoin price has been acknowledged (here and elsewhere) a long time ago. That doesn't disadvantage it much as a store of value but it does as a medium of exchange/money. Its market capitalisation is just $160 billion. As that expands and as the asset matures, volatility will dissipate. Whilst everyone accepts its current volatility, oddly it's not the most volatile asset class right now (oil has been in 2020).


*Edited from 'asset class' to 'asset' as per Brendan's post below.
 
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'The Halvening' did not turn out to be a Hollywood blockbuster....not yet anyway.

In my opinion, the performance of Bitcoin YTD vs the rest of the market shows it has some way to go before it and other cryptocurrencies have real relevance in economy / financial markets.

We are experiencing a global pandemic / idiosyncratic event and financial markets have sold off across the board (Equities, Rates, Credit Spread, Oil) with the exception of Gold. Bitcoin is a closed ecosystem, the exchange of coins happens only with market participants and the coins don't enter the real economy. The last few months it has been trading on the halving, rather than it being a store of value / hedge against financial markets.

It will be easy to say "Hedge fund Manager is now looking at Bitcoin as a hedge", but that is forward-looking and maybe Bitcoin will accidentally thanks to its performance during pandemic become a hedge play.

I love the anti-authoritarian Orwell esque rhetoric that comes with Bitcoin, but I can't see it being around forever and I don't see that as bad thing. The first car that rolled off the Ford production line was a great invention, but thanks to innovation we have better options today.
 
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'The Halvening' did not turn out to be a Hollywood blockbuster....not yet anyway.
The halving did as it said on the tin - and cut the supply of newly minted coins in half. If you're thinking in terms of price action, then we only have two other halvings to compare it to. In those cases, price increased 12-18 months after the halving. That may or may not be the case in this instance - perhaps it's priced in already. That said, we had 7 consecutive weeks of an increasing bitcoin price leading up to the halving.

In my opinion, the performance of Bitcoin YTD vs the rest of the market shows it has some way to go before it and other cryptocurrencies have real relevance in economy / financial markets.
I'm not sure what 'performance' you were expecting from it. However, its market cap is around $160 billion - vs. gold which has a market cap of $7 trillion. Therefore, yes - this is at a nascent stage.

We are experiencing a global pandemic / idiosyncratic event and financial markets have sold off across the board (Equities, Rates, Credit Spread, Oil) with the exception of Gold.
Both bitcoin and gold sold off initially too following the March 12 crash but as per the graphic above, they both recovered later on.

It will be easy to say "Hedge fund Manager is now looking at Bitcoin as a hedge", but that is forward-looking and maybe Bitcoin will accidentally thanks to its performance during pandemic become a hedge play.
I think it's fair to say that we have not had broad participation of institutions in bitcoin/digital assets yet. However, we have had two recent examples of interest from that world with Chris Wood - the global head of equity strategy at Jefferies (Worlds 9th largest investment bank) advising clients to hold some bitcoin. Then we had Paul Tudor Jones of Tudor BVI Global saying he's keeping 2% of his portfolio in bitcoin with his fund having taken steps towards buying bitcoin futures.
It seems to me that covid is just the trigger here and the overall economic and market conditions may move bitcoin's formative digital gold thesis toward greater relevance. We'll have to see how things pan out.

I'm very much onboard with the notion of further innovation - and that's actively happening in the space (there are other subsets of conventional finance which will be disrupted). However, for that store of value use case, I'm not seeing anything that fits the bill comparatively but lets see how things unfold. In the case of CBDCs and Facebook's Libra, I agree with Tudor Jones when he says that "they will make the understanding, utility, and ease of ownership of Bitcoin a much more commonplace option than it is today".
 
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Then we had Paul Tudor Jones of Tudor BVI Global saying he's keeping 2% of his portfolio in bitcoin with his fund having taken steps towards buying bitcoin futures.

Bitcoin Futures are cash settled? So Paul Tudor is taking exposure to Bitcoin without physically purchasing Bitcoin, so it has little impact on the Bitcoin Network. It does have an impact on legitimizing Bitcoin in Financial Markets, but not sure hedge fund owners really help legitimize it. It is more interesting that custodial services are being set up by Financial Institutions.


