The Bitcoin halving – what happened?

Last Monday, May 11, at around 19:23 UTC, the third Bitcoin halving occurred. This event is currently scheduled to happen approximately every four years, and is a core mechanism in Bitcoin’s protocol. In short, combined with the finite supply of bitcoin (BTC), the halving acts as an anti-inflationary measure by reducing the number of BTC payable to the miners who confirm each block of transactions, and maintain the integrity of the blockchain ledger. By using dedicated, high-powered computers to solve Bitcoin’s complex algorithms, the miners earn BTC as rewards for their efforts (and to help recoup their energy costs). As a result, the halving is an integral component in measuring key metrics in BTC’s performance, including pricing, supply and mining profitability. What happened around the time of the halving provides for some interesting analysis before and after the event.

BTC price dropped dramatically just prior to the latest halving event – the above graph is plotted using the hourly closing value of Brave New Coin’s Bitcoin Liquid Index.

The halving is programmed to occur after every 210,000 blocks, which themselves are “mined” approximately every 10 minutes. Last week’s third halving was triggered when block number 629,999 was confirmed – from block 630,000 onward, the block reward reduced from 12.5 BTC to 6.25 BTC per block, and is designed to continue halving until the block reward reaches 1 Satoshi (0.00000001 BTC).

Usually, financial markets have already priced in events such as the halving, so traders don’t expect the event itself to have an immediate impact on price. (Think of the halving as just one type of “corporate action” that is peculiar to cryptocurrencies and digital assets. Others might include hard forks, coin burns, and token lock ups.) As with company results and profit announcements, traders and analysts are usually prepared for the best (or worst).

However, leading up to the latest halving, BTC briefly touched a 3-month high of US$10k, before going through an almost typical “market correction” of a 20% decline immediately prior to the halving event. BTC has since recovered some of those losses, and in any case, the price performance before and after each halving event has become yet another indicator of long-term price movement, as the following chart illustrates:

Other metrics to watch include: “hash rate” (the degree of difficulty, and therefore the amount of computing power, to solve the algorithms and mine each block); transaction fees (if miners can’t earn as much from mining activity, they are expected to start increasing their network fees); the price of electricity (as an input cost to mining); and even the cost of computing power itself (as older machines become less efficient and therefore less profitable, while newer, more powerful and more expensive processors come to market).

Indeed, different scenarios used to predict the exact date of the next halving are largely based on the hash rate, which has been relatively volatile before and since the halving, and transaction fees likewise escalated (and then settled down again) around the time of the halving. Key data to track as part of halving analysis and forecasting can be seen in the table below from Brave New Coin:

Other interesting developments around the time of this latest halving include a legendary hedge fund manager reported to be buying BTC as a hedge against inflation; an increase in open interest on CME’s BTC futures contracts (assumed to be coming from institutional clients); and an intriguing message attached to block 629,999 (“NYTimes 09/Apr/2020 With $2.3T Injection, Fed’s Plan Far Exceeds 2008 Rescue”). Given the recent quantitative easing measures pursued by many governments and central banks in response to the Covid-19 pandemic, this choice of headline echoed the message attached to the genesis or very first Bitcoin block, mined in 2009, soon after the GFC (“The Times 03/Jan/2009 Chancellor on brink of second bailout for banks”).

Finally, as more data and analysis attaches to the halving events, they form the basis of a fundamental aspect of understanding how financial instruments perform over time – giving rise to the BTC equivalent of a 1, 5 or 10 year yield curve, which in turn will create more sophisticated derivatives and hedging tools, and another level of comfort for traditional and institutional investors.

(My thanks to friends and colleagues at Brave New Coin and Apollo Capital.)

Next week: “How do I become a business strategist?”

 

 

My Four Years in Crypto

It’s four years since I began my career in Blockchain, crypto and digital assets. (I can’t claim to be an early adopter, although this blog first mentioned Bitcoin in 2013.) My knowledge on the topic was quite rudimentary at the time, and it was like jumping in at the deep end when I joined the small team at Brave New Coin. Apart from the 3 co-founders, there were 3 other core team members already on-board, so I was lucky 7.

