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Friday Inferno market update

TL;DR it’s a slow time for the markets, but that means…

 

We’ve seen it before, recently and more than once. It seems to be bitcoin’s signature right now. Days of boredom, with prices doing little of interest. Then BOOM! A big move, up or down, immediately followed by a frenzy of speculation that the bear market is finally over or else due another leg down.

 

Right now, bitcoin is tracking slowly and quietly downwards in what looks a lot like a bull flag. The pattern has continued for several days now after the monster spike higher, with price gently falling, staying below the 50 moving average on the one-day chart. Should this break up – and that’s quite possible – then we’d want to see at least $4,000 before we regain some optimism.

 

What we need to remember here is that we have not yet seen a higher high in this cycle. Right now, the trend is unclear: after 14 months of the bear, most indicators are still pointing downwards. We’re about to see a 50/100 cross on the weekly moving average, we’re trading below all of the major daily MAs and bumping along the 200 weekly MA. One positive-looking pattern doesn’t change all that – and bull flags don’t have to break upwards. In short, we’re waiting to see how this situation develops before we get our hopes up.

 

Meanwhile, the fundamentals continue to improve. Jack Dorsey has been making waves after his public endorsement of the Lightning Network by playing the torch game on Twitter. He’s now going all in, suggesting that LN could be used within the Square app.

 

Lastly, on a more pessimistic note, QuadrigaCX – the exchange that collapsed when its CEO (apparently) died, taking with him the keys to its cold storage – has lost more funds. Someone sent 103 BTC (almost $400,000) to the CEO’s cold wallet. Because he’s still (apparently) dead, they’re gone too.

 

Oops.

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Craig Wright wrote an early (2001) version of the Bitcoin white paper – in 2019

The self-proclaimed Satoshi Nakamoto has tried again, with no more success than last time.

 

Popcorn time again. In the absence of a bull trend, the crypto community seeks entertainment wherever it can get it. Fortunately, there’s a willing source close at hand.

 

First, a little background.

 

Back in 2016, early bitcoiner Craig Wright claimed he was Satoshi Nakamoto, the protocol’s creator. He ‘proved’ this by means of some very convoluted evidence involving a cryptographic signature. The internet – including a number of security and cryptography experts – was quick to point out that it was fake. Wright was thoroughly disgraced and, after some mumbled excuses, went quiet for a while.

 

He later arose as one of the architects of Bitcoin Cash and then Bitcoin Cash Satoshi Vision, which he claims is closer to the original Bitcoin than Bitcoin Core is now. He never retracted his claim to be Satoshi.

 

Now, he has apparently published further evidence in the form of an R&D paper he says he wrote for the Australian government in 2001 – seven years before the Bitcoin white paper was published. Certain extracts of the Black Net shown are very similar to the Bitcoin white paper – very similar. Almost word for word.

 

Now, Wikileaks was impressed enough to retweet CryptoPotato’s story about this. Because here’s the thing.

 

The extracts are almost identical to the October 2008 version of the Bitcoin white paper. But Satoshi published an earlier draft back in August 2008. The ‘2001’ Black Net document shows updates and edits that were only made in the October version.

 

This is highly suspicious, to say the least. And we were highly suspicious of Craig already, because he has a bit of a reputation for making outlandish claims and then not backing them up. To put it charitably.

 

Right now, it almost looks as if Craig tried to convince the public he was Satoshi, again – probably to give legitimacy to the failing Bitcoin SV project – but overlooked the fact that there was an earlier version of the Bitcoin white paper he should have copied to make it look more convincing.

 

Wikileaks and Wright have opened up this debate on Twitter, with Wikileaks providing evidence of previous Satoshi-related fabrications and Wright calling them names. It’s worth a read, for the lulz.

We’ll let Wikileaks have the last say. ‘The Bernie Madoff of #Bitcoin, Craig S. Wright, who keeps forging documents to make it seem that he is Bitcoin’s pseudonymous inventor Satoshi Nakamoto, caught again, this time forging a “2001” antecedent to Nakamoto’s first Bitcoin paper.’

