Before I get started today, I wanted to let you know that Eoin Treacy’s latest research into exponential growth in the energy markets is up online.
You’ll have noticed that over the last couple of weeks, I’ve been writing a lot about renewable energy, electric cars and the oil nations.
Well, that’s because I had early access to Eoin’s latest investment report. Eoin’s work brings together everything I’ve been writing about, and shows you how you can invest in it. If you’ve liked anything I’ve published over the last couple of weeks, I’d urge you to check out Eoin’s report now.
Now on with today’s issue…
In a bear market good news has no effect on the price, only bad news.
In a bull market bad news had no effect on the price, only good news.
In the last couple of weeks, we’ve seen some vey disturbing news come out of the cryptoshpere (which I’ll get to a little later). And yet, as I type, bitcoin is sitting at its highest price in six months.
Back in February, bitcoin was languishing at around $3,500. Three months later and it’s just topped $6,300.
That’s an 80% price increase in three months. Anyone who bought into bitcoin at any point that year should be pretty happy.
In any other asset class, people would be over the moon with this gain. But not in crypto. In crypto it’s expected. In fact, take a look around the forums and you’ll see most people are expecting bitcoin to have much further to go yet.
Today, I’m going to show you why.
The halvening has begun
If you recall, there will only ever be 21 million bitcoin in existence. These bitcoin were not all created at once, but “mined”.
They have been continually mined by people with powerful computers since bitcoin’s inception.
In order to ensure bitcoin’s supply will never go above 21 million, the reward for mining bitcoin halves every 210,000 blocks – which is roughly every four years.
This is why some people refer to the halvening as bitcoin’s four-year cycle.
As time goes on it gets increasingly difficult to mine bitcoin, and the rewards for doing so drop significantly.
Back in the day you could mine hundreds of bitcoin a month on an ordinary desktop PC. Today, only specialised farms of computers, running in parts of the world with low electricity costs can do it.
Right now, bitcoin miners get 12.5 BTC (around $78,750) every time they successfully mine a block.
Come the halvening, that reward will, well, halve. Miners will only get 6.25 BTC for every successful block they mine.
The reason behind all this is to control inflation.
In the UK, and most other countries, your money is worth less every year because of inflation.
The price of goods and services goes up every year, and so the pound is effectively worth less. Over the last decade or so inflation has averaged around 2.3%.
2.3% may not sound like much, but over the course of a decade or so, you’re really losing out. In 20 years, you’re worth half what you were.
This is one of the key reasons people get pay rises. Work a job for a decade without a yearly pay rise, and you’ll be struggling to live – even though you’re getting paid the same.
It is also one of the main reasons people invest. As I said, if you held all your savings in cash, in 20 years your money would be worth half as much as what it was.
You need to make at least inflation on your money or you’re losing.
The way that central banks control inflation is through raising and lowering interest rates. And they generally aim for around 2.5% inflation.
But interest rates aren’t the only factor at play here, quantitative easing, or “money printing”, literally devalues a country’s currency.
Bitcoin, if you’ll remember, was a child of the financial crisis. It was created because people had lost faith in central banks and the wider financial system in general.
The idea behind bitcoin – other than solving the problem of trust and removing third parties in financial transactions – was that its supply couldn’t be messed with.
In order to get over the financial crisis, many countries printed vast amounts of money to buy their way out of debt. And that money printing to fuel debt is still going on to this day.
The money they have printed is money simply because the government says it is. It’s not “backed” by anything. It’s backed by decree, hence the name fiat currency.
Fiat literally means “a decree”.
Satoshi Nakamoto set out to make a currency backed, not by decree, but by computer code.
A currency that could never be tampered with. A currency whose supply could never meddled with by central bankers. And a currency that needed no central authority whatsoever to function.
The lack of a central autotomy is why Nakamoto referred to it as a “peer to peer” currency.
However, Nakamoto couldn’t simply release all 21 million bitcoin on the world at once. This would not have made for a fair distribution.
So he set it in bitcoin’s code that it would take until roughly 2040 for all 21 million bitcoin to come into existence.
As Nakamoto said in an email: “Coins have to get initially distributed somehow, and a constant rate seems like the best formula.”
And so, roughly every four years we experience a halvening.
Due to the fundamentals of supply and demand, these halvenings usually result in massive price increases.
All other things being equal, if demand remains the same and supply halves, prices will go up.
And that, many believe, is the main driving force behind bitcoin’s latest bull run.
The halvening will happen in around one year from now, in May 2020.
Of course, as the saying goes, past performance is not a reliable predictor of future results, but in the run-up the bitcoin’s last halvening, its price increased by around 50%.
And that was when there was a lot less interest in bitcoin in general. Now it has institutions and investors all over the world eyeing it up, no one really knows what could happen.
And on that note…
Fidelity will begin crypto trading “within a few weeks”
One of the main hurdles to institutions investing in bitcoin, or any crypto, has been custody.