My professional career has mainly been in law, publishing and financial services, plus a range of consulting, contract and freelance roles across various sectors. My point of entry into crypto was my experience with Standard & Poor’s and Thomson Reuters in market data, indices, analytics, content, research and portfolio tools – the basis of Brave New Coin’s business, and therefore an appropriate fit with my experience and skills set.

In the past four years, I have been privileged to witness at close hand the market exuberance of 2017 (fuelled by the ICO phenomenon and the incredible bull market), the regulatory backlash of 2018, the crypto winter of 2018-19, and the stop-start messages coming from regulators, markets, institutional investors, central banks and major corporations.

Getting to grips with some of the technical and other idiosyncrasies has been a steep learning curve – but I have tried to adopt a dual approach to expanding my own understanding. First, focus on the major components before getting to far into the weeds on any particular area of technical detail; second, create a personal framework of analogous concepts, and identify practical metaphors that you can also easily explain to others – self-education is critical to personal survival, but sharing knowledge is the path to wider adoption.

It’s also important to maintain an anchor based on your original point of entry – not only does that become a constant point of reference, it also enables you to build areas of personal expertise and domain knowledge. So, while many early proponents and adopters were drawn to crypto because of their underlying belief in Libertarianism, or their fascination with cryptography, or their distrust of centralised banking systems, my own points of reference continue to be around financial services (asset origination, tokenisation, digital wealth management), market data (indices, industry standards, benchmarks), regulations and analytics. While I am an advocate for Blockchain technology, I am not a hardcore technologist, but I realise that it will take time for issues such as scaling, interoperability and mass adoption to be fully resolved.

At the very least, a great deal of that market experience (especially driven by the decentralized, project-intensive and ICO-related activity of 2016-18) has demonstrated the following truths about Blockchain technolgy:

1. This is a new model of capital formation – just as companies no longer have a monopoly on human capital, banks and traditional intermediaries no longer have a monopoly on raising financial capital

2. This is a new means of asset creation, wealth distribution and market access – backed by Blockchain solutions, crypto is the first asset class that was retail first, in a distributed/decentralized bottom-up approach to issuance

3.This is a new platform for commerce – whether via tokenomics, network incentives, value transfer, smart contracts or programmed scarcity

4. This represents a paradigm shift in governance models – via the use of decentralized, autonomous, trustless, consensus and incentive-based operating structures and decision-making systems

5. This introduces new principles of distribution – assets are consumed closer to the source of value creation (fewer intermediaries and rent seekers)

6. But, it is not (and should never be) the solution for everything

Given what is happening at the moment around the COVID 19 pandemic, Blockchain, crypto and digital assets will prove to be perfect solutions to a number of problems such as: establishing the provenance of medicines; identity verification; managing supply chain logistics; enabling the distribution of assets; computing power for scientific modelling and testing; and providing alternatives to cash.

Next week: Social Distancing in Victorian Melbourne…

 

Australia’s Blockchain Roadmap

The Australian Government recently published its National Blockchain Roadmap – less than 12 months after announcing this initiative. While it’s an admirable development (and generally, to be encouraged), it feels largely aspirational and tends towards the more theoretical rather than the practical or concrete.

First, it references the US Department of Homeland Security, to define the use case for Blockchain. According to these criteria, if a project or application displays three of the four following requirements, then Blockchain technology may offer a suitable solution:

  • data redundancy
  • information transparency
  • data immutability
  • a consensus mechanism

In a recent podcast for The Crypto Conversation, Bram Cohen, the inventor of the BitTorrent peer-to-peer file sharing protocol, defined the primary use case for Blockchain as a “secure decentralized/distributed database”. On the one hand, he describes this as a “total oxymoron; on the other, he acknowledges that Blockchain provides a solution to the twin problems of having to have trusted third parties to verify transactions, and preventing double-spend on the network. This solution lies in having to have consensus on the state of the database.

