Bitcoin Fundamentals Report #162

A weekly newsletter summarizing important sectors in bitcoin

by Ansel Lindner

In Case You Missed It...

• (Podcast) Supply Chains Are Breaking Down - FED 65
• (member) Macro Chart Rundown - 6 Oct 2021

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Market Commentary

Rumors of an ETF are heating up

For years professionals on Wall Street have been trying to get approval for a bitcoin ETF. I remember very specifically, March 2017 was when the Winklevoss COIN ETF was disapproved for the last time because my wife was in labor as the news broke.

Over four years later we're still waiting. There are currently a handful of ETF's on the SEC's desk waiting for approval. They are already years behind Canada and Brazil and several other countries on the approval of a bitcoin ETF making the absence of this kind of product in the US blatantly obvious, especially since rejections and delays are not supported by any legitimate reasoning. Many ETFs have gained approval based on much more volatile things than bitcoin, and even based on border line scam financial products.

The tune of the SEC changed when Chairman Clayton left (for a crypto company btw), replaced by the current Chair Gensler, who I've written about a lot on this newsletter. Gensler taught a course on decentralized networks, bitcoin and block chain at MIT when he was teaching there. He's very familiar with Bitcoin and the space in general. On top of that he is very friendly to bitcoin while rightfully sees altcoins as almost universally unregistered securities and hence illegal.

This year very much feels like 2017, with a slew of ETF's waiting to get approval and the community split on whether or not one will be approved. I think the time has come, and the pieces are aligning just right for an approval.

That brings us up to this week. On twitter a few rumors started circulating that foreign banks were given a heads-up on an imminent approval of a bitcoin ETF in the US. Articles are following, and financial press pundits are starting to make predictions (one says the likelihood is 75% a bitcoin ETF will be approved in October). This comes just days after the much maligned investor George Soros gave bitcoin his blessing.

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Quick Price Analysis

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First off, apologies for not updateding the Weekly price on last week's issue. It slipped through my proofread. On to this week...

Bitcoin Chart

What a strong move we saw over the last week! New swing highs, raging right through resistance and is now primed to attack the ATH. This move was stronger than I had anticipated, immediately heading to the next resistance level at $55k. All technical indicators are a go.

That being said, price could cool off a little before making its next push, since it has rallied 35% off the most recent dip. Though blue skies are very near.

I thought it was interesting that bears lost control on the 1st of the month (and the end of the quarter), making me think it could have something to do with people buying at that time specifically. It rallied before the ETF rumors and any really bullish news. If that is the case, the next big leg up should come two weeks after (Oct 14th), as people's next paychecks come in.

A note on the ETF affect on price. If the ETF announcement comes in the area of the price breaking the ATH, price action could get very explosive and volatile. If you are trading, have targets and stop-losses placed. A $10,000 green day is in our future, but so is a $5,000 down day.

Mining and Development

Liquid Network Hard Fork Outage

Liquid network is a sidechain of bitcoin. The easiest way to describe a sidechain is as a second network that functions with another network's token. Liquid is a sidechain that uses bitcoin. Bitcoin is cryptographically locked into the sidechain and can function under different rules there.

Liquid is a separate block chain, separate software, and separate rules. The main features that differ from the parent Bitcoin network are 1) a Federated consensus mechanism instead of mining, meaning it is more centralized by design than Bitcoin, with a group of 15 functionaries who agree on the blocks, 2) blocks are faster at 1 min vs a 10 min average for Bitcoin, 3) the ability for confidential transactions, a standard for private transactions, and 4) smart contracts on par, or better than, other platforms.

The thing to be aware of here is that Liquid does not claim "decentralization", and that is okay in this case, because the money is the thing that needs to be decentralized, and since they use bitcoin they're covered. They claim all the abilities and more of other platforms, without being dishonest about their level of decentralization.

The news this week from Liquid is they had a bug in a planned upgrade on Monday. This is not a bug in Bitcoin, it is a bug in the Liquid software, very similar to bugs in altcoins that are very common. The difference here is that Liquid solved it in their semi-centralized fashion by design, while altcoins (like ethereum) solve it in a centralized fashion but then gaslight the world into thinking it was handled in a decentralized way. You can read their own debrief of the event here.

Mempool and Network Traffic is Increasing

That little blip on the right is the increase we are talking about. After months of very low network activity, things are coming back to life.

I must note here that the usage characteristics of the Bitcoin network itself has dramatically changed over the last year. The Lightning and Liquid networks are beginning to shoulder a lot of the burden of smaller transactions away from the main net. This is a good thing for the future, but there might be some unfriendly concern-trolling in the near term.

Let me explain that a little more. As you know, currently 6.25 bitcoins are released every block. This number gets cut in half every 210,000 blocks (~4 years) in what's colloquially called the halving. As the decades proceed, fees on transactions are intended to take over the incentive that issuance has dominated. Right now, fees are only 2.75% of the block reward (5-10% has been achieved in the past) and we need that to increase over the next 50 years to nearly 100%. If Lightning and Liquid are very successful, they will have a downward pressure on fees.

The solution to this supposed problem is large entities entering the network. Banks, financial service providers, central banks, etc will need to transact in huge million dollar amounts. These large transactions will surely be settled on the main net and be relatively fee insensitive. A transaction worth $10 million equivalent will happily pay a 0.1% fee of $10,000. When the block chain is full of these large transactions, block rewards will not be an issue.

Miscellaneous

Lightning network growth is exploding. As you can see below, the amount of bitcoin capacity in the network is going parabolic. This is bitcoin used in small transactions, in amounts anywhere from sub-$1 to $200 or so. An increase in the capacity is a huge signal that more people are transacting in bitcoin for small daily spending and that it's becoming a viable payment method globally.

A lot of the effect is due to El Salvador adopting bitcoin, as well as lightning getting connected into many other apps like Twitter and games.

A fact that many people miss when examining lightning is the private vs public capacity. Most wallets are by default private, which keeps your activity (though already pseudonymous) more private from network participants. This private capacity is not tracked as capacity.

Estimates differ on the private capacity, but using some other stats can get us in the ballpark. Arcane Research shows the number of payments growing at 94% month-over-month in September, while public capacity only grew at 26%. This isn't simple math because those transactions don't have to be with new capacity, but at least some of it is. I'd estimate at least as much private capacity as public, meaning there is approximately 6,000 bitcoins ($330 million) ready to transact on Lightning.

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October 8, 2021  |  Issue #162  |  Block 704,135  |  Disclaimer

Meme by: @swanbitcoin

* Price change since last week's issue