Bitcoin Fundamentals Report #194

This Week‌

Gemini sued by CFTC, US regulation scare and battle for 401k's, Jamie Dimon copies my Monetary Hurricane, price analysis, miners under stress and regulatory pressure, and Ethereum's Merge.

In Case You Missed It...

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• (Fed Watch) Macro Chart Week - FED 95
• (Bitcoin & Markets) Energy Crisis and Recession | A Reaction to Peak Prosperity - E243

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Market Commentary

Hello dear readers,

I have two admin notes up front on this issue. First, I have been fighting website issues for the last couple of days. As you may have noticed, the website has been down for the 24-36 hours. Sorry for any inconvenience.

This is a problem that comes and goes with self-hosting, so I've decided to do a major overhaul to the website in the next week or two and move to better hosting. I hope it will be transparent for you. Your subscriptions and paid memberships, should migrate over without a hitch, but there is a chance of an interruption. Please bare with me.

Second, is a simple Change log: Last week's issue was published on the wrong canonical URL. It has been updated to https://bitcoinandmarkets.com/r193.

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Gemini Sued by CFTC and Reduces Staff

Archived so you don't have to give crypto scammers a click!

The markets regulator alleges that from approximately July 2017 to December 2017, Gemini misled regulators "for making material false or misleading statements" in an effort to gain approval for its Bitcoin futures product.

Specifically, the CFTC alleges that Gemini misled regulators about how this auction works.

According to Gemini, the bets have to be fully pre-funded by the traders, telling regulators that increased trader costs would make their Bitcoin futures product less susceptible to manipulation.

Still, the company allowed some bespoke participants to trade before their account was fully funded.

I would not be surprised if this is true. If so, it would mean that excess volume and possible manipulation is taking place (or at least has taken place) in bitcoin futures via Gemini's product.

What is unclear in this report is when and for how long this possible manipulation took place. I tend to like the Winkelvoss twins, but I wouldn't put it passed them to try and attract volume with incentives.

For bitcoin, Gemini's futures product is not a major player. Their volume is dwarfed by CME, so any manipulation would be limited.

News of the lawsuit comes on the heels of the headline that Gemini is cutting 10% of its staff.

This happens each bear market. Of course, all the altcoin scammer companies will be laying off people rapidly, and other projects will simply disappear.

Get ready for some altcoin services to simply stop working. When they break, that'll be it, they won't get fixed. Promised upgrade will never come to the smaller coins.

Altcoins will not go away on their own. They will shrink and consolidate, and come up with new marketing narratives. The one thing that could keep them down for a decade or more is regulation.

US Regulator Battle Heats Up

US Labor Department Sued After Warning 401(k) Providers About Allowing Crypto Investments
US Department of Labor did not follow procedure earlier this year by releasing a warning about the "crypto" without a comment period, to rush it out before the Super Bowl ads. Now, they're being sued.

Bitcoin's crashing. The Biden administration wants to keep it out of your 401(k)
This Labor Department warning is getting heated. 401k giant, Fidelity, has asked the DOL to rescind the warning and declared they are going through with offering bitcoin to clients later this year as scheduled.

Senator Tommy Tuberville has introduced a new bill to make it illegal for the DOL to restrict what individuals can own in their self-directed 401k's.

Folks work for decades, live within their means, and invest wisely so they can retire comfortably,” said Senator Tuberville. “Now, the Biden administration has taken it upon itself to dictate what assets are viewed worthy of retirement investment, taking the decision away from individual investors by issuing regulatory guidance targeting cryptocurrency. This is government overreach at its finest. The government has no business standing in the way of retirement savers who want to make their own investment choices. When you’ve earned your paycheck, how you invest your money should be your decision. My legislation makes sure that is the case.

White House to Craft Bitcoin Mining Policy Addressing Energy Use: Report
Another story to add to the weight of headlines, but it's about the President's ordered study into bitcoin mining. Due in August, if it is honest, it will find that bitcoin mining is one of the cleanest best industries, and will help push toward innovations in renewable energy.

Like I said, regulation is heating up. On the bright side, all of this pressure about putting bitcoin in retirement accounts will dry up at new ATHs. It's only a matter of time.

Economic Hurricane

Archived

It was about two years ago that I introduced the Monetary Hurricane analogy. Now, the big boys are catching on. What happens when they realize that bitcoin is like hurricane rated windows?

"You know, I said there's storm clouds but I'm going to change it... it's a hurricane," he said, adding that the potential for an imminent economic recession requires preparation by banks.

For JPMorgan, that preparation includes conservatively positioning the bank's balance sheet to be ready for any economic shock.

"You better brace yourself. JPMorgan is bracing ourselves and we're going to be very conservative with our balance sheet," Dimon said.

