The State of Crypto

In March 2019, Bitwise Asset Management made a presentation to the SEC to launch a Bitcoin ETF. On October 9, 2019, the SEC disapproved Bitwise’s proposal. This follows the rejection by the SEC of every previous bitcoin ETF proposal, including the Winklevoss Bitcoin Trust and the VanEck SolidX Bitcoin Trust. 

In their proposal to the SEC, Bitwise presented evidence that 95 percent of crypto exchange volume is fraudulent. The key finding of Bitwise was:

We will demonstrate in multiple different ways that approximately 95% of this volume is fake and/or non-economic in nature, and that the real market for bitcoin is significantly smaller, more orderly, and more regulated than commonly understood.

Finance professors John M. Griffin from the University of Texas and Amin Shams from Ohio State University published Is Bitcoin Really Un-Tethered on the relationship between tether and bitcoin. Tether’s White Paper states that “each tether issued into circulation will be backed in a one ­to­ one ratio with the equivalent amount of corresponding fiat currency held in reserves by Hong Kong based Tether Limited. (i.e., one Tether USDT is one US dollar) ” Tether’s purpose is to act as a stablecoin that facilitates the exchange from volatile cryptocurrencies into the relative stability of fiat dollars.

Griffin and Shams used forensic algorithms to analyze trading data. Their paper shows that a single large entity on the Bitfinex exchange created tether unbacked by dollar reserves to purchase bitcoin when its price was falling. In other words, the entity created tether out of thin air to purchase bitcoin and manipulate its price upwards. These purchases were then sterilized toward the end of the month to balance accounting requirements. Griffin and Shams allege that manipulation by a single entity is the reason for bitcoin’s stratospheric rise from $1000 in January 2017 to $20,000 in December 2017.

PlusToken is the latest scam working its way through the crypto space. PlusToken is a Chinese based classic Ponzi scheme that cheated millions of users out of $2.9 billion of crypto assets. PlusToken accumulated 200,000 bitcoin, 789,000 ether, and 26 million EOS in wallets the PlusToken team controls. Chinese authorities have arrested six of the PlusToken scammers, but the ringleader is still loose and attempting to cash out the scammed crypto assets. 

PlusToken follows in the wake of previous multi-billion dollar crypto scams Bitconnect and OneCoin. The constant scams and hacks of wallets and exchanges continue to taint the crypto space as an environment unfit for legitimate financial adoption.   

Most crypto exchanges are unable to establish banking relationships due to an environment of pervasive scams, exchange hacks, perceived anonymity and illegal activity, and price volatility. Exchanges turn to shadowy middlemen for payment processing and other financial services. Recently, $850 million of customer funds went missing from the Bitfinex exchange that the Panama-based Crypto Capital Corp. held. The U.S. has indicted executives of Crypto Capital for conspiracy to commit bank fraud and conspiracy to operate an unlicensed money transfer service.  

A random look at a list of cryptocurrency prices evidences a strong correlation between the price movement of bitcoin and other altcoins. This occurs due to the trading pair aspect of cryptocurrencies. Because the traditional banking system is unwilling to enter the crypto space, purchasing any of the thousands of altcoins on various exchanges requires a conversion of fiat to bitcoin or ether, which is then exchanged for an altcoin. This results in trading pairs on crypto exchanges where the altcoin is linked in price with the value of bitcoin or ether. The altcoins do not trade as independent entities with fundamental value, but rather in a curious fixed relationship with the value of bitcoin. Many altcoins appear to have no underlying value or even function other than a tenuous price connection with bitcoin. 

The fixed supply design flaw is the root cause of volatility and speculation that creates a fertile environment for scams and general lawlessness. In turn, regulatory approval and mainstream adoption remain elusive.  

It is not possible for a currency of fixed supply to act as a stable value medium of exchange for goods and services. Conventional crypto wisdom is that the Wild West nature of the crypto space is the growing pains of a nascent, revolutionary technology, and the initial volatility will eventually decline into stability and widespread adoption. Conventional crypto wisdom is wrong. The current issues are due to a foundational monetary flaw that must be changed. Cryptocurrency cannot and never will act as a transactional currency for goods and services under Bitcoin’s template of fixed supply.

Craig Wright of Bitcoin SV, the self-proclaimed Satoshi Nakamoto and inventor of Bitcoin, encapsulates the salient issue with a statement he made On August 30, 2018, at the Future of Bitcoin Cash summit meeting for miners (and BCH developer groups) in Bangkok, Thailand.

There was a comment 10 years ago. ‘In 20 years, we either have massive transaction volume or none’. We are half way. If we do not scale in the next couple of years, it’s over. That simple. All your investment, piss it away in the wind. We either scale or you may as well go home now.

The “next couple of years” is here. Bitcoin SV has announced that on February 4, 2020, it will enact the Genesis update, a protocol restoration that creates unlimited block sizes. Bitcoin SV has scaled, but where are the increasing transaction volumes? Despite Bitcoin SV’s current scalability at 2GByte blocks, average transaction block sizes are around 1.3MBytes, a tiny fraction of its potential. Bitcoin core BTC block sizes are in the hundred thousand KByte range. Litecoin, the number 6 crypto by market cap, has block sizes around 20KBytes.

The next bitcoin halving arrives in May 2020, which reduces the mining reward from 12.5 to 6.25 bitcoins per block. Wright understands that for Bitcoin SV to survive, a massive increase in lower-cost transactions enabled by unlimited block sizes will have to occur. Yet, there is zero evidence that this will happen. The transaction for goods and services with cryptocurrency remains nil. This is not a function of previously limited block sizes, but rather the speculative volatility of fixed supply. It is wishful thinking that the crypto space will right itself with time. Where is the near term massive increase in commerce transactions going to come from? When the halving occurs and transactions fail to materialize, what happens to crypto valuations?

The promise of the blockchain’s immutable ledger and its disruptive potential to create a new, efficient, and democratic global financial order remains as achievable as ever. Innovators are introducing hybrid blockchain solutions that bypass cryptocurrency volatility but come at the expense of decentralization. Without permissionless, decentralized cryptocurrency, blockchain solutions are merely finessing the current financial system through new attempts at added efficiency under the crypto banner. They do not offer the true promise of cryptocurrency and the blockchain. The hybrid solutions require centralized control and negate the decentralized promise that led to the creation of cryptocurrency in the first place.       

1 Comment

  1. Harold

    Main feature of immune-to-money-printing Bitcoin is being an escape hatch from fiat inflation and the Marxist interest rate setting cartels. To have a state central bank is what Marx instructed in his communist manifesto. Bitcoin is a first class savings account that incidentally can also act as a payment network of last resort for censored individuals or groups.

    All the rest is noise

    Reply

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