NNT

Total hash of it

The situation in China has worsened somewhat for local bitcoin miners this week. It is really starting to show in the overall hash rate. We are now down from 160TH/s to somewhere near 110TH/s. This is still enormous and ranks as the single largest use of computing power ever. Nonetheless, the decline is notable. The consequence is that Chinese miners are being forced to wind-down their operations, sell equipment, transfer it overseas and to fund it all; they are selling bitcoin. The downward pressure on price has been sustained for weeks. Very often in these circumstances it pays to zoom out a little. Overall mining power is back to where it was late last year, the amount of new mining coming online is enormous but no doubt it will take time to recover from what is a significant interruption.As to the overall operation of bitcoin, it was designed to ride out periods like this. The next difficulty adjustment will be -17%, which reduces the difficulty level for miners and will ensure block times average 10 minutes. In short, it makes no difference at all because the protocol was designed with disruption in mind. 

The situation is a gift for the rest of the world. Mining equipment will be cheap now for months. In North America, where bitcoin mining is really starting to take off, they will mop up this surplus equipment. Likely it takes 3-4 months for all this to wash through the system, at the end of it China will have surrendered a large part of its strategic advantage in Bitcoin to the USA. I further expect them to do a subtle 180 degree turn in about 18 month's time. When that happens, we'll hear a lot less about it than we have about this current burst of activity. One of China's biggest miners, Bitmain, held a presentation last week laying out their committed and unused power capacity for mining. Note all of it is US based and also has incredibly low prices 2-2.5 cents/KWh in Texas is incredibly low. Texas has made clear that it is welcoming miners and they'll be happy to move at those prices. 

China's miners aren't disappearing. They have risked capital; they are up against the twin vectors of power prices and chip processing speed and that didn't put them off before. Temporary disruption will not put them off now.If you think we have had a bad week look to the bitcoin miners; it is genuine risk taking in action. All credit to them, they take enormous grief (like in H1 this year) when they are making fees "for nothing". Now times in China are hard and they can't find a friend.Fortunately it won't stop them and we are lucky to have them. No bailouts, no regulatory favours just pure risk and pure return. 

NNT

Not sufficient that the world's most populous nation turned against bitcoin mining this week, we also lost one of our most famous supporters, Nicholas Nassim Taleb.Taleb is most well-known for his book the Black Swan, which incredibly predicted that something might go wrong. It did and he became instantly famous. He then proceeded to write the same book three more times at suitably marketable intervals. They are readable and amusing and I personally enjoyed them very much.In March 2018, Taleb wrote the foreword to a book called "The Bitcoin Standard" in which he had this to say:

“Bitcoin is an excellent idea. It fulfils the needs of the complex system … because it has no owner, no authority that can decide on its fate. It is owned by the crowd, its users. And it now has a track record of several years, enough for it to be an animal in its own right.”

Then, during the depths of Covid he had a spectacular and public falling out with the book's author about the virus and now it seems, all is bad with bitcoin in Taleb land. He has published a paper on his blog which can be found here "explaining" his view. 

Perhaps sadly for his reputation, the paper doesn't have much rigour, although encouragingly it does use the word pseudorandom quite early which presumably gives it some credibility. Here's a dose to torture yourself with:

"Quite intuitive to early practitioners of quantitative finance". By which Taleb modestly means, himself. Except that he absolutely didn't think of it at any point, making it anything but intuitive. Anyway, now he's heard about it, it's obvious.

A summary of his criticisms are provided for you here, in pseudorandom stochastic sequence.

1. Bitcoin's value has advanced well in front of its usefulness and transaction count. So, much like saying back in 2009 when Amazon was on a PE in excess of 100x it was in front of itself? It dived around and was volatile because of lot of work needed doing and most people didn't believe in it. Sound familiar?2. It cannot be a store of valueWell it is and it has been. Taleb claims it cannot be because it has a permanent maintenance cost in terms of mining. This is true, and for bitcoin to win the inflation rate of fiat currency needs to be greater than that of bitcoin over the long term. This has been true since 2009 (and the since the beginning of fiat currency), it is true by a factor of about ten today and I don't see it changing. Taleb thinks, or hopes, that it might. To give him his due, it is not impossible, but the idea that politicians stop printing money? They might. 3. It is not a hedge against inflationWe're told the short-term volatility means this is not possible. If you plan on holding bitcoin for about two weeks, then he is right. If you plan on holding it for a number of years, he will be wrong and consistently has been for about 12 years.  This guy picks a lot of fights and is incredibly obnoxious and rude wherever he goes. This fight is fascinating though, Taleb v Satoshi, and on reading the paper, it's round one to Nakamoto. Zero criticism of the protocol at all. Just if this, then maybe that, oh and gold is bad, so bitcoin is bad. There is, it would seem, a fine line between being good at calculus and being a bloviating moron with a personal vendetta. 