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Inferno picks: MimbleWimble in action – Grin

This new grassroots initiative implements some amazing new tech, and has already gained a huge amount of interest from the community.

 

Two weeks ago we gave an overview of MimbleWimble, the new blockchain protocol that we believe is one of the most exciting things to come out of the crypto space in the last year or more. As a brief summary, MimbleWimble manages to combine both privacy and scalability – a tricky circle to square – and does so in a completely new and very powerful way. Some impressive cryptography ensures that no addresses or transaction amounts are stored on the blockchain, while simultaneously guaranteeing the integrity of the system (i.e. that no new coins have been created). Transaction cut-through, which prunes unnecessary transactions from the record, both reduces bloat and improves privacy. Where other privacy-focused blockchain solutions obscure transactions in various ways, MimbleWimble goes a step beyond this by ensuring privacy by not recording sensitive information at all. It is, in short, extremely impressive and very promising.

 

Last week, we looked at one of two implementations of MW, called Beam. You can read more about our thoughts on it here. This week we’re looking at the other implementation, a grassroots initiative called Grin.

 

Firstly, we need to say that much about Grin and Beam is very similar, because they’re both building on MimbleWimble. The biggest differences are not tech, but economics and culture. And in those two things, they couldn’t be more different.

 

Coin emission

We’ll get it out of the way now because it’s a big one for the crypto faithful: Grin has infinite supply. Yes, that’s right. Each block sees 60 new Grin created, so on average there will be another Grin every second. Forever.

 

This means massive early inflation. The early months will see a huge increase in supply (as is fairly normal with a PoW coin). But year 2 will see 100% inflation, year 3 50%, year 4 33%, and so on. Basically, there are going to be a lot of Grin.

 

This inflation is intentional, since the creators did not want to unduly benefit early adopters or disadvantage later ones. Economically, we might see Grin more as a transactional currency than a store of value. And after a couple of decades, inflation as a percentage drops to a minimal level since the proportion of supply represented by those new coins gets less and less over time. Ultimately, lost coins will offset new supply and it may even prove to be deflationary – maybe. But to begin with, you’re looking at significant downward pressure on coin price simply through new coins being mined.

 

Culture

Grin looks to replicate the cypherpunk culture of early Bitcoin – a grassroots effort, without external funding. Its sole full-time dev is funded by donations, which is not ideal and necessitates a slower pace of development, but means there’s less chance of corporate interference, and therefore greater appeal to the crypto-libertarian crowd.

 

So Grin has more of an indie feel to it that surfaces in various ways. It’s more experimental; for example, it uses Cuckoo Cycle for its consensus algo, rather than a better-established algo like Equihash (used by Beam). But it also means its software is far rougher round the edges; its wallet is a lot harder to install and use, and is only available for Linux or MacOS. Using a Grin wallet means running a node of your own and using the commandline wallet as a separate piece of software – and probably sending transaction files between sender and recipient. Accessible and intuitive, it is not. There’s plenty of room for improvement and no doubt that will come, but right now Grin is not exactly a beginner-friendly crypto.

 

For all that, Grin has captured a lot of interest. There are die-hard bitcoin maximalists who are saying it’s the only altcoin they think is worth a look.

 

Next week, we’ll wind up our MimbleWimble series by make a more detailed comparison of the coins that currently use it – Grin, Beam and possibly soon Litecoin too.

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Tuesday Inferno market report

Was it a flash in the pan, or the start of a roaring bull trend?

 

Friday’s green candle was impressive in both size and volumes, with BTC soaring $350 – 10% – in a matter of hours. Crypto Twitter was quick to claim the bottom was in and the new uptrend had started. While that’s possible – this is bitcoin, after all – we’re going to advise caution for now. Here’s why.