If banks are positioning for an economic shock as Jamie describes, how can we expect them to lend into the economy to produce growth??? Dimon is saying here, quite simply, that money is about to get very tight. Inflation will snap into deflation very quickly. The winds of his hurricane are created by money flying into safer assets and jurisdictions.

That is exactly what my monetary hurricane analogy was intended to explain. How and why specific asset classes go up in value during times of prolonged negative market conditions. For a decade, we saw bond prices very high (yields low), real estate constantly going higher, large "safe" stocks (FAANGs) doing well, because that is where money is going to go in a monetary hurricane.

What I think Dimon missed for so long, and continues to miss actually, is that these monetary conditions are not new. In fact, it's been this way since 2008, and why we have rotating financial crises around the world. We are stuck in a very long period of economic degradation due to excess debt and counterparty risk, resulting in low growth.

You cannot get out of the hurricane by increasing the wind (adding debt/money when it is excess debt causing money to fly into safe havens), you have to change the form of money away from a debt-based system. The money created in bank lending, is focused on these safe haven type assets. Fortune 500's can get funding to buy back their stocks, but Joe 6-pack can't to take a risk and expand his business. People can get a collateralized loan for a home, but not a new assembly line. College students can get a non-dischargeable loan for school, but not for tools to start a business. Money creation in the economy is therefore centered around these asset classes. Dimon merely identifies new factors that exacerbate this underlying structural dynamic. He does not see the primary cause, excess debt in a debt-based system.

Quick Price Analysis

Is there any hope for the bitcoin price in the near term? Let's take a look.

Weekly chart

The weekly candle is back in the red at the time of writing. This would make 10 weeks in a row, extending that record. The area of high volume resistance acted as major resistance, pushing the price back down.

Daily chart

I showed this particular chart on this week's Fed Watch livestream. It shows an eerie similarity to price action in the middle of the down trend last June. The last couple of days have been uncanny. If the comparison continues, we would see price drop back below the red line (zoomed in below), make a new low, then battle its way back up.

I'm not convinced this pattern will repeat, but we can watch and notice the differences. It's a point of departure, because know the scenario last time, if price action differs this time, we can make some conclusions about that.

Bitcoin and Stocks Diverge

Interestingly, we also had a divergence from the S&P500 after that similar peak back in June. Stocks started higher, and then bitcoin joined higher after the Grayscale GBTC unlock on 20 July.

Again, nothing like that is happening now, so perhaps if stocks turn around bitcoin will, too. The Ethereum upgrade (discussed below) could be a similar force, but nothing directly in Bitcoin.

Review the Broader Market Thesis

To restate my thesis here, as global markets slip into recession, capital will flee to US jurisdictions and dollar denominated assets like USTs and stocks (and bitcoin). That should be enough to keep things from dropping too much until the economic numbers force the Fed to pivot.

It doesn't have to be a major drop in stocks for the Fed to change course. It could be that credit markets become tight and threaten an event like back in 2018. So, after all their aggressive rhetoric the last few months, they will not risk a credit collapse. They will risk a recession, but not a credit collapse (related but not the same thing), and that is what Jamie Dimon's comment sounds like.

Don't forget either, the Fed is owned by the banks, so Jamie Dimon's words are probably closer to the sentiment at the Fed's Wall St masters than all the bluster from Federal Reserve governors.

Price Conclusion

I'm still a bull, it just depends on the time frame. In the next few weeks, anything could happen, but when we eventually get a bounce it's going to be with lots of momentum to the upside. I think it is equally as likely to make new lows in the mid-$20k's, or to break back into the mid-$30k's. It is highly unlikely for any sell-off to drop below $20k.

As for the headwinds I mentioned last week, the altcoin headwind remains but has lessened a bit, along with the inflation hysteria which has come down noticeably IMO. It has shifted to a mix, or one could say confusion, between inflation and recession. So, the third headwind, the broader economy sliding into recession, I think has intensified. In total, the headwinds are slightly diminished IMO.

My prediction for the coming week is mixed to bearish. When what I outlined above, about the Fed, happens, bitcoin should be along for the ride. There is some regulatory drama, but terrible regulation is very unlikely. As bitcoin's price creeps up, Veblen good properties kick in (demand rises with price), and we could approach the ATH by the end of the year, or even Halloween.

Mining and Development

Mining News

This horrible legislation is back!

Several weeks ago, I reported on this bill in the NY Senate that proposed a moratorium on bitcoin mining in the State of New York.

At the time, it did not look like it was going to make it through committee prior the end of the session. It appears now, it was fast tracked and several holdouts were convinced to vote for it, so it passed.

§ 19-0331. MORATORIUM ON AIR PERMIT ISSUANCE AND RENEWAL.