The involvement of facebook and Central governments will legitimize the technology, and I really believe that in the next 5 years we will see some form of a CBDC, in essence money is already digital.

The biggest problem with Bitcoin is the design never fully considered the costs associated with operating the network. The Miners are operating a business and when it becomes unprofitable they will stop, or increase transaction fees to the point the network has no benefit vs traditional payment systems.
 
I agree with all of the above. There are some physically settled bitcoin futures options - so depends on what service provider he utilises.

The involvement of facebook and Central governments will legitimize the technology, and I really believe that in the next 5 years we will see some form of a CBDC, in essence money is already digital.
Agreed. It probably will take quite some time until that gets to retail level but above that, we will see CBDCs for sure. China's digital Yuan (DCEP) is the favourite to be first out of the blocks.

That's a good point. It depends on how it pans out. It may be that bitcoin - as the main net - in a network with multiple sidechains - will be utilised for substantial money movements. As an example, lightning network is being developed as a layer 2 solution ( a network that runs on top of the bitcoin network ) for micro payments. Increased transaction cost on main-net may be feasible in such an instance. And of course it depends on the level of network activity also. In a worst case scenario, bitcoin could fork to a different mining algorithm. This is much further down the road so we will have to see how it pans out.
 
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I have lost the link to Paul Tudor Jones letter but the following is written from my recollection.
He argues quite persuasively that there is a danger of a Great Monetary Inflation arising from these unprecedented monetary initiatives. He by no means argues that a GMI is certain but that it is possible that Central Banks' capability to put on the brakes and wind back the QE might not work. I agree there is that danger. (This is not Zimbabwe where the car was raced to 200 kph in the knowledge that there were no brakes).
He then runs a horse race to see which is best placed to meet that challenge, Financial Assets, Gold, Fiat Cash and Bitcoin. They are judged by some focus panels or such on the criteria of Purchasing Power, Trustworthiness, Portability and Liquidity.
For a start the stewards should not have allowed Fiat Cash to enter. As the panels observed, since the CBs have a stated aim to devalue FC by 2% per annum this poor beast was carrying a hopeless top weight. Instead Monetary Assets should have been entered, meaning deposits (in more normal times) and for humble folk like myself State Savings. Monetary assets have quite a good track record in matching inflation.
Bitcoin did well on Portability and Liquidity but got trounced on Trustworthiness. Exactly how I would have rated it except for me no amount of doing well under the other headings (where at best it is only equal to Monetary Assets) could make up for my zero trust in its long term future.
Bitcoin came last. Financial assets won. Amazing how the bitcoin community are hailing this modest endorsement, if you could call it that, as a major breakthrough.
PTJ seems to take the detached view that if folk are prepared to buy and sell it then it deserves consideration as an asset. He doesn't even attempt to consider its fundamentals, which in most economists' eyes condemn it outright. PTJ more or less admits that he would have found a rôle for tulips in his portfolio. As he says himself Bitcoin is a pure speculation.
I understand that the Great Halvening block contains some media references to the unprecedented monetary interventions, echoing similar references in the Genesis block. In fact, in terms of the rationale for bitcoin current conditions could hardly be more auspicious. The threat of a GMI will underpin the bitcoin price for a while yet. If the GMI fear dissipates in a year or two then the rug will have been pulled form under that rationale.
 
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I have lost the link to Paul Tudor Jones letter but the following is written from my recollection.
PTJs letter can be found.

I don't think anyone has said that there are known outcomes here. There's potential for inflation in the wake of the current money printing on steroids. Equally CBs may not win the battle with deflation either. As regards Zimbabwe, CBs & governments can mismanage FIAT money to varying degrees. It doesn't have to be as bad as what's going on in Lebanon right now to qualify as mismanagement. Once programmed appropriately from the outset, that's not the case with decentralised digital currency.

Well done you on finally recognising that FIAT money is a bad store of value. Little Jimmy would be proud of you.