 

The rally faltered right where you’d expect it to end. The daily candle closed below the 50 MA, and even the wick upwards didn’t come close to the top of the triangle BTC is currently painting. The top also coincided with the 50% fib, measured from the December low ($3,122, Stamp) to its subsequent high ($4,237).

 

In short, resistance came into play exactly where it should, and BTC is still following the pattern of lower highs. We have not broken out of that pattern, and until we do, we have to remain bearish. As things stand, price is tracking just below the 50-day MA, and trending downwards. It does look somewhat like a (bullish) pennant is forming on the 4h, but we’re just not buying it yet – it’s too unclear for now and downward momentum/volume may be picking up.

 

We currently expect a return to BTC’s former levels of $3,450, and potentially below. Whatever happens in the medium-term – and under these conditions it’s not impossible that BTC would take another leg higher – we still think that 200-week MA will come under fire again.

 

Infrastructure, infrastructure, infrastructure

For all that we don’t like the current chart setup, we love what’s going on in the background. Infrastructure is being built, meaning that when the market does finally bottom, bitcoin is going to be in a strong position to move higher, hard. In that respect the current circumstances feel a lot like late 2014 – but with way better tech. We have a functional and growing Lightning Network; big news recently from Abra wallet, which integrates crypto with mainstream financial assets; Binance enabling crypto purchases via credit card; and, of course, those big institutional platforms like Bakkt and Fidelity, the delays notwithstanding.

 

We’ll get there. Not today, not tomorrow, but soon. And for the rest of your life.

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Dorsey endorses Lightning

The Twitter CEO just gave Bitcoin’s #1 scaling solution a huge morale and publicity boost.

 

If you know much about the Bitcoin blockchain, you’ll know it’s not capable of supporting the kind of throughput that would enable it to operate as a true payments network – digital cash for everyday purchases. That’s why the ‘digital gold’ narrative and use case has arisen: Bitcoin is more popular for infrequent, high-value transfers and storage.

 

The Lightning Network is a so-called Second Tier solution that is built on top of the Bitcoin network and enables low-cost, fast microtransactions. It’s up and running and growing fast. And while Bitcoin ended its last boom with questions about how sustainable the network really was – with $20 transaction fees at the end of 2017 – it looks like it will be starting its next cycle with some real buzz around the potential.

 

Now, Jack Dorsey, CEO of Twitter, has given the tech a boost by playing a game on the Lightning Network. The Torch game is a simple demonstration of the power of the Lightning Network: one user passes the torch to the next by making a microtransaction. It’s all done over Twitter. Dorsey joined in and passed the torch on to Elizabeth Stark, and so on.

 

Dorsey has always been a fan of Bitcoin, but this is a great endorsement for the tech that will help power the next phase of decentralised money. The pieces are starting to come together, as they do in a bear market, when tech and commitment are tested and infrastructure is built. While we’re not out of the woods, the mood is starting to change at last.

 

Perhaps that’s why Mark Jeffrey, an early adopter who wrote Bitcoin Explained Simply way back in 2013 – before most of the world had even heard about Bitcoin – has just gone on record predicting a significant ‘Third Act’ for Bitcoin, with prices heading for $250,000. Comparing the current crypto winter to the dotcom bust, Jeffrey uses the analogy of Star Wars to show where we are in the overall arc of crypto history:

 

‘This is not the end of the story. This is the middle part. This is the second act. The third act is return of the Jedi and we’re not there yet.’

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Inferno Friday market report

TL;DR waiting, endlessly waiting…

 

There is an inevitability to market cycles. While markets are inherently unpredictable in the short term, in the long term we have macro trends that have a clear direction. We don’t know when that trend is going to end, or at what price things will turn around, we just know the direction of travel. And we know we’re not at the destination yet.

