Monthly Archives: November 2018

Central Bank Digital Currency is not Cryptocurrency as Envisioned

Recently the International Monetary Fund produced a research report on Central Bank Digital Currencies, titled “Casting Light on Central Bank Digital Currency”, and available here:

Even the title is interesting in its omission of the terms cryptocurrency and blockchain.

The basic concept they were evaluating was that of central bank controlled digital currency issued for the benefit of retail users (individuals and non-banking businesses). These would exist alongside existing fiat currencies and be intended for domestic use primarily. Their value would have to be tethered to the related fiat.

The study reached several initial conclusions:

  * CBDC could be the next milestone in the evolution of money.

  * It is a digital form of fiat money, issued by the central bank.

  * The ability to meet policy goals is one major issue.

  * The demand for CBDC depends on the attractiveness of alternatives (cash, e-money).

  * The case for adoption could vary from country to country.

  * Appropriate design and policies should help mitigate risks.

  * Cross-border usage would raise a host of questions.

A number of central banks around the world are studying CBDCs. This table from the IMF report indicates their publicly stated rationales, which include diminishing use of cash as other payment channels e.g. mobile become popular, efficiency gains for payment and settlement, and greater access for the unbanked or lightly banked to financial services.


But the key point is that CBDCs are quite antithetical to Bitcoin and mined cryptocurrencies in general (we exclude in this comparison airdrops, premined, and other largely centralized, but private, forms of cryptocurrency). CBDCs are closest to the tethered cryptos, but maintained by the fiat issuing authority itself.



Created by miners running hashing protocols Created by central bank
Predefined monetary policy Variable monetary policy set by central bank committee
Transnational usage Domestic usage primarily
Open triple entry ledger Central bank permissioned ledger
Validation by private computer nodes Validation by central bank

There is very little in common between Bitcoin and mined cryptocurrencies in general, and hypothetical CBDCs. Most existing fiat is already digital; a small portion is cash.

The main new alternative, besides existing fiat cash, for CBDCs are private payment channels (private e-money) such as PayPal and M-Pesa in Africa. These are similar to stored value cards with prepaid fiat balances, but with mobile interfaces. Here the account balances are managed by private companies, usually with a known partner, and a user needs to trust the company holding the balance.

Both new private money channels and CBDCs threaten to disintermediate balances held in bank checking and savings accounts. So do cryptocurrencies, of course.

These balances are used as reserves for banks to issue loans, so if they were moved to a cryptocurrency or a central bank ledger they are no longer available for lending (fractional reserve banking).

A fundamental difference is that cryptocurrencies are assets whereas fiat money is debt-based, created when banks issue loans. CBDCs in their basic form are not available as reserves for bank lending.

CBDCs would in essence just be a different form of fiat, tethered to fiat, and with the same accounting unit and value.

Cryptocurrency represents a challenge to the banking system and to central banks. It seems that the IMF may be encouraging central banks to sacrifice the interests of banks in order to maintain, and even increase, their own power.

The CBDC framework, like cryptocurrency, would move deposits away from the banks. Unlike cryptocurrency, which holds balances on an open ledger, accessed by private keys, CBDC balances would be held for individuals and businesses at the central bank. This means the central banks would be able to restrict access to funds owned by individuals. One can assume they would do this during crises or under court order.

Central banks could even apply interest to CBDC deposits, possibly even with negative interest rates during times of slackened growth.

Fractional reserve banking and the economy as a whole are based on the provision of credit by commercial banks, backed only by a small percentage of reserve balances held with the central bank. If deposits move in large amounts to CBDCs or cryptocurrencies, both of which are assets in the name of the depositor, the system of credit provision in the economy will have to be significantly transformed.

Or a system that allows banks to participate and hold reserves based in CBDC would have to be developed.

CBDCs of the simplest type discussed in this IMF paper seem like a way to protect the prerogatives and increase the power of central banks, and co-opt cryptocurrency. The losers would be traditional banks because their lending power would be decreased. 

Playing Defense

Now is the time to be defensive. First the NASDAQ, then the S&P 500, and now the Dow have broken their 40-week moving averages.

All of the major sector indices are below their 40-week moving averages (similar to 200-day averages).

Industrials? Below. Finance? Below. Technology? Below. Energy? Below. Materials? Below. The new Communications index XLC? Dived from the start.

All of the leaders have broken down. The FAANG stocks have been brutalized and entered individual bear markets. Facebook is down -25% (disclosure: I’m short).

These sections of the market look like they are ready to enter their own bear markets. Certainly tech. Certainly finance.

The whole cryptocurrency sector has been brutalized. Bitcoin is down 1/3 in the last couple of weeks and is selling at 2/3 of its 40-week average.

We could well get a bounce, but expect these sectors to trade back toward a 40-week average that is resistance, not support.