Second, the Roadmap speaks of adopting a “principles based but technology-neutral” approach when it comes to policy, regulation and standards. Experience tells us that striking a balance between encouraging innovation and regulating a new technology is never easy. Take the example of VOIP: at the time, this new technology (itself built on the newish technology of the internet) was threatened by incumbent telephone companies and existing communications legislation. If the monopolistic telcos had managed to get their way, maybe the Post Office would then have wanted to start charging us for sending e-mails?

With social media (another internet-enabled technology), we continue to see considerable tension as to how such platforms should be regulated in relation to news, broadcasting, publishing, political advertising, copyright, financial services and privacy. In the music and film industries, content owners have attempted to own and control the means of production, manufacture and distribution, not just the content – hence the format wars of the past in videotape, compact discs and digital file protocols. (A recurring theme within  Blockchain commentary is the need for cross-chain interoperability.)

Third, the Roadmap mentions the Government support for Standards Australia in leading the ISO’s Technical Committee 307 on Blockchain and DLT Standards. While such support is to be welcomed, the technology is outpacing both regulation and standards. TC 307 only published its First Technical Report on Smart Contracts in September 2019 – three years after its creation. In other areas, regulation is still trying to catch up with the technology that enables Initial Coin Offerings, Security Token Offerings and Decentralized Autonomous Organizations.

If the ICO phenomenon of 2016-18 demonstrated anything, it revealed that within traditional corporate and market structures, companies no longer have a monopoly on financial capital (issuance was largely subscribed via crowdfunding and informal syndication); human capital (ICO teams were largely self-forming, self-sufficient and self-directed); or networks and markets (decentralized, peer-to-peer and trustless became catch words of the ICO movement). Extend this to DAOs, and the very existence of, and need for traditional boards and shareholders gets called into question.

Fourth, the Roadmap makes reference to some existing government-related projects and initiatives in the area of Blockchain and cryptocurrencies. One is the Digital Transformation Agency’s “Trusted Digital Identity Framework”; another is AUSTRAC’s “Digital Currency Exchange” regulation and registration framework. With the former, a more universal commercial and government solution lies in self-sovereign identity – for example, if I have achieved a 100 point identity check with Bank A, then surely I should be able to “passport” that same ID verification to Bank B, without having to go through a whole new 100 point process? And with the latter, as far as I have been able to ascertain, AUSTRAC does not publish a list of those digital currency exchanges that have registered, and exchanges are not required to publish their registration number on their websites.

Fifth, the need for relevant training is evident from the Roadmap. However, as we know from computer coding and software engineering courses, students often end up learning “yesterday’s language”, rather than acquiring flexible and adaptable coding skills and core building blocks in software development. It’s equally evident that many of today’s developers are increasingly self-taught, especially in Blockchain and related technologies – largely because it is a new and rapidly-evolving landscape.

Finally, the Roadmap has identified three “showcase” examples of where Blockchain can deliver significant outcomes. One is in agricultural supply chains (to track the provenance of wine exports), one is in education and training (to enable trusted credentialing), and one is in financial services (to streamline KYC checks). I think that while each of these is of interest, they are probably just scratching the surface of what is possible.

Next week: Brexit Blues (Part II)

 

Cryptopia – The Movie

A quick plug for Torsten Hoffman‘s new documentary, Cryptopia: Bitcoin, Blockchains and the Future of the Internet. After a series of preview screenings around Australia and  New Zealand last last year, the film has its world premiere tonight in Melbourne.

Five years after producing Bitcoin: The End of Money As We Know it, the director has gone back and interviewed a number of key figures who appeared in the last film, to update their stories, and to dig deeper into the whole Blockchain, Bitcoin and crypto narrative.

I haven’t yet seen the latest film, but I first met Torsten when he was screening the previous documentary on the meetup circuit. He was kind enough to show me some early edits of Cryptopia, and I have to say the new content looks very promising.

Given the speed at which Blockchain and Bitcoin markets move (a week in crypto is often referred to as a year in any other asset class), it’s actually important that we stand back and take stock of where we are in this new paradigm for FinTech, decentralisation and distributed ledger technology.

Even if you can’t make it to the Melbourne premiere, look out for Cryptopia the movie as it tours globally.

Next week: Tarantino vs Ritchie