Even if they wanted to, they can’t hold crypto directly – the regulatory framework and the systems simply aren’t in place.
This is what I learned last month at Paris Blockchain Week during a panel discussion.
Institutions want some exposure to crypto. But as is stands, they can’t get it.
All that will change when Fidelity (and later Bakkt) enters the fray. And that will be happening “within a few weeks”.
Fidelity Investments, which began a custody service to store Bitcoin earlier this year, will buy and sell the world’s most popular digital asset for institutional customers within a few weeks, according to a person familiar with the matter.
The Boston-based firm, one of the largest asset managers in the world, created Fidelity Digital Assets in October in a bet that Wall Street’s nascent appetite for trading and safeguarding digital currencies will grow. It also puts Fidelity a step ahead of its top competitors that have mostly stayed on the sidelines so far. The firm said in October that it would offer over-the-counter trade execution and order routing for Bitcoin early this year.
A study released by Fidelity on May 2 found that 47 percent of institutional investors think digital assets are worth investing in.
My colleague Eoin Treacy also noted in one of his recent Exponential Investor Premium videos that the CBOE Pulling Out Of The Bitcoin Futures Market has stopped a lot of downward pressure on the price.
This is not a factor to be overlooked. Many credited the creation of bitcoin futures with its run up past $19,000.
But many also blame “cash settled” futures for hampering bitcoin’s recovery. Is it a coincidence that bitcoin only really started recovering when the CBOE announced it was pulling out of the bitcoin futures market?
Maybe. But if you add all three of these factors together, you come up with a pretty compelling case for bitcoin’s latest climb.
And then finally, we have perhaps the most compelling factor of all… the bad news.
The world’s largest crypto exchange was hacked and $40 million worth of bitcoin was stolen – but bitcoin’s price went up
Last week hackers made off with 7,000 bitcoin from Binance, the world’s biggest and arguably most trusted crypto exchange.
Usually you would expect news like this to absolutely tank crypto prices. But it didn’t. After a brief drop, prices were higher than they were before within 24 hours or so.
The main reason for this is because of the way Binance operates. It puts 10% of its profits into a Secure Assert Fund for Users (SAFU).
So when something like this happens, it simply dips into the SAFU and reimburses any users that lost out.
It also, like most worthwhile exchanges, keeps most of its funds in cold storage. This basically means they cannot be hacked.
The only funds hackers could get hold of are in its “hot wallets”, which are used for liquidity. The hot wallets only contain around 2% of Binance’s total bitcoin. And that’s what was stolen.
Of course, the fact that hackers could breech Binance security is very worrying. But the fact that the systems it put in place to safeguard users’ funds worked is very encouraging.
Still. It goes without saying that you should never keep your crypto on an exchange. No matter how reputable it may be.
Tether and Bitfinex under investigation by New York Attorney General
And then finally, we have the Tether fiasco.
Tether is a “stablecoin”, a crypto that’s pegged to the dollar. One tether represents $1 held in a vault.
Only it doesn’t.
Tether has been a known bad actor for as long as I can remember. No one really trusts it, but people keep using it out of necessity.
At least they used to. Back in the day there were no alternatives to Tether, but now we have alternatives that are much, much more reputable.
Everyone knew that Tether and its owner Bitfinex would get called out eventually.
A few weeks ago that happened. The New York Attorney General’s office announced it was filing against Tether.
The New York Attorney General’s office has alleged that crypto exchange Bitfinex lost $850 million and subsequently used funds from affiliated stablecoin operator Tether to secretly cover the shortfall.
According to a press release issued Thursday, NYAG Letitia James announced that she had obtained a court order against iFinex Inc., which operates both Bitfinex and Tether, ordering them to cease violating New York law and defrauding New York residents.
James said that an investigation by her department determined that iFinex “engaged in a cover-up to hide the apparent loss of $850 million of co-mingled client and corporate funds,” adding:
“New York state has led the way in requiring virtual currency businesses to operate according to the law. And we will continue to stand-up for investors and seek justice on their behalf when misled or cheated by any of these companies.”
According to the statement, Bitfinex sent $850 million of customer and corporate funds to Crypto Capital Corp., a payment processor that is said to be holding funds from other exchanges as well, such as QuadrigaCX. Funds from Tether’s reserve were used to make up the shortfall, but neither the loss nor Tether’s fund movements were disclosed to customers.
Since then, people have continued to use Tether. But prices on Bitfinex are way above other exchanges. People are moving their money out.
One theory for bitcoin’s recent run is that people are fleeing Tether and buying bitcoin. When Tether eventually tumbles, they say, it will take the whole of crypto with it.
So, you’d have thought given the fact that a major exchange and the world’s number one stablecoin is under investigation by the New York Attorney General, prices might be tumbling.
But they aren’t.
What does that tell you?
Well, to go back to my opening, we must be in a serious bull market right now.
Until next time,
Editor, Exponential Investor