 

So although we’re expecting resolution that will involve:

  • A re-test of the 200 WMA (currently around $3,300)
  • A high-volume capitulation of one form or another

 

That will happen in its own good time and there’s nothing we can do but wait it out. Bitcoin’s current drift sideways on very low volume is highly reminiscent of the same pattern in October, before the sudden crash through $6k and down to $3,100. Given that the price is now practically sitting on the 200 WMA, the next move could be sooner rather than later, but there are never any guarantees. Another factor that might play into an impending resolution is the fact that the 50 and 100 WMAs are about to cross, which could well trigger a round of selling from bots with those conditions programmed in.

 

At the time of writing, bitcoin is staging a small rally, but we’d advise caution. Every similar green candle to date has resulted in a lower high. That has been the pattern and until we see higher highs we see no reasons for undue confidence.

 

Longer term, of course, we’re as bullish as it gets. The underlying picture is great. Transactions per day are rising, and have been now for over six months. Many of these are down to Proof-of-Proof – the practice of recording the state of smaller blockchains on Bitcoin, to protect against 51% attacks. Still, adoption is adoption and this is just another use case for Bitcoin.

 

We also have a report that suggests Bitcoin’s core infrastructure is becoming more decentralised, thanks to competition in the mining sector. And a final piece of news in global adoption is that Argentina has started accepting bitcoin for public transport. Thriving economies are more circumspect, but failing states have figured that bitcoin offers a way to pay for goods in something other than the imploding local currency.

 

That’s all for now! Stay tuned.

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‘Bubbles’ or bumps in the road?

Perhaps we need to start thinking differently about bitcoin’s market movements.

 

2017 saw a speculative bubble for bitcoin. The price soared over 100x from its lows at the end of the last cycle, when it fell to $155 in January 2015. 2017 alone saw a 2,000% rise to $20,000. And it was a bubble. Everyone said so, and even if they didn’t grasp it at the time, it has become painfully evident over the course of 2018. The price now stands at $3,400 – down over 80% but still up 340% on the start of 2017.

 

It has been a lot like the 2013 bubble, say those who have been in bitcoin for years, when BTC rocketed over 1,100%, from $100 at the start of October to around $1,200 at the end of November – followed by a painful bear market of over a year.

 

In fact, they say, bitcoin has bubbled many times. There was the bubble of April 2013, which saw bitcoin spike to $266 before rapidly deflating back to $60 by July – followed, of course, by the massive winter bubble. Then there was the 2011 bubble, which saw the price rise from around $1 in April to $32 in June, retracing to $2 by the end of the year. For the real old timers, there was a bubble that resulted from bitcoin starting trading on the open market in July 2010; some publicity from Slashdot saw the price shift from $0.008 to $0.08, before settling to $0.06.

 

Overlaid on this, we have bitcoin’s halving schedule, which apparently drives some speculative and fundamental activity – as you would expect from a marked drop in supply. Analysts have noted that bitcoin’s price has began moving upwards about a year before the peak of both of the last two bubbles.

 

Not all bubbles are equal

However, we have to distinguish between a ‘bubble’ and something rather different. Some of bitcoin’s ‘bubbles’ have retraced almost entirely; others have barely retraced at all; a couple have ended with significant growth measured from the start of the bubble, let alone the low from the last cycle. This isn’t a precise science, but we can offer these thoughts:

  • 2010 was simply price discovery. BTC stabilised not far from its peak
  • 2011 was a blip. Price retraced almost fully.
  • April 2013 was a blip. Price retraced almost fully.
  • November 2013 can be considered a conventional bubble, but would be better characterised as an overheated phase of exponential growth on the back of greater awareness.
  • The same is true for 2017.

 

In short, ‘bubble’ is not a helpful term for bitcoin’s growth curve, and misses even the medium-term picture of what’s going on here: exponential growth with a few speed bumps along the way.

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Tuesday Inferno market roundup

TL;DR the slow grind continues.