I don't think there's any surprise here given that it is very much the relative newcomer with an 11 year vintage as opposed to the other contenders that are established. However, he also believes it to be mispriced in this context:
"It scores 66% of gold as a store of value, but has a market cap that is 1/60th of gold’s outstanding value. Something appears wrong here and my guess is it is the price of Bitcoin."
Through the course of these discussions on AAM, I've suggested that bitcoins development as a store of value/digital gold is formative. PTJ is confirming the same thing - as per his CNBC interview yesterday, he said that we could be "watching the birthing of a store of value".

He doesn't even attempt to consider its fundamentals, which in most economists' eyes condemn it.
Duke of Marmalade falters at Becher's Brook. That's incorrect.

On bitcoin's scarcity, PTJ had this to say: "[Bitcoin represents] the quintessence of scarcity premium".
In terms of liquidity, he states: "Bitcoin is the only store of value that actually trades 24/7 in the entire world." That's significant - and it's a point that has been misunderstood here previously. With regard to portability, he states that "nothing beats bitcoin".
Fundamentals are discussed. Bear in mind this letter is co-written by Lorenzo Giorgianni - former deputy chief of the IMFs Strategy, Policy & Review department. He was there alongside Ajai Chopra in the Troika when the IMF had to bail out the nation due to government mismanagement.

PTJ more or less admits that he would have found a rôle for tulips in his portfolio.
He does no such thing. We've discussed fundamentals of bitcoin as a store of value. PTJ identifies bitcoin's qualities as a store of value. Tulips don't have any of the good characteristics of bitcoin as a store of value. The analogy mismatch is very much tongue in cheek and inappropriate.

As he says himself Bitcoin is a pure speculation.
To hedge is to speculate. He is speculating on the realisation of 'the great inflation'. With that, he's speculating on the use of a digital asset (bitcoin) as a hedge against that possibility.
In considering such an eventuality, he quotes our good friend, Milton Friedman:
"Milton Friedman famously stated that 'inflation is always and everywhere a monetary phenomenon that arises from a more rapid expansion in the quantity of money than in total output'." No mention of fax machine guy but then he didn't send his letter by fax either.

Ah, so are you going to call it then? Are you confirming that bitcoin dies if there is no significant inflation within 36 months of this currently limitless money printing?
My contention is that it continues along with its development either way. Where there's a place for gold, there's a place for digital gold. Where there's an internet, there's a need for internet money. In the event of runaway inflation though, for sure that makes a solid case for bitcoin - as PTJ outlines.
 
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The interference of Central Banks in the economy via monetary policies such as QE reminds me of a Father Ted episode. The one where Ted tries to tap a small dent in a car out with a hammer and results in him destroying the car. The Central Banks had no choice but to interfere because we can't be trusted to behave by ourselves, but once the interference starts it is hard to stop, and those actions are having less and less of an impact.

When it comes to digital currencies, in particular, a Central Bank Digital Currency, one of those most exciting parts is that it is programmable. Therefore it could become a new tool for monetary policy. For example, the US government sent out cheques for $1500 to everyone, but the government has no control over how it is spent. In the future, the government could send out 1500 Digital Dollar and program it to be only spent in certain shops or have it expire after a certain time.

Maybe Bitcoin has laid the groundwork for the government to have even more control over us!
 
For sure. Euro/USD/GBP, etc have not been weaned off the first wave of QE - and going into this crisis, there was little leeway in terms of reducing interest rates. I understand that they have no other option but to print money right now - but that doesn't mean to say that anyone knows if there's a way out of all that afterwards - as we have not been here before (not at these numbers).
Central bankers are just made up of people - and people are not infallible. Furthermore, CBs come under pressure from politicians - but who's interests are being served in those cases?


That's guaranteed! Not only what you spend it on but a time limit on when you have to spend it (as per this inflation based keynesian pro spend approach, have to keep people buying)>

Maybe Bitcoin has laid the groundwork for the government to have even more control over us!
Tech is neutral. However, it can be used for good or bad - and it's no different in this instance. I welcome the advent of CBDCs and Corporate money (Libra). They'll serve their purpose in getting people accustomed to digital money - the differences between them and the advantage that decentralised crypto offers in that context.
 

The neutrality of tech is a great debate! Not one for this forum though.
 
