Fundamentals Report #143

Market commentary on the negative externalities of bitcoin influencers, Taproot update, China mining update, and price.

Fundamentals Report #143

A weekly newsletter summarizing important sectors in bitcoin
by Ansel Lindner and Jeff See

In Case You Missed It...

This week's Bitcoin & Markets content

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Bitcoin in Brief

Weekly price $36,996   (-$725, -1.92%)
Market cap $673.5 billion
Satoshis/$1 USD 2,702
1 finney (1/10,000 btc) $3.69
Median fee confirmed (finneys) $5.44 (1.47)
Market cycle timing Mid-cycle adjustment
Weekly trend Trying to bounce post-crash
Media sentiment Very negative
Network traffic Low
Mining Low hash rate

Market Commentary

Most people can't understand Bitcoin because they view it like other arbitrarily designed computer networks or software. For instance, your company's network is designed and changed to suit your company's needs and interests, Facebook and Twitter can be manipulated to align with regulation, corporate board wishes or arbitrary political views. Bitcoin, however, cannot.

Bitcoin is an element

To understand Bitcoin it must be thought of as an element on the periodic table. It cannot change, and if it does, by way of some hard fork transmutation, it becomes something completely different.

Bitcoin is often compared to gold, for obvious reasons, but it fits this analogy well. Gold is an element with atomic number 79. If humans discovered a way to turn gold into some other element, the quantity you change would cease being gold, yet gold would still exists. Likewise, if you attempt to change bitcoin into something it is not, you will create a new network, but others will stay behind and remain Bitcoin. You cannot change Bitcoin's nature, the things that make up Bitcoin's atomic number, the protocol rules. (You can upgrade Bitcoin as long as you don't change the underlying rules)

Political distractions

Most political debates in the bitcoin industry are based on this misunderstanding. Take the 2016-2017 block size conflict for example. This was a debate between people who wanted to change the structure of Bitcoin and those who see bitcoin for what it is, a part of nature that can't be arbitrarily changed. It doesn't matter if a majority of people want to change bitcoin into a new element, it doesn't destroy the old element from existence. The original Bitcoin will retain the acceptance, confidence and moral high-ground of monetary properties.

Today, the debate we hear about is energy consumption. Detractors claim Bitcoin consumes too much energy and will harm the environment if left as is. As of yet, the conversation hasn't turned to changing the code, but it probably will. Especially, when altcoins like Ethereum are changing their entire structure to go Proof of Stake.

To limit the ability for those who profess arbitrary changes to Bitcoin to affect users and the market liquidity, we cannot raise influencers too high. Elon Musk recently made a splash in bitcoin and we quickly regret praising Tesla so highly for their adoption of bitcoin. Influencers are security holes.

The Bitcoin Mining Council

And this brings us to the heart of what we wanted to discuss today, the new Bitcoin Mining Council. It is an effort spearheaded by Michael Saylor CEO of MicroStrategy, an influencer the community has elevated to sainthood. He was joined this week by several large North American Bitcoin miners in a meeting with Musk. We've seen things like this before in bitcoin, and it is a recipe for disaster.

In 2015 or so, prominent developers met with prominent miners to discuss the controversial bitcoin upgrade. They hatched a plan to change bitcoin, and kicked off 2-3 years of infighting. Again, in 2017, there was an "invite only" meeting in NYC, which hatched yet another plan to change bitcoin. Both these efforts were doomed to fail, but they caused much social damage in the meantime.

This Bitcoin Mining Council might not be malicious, but it is dangerous. North America will be a massive hub for bitcoin mining in the future. We anticipate between 25-50% of hash rate will be located here. We cannot risk even a semblance of official-ness from the Council. It opens up an attack vector for regulation, to capture or at least spread misinformation.

The Bitcoin Mining Council produced a couple innocuous recommendations from the meeting this week, but that is a bad start. How about, they just meet for drinks and form individual peer-to-peer relationships instead of forming some semi-official body?

There is nothing immediately wrong with this Council, we have nothing for or against their specific recommendations, and on a long enough timeframe it doesn't matter bitcoin still wins, but it is a danger as a general concept and bitcoin would benefit from tearing this down right now in its infancy. Being headlined by the recently canonized Saylor makes it that much more dangerous. Bitcoin does not need a spokesman. Next, Saylor could run to the "rescue" and create a "Bitcoin Regulatory Council". This is our warning.