 

And so it goes on, with the rhythm of dump, consolidate, dump, consolidate evident on the daily chart. Traders await resolution to the bear trend as a whole and the magnetic appeal of the 200 weekly MA in the immediate term, which seems to be offering gently rising support for now. Bitcoin closed last week almost sat on the 200 WMA line, which is currently at $3,300.

 

The big news this week is the QuadrigaCX debacle, which is either colossally bad luck or a blatant exit scam, depending on who you ask. The exchange – one of Canada’s largest – has suspended trading after the supposed death of its CEO, who took with him the private keys to its cold storage. In total some 26,500 BTC, 11,000 BCHABC, 11,000 BCHSV, 35,000 BTG, 200,000 LTC and 430,000 ETH are on ice, and the exchange allegedly owes its customers almost $200 million.

 

There is lots that is suspicious about this episode, and the ‘lost’ QuadrigaCX coins may not be lost at all. They therefore still overshadow the market, and we may not know much more about how they will impact trading until it is too late. As yet, the event has not proven a catalyst for lower lows – but there’s still time.

 

QuadrigaCX aside, wider opinion from major industry figures is mixed. Mike Novogratz recently tweeted: ‘Realizing having tweeted about crypto in a while. It’s a grind.  Don’t think we head north for at least a few more months. Always take longer for institutions to move. Very confident they will. Tons of activity under the hood. Stay the course.’

 

Meanwhile Charlie ‘Satoshi Lite’ Lee, creator of Litecoin, thinks a new all-time high will be reached within the next three years. Based on the pattern of the last bear market, that sounds quite plausible at this point.

 

Brave New Coin has a different perspective, noting:

A bottom may be close, however.  Exchange order book data indicates a large buy wall emerging on major exchange Coinbase Pro around the low- $3000 level that will likely prevent, at least in the short run, a push down towards a $2000 level (Coinbase data is used because it is more difficult to set up faked or spoofed bids because bids are fiat backed and faking bids has much higher costs involved).  

 

We’ll see.

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Quadrigacx sees 26,000 BTC go AWOL, perhaps forever

The CEO of the Canadian exchange is reported to have died, taking the private keys to its cold storage with him. Not everyone is convinced.

 

Back in January 2015, the bear market was a little over a year old. It had been a tough year, with existential questions asked of bitcoin and blockchain. Then, when hope was waning and the digital currency was on the ropes, in came the knockout blow. Bitstamp was hacked, with the loss of 19,000 BTC – then worth around $5 million. The exchange went offline, and the price data simply shows a gap for that period. When it came back online, it wasn’t long before traders threw up their hands and capitulated, driving the price down to a low of $155. Bitcoin swiftly met powerful buying pressure, bringing it back above $200, where it ultimately stabilised. Thus the 2014 bear market ended much as it had begun, with the hack of a major exchange (the first, for the uninitiated, being MtGox in February 2014).

 

History doesn’t repeat but it rhymes, and it’s interesting that we have just seen another major exchange shut its doors – probably for good. The story of Quadrigacx has attracted plenty of attention, for various reasons. The loss of the private keys to cold storage – containing the vast majority of the exchange’s funds – as well as the apparent loss of access to its fiat accounts (presumably temporary), has left its traders gnashing their teeth in anguish. $190 million is in the wind. How, in 2019, after all we have learned, could this have happened?

 

There are many twists in the story. Naturally, there is a conspiracy theory that the CEO, Gerald Cotten, did not die in India, as claimed. Presumably it is a trivial thing to purchase a death certificate from corrupt officials with the right connections and tens of millions of dollars in virtual currency. Then there is the report that uses blockchain analysis to evidence the likelihood that Quadrigacx never had the crypto it claimed; it was supposedly running a fractional reserve and paying withdrawals from new deposits. Then Jesse Powell, CEO of Kraken – who has noted how convenient were the timing of the death and the circumstances of the lost funds for a troubled exchange – tweeted that Quadrigacx had apparently been using Kraken to store crypto.