PTJs letter can be found.
Thanks. I can now give a more detailed critique of the horse race. This took the form of polling a Research Group on how they would rank Gold, Fiat Cash, Financial Assets and Bitcoin on Purchasing Power, Trustworthiness, Portability and Liquidity. This was in the context of a well argued case for the potential for a Great Monetary Inflation resulting from the unprecedented monetary interventions.
As said before, Fiat Cash was hopelessly handicapped in this contest since by definition inflation is the loss of value of Fiat Cash (meaning M2 - notes and coin and checking accounts, not deposits). So it scored zero in the category of Purchasing Power. Its overall score of 54 then came from the remaining 70 on offer which I presume put it ahead of the rest, especially on Trustworthiness. A surprising result in the context of an article highlighting how precarious trust in Central Banks can be.

The sponsor of the contest made a big pitch for Bitcoin:
Notwithstanding this endorsement Bitcoin came plumb last, even behind the hobbled Fiat Cash. PTJ's observation on this performance was as follows:
PTJ said:
What was surprising to me was not that Bitcoin came in last, but that it scored as high as it did.
So despite his enthusiastic promotion of the brilliance of bitcoin he still expected to to come in last. In the event it got a total thumbs down on Trustworthines which shows a considerable amount of ignorance on behalf of the Research Group - the White Paper makes a big play about how bitcoin avoids the need for trust in Central Banks.

The fact that it wasn't as bad a last as PTJ expected has persuaded him to have a punt on bitcoin with no more than 2% of his portfolio - a "great speculation" in his own words.
And there are those in the bitcoin community who have heralded this as a ringing endorsement by a leading hedge fund manager

He then makes a point that bitcoin, being a mere fraction of the market cap of gold can only make up that difference through a price increase. I mean really!? He tells us elsewhere that bitcoin has 10 times the market cap of rival cryptos. Surely by the aforesaid "logic" that gives much greater scope for a price surge in bitcoin's over 2,000 crypto lookalikes.

He sums up the bullish case for bitcoin with the following:
PTJ said:
The most compelling argument for owning Bitcoin is the coming digitization of currency everywhere, accelerated by COVID-19.
I don't think I have been to an ATM this year. I do carry notes as a sort of emergency or to drop something in an SVP box. I don't know about where PTJ hangs out but here in Ireland digitization of the currency is not coming - it has well and truly arrived.

Edited courtesy tecate
 
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Or they could just send a one for all voucher.....Hardly a reason to embrace digital currency......
 

That comment by PTJ is not a compelling argument for owning Bitcoin.

My two cents....

In my view the movement away from cash to card payment is the digitization of payments rather than the digitization of money. Even before card payments the amount of physical cash was less than cash deposit on bank ledgers. Though money can essentially be thought of as digital now, and for the retail user there is little benefit (in my mind) to owning a digital Euro issued as CBDC or a regular Euro. However, every major central bank is investigating CBDC's right now.

I have read almost every Central Bank paper and peer-reviewed article on CBDCs published over the last 3 years and the conclusion is "CBDCs have potential but much more research is needed to understand the design, risks and costs". My opinion is the spike in crypto popularity in 2017 drew attention to the regulators, but it was the Libra announcement by Facebook that forced them into action on CBDC. This is because a 160bln market cap cryptocurrency is of little threat but a global company with 2.5bln users is a threat. I don't think Bitcoin is going to result in a disruptive innovation because the incumbents are showing adaptability. The biggest space for innovation in financial markets is payments, that's why Facebook got into Libra and why Stripe is valued at $36bln.

Bitcoin, in my opinion, is a speculative investment, I actually researched how one could acquire a bitcoin in Dublin and then spend it, my findings are the costs were prohibitive and there is nowhere to spend it. Thus it is really a closed economy, the value is set in the network and on exchanges which are less regulated, less sophisticated and easier to manipulate.
 
I forgot about this gem from Paul Tudor Jones.
PTJ said:
Gold has survived the test of time although a rational person could ask
“Why gold over any of the other 118 elements?”
And I am not quibbling with the fact that there are only 117 other elements. This particular person (I leave others to decide my rationality status) has asked:
The Duke said:
Why bitcoin over any of the 2,000 other crypto currencies?

Edited for correction courtesy tecate
 
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