Bitcoin Fundamentals Report #158

We cover a lot of ground this week, El Salvador, Ukraine, Coinbase, bitcoin price, mining, and CBDCs.

Bitcoin Fundamentals Report #158

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

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Bitcoin in Brief

Weekly price $45,562   (-$5,108, -10.1%)
Market cap $856 billion
Satoshis/$1 USD 2,194
1 finney (1/10,000 btc) $4.56
Median fee confirmed (finneys) $0.63 (0.14)
Market cycle timing Second half of bull market
Weekly trend Consolidation
Media sentiment Neutral
Network traffic Low
Mining Stable

Market Commentary

Launch of Bitcoin in El Salvador

The long awaited launch of Bitcoin as legal tender in El Salvador has now come and gone. Throughout last weekend, prior to Tuesday's launch, the atmosphere in the bitcoin community was very bullish and price responded by drifting upward. Everyone was bullish. Everyone was on one side of the trade. It got to the point where I tweeted about front running the launch, which was obviously happening.

This is a great lesson for us in the industry: when the herding effect is that noticeable, whales will take advantage of the liquidity in the other direction by forcing a cascading liquidation. There was no manipulation above and beyond normal market behavior.

We hoped the price would recover quickly through the week, but that has not materialized. Continued in the Price section....

Ukraine Legalizes Bitcoin

A story that is flying completely under the radar, but which is equally as important in our opinion to El Salvador is Ukraine passing legalization of bitcoin this week in a near unanimous vote in Parliament.

While not as far reaching as El Salvador's adoption as a legal tender, the Ukrainian law paves the way for bitcoin industry growth via regulatory clarity. No longer do bitcoin businesses have to worry about their equipment and property getting seized by the government. Bitcoin Magazine reports one of the main reasons behind this legislation is that high-profile public servants own a lot of bitcoin, 46,351 BTC to be exact ($2.5b today).

Coinbase Gets Frisky with the SEC

The SEC is at the center of several storylines in bitcoin right now. First is the ongoing struggle to get a bitcoin ETF approved. This week they delayed a decision on the Van Eck ETF once again, pushing it back to November.

Second, and not widely discussed in bitcoin-only circles, is the never-ending court battle versus Ripple. Ripple (XRP) is so obviously an illegal security and so scammy as a project, that most bitcoiners take it for granted that the SEC will put an end to it. As of now, doesn't look like that's happening. It is dragging on into months and might result in a slap on the wrist. Just like the other major fraud, EOS, that resulted in a pittance of a fine.

If that is the case, if the SEC is powerless in court against the fraudulent projects themselves, they will have no other option than to go after platforms, which brings us the big news this week.

In June, Coinbase announced the intention to launch an interest bearing product, called LEND. It was to offer 4% on stablecoin deposits. However, in a blog post on Tuesday this week, Coinbase said the SEC was threatening to sue Coinbase if they proceed with the launch, a move which seemingly caught Coinbase off guard.

CEO (and enemy of bitcoin) Brian Armstrong, responded with a long twitter thread where he whined about the SEC being secretive, not giving written guidance, and then threatening lawsuits.

We feel for Armstrong here a little bit, but he comes across as whiny and not understanding how the SEC works. We do not support government interference in the market, however, we are not going to shed a tear for Coinbase.

This is how we explain the SEC's behavior:

1) The SEC always regulates through litigation, expecting something different shows a misunderstanding of the system. The all-important Howey Test came from litigation. That is their MO.

2) There is no benefit for the SEC to commit any guidance to writing. That would allow multi-billion dollar obfuscation efforts to build around that guidance, and would box the SEC in regarding later developments in the industry.

3) The SEC is not a consumer protection agency, they are a system protection agency that protects consumers when necessary.

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Quick Price Analysis

The price dip on Tuesday this week was surprising (yet somewhat predictable). The worst part about it is the lack of a bounce so far. Volume on exchanges has been horrible the last couple of months, telling us there's still a lack of conviction from the bulls.

This is what we would expect if demand was driven by spot accumulation vs leverage trading. During spot accumulation, price will drift until it hits a brick wall, at which time, price insensitive accumulators will force price up quickly.