 

We have thousands of wallet addresses known to belong to @QuadrigaCoinEx and are investigating the bizarre and, frankly, unbelievable story of the founder’s death and lost keys. I’m not normally calling for subpoenas but if @rcmpgrcpolice are looking in to this, contact @krakenfx

 

There is now a petition for Kraken to take over the running of what remains of Quadrigacx. Needless to say, the weight of evidence is stacking up and this is looking more and more like an Exit Scam with every passing hour. If so, that crypto is not off the market, locked forever in a forgotten cold storage account.

So one of the wider questions this episode raises is: Is Quadrigacx to 2019 what Bitstamp was to 2015?

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Looking ahead: the Halvening 2020

In the grip of a deepening crypto winter, the Bitcoin Faithful are looking ahead to the next Halvening to inject new life into the market.

 

The Halvening is Bitcoin’s only adjustment in Monetary Policy. Unlike fiat currencies, where inflation targets and monetary supply are typically set by politicians and central banks respectively, bitcoin’s supply is algorithmically determined. Every block – on average 10 minutes – a new tranche of bitcoin’s are created. And every 210,000 blocks, or around 4 years, the size of that tranche is cut in half.

 

Thus decreasing new supply is built into the Bitcoin protocol. The laws of supply and demand suggest that this should have a significant effect on price, since – all things being equal – there are fewer new coins coming onto the market.

 

To date, history appears to have borne out that idea. The first Halvening took place on 28 November, 2012, when Bitcoin’s rewards dropped from 50 BTC per block to 25 BTC. At the time, bitcoin cost just $12. Looking at the log chart, price action was flat at the time but it’s clear that this was the point that the huge run-up to over $1,000 at the end of 2013 began, almost exactly a year later.

 

The second Halvening occurred on 9 July 2016. Once again, the chart suggests this was a key point in the next run-up, from around $620 at the time to almost $20,000, 17 months later.

 

Important though these events are, they’re not nearly enough on their own for making reliable predictions. The ecosystem was very different in 2012, when bitcoin was barely known. By 2016, the growing influx of retail money was making an enormous difference to price – the Halvening helped but did not fundamentally change that dynamic.

 

Still, basic economics points to the next Halvening as a major event for Bitcoin. Right now, it’s expected to happen in May 2020, and block rewards will drop from 12.5 BTC to 6.25 BTC. You can keep track of it at http://www.thehalvening.com. One factor noted elsewhere is that this Halvening will see Bitcoin’s inflation rate drop below that of the target rate for central banks: 900 BTC per day will put inflation at just 1.8% and falling.

 

We have to repeat that we don’t have enough data to know what will happen, as so much depends on the state of the market. So far, the price run-up in the year before each Halvening might just be a coincidence – though intuitively, it makes sense. The event is known in advance and expected, so traders factor it in. Nothing really happens for a while. But then the fundamental fact of reduced supply gradually takes effect, causing incremental changes and helping drive the market higher. In the context of increasing global demand, that’s powerful. Of course, the market gets overheated, the bubble pops and the cycle starts again.

 

We also have to look at the timeframe. The bubble tops do not coincide with the Halvenings, they take place between them, and the offset has been different – around 12 months and 17 months afterwards in each case. Looking at it a different way, the bull market seems to begin around a year before each Halvening. That would put the start of the new uptrend in May this year, which allows very little time for consolidation but could potentially fit with the bottoming of the market.

 

One last point, from the other side of the coin. The Bank of International Settlements recently published a report that falling block rewards would ultimately kill Bitcoin, as there would not be enough money to pay miners, impacting speed and security. ‘Whenever block rewards decrease, the security of payments decreases and transaction fees become more important to guarantee the finality of payments. However the economic design of the transaction market fails to generate high enough fees. A simple model suggests that ultimately, it could take nearly a year, or 50,000 blocks, before a payment could be considered “final”.’

 

So for various reasons, we await the 2020 Halvening with interest.

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