Fundamentals Report #124

January 15, 2021  |  Issue #124  |  Block 666,201  |  Disclaimer

Written by Ansel Lindner and Jeff See

Bitcoin in Brief

This week's Bitcoin & Markets content

• (Member) Refuel or Repeat - Bitcoin Pulse #97
• (Podcast) Bitcoin 2021: A New Hope - FED 36

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Market Commentary

In 2019, Facebook's announcement of Libra startled international regulators out of their slumber. The threat of one of the largest companies in the world, with over a billion users, could launch a currency and actually threaten national currencies was a huge wake up call.

Libra, of course, is a different animal than bitcoin. It is the product of a centralized company, where bitcoin is a decentralized technology. Governments are well versed in how to deal with companies doing things they don't approve of. They hold hearings, call witnesses to give testimony, consult lobbists and special interests, and then enforce regulations on centralized entities. They were quite successful in neutering Libra in short order.

Now, bitcoin is approaching a $1 trillion market cap, it's bitcoin's turn to provide a wake up call. The monied elites are completely astounded, drunk on their own Kool-Aid, that the market could never want a money which they, our benevolent rulers, had not dictated to us. What they don't realize is bitcoin won't play nice like Facebook. There are no witnesses to subpoena, no company to sue.

We can see the old-world thinking in, convicted criminal and President of the ECB, Christine Lagarde's recent comments on bitcoin:

(Bitcoin) is a highly speculative asset, which has conducted some funny business and some interesting and totally reprehensible money laundering activity [...] There has to be regulation. This has to be applied and agreed upon ... at a global level because if there is an escape that escape will be used.

Bitcoin did not launder money anymore than http did. It is no longer a "highly speculative" asset either. Our monetary overlords are simply dumbfounded bitcoin is still around and are beginning to wake up to the fact that bitcoiners have been right, it really does threaten their national currencies (the Euro in particular btw). The only tool they have is the hammer of regulation and to treat bitcoin like they treated Libra.

Notice, she is calling for "global level" regulation in an era of decoupling, trade wars, and currency wars? Good luck with that.

Quick Price Analysis

Weekly BMI |  -1 : Slightly bearish

We published a very important issue of the Bitcoin Pulse this week where we discussed a new important indicator, as well as the emerging trend of Bitcoin Bloody Mondays. Don't miss that one, sign up at the link below.

Right now is a precarious time for the price. There are fundamental forces applying pressure on price to continue up, like institutional buying, retail FOMO, inflationist headlines, and international interest. However, there are also fundamental forces applying pressure on price to drop to test lower levels of support, like historically significant overbought indicators, whale games (e.g. dumping into volatile markets and re-buying lower), regulation FUD, and depressionary conditions globally.

We believe the bull market will continue, but likely after a consolidation which includes testing lower support levels on the price. If you are dollar cost averaging (buying every week or month when you can) try to save a little extra to buy large dips when they come. If you are trading, never short bitcoin, but this is a time to pay close attention and keep your stoplosses close.

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Mining

In the last few days the mempool (the pool of transactions waiting to be confirmed on the network) has been holding approximately 135 MB worth of transactions, which is the highest since the 2017 peak of ~330 MB. 135 MB of transactions is roughly 18 hours worth if no new transactions were to come in during that time. Of course, that won't happen, so it could take weeks to fully confirm all transactions waiting.

This may be the beginning of a year long competitive fee market, where users who need their transaction confirmed in a timely manner will have to pay an appropriately high fee. During the last major bull run at the end of 2017, the mempool maintained 30-330mbs from the middle of October until February 2018.

At the time of writing, the average fee being confirmed on the network is $9. That's $9 regardless of the value of the transaction, whether you are sending $5 in bitcoin or $5 million.

To beginners that fee might seem ridiculous. We often hear, "how could it ever become widely used with that kind of fee?" Well, for large transactions a $9 fee is very small. Fees on wire transfers for instance are usually $20 in the US. But also, high fees on the main network will incentivize people onto the payment layers like the Lightning Network, a cryptographically secured payment network on top of bitcoin itself. On these Layer 2 networks you don't have to wait for confirmation on the main network and fees are miniscule in comparison.

In other words, high fees will drive the evolution of bitcoin forward. It's not ready quite yet for mainstream use, but it's getting closer every day.

Hashrate remains healthy after the last difficulty adjustment of +10.8% and is trending to adjust up another +4% in seven days. As the price rises so does miner profitability, and as profitability rises so does the hashrate; kicking off the incentive feedback loop securing the network.

Miscellaneous

The number of payments per day (7d average) making a new ATH three years to the day after the last peak in January of 2018. In addition, the number of daily addresses that sent or received a transaction - referred to as the number of Active Addresses - broke the ATH shooting up over 1.2m per CoinMetrics.

Despite fees being high as mentioned above, demand is at record levels.