1. For the period commencing on the effective date of this section and ending two years after such date, the Department, after consultation with the Department of Public Service, shall not approve a new application for or issue a new permit pursuant to this article, or article seventy of this chapter, for an electric generating facility that utilizes a carbon-based fuel and that provides, in whole or in part, behind-the-meter electric energy consumed or utilized by cryptocurrency mining operations that use Proof-of-work authentication methods to validate blockchain transactions. (emphasis added)

Funny thing is, Proof-of-work doesn't validate transactions, it orders them. Transactions are validated through cryptography on every node. So, technically, this does not describe Bitcoin at all.

Very interesting as well, is that Bitcoin mining in New York is one of the most sustainable energy industries in the State, with nearly 80% of its current energy usage coming from renewables. All this law will do is hurt renewable innovation and usage in New York. LOL

Archived

One of the largest of the publicly traded bitcoin miners, Riot in May mined 466 bitcoins, about 8% fewer than April but more than double the year-ago level.. The company sold 250 bitcoins in May, raising about $7.5 million, or an implied price of roughly $30,000 each.

Riot sold roughly half their mined bitcoin in May. If this happened 3-4 years ago, it would not even be a headline. However, with the bitcoin mining industry booming, and Riot's promise to not sell the coins they mine, makes this a big sign that stress is occurring.

The mining company still holds over 6,000 bitcoins and is adding each month.

Riot expects by 2023 to increase its hash rate from 4.6 EH/s to 12.6 EH/s. They are aggressively adding mining equipment each month, with an upcoming deployment of 7,000 rigs happening very soon. This should bring them up to 5.4 EH/s.

None of Riots plans have changed, they are growing despite the price of bitcoin. The sale of this bitcoin could be strategic, as a way to finance market share in a down turn.

Their share price is down 70% from the highs, and might be a very good buy as the price of bitcoin recovers.

Difficulty and Hash Rate

Hash rate recovered this week a little, but has headed back down in the last 24 hours. Right now, in 4 days, the difficulty is estimated to adjust down by only 0.4%, which is amazing considering it is just off ATHs.

Altcoins / CBDCs

Ethereum's Merge is coming

Archived

I've reported that Vitalik and other other high level developers for Ethereum have been acting very nervous lately. Well, that is because of the long awaited upgrade bringing Proof-of-stake is about to happen.

Long ago, I said that Ethereum would not go PoS while having a market cap over $1 billion, because I thought the incentives were aligned against doing something so insecure if they still had runway left with PoW. I guess I was wrong, but we'll see if it succeeds.

Last week, the beacon chain, the Proof-of-stake future of ethereum, experienced what Vitalik and other said was highly unlikely, a deep "reorg". A reorg is when the fresh blocks at the end of the blockchain are replaced by new blocks. In this case, it was a 7-block deep reorg.

Vitalik and others said that the beacon chain with PoS was MORE secure than the PoW version. However, it's been many years since the PoW chain has had a 7-block reorg.

Reorgs pose a serious problem for computation networks like Ethereum, and even bigger risks for sharded networks (with many smaller blockchains woven into one). A reorg could really mess with smart contract finality. Say you have one smart contract that swaps tokens and does some calculation for a payout. It gets executed, and some tokens are swapped onto a different network. But then the original smart contract gets reorg'd, the transaction will still be there, but the tokens from the other network will not be.

We can also imagine a scenario where one of the shard chains (smaller blockchains) has a reorg but then falls out of consensus with the rest of the network. It could be disastrous.

Anyway, I'm not an expert on ethereum any more. I know the basics and the economics of the system, but they have made it so complex, I'd be surprised if anyone was an expert on the whole thing (even Vitalik). We shall see in August if they can pull it off. It is certainly causing a lot of uncertainty in ethereum and spilling over to bitcoin.

I put that arrow on in on the right a couple weeks ago when it looked like ether was starting to crash. I think it could easily fall to 0.05 btc or even 0.04 btc in the next few weeks before the upgrade.

I'll also point out that ethereum gains against bitcoin are very brief, fast rallies. Look on the left of the chart, or in May 2021 is another example. Most of the time, ethereum is falling against bitcoin.

Japan Stablecoin Regulation

This came across my feed right before publishing. I wanted to include it because I think it might be blueprint for how the US addresses stablecoins in the near future. The Fed likes centralized stablecoins, they dislike defi scam stablecoins like Terra. Making them become banks, like Japan did here, is logical.

It remains to be seen what fallout this will have on the defi space. I'm betting it won't be good.

Archived

On Friday, Japan’s parliament passed a bill to ban stablecoin issuance by non-banking institutions, local news agency Nikkei reported.

The bill reportedly stipulates that the issuance of stablecoins is limited to licensed banks, registered money transfer agents and trust companies in Japan.

The bill is to take effect in 2023.

That's it for this week. See you again next Friday!!!

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June 3, 2022  |  Issue #194  |  Block 739,169  |  Disclaimer

Cover image: unknown

* Price change since last week's report