As you can see in the chart below, price is dropping right into the Gold Cross zone of the 50/200 MAs. Support at $42,000 is very strong and we expect it to hold during any dip. Over the next week, we do expect a bounce to come, and price to be high by next Friday.

Bitcoin Chart

Exchange volume has been low, but futures open interest has been climbing again. This brings us to talk quickly about systemic altcoin risk. Altcoins are more volatile and risky than bitcoin. As the altcoin sector's open interest and leverage increase, the risk of a very large correction becomes greater.

In the chart below, we see that open interest in altcoins is reaching a new high for the cycle. I'll add to this the Tether Dominance (Tether supply/altcoin market cap) is very low, meaning there is not a lot of liquidity for altcoins to sell into. High leverage and low liquidity is a recipe for a very sharp sell-off.  

Source: CoinMetrics

A sell-off in altcoins will have negative market effects on bitcoin as well. But since we don't see a bear market for bitcoin in the immediate future, that means altcoins will also likely continue to go up for now, building even more risk into the altcoin sector.

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Mining and Development

Previous difficulty adjustment 4.54%
Next estimated adjustment Even in ~11 days
Mempool 7 MB
Fees 3 sats/byte

Hash rate shot up a few days before the difficulty adjustment on Tuesday, resulting in difficulty adjusting upward over 4.5%. Blocks are currently coming in just under the designed 10 minute average, meaning the next adjustment could be even. That would be the first pause in the mining recovery after the Chinese crackdown earlier this year.

Below is a cool chart from Glassnode showing mining profitability is currently about as high as it has been in the last 3 years in dollar terms (green line). In bitcoin terms (orange line) you can see the long downward trend, but notice the increase for several months after the 2018 capitulation and the capitulation earlier this year.

Source: glassnode

Overall, mining is very healthy and still recovering from the Chinese crackdown and chip shortage.

CBDC / Stablecoin / Altcoin

Central Bankers are panicked over stablecoins

Benoît Coeuré, a senior official at the Bank of International Settlements (BIS), head of their research on central bank digital currencies, said in a speech today at the Eurofi conference about CBDC (Central Bank Digital Currency):

[Central banks] have a job to do — delivering price stability and financial stability — and they must retain their ability to do it,” [...] “[They] have to act while the current system is still in place — and to act now.

Note that he is French, speaking at a Europe-focused conference, working at the BIS which is headquartered in Europe. Private market stablecoins are a particular European worry as we have been saying here on the Fundamentals Report for months, perhaps years now. The US doesn't care much about them. The reason Europeans are worried is because no one uses a private digital Euro.

Tether has a Euro product along with their dollar product. But no one wants it. Today there are 56 million EURT (euro tether) to the $69 billion USDT (dollar tether). Europeans are terrified that they will lose global market share of the Euro and monetary policy control. They are freaking out, but the Fed is not concerned.

Stablecoin performance during dip

CoinMetrics released this chart after the market crash on Sept 7th, showing the fiat stablecoin performance during the event. What jumps out at us is the high volatility of some of the coins, and the lack of volatility in others where you'd expect to see more. For instance, DAI (green line) is not as widely used and managed programmatically, a less robust way to manage it. Yet, it did not vary far from $1. Our interpretation is that is because it is simply not an important stablecoin during these types of events.

Tether (light blue) performed very well, ramping up steadily, holding a premium, and slowly coming down. That is the behavior of a very widely used, liquid stablecoin.

Source: CoinMetrics


There are awesome data visuals coming out of the bitcoin space and we highlight another one this week.

Below is the amount of bitcoin held by institutions and grouped based on likeness. We wonder how orange pilled a country like Bulgaria is, who confiscated their bitcoin from a group of people allegedly scamming their custom's system (fraud) back in 2017. They appear to still hold those coins, which are now worth just shy of $10b; we wonder what are they thinking?

Overall, these bubbles will continue to get filled up by new entrants. It's not too late for them either. Microstrategy just started stacking last year. Any large nation-state could carefully accumulate 100,000 btc over the next year, at a basis below $100k. And when the US-based ETFs launch eventually, they will quickly be a sinkhole for even more bitcoin.

Source: @ecoinometrics

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September 10, 2021  |  Issue #158  |  Block 699,943  |  Disclaimer

Meme by: @StarfuryFlames