ETF Update

Completing the trifecta of cataclysm, a bitcoin ETF was once again denied in the US this week. This time though, VanEck were delayed by a different approach. Rather than a flat no, the SEC decided to put out the prospect for public consultation with the following questions. 

• Whether the ETF would be susceptible to manipulation?

• Whether there is a plan set up to prevent fraud and manipulation?

• How transparent is Bitcoin?

• Has regulation of the Bitcoin market changed substantially in the past five years?

• What views do commentators have on the size and regulation of CME’s Bitcoin futures contracts?

It's a cop out of course. Particularly when you consider the extent to which Wall Street receives assistance from the Federal Reserve. If that is not 'manipulation' one would have to ask, "what is?".'How transparent is bitcoin?' Really? Every person everywhere can see every transaction. Do they need it to be in the newspaper?All the same, the denials are seemingly harder to find. The SEC needs a good reason to say no, it would appear they can no longer find one and the final hiding place is delay. A very good sign, it looks like the instructions from the top are "delay, while we get our digital dollar sorted".

Elsewhere

The news elsewhere was markedly better with Brazil launching its first 100% Bitcoin ETF. It's a great product in economies with weaker currencies so one to follow. As far as we know:

• Canada: Bitcoin ETF Live in April.

• USA: 7 Bitcoin ETFs in the queue (see above).

• Australia: 4 Bitcoin ETFs in the queue (some issues getting them away but all run by big ETF providers).

• UK: no official queue, but all major players enquiring.

Finally, staying with Brazil. Some radio amateurs sent a bitcoin transaction to the moon. The text file that makes up a payment was converted to morse code; sent via radio wave and then returned to earth (I'm guessing having bounced off the moon).

It took the team involved three months to do. For their next trick they will be doing the same with the bitcoin lightning network and live streaming it. Practical uses, you might think nil, but bitcoin over radio would be even more difficult to stop which is why people work on it. No real reason to go bouncing your payments off the moon, but if you can, why not? Here he is coding the morse, not a billionaire but he got there before Elon. 

Euro-Trash

Our favourite ECB team was able to meet in person again for their 'Annual Retreat'. It is the first in person meeting of the ECB Management Committee since March last year. According to the official press release the meeting took place in the Taunus region close to Frankfurt.As you can see, social distancing was very much at the forefront, as was not wearing a tie. One would think if social distancing were indeed necessary, perhaps the meeting should still have been on zoom? In any event, I bet they maintained it all weekend, even while they relaxed with a few beers while Christine told them "the one where I'm found guilty of financial negligence but avoid jail"There wasn't much to report after the meeting other than the "concrete foundations were set for monetary policy post pandemic". Those foundations are obvious, the bond buying will continue because there is no other option.1. The ECB now holds the highest percentage of government debt of any central bank in the world, now 65% having recently surpassed Japan.  They are quite spectacularly running out of government debt to buy and make the Federal Reserve look thoroughly conservative. 

2. Greek bonds are now negatively yielding. Greece is bankrupt, yet its bonds yield less than equally bankrupt Italy. That's because the ECB has run out of German bonds to buy and so it has to buy those of the weaker countries. 

All of this of course is totally fine, the chorus of "so what" is deafening.So what is this; Greece and Italy are now part of Germany, that might be absolutely fine as long as everyone accepts it, but it will be absolutely awful when they do not. Who knows which side will decide they don't like it first.The Euro will fail and simultaneously, when disaster strikes, Agent Lagarde will likely win a Nobel Peace Prize. For us, our economic reason for being remains stronger than ever despite a weak month. Our fearless leaders will not let us down, of that we can be sure.