The sectors that remain above their averages include:

  • Utilities
  • Real estate
  • Consumer staples
  • Health care


And gold may have double bottomed, but is still below its moving average, as is TLT (long-term bonds).

Be careful out there, focus on the defensive sectors. One must assume a downtrend until an uptrend is restored.

There are plenty of options in the four sectors mentioned above, and decent dividends can be found as well, that can rival the 10-year treasury.

This is not investment advice. For informational purposes only.

Crypto Supercomputers: First Aggregated Ranking

Working with OrionX, we have just published the first aggregated list of cryptocurrency supercomputer mining pools, ranked by the economic value generated.

I have recorded a podcast about this list with Rich Brueckner, President, InsideHPC. You can listen here:

A related slide presentation with a complete set of tables is available here:

The list is inspired by the Top500 supercomputer list that is released twice a year at the major supercomputer trade shows and conferences held each June in Germany (ISC) and each November in the US (SC).

That list is based on the performance of Linpack, a floating point intensive benchmark that solves a very large system of linear equations.

Supercomputers are based in a single location. They are very large clusters of general purpose CPU-based nodes, often augmented with GPUs, and frequently employing specialized interconnects.

Cryptocurrency mining is embarrassingly parallel. Many nodes can be racing simultaneously to solve the same cryptographic puzzle for the block reward. Mining pools may be centralized, but more likely they are decentralized to various degrees. Mining pools often have many contributors located in many countries, so even the concept of a host nation associated with the pool is fuzzy.

And the hardware employed is typically specialized ASICs or FPGAs, as well as the GPUs frequently found in traditional supercomputing simulation of science and engineering problems.

With mined cryptocurrencies, we must take a different approach and look at economic value.

For this initial list we looked at the top dozen cryptocurrencies by money supply, which is usually called market cap, and that is simply the number of coins created by a certain date, and the coin price on that date.

Of the top dozen, just half of those or 6 coins, are mined: Bitcoin, Ethereum, Litecoin, Bitcoin Cash, Monero, and Dash. Other coins are generated by premining, airdrops, or consensus algorithms that avoid mining. As a result they are centralized to varying degrees and presumably less secure.

We chose October 30, 2018 to gather prices, supply, block production, and other statistics. This was prior to the Bitcoin Cash fork into two coins, so only the initial coin is considered for the first list.

Among mined coins, a range of mining consensus algorithms are used. Differing cryptographic hashing protocols may be used. Time windows and block rewards vary. Hashing rates have a tremendous range across the set of coins, from MHash/s with Monero to ExaHash/s with Bitcoin.

Thus we cannot compare across coins based on hashing rates and block rewards per se. Instead we look at economic value. For a given coin, one can rank order by blocks produced.

We ask what is the daily value of a certain coin produced by a given mining pool? How many coins at what price? We took daily averages for the prior week, and where we had better data, for the higher value coins, we used the prior month average daily rate instead. We then extrapolated the annualized value based on the average daily rate.

We compiled statistics for the 30 largest pools on a per coin basis. We also aggregated results for pool operators that produced more than one type of coin.

The first table is a table of average daily and estimated annualized production in millions of USD for the top coins. (With the very recent price slump following the Bitcoin Cash fork, the numbers would now be lower by about 1/4 if prices do not recover for a while). About $4 billion of Bitcoin is mined (minted) per year, and around $1 billion of Ethereum. Litecoin, Bitcoin Cash, and Monero collectively contribute around  $400 million (Dash did not make the cut).

Table 1: Top 5 Mined Coins


# Top Pools

Daily M$

Annualized M$













Bitcoin Cash












Next is a table of the top half dozen pool operators, combining different coin types if they are mining more than one of the top coins. Three are in China, one in Hong Kong, and two in the U.S.

Table 2: Top Pool Operators (aggregated across top coins)

Top 6 Operators (across coins)

# Top Pools

Daily M$

Annualized M$



1.901 694






Hong Kong








1.329 485
















Bitcoin has its own decentralized, open source, version of a central bank and a clearing house system embedded in the Nakamoto consensus. Bitcoin is presently an emerging economy with over $1 trillion in annual transactions (GDP, gross decentralized product), supported by a very economical and efficient seigniorage of about $4 billion in mining block rewards, or less than 0.4%.

The indicated inflation rate at present is about 4% in supply, but in about 18 months the block reward will have its third halving. This will decrease the block reward to 6.25 Bitcoin from its current 12.5 coins. The inflation rate will drop below 2%.

This is not like your Federal Reserve that issues forecasts and goals. Recently the Fed has been pushing to increase inflation to 2%, and happy that they achieved the increase.

With Bitcoin this decrease in inflation will definitely happen, come hell or high water; it’s math, it’s baked in to the Nakamoto consensus. Relative to the US dollar and fiat currencies in general, Bitcoin will be disinflationary going forward.

The next list will be announced in June, 2019, and we can begin tracking developments in the cryptocurrency space over time.