That's it for the rant this week. Please enjoy the rest of the Fundamentals Report.

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Quick Price Analysis

Weekly BMI |  2 : Bullish

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Price has found resistance beneath the 200 Simple Moving Average and the January high of $42k. Bearish momentum is waning as seen in the MACD oscillator on the bottom of the chart. There is also a bullish divergence on the daily RSI which is the first time that has occurred since September of last year right before the large end of year rally.

We expect the selling has subsided for now, and price can rally above the important 200 SMA soon before running into the next level of resistance at $46.5k. For much more chart and price analysis check out the Pulse.

Stock-to-flow discussion

There is nothing quite like S2F to trigger some hardcore bitcoiners. As a refresher for beginners, the S2F model is a mathematical representation of scarcity in bitcoin. Bitcoin is unique from any other good because we can know the supply at every block in the past and the future. We can use that data (not available for any other asset) to map the price at specific times and project into the future. It's quite brilliant and mind-bending.

Hardcore bitcoiners don't like S2F because the economic school of thought most prevalent in the bitcoin, Austrian Economics, says the future is uncertain, that we stumble through a random world making our best guesses about what the next moment has in store. There is truth in that, but certain things in the real world have a very high level of certainty and don't fit nicely into that theory.

In recent weeks, the price has deviated from the S2F model, which had been performing to near perfection. We don't think this disproves the S2F, we all expect some volatility around a mean in the market, but it will be interesting to watch as we go forward. Can we bounce back into the predicted range? That would bring us back to the ATH in the first week of June.


Taproot Signaling

Taproot signaling will barely miss the 90% threshold this difficulty period, but it is very likely to lock-in during the next one, starting in 24 hours. That means in November we get a bunch of exciting new functionality in Bitcoin!

To re-attack what was said above in the Commentary section, it might be confusing to new people when we say "bitcoin cannot be changed" and here we are saying "Yeah, bitcoin is getting an upgrade." The distinction is that Taproot doesn't change any consensus rules. by @hampus_s



The hashrate has dropped significantly due to a possible exodus of miners out of China (see below). This has led to slower block times and an estimated difficulty adjustment of -15% taking place on Saturday evening. This will be the second of the last 3 difficulty adjustments to be double-digit drops. The chip shortage also has played a part in the wild volatility of the hashrate lately.

This is definitely a notable occurrence in the bitcoin ecosystem, but should not any meaningful effect on bitcoin security. When the dust settles, bitcoin mining will take off like a rocket.


The mempool is holding up okay with transactions confirming for as little as 5 sats/byte (~$1) in the last day. At the time of writing, to get in the next block a fee of 60 sats/b (~$12) is required; however, we expect transactions to confirm for 5 sats/b or less over the (US) holiday weekend.


There are reports out of China such as the tweet below by @MustafaYilham indicating miners are taking the Chinese government's threats to crack down on bitcoin mining and trading seriously. Mustafa reports miners who can relocate their hardware outside of China are preparing to do so, while some of those who cannot are selling their hardware and bitcoin on the open market.

Ultimately this is good for bitcoin in a couple ways: 1) the bitcoin hardware and coins will enter more secure hands and the ever-present threat can pass because it has happened, 2) as one of the oldest critiques of bitcoin, the perceived centralization of miners in China will finally be squashed for good.

This is one of the biggest stories of the year if true. We will continue to watch the mining space and report on it here for our readers.


Here is a cool chart from @therationalroot showing a comparison of each bull market cycle and a trendline from the break of the previous ATH to the mid-cycle pullback. It demonstrates that the recent low is inline with previous mid-cycle adjustments, and could even go a little lower before matching the 2017 rally. So, talk of this cycle being over is very premature.

Do you think the low is in for this phase? What % gains do you think this period ends with?

Source: @therationalroot on Twitter

Holiday Weekend

Have a great Memorial Day Weekend! The legacy markets will be closed Monday, giving an extra day for bitcoin-only exchanges be volatile. Perhaps we see a large price spike, dealing maximum pain to old-school traders on the CME.

Don't forget to tune in to the Indy 500 race this Sunday featuring Car 21 driven by Rinus Veekay starting in the 3rd position in the first row!

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May 28, 2021  |  Issue #143  |  Block 685,293  |  Disclaimer